Tim Connors breaks down how startups innovate through iteration, focusing on five winning metrics: understanding your customer, product functionality, customer happiness, retention, unit economics, and scaling revenue. The talk covers how to optimize for product-market fit and sustainable growth.
So in earlier videos we talked about the innovation process, starting with mission. Then figure out your high level metrics and then figure out your bottlenecks in the metrics and do iteration. But how do you do this iteration process? Once you have your mission and your metrics nailed down, how do you really do the iteration? It's actually pretty simple. There's five winning metrics that we focus on to optimize within that iteration process. So who is your customer? So you understand your mission well, who are you serving? Who's your customer that you're serving with that mission? Then does the product work? You'd be amazed at how many startups have been operating for years and years and years and they don't know that their product works or their product doesn't work. So does what you have work? Then are the customers happy? And there's two ways to tell if your customers are happy. You can ask them if they're happy and you ask them what's called a Net Promoter score. Set of questions. So how likely are you to refer this organization to your friends and colleagues? And you look at the percent that are very likely that love your brand and you look at the ones that are very unlikely that really dislike your brand. If they love you, you ask them why and that's what you market, that's your differentiators. If they're very unhappy with your brand, that's what you fix. And customers, if you ask them, will always tell you what they love and tell you what they hate. You can just go to work then to fix it. So you know exactly what to do. If you monitor NPS and ask the follow up question of why, then there's another way to show if they're happy with you. And that's retention. So if people start using your product, do they keep coming back over and over and over again? So you can draw these retention asymptote charts that say by month. So number of months since acquisition, what percent are retained, what percent keep coming back and using the product each month? We'll come back and pay for the product each month. And what you'll find is you'll start at obviously 100% who start trying to use the product. And then as the months go on, what typically happens is you lose some of those customers along the way, but there's a whole bunch of loyal customers that will last forever. So kind of if they're still customers after six months, usually, then usually it asymptotes to that number. So what you care about is you look at the Slope of that line, how fast do folks who are not interested in the product turn off? And then what is the asymptote level? So if you say 40% of the people you acquired early in a B2C startup are still customers, six months later, they're likely to be customers for years and years and years. So you look at the slope of this line and always try to make it ever more shallow. And you look each month of customer acquisition and you try to make this asymptote get ever higher. If you're doing that, you're iterating properly. So who's your customer? Does the product work? That's kind of winning metric zero. Winning metric one is are they happy? Do they tell you they're happy? Winning metric two is do they show you they're happy? Winning metric three is the unit economics. And this is 95% of the battle usually. So unit economics are pretty simple. So you need to acquire your customer. So if it's a consumer facing startup, you'll spend ads on Facebook or Google. If it's a business customer that you're selling SaaS software to, it'll be an enterprise customer, but you're selling to a human. In either case, just question whether they're buying for themselves or buying for their organization. So there's an investment in getting their attention, getting them to become a customer. And then what you monitor for is how long does it take you to make that money back and double back that cost of acquisition and gross margin from that customer. So let's say you have a company where you spend $10 in customer acquisition costs CAC to get a user of a consumer facing product. What you then look for is how much revenue do you get per month from that user and how much gross margin do you get from that user. So let's say you get $5 a month in gross margin from that user. So what you do is you take the $10 cap, multiply that by two. So 20. So your CAC doubling time, your CAC D is customer acquisition cost double back. So if you have a $10 CAC, you multiply that by two and get 20. So then the question is when do you get $20 of gross margin from a customer? So in this case, if you spend $10 in CAC and get $5 a month, every month after a month you have 5, after 2 months you have 10, 3 months you have 15, after 4 months you have 20. So you have a 4 month CAC doubling time. Anything 8, 8 to 10 months in a consumer startup usually is really good and you got a business because you spend a dollar and you get two back quickly. So then you can self fund spending the next $2 to acquire two more customers. There's tons of startups that have what people call product market fit where the customer the product works and the customer loves it. But the unit economics don't work. So you try to optimize for winning metrics 0 through 3 all at the same time. Once you have a short CAC doubling time, then winning metric four is just scaling up the unit economics. And in venture backed startups, there's kind of four key milestones of scaling 1 million revenue run rate, 5 million revenue run rate, 30 million revenue run rate and 100 million revenue run rate. If you hit one, it unlocks the next opportunity for a venture capital round.
