The full story of “the one important thing” for startups

You might tacitly assume that I have no major blind spots when it comes building little tech startups. I pontificate on concepts that I learned through hard work, luck, observation, and failure, so surely I have all my bases covered. No stupid mistakes happening over here, no sir.

Completely untrue, of course.

I just had a new epiphany, which if you just skim the bold bits you’ll think is old news, but I thought that too, and by skimming I missed its important implication.

I was listening to Noah Kagan (founder of AppSumo and the marketing mind behind Mint, and the author of this great guest post) talk to the current crop of Capital Factory companies, when he said something so simple, so obviously correct, and yet it completely changed how I thought about my approach to WP Engine.

I’m sure he won’t mind me revealing this little nugget, seeing as this is the same Noah who does topless video interviews and will show you his underwear if asked, though I’m not sure why anyone asks, except that they know he’ll do it, and someone so willing might have something worth looking at.

He said: “A startup can focus on only one metric. So you have to decide what that is and ignore everything else.”

It might sound like the usual platitude that “startups need focus!” It’s not, as he proceeded to explain. I’ll explain it here using WP Engine as the foil rather than revealing secrets about AppSumo because, although AppSumo internal metrics are both impressive and instructive, it isn’t my place to reveal them. (Maybe you can beg Noah in the comments to give up some love in a future guest post?)

I was talking to Noah a few weeks later about WP Engine, inspired but still not fully understanding what he meant.  It went something like this:

NOAH: So if you could change just one thing at WP Engine, what would it be?

ME: Well Dharmesh told me it’s our cancellation rate. And Dharmesh is a SaaS business-model God, as evidenced by his well-reasoned Business of Software speeches and tangible success with Hubspot.

(Yes, I proceeded to lecture Noah about SaaS business models, as if he didn’t already understand, probably to prove that I did know, or to finally work out for myself what I believe. If this isn’t enough for you, here’s my expanded brain dump on cancellation rate.)

See cancellation rate is indicative of several important things. First, whether we’re providing a genuinely valuable and desirable service. After all, I can bludgeon a person into signing up with us through marketing and salesmanship, but if they don’t stick around it proves we’re not really providing something they need, at least not at this price. So it’s an important measure of the service itself.

Second, and more “metrics-y,” cancellation rate is one of the keys to computing customer LTV (lifetime value). If we know a typical customer pays us $50/mo and stays with us for 30 months, that’s $1500 in “lifetime” revenue. That helps us answer questions like: How much can we spend to acquire a customer? Or: How many customers do we need to produce $10m in revenue?

But the key to computing LTV is “how many months will a customer stay with us,” and the key to that is cancellation rate — the higher the rate, the fewer the months, and LTV plummets. High LTVs are nice because it means the business has good cash flow, and means we can spend more on things like marketing and advertising.

So yeah, I want cancellation rate to go down!

NOAH: OK.

(That’s how Noah says, “I heard everything you said. I’ve heard it before. It’s technically accurate, but you’re a dumbass and you’re missing the whole point. But you won’t listen to the truth until you get this bile out of your system.” Noah is a man of few words. Unlike me.)

NOAH: So do you think you could get your cancellation rate from 3% to 2.5%?

ME: Yeah I think probably we could, and that could increase our LTV by 15%.

NOAH: Let’s say you did that. Congratulations. What would be different?

ME: Oh, we’d have more revenue and we could spend more on ads.

NOAH: That’s it? All that would change is you’d spend more on ads? That’s important? That makes the business fantastic?

ME: Well no, I guess things wouldn’t change that much.

NOAH: You should only be doing things that can be “that much.”  If you increased signups by 2x would you say that would make a big difference?

ME: Heck yes, that would be huge!

NOAH: So do that and ignore the cancellation rate.

ME: But I can’t just ignore it because: I could easily get sign-ups to double if I just spent 5 times as much on AdWords, but then the lead quality would suck and cancellation rates would skyrocket and in the end I haven’t done anything meaningful, and I probably made things worse because now we’re sifting through all these crazy people who won’t even stick around and it just doesn’t seem strategic.

