Use These Two Simple Measurements to Grow Your Startup and Raise Money

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We recently teamed up with 500 Startups to offer a series of startup workshops at our Galvanize San Francisco campus. Mat Johnson shared his insights on how to understand startup metrics and identify which are the most important. Here’s an overview of what you should track to grow your startup:

Don’t Just Check the Metric Box

At the early stages of development, all that matters is that your idea works. That’s why metrics are essential to your business; if you don’t have a reputation, metrics and traction are all you have. A classic error that founders make is checking off the metric box before they realize what they’re actually tracking. Just because you have metrics doesn’t mean you have the right ones for growth or for your business.

Identifying the metrics that matter is a critical part of building your company. You’ll be able to build a better product and clearly articulate how your business works so investors think that a) you’re smart and b) you know what you are talking about.

Metrics are all about helping you make better decisions. Don’t spend 6 months pursuing the wrong strategy or wasting investors’ time because you didn’t track right metrics.

Bring it Down to Two

All metrics are valuable, but before you make things complicated, start with two simple measurements:

  1. How fast/easy is it to make a sale
  2. How cheap/easy is it to serve a customer

Start by measuring these two numbers, then drill down into more detail over time. The key here is showing that you have an awesome, fast-growing business with high margins. Once you can tell that story effectively (with the numbers to back it up), investors will be falling over themselves to invest in your business.

Basic sources to track:

  1. Customer Sources (UTMs)
  2. Conversions (Pixels)
  3. Retention (payback period, not LTV)

Beware of LTV or “life time value.” It can be dangerous because you’re trying to show traction in the short term, not over the entire lifetime of a customer. If you have something that’s working, you want to scale it now. And you can’t scale it if you don’t have enough money.

Use the Right Tools

The point of early-stage metrics is to get a signal that you’re offering something the market wants. Metrics give you a feel for product market fit and how much customers and potential customers want what you have. If you’re unsure if you’re getting a positive signal, then your numbers aren’t good enough. People should love your product – make it great.

Always keep these tips in mind when building metrics:

  1. All the popular analytic tools are good and allow you to create readable metrics and funnels.
  2. Your own database is good.
  3. Web metrics can be off by as much as 20%.

No out-of-the-box analytics solution maps exactly to your unique business. Some analytics in your personal database, such as retention and user activity metrics, might not be captured in a 3rd-party analytics tool.

When building a quantitative understanding of your business at an early stage, you’ll have tons of data to look through from your app, user logs, and other sources. Dig into your data and  see how your customers are getting to your site, interacting with your product, and what their purchasing habits are. Using the data you already own will give you get a better understanding of the market you already have.

The right way to build your business is by coming up with a couple metrics that really matter. So instead of just throwing numbers up on a board and feeling smug about it, think through the hierarchy of your metrics and why some matter more than others.  

If you’re paying attention to the right numbers and making informed business decisions, the vast majority of your customers will be in front of you – not behind you.

Watch the full video below:

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Video Transcript

Mat: How many of you guys are full time on your companies? Pretty much all of you because you are paying rent in this space. Great. How many of you are launched already? Products are all launched, mostly. That’s pretty good. How many of you, with launch products, are also making revenue? Yeah, almost? Okay. More of you should make money.

Like Shaun said, my name’s Mat Johnson. I’m one of the partners at 500 Startups. I manage our DistroFund that invests slightly later stage than the accelerator. I also manage our team of 12 awesome growth marketers that helps level up our companies and 10X them, both in and out of the accelerator so they raise more money from better investors and get richer later. Previous to 500, I sourced deals for Charles River Ventures, I was the senior marketer at General Assembly. For a while, I helped start a pretty successful enterprise software company called Socratta in Seattle earlier in my career.

So I’m talking about metrics in fundraising and especially in the context of early stage. Very early stage, like you guys. And this is one of my favorite quotes, “There’s no sense in being precise when you don’t even know what you are talking about.” This is one of the classic errors that founders make because they think metrics. I’ll check that box and have a lot of metrics. Pretty much the whole point of my talk today is really, deeply understanding your business and what’s important about it. What metrics are more important, what’s less important. So that you can both run your business successfully and also clearly articulate how your business works. So investors will think you’re A, smart, and B, know what you’re talking about.

