Opinion: Pick your compass metric

One of the most important tasks as a leader in a startup is to pick the right metric to track.

By Tobi Lütke.

This is often referred to as the "compass metric" because it will be your compass for growth. It's important to note that the compass metrics will likely change over the lifetime of a business.

Let’s say you started a new social network. When it’s time to pick your first compass metric, you settle on tracking the sum of people who log in on a given day: Daily Active Users.

Good pick. It’s hard to misrepresent a metric like DAU. If people don’t like your service, they will likely not return, and your DAU will fall over time.

Another metric you could have picked is daily sign ups. This would also give you a good sense of progress, but it’s not nearly as robust. Although you want sign ups, they aren’t necessarily synonymous with the health of your business.

By spending a lot of money on marketing you might get a lift in sign ups, but if none of these sign ups ever return, your metrics would tell a misleading story. Daily sign ups look great, but without daily active (and engaged) users you’re just filling up a leaking funnel.

The metric you decide on will be your compass for growth. You implicitly tell your team that if someone moves this metric in the right direction they are doing a good job. If you launch a lot of experiments you can sometimes allow people to use other metrics for some early readings, but you should only conclude the efficacy of your experiments by checking the impact on your compass metric.

After you settled on the compass metric, you have to choose a time frame. This is important because you want to have a very tight feedback loop. If you have a six-month sales cycle and your chosen metric is bookings, then it’s very hard to properly experiment.

Lastly, you have to design the user interface for your tracking. How exactly are you going to keep your entire team informed? From which angle are you going to look at your metric? As an absolute number ($10,000 in bookings this month), or as a relative number (30 per cent growth over the last quarter)?

Let’s take Shopify as an example. We are a fairly complex business with (thankfully) many different streams of revenue. Most of our money comes from customers that pay us subscription fees. After a lot of experimentation, we concluded that the best compass metric for Shopify is weekly CMRR growth.

(What's CMRR? CMRR stands for Committed Monthly Recurring Revenue. From Bessmer’s cloud computing law #2: To achieve better business visibility, most top performing cloud companies focus on annual contract value or monthly recurring revenue - the combined value of all of the current recurring subscription revenue - instead of bookings. We recommend companies actually take this a step further and track the forward view of committed monthly recurring revenue. The CMRR differs from the MRR in two ways. Firstly, it includes both “in production” recurring revenues of the customer and the signed contracts going into production. Secondly, it is reduced by “churn” which is the MRR expected to be lost from customers that are anticipated to be ending service in the future. CMRR gives you the most pure forward view of the “steady state” revenue of the business based on all the known information today. This is the single most important metric for a cloud business to monitor, as the change in CMRR provides the clearest visibility into the health of any cloud business.)

In short, you take the monthly value of all your active customers, plus committed sign-ups and upgrades, minus the monthly value of all your downgrades and churn. Then you calculate the growth of that number compared to last week.

Our internal goal is to reach 3 per cent weekly growth, a very ambitious number given our size. The user interface is simple. Monday mornings, our system sends an e-mail to the team that includes a red ✘ if we fell short or a green ✔ if we made it. Everyone gets it.

Most groups that have a direct CMRR impact also get their own versions of this e-mail that reports how their group did compared to everyone else.

Weekly meeting

Every Thursday we have a quick funnel meeting. This meeting is attended by everyone who has a direct impact on the CMRR number, including those in sales, marketing, partnerships, etc. Everyone in attendance shares two things:

- What have we learned this week; and

- What we are going to do differently next week

This is the motor of a fast-growing multi-million dollar venture-backed business. Our growth comes from a combination of choosing the right time intervals (one week), the right compass metric (CMRR), and the right perspective (week over week growth).

There is only a minor amount of support scaffolding built into this structure: one email and one meeting a week. Everything else flows from that.

Tobi Lütke is the founder of Ottawa e-commerce platform provider Shopify. This column originally appeared on his blog.