NOAH: I stopped listening after you said “I could easily get sign-ups to double.” Go do that.

ME: But what’s the good of a “sign-up” if most of them cancel?

NOAH: You don’t know they’ll cancel. What if you got sign-ups to triple? And cancellation rate doubled, from 3% to 6%. You’d still be growing almost three times faster.

ME: Oh yeah. Shit. Oh yeah.

So I did, and guess what? Cancellation rate didn’t go up much. Noah was right.

Sure, it went up a little, for the reasons I gave, but it doesn’t matter.

At a little company there’s no time for small changes achieving small goals. Increasing conversion rates from 0.9% to 1.1% doesn’t matter if only 100 people come to the website every day. Much more important is getting 1,000 people to come to the website every day.

And anyway, you can always optimize that little stuff later. You can always eke out 0.1% more conversion rate. Or even 1%. Of course you can. There’s probably 1,000 people you could hire to do it too, because it’s mechanical. Non-trivial, but not difficult. And in your control.

So don’t bother. Focus on the big thing where, if you moved the lever, it would significantly change the business. It doubles revenue or solidifies the funding story or pegs the viral coefficient above 1 or builds the asset of having an active user base.

Little incremental things can come later, when you have the extra time. Today, it’s just big needle-moving things.

Does that mean no A/B testing, no tweaking of AdWords copy, no landing page optimization? For Noah, yes that’s exactly what that means. I’m not as disciplined, so for me it’s not so spartan. We’ve all heard stories about little tweaks resulting in 15% lift in revenue. Fine.

But remember you’re deciding between spending hours iterating to a 15% lift, versus spending all your energy, time, emails, social media, creativity, new features, marketing efforts, ads, measurement, trying to get a 2x or 3x change in the Most Important Number, that’s an order of magnitude better. And you can still do the 15% thing!

However, part of this “only do big stuff” means knowing what “big stuff” is, versus the secondary stuff. And to do that, you have to focus on only one metric. For us, that’s growing the number of sign-ups. Yes, cancellation rate is also very important (and I’ll talk about that in detail in a future post), but by narrowing down on the one thing that matters, you can focus on actions which have the potential to move that one needle regardless of the others.

Often, that’s the kind of action and focus which breaks you out of those incremental changes and into major changes in the trajectory of the business.

It took me 15 years and side comment at a group meeting to understand this. Hopefully you can internalize it right now and act accordingly.

I am!

What’s your most important metric? What could you do in the next two weeks to change it? Or ask the community here for advice! Let’s discuss in the comments.

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  • Anonymous

    We’re a WP Engine customer, and I have a theory why you have a high cancellation rate.

    The reason is: you do not frequently remind us how awesome you are at your core competency of WordPress hosting.

    We’re reminded of how awesome you are incidentally. We have some support problem and you resolve it in nanoseconds.  A customer or an advocate comments on the unbelievable speed of our website. Non-WP Engine hosted sites go down, and we think: “Wow, it’s good that we’re on WP Engine!”

    How about a newsletter talking about how awesome you are? How about a monthly email with some of our own uptime statistics and page-load times?  How about pass-along coupons or thank-yous for testimonials or other incentives to loyal customers?

    Oh wait, you weren’t talking to me. You decided that increasing sign-ups was more important than reducing cancellation rates.   Maybe those two things are actually more connected than you realize. :)

    • http://blog.asmartbear.com Jason Cohen

      Our cancellation rate isn’t high! Just seems like a priority anyway.

      But I think your point is excellent. I guess the trick is tooting your own horn while still adding useful content to the world. Maybe we could couple the “we’re so fast” stuff with additional tips to increase site performance (e.g. a good Twitter plugin or some on-page optimization trick.)

    • http://blog.asmartbear.com Jason Cohen

      Our cancellation rate isn’t high! Just seems like a priority anyway.