So basically, the reasons metrics are super important is because if you were trying to raise money with only one slide, you could do it. You don’t need any of those other slides that the other guy was talking about. Problem is, most people don’t have this deck. If you do, you can just have one slide deck, maybe two. Maybe you’re an awesome team. But if you’re not, like, you guys are probably not all like famous serial entrepreneurs yet. So then your team page doesn’t really matter. What matters is this business amazing? Could it be amazing? Would an investor get excited? An investor doesn’t get excited with, “Oh, I have a job once” or with “Oh, I made a website once.”

We see a lot of times early stage entrepreneurs, even at 500 Accelerator, they say like “oh, you know, I’ve had this exit.” By Silicon Valley standards, no you really haven’t. Maybe you made a website that went out of business and you sold it’s assets or something like that. But what’s really important are the metrics of the business because if you don’t have a reputation, then this is pretty much all you have. Also, like the guy right before me was saying, if you…at this stage, it doesn’t really matter what your idea is. It matters if it works. I’m interested in hearing about your business. Once I know that there’s something there, there’s something like taking off, I’m interested in hearing your story. That’s why we think metrics are really important. That’s why we have a growth and marketing team. That’s why 500 is very metrics-focused and revenue focused versus other accelerators or just in general in the early stages investment world.

So pretty much, web metrics are super, super complicated. The biggest problem is just as Tim Barksdale said, keeping the main thing the main thing. Metrics are about making better decisions. So this shit’s all really complicated and can make you really confused. But it’s also really powerful. Like you how you don’t waste six months of your life pursuing the wrong strategy because the metrics told you different and you weren’t measuring that. It sounds really obvious when I say it right now, but it’s actually pretty difficult in practice and takes a lot of explicit focus to do this right. So pretty much what I think you guys should do is basically have two metrics. It’s like one is how fast or easy is it to make a sale. And that’s like a funnel. It could be acquiring a new customer, it could be like getting an existing customer to buy against, maybe it’s some blend of that. Maybe it’s extending a subscription. And then, depending on your business, it’s like how cheap or easy it is to serve this customer. If you are in some sort of marketplace then you have a cost here to provide the service to find supply. If you’re just purely a software product, you have these like product development costs. You have more features to build. But if you’re smarter about the metrics and which features your best customers are using most, then maybe you don’t need to incur all that cost. Then if you’re measuring these things you can drive these two things over time. Drive them down over time. Then you have an awesome business that grows really fast and has high margins. If you can tell that story effectively with numbers to back it up then investors are going to be falling all over themselves to invest in you.

This is why I think starting with just the simplicity of the drivers of your business and just being able to talk intelligently, like you’ve thought deeply about what matters in your business, what are the things that are risk factors in the numbers like, “Oh, I buy a lot of ads and that costs a lot of money but my customers go away after one purchase.” Or just something that just you as a smart business person, if you were a domain expert would understand, those are the web metrics that matter. Not just like a set of metrics that Google analytics or Mix Panel or whatever you use is reporting right out of the box to you. That then you’ll parrot to an investor, something like these are my KPI’s. Aren’t these good? Aren’t these good enough KPI’s? The point of web metrics and the point of what I think excites investors are like you being able to understand the numbers of your business and talk cogently and intelligently about them. So the basic things you do track are like sources and their conversions. And often there are pixels that are associated with that. If you’re buying ads and then there’s kind of a third piece which kind of goes maybe in the middle that you might want to talk about which is server attention metric after you pay to acquire a customer. How much is that person worth to you? This is just as a kind of side note. Pretty soon, when you start thinking about your web metrics, you start getting into the customer acquisition cost and then the long term value of that customer.

One thing that’s come up for us pretty frequently, in a lot of our companies, is that this long-term value is really, really dangerous, this entire concept for you. Because you’re not in it for the long term. You’re in it to stay in business for the next four months or six months or nine months or at that next funding round. Or to get to profitability. A, you’re in this for the short term. And so what matters is actually the payback period for the customer acquisition cost. So it doesn’t…yeah, question?

Male #01: [Inaudible 00:07:43]

Mat: What do you hear a lot?

