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Entrepreneurs buck conventional wisdom by proposing new means of solving old problems. Creating a new startup is an exercise in innovation. But how do startups measure how effective they are at innovating? The answer is simple: accounting—just not the traditional type.
Vonjour, the new uber intelligent business phone system and customer support solution, has built a best practice guide to startup analytics and customer development. The best practice guide is aimed to help businesses to channel innovation in a way to fuel growth.
Startup accounting is different than traditional accounting. Traditional accounting pertains to achieving certain financial milestones, auditing resources, and holding managers accountable. Startup accounting on the other hand helps business learn how to grow a sustainable business.
Eric Ries, the founder of the lean startup movement, coined the term “innovation accounting” to describe the accounting framework startups use to validate the progress of how a development team is delivering a product that is actually driving growth. Innovation accounting is not unique to startups though; it can be utilized by businesses of all sizes.
For businesses experiencing growth and traction, it is tempting to point to new feature releases and more users as evidence that a development team is making progress at “improving” the product. But how does a startup know whether current growth is due to current product development, as opposed to simply reaping the rewards of early product development?
Truly understanding a company’s growth requires a different set of metrics. Traditional accounting frameworks rely on gross metrics such as total user signups and revenue to assess the progress of a business. However, these metrics can distort what truly is driving growth.
Inaccurately ascribing growth to current product development can give a product development team a false sense of progress. More importantly, it can also reinforce the wrong lessons on growing a business.
As an alternative to gross metrics, innovation accounting relies heavily on measuring how independent groups of users respond to changes in a product. Cohort analysis is one of the most important tools of startup analytics. The premise is fairly simple. Instead of looking at cumulative totals like revenue and account activation, companies measure their progress through the performance of each group of customers that comes into contact with the product independently.
• How have new product tweaks changed retention?
• Do these customers increase their spend on the platform?
• How do these metrics compare to earlier cohorts?
The power of this type of analysis is that a startup can assign an independent report card on each cohort. If a new batch of users responds to product tweaks with increased retention, a business can more accurately attribute which product tweaks are driving increases in performance.
Cohort analysis allows us to understand a business through objective metrics. In addition to quantitative metrics gleaned from cohort analysis, startups can gain a more nuanced and comprehensive idea of what users are responding to by talking to users through customer support and user interaction sessions.
Customer support provides a qualitative feedback loop on how users are responding to product tweaks. For example, cohort analysis may show that product changes are not driving growth, but actually talking to users helps a business understand why users are not responding to the product the way the business envisioned.
After a release of a new feature, members representing the various branches of a the business should make it a priority to support customers through its various customer support channels. Engineers can understand how users respond to performance issues. Interaction designers can understand how to users can better access a new feature. Sales and marketing of course can determine what the aha moment is for that user.
Customer feedback and rapid iteration based on that feedback is an integral part of creating a successful business. Listening to users does not mean doing exactly what they request. It’s up to founders to decode what users are saying into the pain point that they are experiencing—the true message of user feedback is often buried on the surface of their requests.
In supporting these customers, it’s critical to figure out what makes them happy. When launching Gmail, Eric Schmidt challenged his team to get 100 happy users inside of Google before launching the product to the public. The team approached 100 users inside of Google and asked what they could do to make them happy. The users provided a feedback loop to create a very good product.
It’s an error for companies not to actively engage early users through customer support. Startups often make the mistake of neglecting their customer support. It is a mistake. For most successful startups over engaging with early users is a necessary part of the feedback loop that makes a product good.
A key component to driving growth is making users happy with a product that solves their pain points. Tools like Vonjour and ZenDesk provide channels to support customers intelligently. When combined with analytics tools like MixPanel and Kissmetrics, businesses can gain a comprehensive view how well their product development drives growth. These tools are essential to testing a vision continuously and learn valuable lessons on innovating and driving growth.
Improving a product clearly involves serious dedication to engaging with customers. Here are some additional resources to understanding Innovation Accounting:
- Paul Graham on doing things that don’t scale. Pay particular attention to his ViaWeb example. In it's early stages ViaWeb made customized products for individual customers. Including customers in product backlog grooming is a great way to make sure that you are tailoring a product towards actual user needs. Finding users in your target audience is the first step.
- Paul Buccheit talks about making 100 users happy with Gmail prototype.
- Marc Andreessen popularized the notion of product/market fit, which fits in perfectly with…
- Steve Blank is famous for his lessons on customer development (slides).
- Vonjour has some tools to help your company talk to and support users more intelligently: intelligent virtual phone numbers, fax services, online voicemail, conference calling, and more.