      But I think your point is excellent. I guess the trick is tooting your own horn while still adding useful content to the world. Maybe we could couple the “we’re so fast” stuff with additional tips to increase site performance (e.g. a good Twitter plugin or some on-page optimization trick.)

      • http://patrickfoley.com/about Patrick Foley

        I wonder if the activities @robbyslaughter:disqus mentions could be made the responsibility of a specialist – presumably not you and perhaps a new hire? Do you think the activities for keeping existing customers happy (reminding them how good they have it and helping them improve) are separable from the activity of signing up new customers?

        There might be a sales element as well … Bob and I spoke with an interesting founder here: http://startupsuccesspodcast.com/2011/05/show-110-isaac-garcia-ceo-of-central-desktop/.

        He made a point that amazed me … he gets an enormous amount of new business by selling more services/capabilities/capacity to existing customers. I’m not sure how much more you could do there, but it’s worth thinking about.

        • http://blog.asmartbear.com Jason Cohen

          Sure, I think often those folks have titles like “Community Evangelists.” They might also moderate customer forums, participate in other forums, organize meet-ups, generate content (blog posts, webinars, white papers), and generally evangelize.
          Robby points out that “evangelism” isn’t just outward (i.e. earning new adherents) but inward as well (i.e. developing a “happy customer” into a “zealous customer.”)
          I agree it’s a wonderful and important point.

    • http://blog.asmartbear.com Jason Cohen

      Our cancellation rate isn’t high! Just seems like a priority anyway.

      But I think your point is excellent. I guess the trick is tooting your own horn while still adding useful content to the world. Maybe we could couple the “we’re so fast” stuff with additional tips to increase site performance (e.g. a good Twitter plugin or some on-page optimization trick.)

    • http://blog.asmartbear.com Jason Cohen

      Our cancellation rate isn’t high! Just seems like a priority anyway.

      But I think your point is excellent. I guess the trick is tooting your own horn while still adding useful content to the world. Maybe we could couple the “we’re so fast” stuff with additional tips to increase site performance (e.g. a good Twitter plugin or some on-page optimization trick.)

  • http://humanautomation.wordpress.com Craig Willis

    Interesting, although I imagine the fact that you had spent time focusing on the cancellation rate meant that you were well informed when you changed what you did to increase the sign-up rate. And hence the cancellation rate was largely static. You said it yourself, the important thing is ‘knowing what big stuff is’. That will be a challenge for many, especially those new to startups.

  • Ken Rugg

    Great post! I’ve often quoted Curley, Jack Palance’s crusty old cowboy from City Slickers, on this topic:

            Curley (Jack Palance): “You know what the secret of life is?”…”One thing. Just one thing.  You stick to that and everything else don’t mean s**t.”
            Mitch (Billy Crystal): “That’s great, but what’s the one thing?”
            Curley: “That’s what you’ve got to figure out.”

    Here’s the clip:  http://www.youtube.com/watch?v=2k1uOqRb0HU

    • http://patrickfoley.com/about Patrick Foley

      Awesome reference. Bravo :)

  • http://twitter.com/usabiliTEST Sergey S, CUA

    Focusing on one thing != doing one thing.

  • http://twitter.com/usabiliTEST Sergey S, CUA

    Focusing on one thing != doing one thing.

    • http://blog.asmartbear.com Jason Cohen

      Exactly right. And often you can kill two birds with one stone. But whenever there’s a choice — and often a choice is forced — you want to know what’s priority #1.

  • http://twitter.com/usabiliTEST Sergey S, CUA

    Focusing on one thing != doing one thing.

  • http://twitter.com/usabiliTEST Sergey S, CUA

    Focusing on one thing != doing one thing.

  • http://twitter.com/usabiliTEST Sergey S, CUA

    Focusing on one thing != doing one thing.

  • http://blog.asmartbear.com Jason Cohen

    Exactly right. I should have made that point too.