Male #01: [Inaudible 00:07:48]

Mat: Or next business milestone. I think a lot of the companies we talk to that are relatively early stage in our accelerator, even beyond it at seed stage because they’re trying to scale marketing, they think a lot about, “Oh what’s our long-term value of a customer.” Maybe it’s three years based on their six months of data or something like that. And then potentially what’s really dangerous if those are ad driven business where you pay big dollars, they’re like, how am I going to scale? Can I spend a million dollars a month on this? Because I made some assumptions about some user sticking around for three years. I think that’s scary because I’ve been in those shoes; I think that’s a terrible idea. I think that’s a good way to go out of business. And a good way to stay in business is to pay either explicitly in terms of advertising or implicitly through whatever market activities you’re paying marketing in terms to do or not. To think about the payback periods, so if a customer becomes profitable in maybe three months or something, that seems like for a lot of companies, something you might be comfortable with if you’re actually trying to scale and spend meaningful amount of money. That’s why I think payback period is super important. Because if you have something that’s working, you want to scale it. And you can’t scale it if you run out of money. That’s what I’m talking about. I’m happy to talk more about this after, I was going to have a bunch of time for questions.

So this is what I think at early stage. I think when I started my career in web analytics, you basically had to build your own tools cause all the tools sucked 10 years ago. Now I think that all the popular tools are really good and track pretty much the same stuff and allow you to make funnels. Particularly at your early stage, where what’s most important for you is not having the more complicated metrics but having a few simple ones that you deep understand to be representative of your business. All the popular tools like the Mix Panels, even the Google analytics, the Heap analytics, a bunch of the mobile ones. Localytics is just one of the mobile tools that I like that I was looking at recently. They’re all pretty good, they all track pretty much the same stuff.

Also, your own database is good. When you are sort of building your own quantitative understand of your business at an early stage, there’s probably going to be data that you will find that you are collecting from your app. Maybe in your orders, maybe it’s your stripe payments, maybe it’s your own user logs, that might not be out of the box be supported by a mixed panel or something but you know is important. And so I’m a big believer at early stage in just like getting into your own real data and understanding the actual customers. How they first come to your site or interact with your product, how they purchase. So your own database is great for understanding your business. So I like to start there. Also, relatedly, all web metrics can be off like 20% and you’re never going to fix that. So analytics is, so if you have a Mix Panel, or Google analytics, like the number of orders you get from it, and if you have a conversion pixel from Facebook or something, the number of orders you get compared to the number of order in your database often, for various reasons, are off by like some reasonable amount. If this is important to you then you have a bigger problem. If you’re at this early stage, that this sort of inaccuracy is so important to your business because you have such razor thin margins and you have such little signal about whether your product and company is any good. Then you should basically have a better product.

The point of metrics in the early stage is getting a signal on whether or not at all your even offering something right that the market wants. And because you’re so early stage, you’re like this brand new company that no one knows about. And it’s not good enough to just be a business that kind of works, especially if you’re trying to raise money. I personally don’t really care if you guys want to be entrepreneurs. I mean, that’s nice. It might be nice for you. You might even make yourself a million dollars a year just from owning a business. That’s great. I personally don’t really care that much because what I care about is companies that have the potential to scale to hundreds of millions of dollars in revenue. If you’re onto an idea that good, then it really obvious in the metrics that you’re onto something. That’s a big part of web metrics at early stage is related to giving you a gut sense of the product market fit of your product. Like how much customers and potential customers really, deeply want what you need. You can sort of see that show in up metrics.

And what they say, there isn’t like a rule of thumb. It’s more like pornography. It’s you know it when you see it. If you feel unsure like, “oh I’m growing a little bit. I’m not sure of our product market fit. I have some customers that like my product.” That means it’s not good enough. Your product should be great and people should love it and you’ll see that in the metrics. And it’s kind of flat to kind of up, it’s not good enough yet. Make it great and then you have your one slide deck and have it really take off.

So similarly, what we advise is…this is really awesome. I built a handful of companies from seed stage to series A, series B, that kind of thing. This is one of the best little infographics I’ve ever seen. It was so good that we re-tweeted it sometime in the last year. The idea is to build a product and a company instead of starting with a part and going up to the full thing. You start with a mini-version that accomplishes the goal in a really ghetto, light-weight, simple, cheap, half-assed way. Then you expand up from that kernel, that fully functioning kernel, to a slightly more polished and larger product that basically still does the same thing.

