Tuesday, November 5, 2013

Lean Analytics

One does not need to take huge risks in order to grow most businesses. Techniques to understand markets before scaling are explained very well in a book that has been previously discussed on this site, The Lean Startup. But what specific metrics should managers focus on, in order to ensure they are on the right path? Alistair Croll's Lean Analytics seeks to answer this question.

The book's main theme is that at every point in a business' life, there are only a couple of metrics that really matter. Businesses should focus on improving these key metrics until diminishing returns are met. At this point, it is other metrics that become important, and it is on these new metrics that managers should focus.

Since the important metrics for a business at any one time will vary significantly by industry and by individual business, the authors don't present an exhaustive list of all possible metrics, but rather a way for managers to think about what the important metrics are for themselves. For example, a newly established retailer with little mind share might consider traffic per week to be the most important metric at a certain point in time. A media site might consider page views per day important, while a social media site might consider minutes on the site per unique visitor to be important.

Whatever the most important metric at the time, each business should apply a build->measure->learn loop (also discussed in the book) on a small scale until it figures out what works, and then scale that solution up. For example, once the retailer's traffic is up enough such that there are diminishing returns (because extra investment brings in little marginal benefit or it has reached the traffic goals it considers appropriate for its market), it's time to move on to another metric (e.g. basket size, or net promoter score, or whatever other metric is deemed appropriate to reach the company's goals).

The authors clearly come from a tech background, so many of the example cases discussed are in software, cloud or other areas in which readers of this site may not be familiar. But I strongly believe that the business concepts described in the book apply not just to tech but other businesses as well, with one caveat; most of these techniques are best applied to consumer-facing businesses.

If you want to think about what kind of metrics are important to the businesses in which you are invested, or you want help thinking about what metrics you should be thinking about in order to grow your own business, then this book is for you.


CH868 said...

Should I read "The Lean Starup" fisr before I read Lean Analytics ?

楊大寶 said...

Hello Saj,

Sorry for another unrelated question. I think apart from general accounting knowledge, an investor will gain an extra edge if he also possesses industry-specific knowledge. What books do you recommend that focus on a specific industry?

Personally I know the following books:

Analyzing And Investing In Community Banks
The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors

Science Business: The Promise, the Reality, and the Future of Biotech

Oil 101

The Shipping Man

Cable Cowboy: John Malone and the Rise of the Modern Cable Business

The Business of Media Distribution: Monetizing Film, TV and Video Content in an Online World

There are some autobiographies written by successful executives/entrepreneurs (Sam Walton, Alfred Sloan, Hank Greenberg...etc), but I think they are more about individual company's rises and falls, probably not ideal in terms of providing a holistic industry overview. What are your thoughts?

Saj Karsan said...

Hi CH868,

It depends on what you are after. If you're going to read both, then I'd say yes.

Hi 楊大寶,

Off the top of my head I would suggest Media Mogul for the media business, the three books on AIG for the insurance business, and The Box for shipping as well.