  • http://blog.asmartbear.com Jason Cohen

    Exactly right. I should have made that point too.

  • http://blog.asmartbear.com Jason Cohen

    Exactly right. I should have made that point too.

  • http://blog.asmartbear.com Jason Cohen

    Exactly right. I should have made that point too.

  • http://twitter.com/usabiliTEST Sergey S, CUA

    Unrelated… Perhaps your “Recent Comments” section should not count Post Author, otherwise looks like you’re the only one commenting on your own article. :) (you can delete this comment)

  • http://20minus.com Thanasis Polychronakis

    That was a pretty enlightening post there Jason! 

    It really gave me a better understanding of the decision making process in the chaos of choices i face as a startup venturer

    Thank you!

  • http://twitter.com/stuckaholic Alex Dogliotti

    That’s exactly the question I needed to listen. What can I do in the next two weeks? I’m usually the one asking those questions, and it’s so easy to forget to ask yourself. Jason, you gave me an idea. Thanks!!

  • http://profiles.google.com/redcort Redcort Software

    This is one of those posts that will have a very long life. Excellent presentation of very important ideas Jason.

    For the first number of years of Redcort Software, we focused on building the most useful time clock software on the planet. A couple of years ago I had a similar epiphany. I realized we had a pretty good product and the one thing that was really important was to increase our sales. Changing focus allowed us to triple net profitability in the past 24 months in a sucky economy. This has given us the resources to satisfy our customers in ways we hadn’t thought possible.

    • http://blog.asmartbear.com Jason Cohen

      You make an interesting additional point about how suddenly resources “appear” to satisfy other needs. It’s true that one thing leads to another.

  • Anonymous

    As someone who has also marketed SaaS products, this seems very oversimplified.

    Say you do triple the number of customers and you spend a significant amount of money in advertising to do so.  But because you are spending money in marketing and not investing in your feature set, you open yourself up to basically, being a crappy product.  I know you have dealt with these types of products personally because we’ve had this discussion before.  Now say your competition is investing in R&D, and then they decide to point blank pick off all your customers.  How hard would it be for them to do this?  How easy would it be to recover now that you have no real product?  It depends on how elastic the demand of what you sell is, right?

    The simple truth is that there is no simple truth to business, even with SaaS products.  It’s important to focus on cancellation rates, and it’s also important to focus on acquisition.  It’s important to focus on profit margin and CSI.  And just like a successful diet or a successful sports strategy, there isn’t a single formula or metric that works universally for everyone.  There is no such thing as a four hour work week and there isn’t such a thing as “the single metric” either.  

    • http://blog.asmartbear.com Jason Cohen

      You’re right that you cannot run your whole business on a single metric, and that one number is far from the whole, important picture, and that anyway different metrics are important for different companies.
      However that’s not what I was arguing. Rather, than in startups you always have fewer resources (time, money, passion) than opportunities to do useful things for the company. Therefore you need some way of prioritizing the myriad of things you could do.
      So for example it’s not that we’ll ignore cancellation rate — we won’t, and it’s still very important to us. But if both signups and cancellation rate go up together, we know that’s better than some other scenerios, like cancellation rate going down and signups flat.

  • Anonymous

    Oh, and my favorite example of what can happen if you only focus on acquisition and not your current customers’ happiness.  Your smaller competitor, who did not focus on acquisition and instead focused on product, gets bought by a huge company with loads of cash to spend on acquisition.  Oops.

    There is always a big picture at bay, and being single minded means you can get blind sided pretty hard.

     

  • Anonymous

    Oh, and my favorite example of what can happen if you only focus on acquisition and not your current customers’ happiness.  Your smaller competitor, who did not focus on acquisition and instead focused on product, gets bought by a huge company with loads of cash to spend on acquisition.  Oops.There is always a big picture at bay, and being single minded means you can get blind sided pretty hard.