So because this is the correct way to build product, this is also the correct way to instrument your business. The right way to instrument your business is to not throw analytic software on your website or in your app and track everything to then see what’s important. The right way is to come up with a couple of metrics that really matter and think really deeply about your business, like I’ve said 4 times before. And when you just have a skateboard, it’s not a lot of numbers in there. If you are selling some sort of enterprise product and if you’re doing some customized code for your customers because you’re an early stage company that hasn’t really finished your product yet and you don’t know what you’re customers are willing to buy from you, then there’s pretty much just two numbers. How much effort it takes to sell to that enterprise company in terms of emailing them and getting them on the phone and getting them into contract or whatever? And then how much work it takes to just serve that customer?

So one thing that you might find by those metrics is that–I understand why that’s logical and that’s why I made this point. Because A, if you’re doing anything meaningful, the vast majority of your customers are in front of you, not behind you. Basically, it doesn’t really matter what happened in the past. Also when you start out, you don’t know what you’re talking about, per slide one. You don’t really know what the funnel is. I mean, this is in general. You personally might be the exception that proves the rule. In general, it is a pretty good rule that the most common error with your mixed panel is that you track everything then figure out you’re wrong or you named things wrong and your business changes, your app changes, whatever. And then you’re stuck with a bunch of craft and it’s just messy. It’s better to start from the simple kernel and then work outwards to instrument your business in a more and more detailed way.

And by the way, when you’re talking to investors and you’re describing the system that is your business, you can communicate that effectively, you can articulate clearly is to not just have a whole bunch of numbers like here’s a bunch of KPI’s and a bunch of growth rates. But to talk about the hierarchy of the numbers. Here are the real drivers, these are the things that we work on everyday. These are the drill down non-obvious things that you as an investor would like with broad general experience but not as much domain expertise as me and my business. You might think it’s true but actually it’s counterintuitive that we learned from drilling down from this one key important metric into something more detailed.

So that’s why I think starting simple is really important because also development time is is at an extreme premium when you’re an early stage company. It’s really easy to spend a third or a half of your CTO’s time or maybe you are the CTO, of your time. Sort of like refactoring your analytics stack every six months or something when you found out, “Oh, I wish we were tracking things this different way.” And it just really slows you down. My main point here is it is beneficial to you to be mindful about the kind of analytics and technical debt you incur. If you really have a rocket ship, you don’t need to really track a lot of optimized shit. The important stuff is the bigger picture stuff. And when the bigger picture stuff isn’t working, then and only then do you drill down into the details. That how I think about analytics and product market fit and telling a story to investors. We just happen to see it all the time. I’m not saying one great experienced analytics person wouldn’t nail it right out front and track everything. It’s just almost never true in my experience.

I basically just gave you the explanation for this slide because you’re building this hierarchy of analytics. You’re building your product from a kernel on out. I also think you shouldn’t instrument your business that way. Your question prefigured what I was going to talk about in this slide. I’ve been in seed companies where this is a six-month project for one persons time. Where there’s a lot of anger in the team and grief because you’re like, “Well how do I even trust these numbers? Because the database says that we’re getting 30 orders and I only see 25 orders.” I’ve also been in Series A and B companies when there’s 25 to 30 people or more, where it’s this massive re-write of a bunch of everyone’s time, where you’re gonna like build your own stuff. Also, no one analytics product out of the box exactly maps to any of your particular businesses. Usually, there’s something weird that you don’t get, that doesn’t quite fit. Like you don’t understand how it doesn’t fit right away. And then you’ll cobble together some stuff. Often it is about retention and user activity metrics or stuff that might be stored in your own database to start with. And you might not be fully capturing in your third party web analytics tool or your marketing attribution analytics. Often one big class of problems is that those don’t map up together. Then you have to learn how to stitch the right tools together for your product over time. That’s sort of what I think.

The reason this is important is just because I deeply believe that time management is the most important thing – your most important problem to solve in early stage start-up. Because you have two people or one person or three people. And maybe one of you is technical. Maybe no one is, maybe you outsource your development. So you just don’t have a lot of time to fuck around with doing analytics wrong or spending a lot of time on the wrong marketing channel. You might find that Google AdWords are the best for your business. Or you might think that you’re going to do the five marketing activities that every other startup does. We’re going to buy a few ads, we’re going to blog a little bit, we’re going to try and influence our marketing, we’re going to do some outbound email marketing or something. Just because you think that’s our table stakes. Like, all companies do this kind of stuff.

There are unlimited marketing activities to take up like the unlimited time of like unlimited monkeys. Especially if you’re doing something like content marketing or building your SEO empire from scratch or something like that. You just don’t have time to do everything. Turns out what will be true is that there will be one channel or something that will end up being the one that gets you your first million dollars in revenue. Pretty much just be one. The deeper insight you have about that one channel that works for you that isn’t going to work for other people, then the more likely it is that one’s going to work. And you don’t know up front which is going to work well for you. This is why I think it’s really about opportunity costs and choice because you easily can go out of business with a great product selling to the right customers the wrong way. If you haven’t instrumented it and you waste all your time.

Also, my last slide was I tried to Google for an image that was ‘How To Impress VC’s’. There wasn’t a very good one. This was the search results; they all kinda sucked. And some of them I don’t even understand at all. How I wanted to tie this all together was just to reiterate what I’ve said a couple of times already in this talk about intelligently speaking about your business in a qualitatively detailed and uniquely insightful way that demonstrates your domain expertise and your command for the numbers. I’m not sure if Shaun has said this yet in your program, but one of the more important first filters that investors go through is, “Do you know what you’re talking about? Do I trust you when you’re telling me numbers? Do you sound like you know what you’re talking…?” At first I filter on like, are you ignorant? Do you know what you’re talking about? If you sound like you know what you’re talking about, do I think you’re lying to me?

There’s this big class of initial investor communication that’s about building trust and command of the numbers of your business. Pretty early is do I think you would do a better job building this business than I an investor would? And if I think I have a better sense for the numbers and more insight into the metrics based on my shallow but broad experience, then there’s no way I would ever invest in you if you know you don’t have this. Well, it’s funny that you would think that and I see what you would because most other businesses in my industry that I’ve researched operate like this. But the way I, a small start-up, am going to win against incumbents is I haven’t found this other insight to do things a little bit differently backed up by numerical experience. So that’s why you should invest in me to disrupt these incumbents. That’s how metrics, at this really early stage, tie together with managing your time right and sounding like you know what you’re talking about.

I don’t know how much time we have now. I guess we have like 15 minutes before lunch. I’m happy to let you go or we can just have a conversation about anything that’s come up. More of less technical right now or more metrics questions you have. More fundraising questions, anything like that. You can pitch me your business, whatever you want. I would say it’s qualitative and relative. So you’ll probably be testing, maybe it’s a handful of channels. Maybe it’s Google ads, Facebook Ads, SEO take a long time to build up. You might have an insight that this is going to be a good channel for you based on your domain expertise. So it’s something you might want to be investing in for a while. Paid channels often have a monthly spend threshold below which knowledgeable practitioners think that you won’t be getting enough signal. So you’ll just be getting wrong results, either false positive or false negative. I think that’s almost on the order of $5,000 a month, frankly, on things like Facebook ads and Google ads. That’s what I think about picking channels.

But because it’s hard to know just objectively what level of signal is enough, thinking about each channel relative to the other ones. And especially putting a dollar cost on the organic activities you might do, let you compare it against other channels. You can also think–one thing I like to do is think about the price point of the product, even a little bit down the road. If you think you are going to be selling a product for less than $5,000 a year, you basically can never pick up the phone and you basically can’t email anyone. A business has to pretty much buy it themselves. There are outbound sales channels that may or may not be open to you depending your price point. So I think the honest truth is, Charle Munger, Warren Buffet’s business partner, has this approach of making data-driven decisions, in his case investment decisions, that he calls “Multiple Mental Models”.

And he describes it really eloquently in being smart about a bunch of different quantitative aspects and then just synthesizing those things together into a gut feel about what a channel’s maybe going to work out for you. One thing that’s going to scale with you as your business grows, for instance. Most channels get more expensive as you scale. Most early stage entrepreneurs mistakingly think that they’ll just get better at it and so it’ll get cheaper as it scales. Usually, if you’re really driving a channel, you optimize as hard as you can and that just keeps your unit economics stable as you grow, as you scale, rather than the opposite. Early stage entrepreneurs often think that “Oh, I’ll start here. And it might not be profitable now but I can drive it way down because I’ve just get better at it and more experienced.” That could be true at constant scale. But if you’re trying to grow by 10x or 100x, usually it goes up in price. That’s just my own personal experience, I don’t have a pat answer for you on that. You have anything you want to say, Shaun?