  • http://www.facebook.com/randy.zeitman Randy Zeitman

    It almost sounds like you’re saying ‘fail forward’ … I’m going to the carnival with limited dollar bills trying to win the prize for my girl so I should make sure to maximize my attempts by choosing a game I can either win or learn how to beat the game I really wanted to should I lose.

    (Why bother practice how to best throw one perfect pitch when you can just buy more balls knowing the inevitably some throws might be good enough.)

    • http://blog.asmartbear.com Jason Cohen

      Could be. Of course there’s a limit to where you’re just throwing balls at random and genuinely not making progress, and then you’re flailing.
      That would be the case if we let our service get crappy, therefore cancellation rates shoot up.
      However that’s not what’s happening, and I’m very sensitive to the fact that as companies grow they can lose sight of what got them to where they are. It’s not acceptable to completely kill parts of the company just to “fuel one number.”
      Rather, so long as we’re not harming other areas, it’s valuable to get our priorities straight.

      • http://twitter.com/jamesbroadhead James Broadhead

        This reply sums up something that is lacking from the article; that the relentless drive towards that one metric is what drives most companies over the edge from providing a good service, to focussing more and more on new sales and disregarding customer experience.  

        I once read a piece about company-longevity, which found that the more that a company focussed on quality (which includes customer experience), the longer they were likely to last. The primary metric is “is operated by a family”, but that is skewed by Berretta (1526!), but this was a close second. 

        • http://blog.asmartbear.com Jason Cohen

          Agreed it was missing.

          Focussing on one metrics does not imply ignoring others. It doesn’t imply hiring doesnt matter, or customer service doesn’t matter or profitability doesn’t matter.
          It means that so long as your other fundamentals are in check, you have a way of prioritizing what to do.


          Jason Cohen
          http://blog.ASmartBear.com
          @asmartbear

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  • http://www.infinimedia.com Brian Breslin

    this is one of the reasons i am glad i befriended Noah years ago. Very few people will tell you straight what you need to hear. @alexknowshtml:twitter is another of this type. Very useful to know people like this.

    When you are small and growing and have to CHOOSE whether to get more customers or retain 1% of your existing ones, you have to pick the option which has the greater impact on your bottom line. Lots of times you’re running a race against time to build up your customer base to support your costs and staff and yours or others investments. 

    • http://www.dangerouslyawesome.com alexknowshtml

      Thank you for putting me in such good company, Brian. :)

  • http://www.webjoe.com webjoe

    This is I think this is a good advice, although many metrics and key performance indicators (KPIs) are important – selecting the “One Important Metric” is a good way to start focusing on the one that matters.  You should note, that this One Metric may change over time.

    • http://blog.asmartbear.com Jason Cohen

      Great point about changing over time.

  • http://thirstyaffiliates.com Josh Kohlbach

    Jason, this post just blew my freakin mind apart.

    Thanks to you and Noah. I’m going to start putting all my energy into the 1 thing that seems to be working the best right now which is contacting other bloggers to try my product for free.

    Thanks dude for the kick up the backide.

  • Meredith

    I always enjoy Smart Bear posts. My partner and I had a somewhat similar realization this past year. We realized we had so many things we wanted to do at once and we decided we needed to just pick 3 things that were going to be most critical for growth and forget about all the other stuff we want to dabble in. Our new found laser-like focus has really made a difference for us.

  • http://zippykid.com/ Vid Luther

    Jason,
     Nice post, and I’m glad you’re on the same track as us. Noah is a smart guy :). We have a stupidly low cancellation rate, and I’ve only focused my efforts on acquisition.  For those who don’t know me, Jason and I are friendpetitors? We have a competing product, yet we like each other :). 

    @michellegreer:disqus the issue with spending too much time on R&D is that you don’t have a way to figure out what customers actually want, and are willing to pay for.  The smaller competitor getting bought is good for the competitor, but that doesn’t necessarily mean it’s bad for Jason or WPEngine.  More importantly, the two don’t have to be exclusive, you can research on existing customers, and exit surveys of the cancellations.. 