Shaun: Yeah. I kind of wanted to unpack that idea of sort of trust and feeling like the person knows what the hell they’re talking about.

Mat: [Inaudible 00:28:52]

Shaun: Yeah, I do. And we talked a little bit about–I mean I used the example. I’ll say, “What’s your acquisition cost?” And they’ll be like, “Oh, it’s between $30 and $50.” Okay, well that’s a big range. But what other mistakes, what other ways can a founder screw that up when they’re asked about acquisition or growth data? What other sort of pitfalls, you know?

Mat: Oh, you know it really varies by stage. One thing that’s super common for early stage founders is that you just don’t even know what you’re talking about; you’re either an idiot or you’re lying to me is the cumulative numbers versus, week over week, or month or month numbers. I think another meta point is just not having a thoughtful reasoning behind any of your numbers or a precision. Because then it sounds like you read a blog post and you’re like, “Oh, investors want to see these numbers,” and you went and found some version of those numbers in your business in the cheapest least thoughtful way possible. Then you’re like, “Here, see? Look, look, I’m growing like this.” That sounds like you don’t know what you’re talking about. It sounds like you just don’t understand your business that deeply. That’s kind of the meta-point that I think is most important. The most dangerous one is, I think, this LTV that I talked about. There’s a lot of extrapolation into a very uncertain future, based on very limited past data.

Shaun: Everyone know what LTV is? Just in case. Yes? If you don’t–okay.

Mat: Long-term value of a customer, lifetime value of a customer, that sort of thing. See if you have customer acquisition cost.

Shaun: How do you answer that question if you’re in month two of your business? And beyond–

Mat: That’s why I talk about pay-back period. Because I think if I was just talking to one of our portfolio companies, that’s one of the best companies that come out of 500 Accelerator with best revenue and raised a lot of money. And they’ve set their sights really high. And they’re really looking to scale now because they have a few millions dollars to do it with now. I was like, look guys, if I put myself in your shoes, like I said before. Do you want to spend a million dollars a month based on this assumption that your customers are going to stick around for six months versus three months? Or, in the future, nine months versus 12? Or by six products versus nine products or something? You have no idea what’s going to be true. You don’t know which group of which customers is going to be long term profitable for you versus the ones you have now. Some will be long term profitable and some other groups of customers will be bad customers. But you might have then now so your data might be wrong. If you have raised–they’ve raised this money and they want to spend it and so I’m like, “Look, I would be so scared about this LTV calculation.”

In their case, they’re profitable in two months right now. And they were thinking to scale and they would start spending more aggressively and drive their margins down. And I was like, “Well, maybe I’d go for three months. I think that seems like a pretty reasonable step forward to discover what the economics were going to be with 50% more spend.” But I don’t know that I would go out to six months. I’d be fucking scared if I were spending millions of dollars and I was counting on spending $100 for a customer that paid me $10 this month and making that up sometime before the end of the year. That would scare the shit out of me.

Male #02: [Inaudible 00:32:44]

Mat: Yes, I’ve done it myself. All the time.

Shaun: Yeah, I did it with my last business. I thought the payback period was 2 months and it was coming more close to being 3.5 to 4 months. So it was twice what I had anticipated. Which has an issue on cash flow–

Mat: It doesn’t–Just what Shaun said there. Like 2 months versus 3 and a half. That is so within any reasonable margin of error you can ever imagine for a start-up business, for an early stage business. There’s probably nothing you did wrong. It’s probably just the margin of error and it was an assumption that was one side the margin of error versus another. You’re tracking it–

Shaun: Yeah, you’re right–

Mat: –just perfectly.

Shaun: I think so. But ever three months, you know a lot more about your business. Everything months, you have this bigger cohort that you can look back on. The resolution just gets a little bit better.

Male #03: [Inaudible 00:33:37]

Shaun: I don’t know if there is one. I mean, if you say that the payback period is–let’s say if you my payback period is 2 months, good. If you say that my payback period is on the second transaction and on average we’re seeing 3.75 transactions per customer, I’m feeling a bit better. Okay, you really know the numbers and you’re not just saying we’d make it back on the second transaction. You’re telling me that most of your customers perform more transactions. But I don’t know. What’s the sweet spot for that? It’s hard to say–

May Johnson: I think it’s really like a gut call and it feels like I can use analogs. Like, if you have a credit card, you’d probably feel uncomfortable throwing down all your expenses for the next six months right now, putting it all on a credit card. You might not even have a credit card limit that high. But you might feel okay if you have a good thing going. Like put down first, last and a security on an apartment or something, to move to San Fransisco and start your business. Maybe that’s pricey like that’s a pretty big hit. But you might not feel comfortable putting six months, even if you had it, putting six months on your credit card or something. That’s kind of what I think.

Shaun: Yeah, I think other things, like most marketers, it’s you doing it or someone else. They’re going to want to step up in terms of acquisition. They’re not going to go, “Oh we’ve spent $5000. Now let’s spend $50,000.” Because if you do that, it tend to throw everything off and your costs are all over the place too. So you just want to feel comfortable. It’s like, “Okay, we spent $1000 this month. We’re feeling better. Okay, let’s ramp it up a little bit.” And you’re sort of–

Mat: Like I said before, there’s a similar–there’s a graph whereas your spend increase, usually your cost to acquire goes higher. Because the first customers you get in any campaign are the ones that are really interested in your product for whatever reason and may be actively looking for it. So they’re the ones that clicked first. Then maybe they’re always on Google or Facebook, always on the look out for that product. And as soon as you start buying ads, they’re like “Shit, I’ve been waiting for this forever!” But then you’re starting to scale up and then you’re starting to find people that, especially if you’re advertising in like display or Facebook where people see the same ads a few times, you’re the getting the people that are like, “Well, I’m kinda interested in looking at this,” after a 5th ad or something. And those people, because they’re not actively looking as much, they’re going to be more expensive to acquire. Plus there are other people that are competing for the attention of those potential customers and they may or may not, have more an affinity for those customers than you do. As you go up in size, you’re just competing more on a competitive landscape for attention. You don’t know, per Shaun’s point, where your economics are at. $10,000 a month are going to be way different than your economics at $1000 a month.

Shaun: Right here, go ahead.

Mat: I see. And so you earn an affiliate fee Well that’s like the same as e-commerce because there’s not a subscription or anything. But just your margins are a lot worse. So then payback periods are a lot longer.

Male #04: [Inaudible 00:36:53]

Mat: Well, you can track the transactions, right–

Male #04: [Inaudible 00:36:59]

Mat: Cause that’s how you get paid.

Male #04: [Inaudible 00:37:02]

Mat: Well, I know but you get paid. Your affiliate fee, right?

Male #04: [Inaudible 00:37:10]

Mat: So the payback period to you is your net revenue, not what they’ve spent as that e-commerce store.

Male #04: [Inaudible 00:37:17]

Mat: Yeah, it’s hard in your business because people aren’t logged in and they don’t have accounts. So you don’t see all the order flow. So I think it really is just your data quality won’t be as good. You’re just going to have to live with that. But there are a lot of affiliate sites that became membership sites, for instance, where your data’s a lot better. You’ll see the repeat click behavior of people who are cookied if no one ever logs in, you know within the cookie window. So that’s pretty much as good as you’re going to get in my opinion.

Shaun: Yeah, I mean, we can’t go into too much technical details. But the main point is when they’re going to a third-party site, you’re going to lose some resolution. Mat talked a little bit about UTM codes. If you’re not using them, I would look it up and understand what they are. Once you know what they are, you’ll start seeing them everywhere. These are like, UTM source equals. The challenge is, yeah. You’re loosing a lot of that data. Some affiliate will let you pipe that data in and then they’ll send it back out on a post-back or call-back when the transactions complete. But there’s probably bigger challenges to worry about that business, primarily high-share and low-margins. There’s other things you need to kind overcome before that.

Mat: Hierarchy of metrics that matter. Like Shaun just said. There are bigger problems like maybe that’s not your biggest problem right now.

Male #05: [Inaudible 00:38:49]

Mat: Well I think it’s 12, I don’t know if–

Shaun: The foods setting up – I was going to make you guys sit here for 10 minutes and just make your tummies grumble. But you’ve been so good. Let’s break here. Let’s thank Mat, everyone. thank you.