    • http://blog.asmartbear.com Jason Cohen

      Yes, it’s refreshingly healthy! It’s nice go be in a big market with different positioning.

  • BillSeitz

    It sounds to me like what drove the metric you chose to focus on was guessing which one you could improve by the largest amount. If you thought you could “easily” cut your cancellation rate from 3% to 1.5% (at 100% improvement in LTV), then that would have been your metric of choice? But how accurate is your forecast going to be? I suppose in this case the one is easier because you just have to spend more money on AdWords….

    • http://blog.asmartbear.com Jason Cohen

      That’s true in the sense that there’s no arbitrary limit to the amount we could improve the metric, and there’s diminishing returns on improving others, like cancel rate.
      No, a change from 3% to 1.5% wouldn’t have been enough because that doesn’t (for example) double the amount of revenue we get in a month, which is far more valuable. Reducing the rate also doesn’t make forecasting more accurate, it just changes the forecast.
      It turns out just spending more money on AdWords won’t do the trick. I wish it were so easy! But it does suggest several things we should do, some easy like “spend more on ads” but some strategic and long-term which I’m not going to reveal just yet. :-)

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  • Mike Fisher

    Ah, thanks for the reminder!  I was in that same room with you and Noah.  It’s so hard to focus on one key thing.  Of course focusing on it and knowing how to make it 2x bigger is the tough part.

    Hopefully it doesn’t take us 15 years to learn this lesson!

  • Anonymous

    My co-founder and I are building out a SaaS business, its 2 months old and he’s been furiously building out the features etc. for the last 2 months (he’s the coder). I am in charge of the non-technical stuff and was a bit stressed a couple of weeks back as I just didn’t know what I should focus on.
     
    After some thought I figured out that increasing the number of ‘Active accounts’ – accounts where people are logging in regularly and using the software are the best metric I can use. Not ‘opened accounts’ as many of them lay dormant, page views or uniques. Active accounts are either providing us with revenue or coming to the end of their one month trial and potentially about to start paying us. Active accounts are also accounts that I can get user feedback from to improve the product.
     
    On a separate note, Jason’s post reminded me a chapter in the book “Made to Stick” which discusses the “Commander’s Intent”. The Commander’s Intent is basically the 1-3 line statement at the top of a military plan that says what the objective is. It could be something like ‘capture that town’ and is placed before the detailed instructions. This means that everyone involved knows the objective, in case things ever veer from the plan. I guess focusing on one metric is somewhat similar to having a Commanders Intent – “Increase sign-ups”.

    • http://blog.asmartbear.com Jason Cohen

      Love it.

  • Anonymous

    This post can be summarized as “perform a sensitivity analysis before you choose which metric to try to improve.”

  • Anonymous

    This post can be summarized as “perform a sensitivity analysis before you choose which metric to try to improve.”

  • http://salvadorfigueros.com Salvador Figueros

    Maybe one metric is too extreme. But it is for sure you must focus on the meat and forget everything else.
    R

  • http://twitter.com/mikitamikado Mikita Mikado

    Hmmm… that really helps. I think we’ll have this strategy going with Quote Roller

  • http://www.itarsenal.com/ Rob

    Noah is consistent and awesome, and somehow needs to only use 5 words to convey a powerful point. I’ve had the same experiences with him as you’ve explained here. 

    He’s direct, semi abbrasive, and brilliant. He is the guy that will continually say…so what? Until what needs to be done is obvious it smashes you in the face. It’s awesome.You can be as concerned and aware with all the little things, and if you’re worried about them just reading this article, you will not be able to ignore them anyway, so it’s in your best interest to focus on that one thing in the start-up arena and GO AT IT. See where it leads, it will accomplish 10x more than trying to see the whole picture. The whole pictures is too big to see, so stop trying.

  • http://mortgagerefinance.1and24.com/ Mortgage Refinance

    We must focus on one thing for the result to be doing something, because if it does not focus loses focus and the results are given.

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