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16 Startup Metrics

by Jeff Jordan, Anu Hariharan, Frank Chen, and Preethi Kasireddy

We have the privilege of meeting with thousands of entrepreneurs every year, and in the course of those discussions are presented with all kinds of numbers, measures, and metrics that illustrate the promise and health of a particular company. Sometimes, however, the metrics may not be the best gauge of what’s actually happening in the business, or people may use different definitions of the same metric in a way that makes it hard to understand the health of the business.

So, while some of this may be obvious to many of you who live and breathe these metrics all day long, we compiled a list of the most common or confusing ones. Where appropriate, we tried to add some notes on why investors focus on those metrics. Ultimately, though, good metrics aren’t about raising money from VCs — they’re about running the business in a way where founders know how and why certain things are working (or not) … and can address or adjust accordingly.

Business and Financial Metrics

#1 Bookings vs. Revenue

A common mistake is to use bookings and revenue interchangeably, but they aren’t the same thing.

Bookings is the value of a contract between the company and the customer. It reflects a contractual obligation on the part of the customer to pay the company.

Revenue is recognized when the service is actually provided or ratably over the life of the subscription agreement. How and when revenue is recognized is governed by GAAP.

Letters of intent and verbal agreements are neither revenue nor bookings.

#2 Recurring Revenue vs. Total Revenue

Investors more highly value companies where the majority of total revenue comes from product revenue (vs. from services). Why? Services revenue is non-recurring, has much lower margins, and is less scalable. Product revenue is the what you generate from the sale of the software or product itself.

ARR (annual recurring revenue) is a measure of revenue components that are recurring in nature. It should exclude one-time (non-recurring) fees and professional service fees.

ARR per customer: Is this flat or growing? If you are upselling or cross-selling your customers, then it should be growing, which is a positive indicator for a healthy business.

MRR (monthly recurring revenue): Often, people will multiply one month’s all-in bookings by 12 to get to ARR. Common mistakes with this method include: (1) counting non-recurring fees such as hardware, setup, installation, professional services/ consulting agreements; (2) counting bookings (see #1).

#3 Gross Profit

While top-line bookings growth is super important, investors want to understand how profitable that revenue stream is. Gross profit provides that measure.

What’s included in gross profit may vary by company, but in general all costs associated with the manufacturing, delivery, and support of a product/service should be included.

So be prepared to break down what’s included in — and excluded — from that gross profit figure.

#4 Total Contract Value (TCV) vs. Annual Contract Value (ACV)

TCV (total contract value) is the total value of the contract, and can be shorter or longer in duration. Make sure TCV also includes the value from one-time charges, professional service fees, and recurring charges.   

ACV (annual contract value), on the other hand, measures the value of the contract over a 12-month period. Questions to ask about ACV:  

What is the size? Are you getting a few hundred dollars per month from your customers, or are you able to close large deals? Of course, this depends on the market you are targeting (SMB vs. mid-market vs. enterprise).

Is it growing (and especially not shrinking)? If it’s growing, it means customers are paying you more on average for your product over time. That implies either your product is fundamentally doing more (adding features and capabilities) to warrant that increase, or is delivering so much value customers (improved functionality over alternatives) that they are willing to pay more for it.

#5 LTV (Life Time Value)

Lifetime value is the present value of the future net profit from the customer over the duration of the relationship. It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC).

A common mistake is to estimate the LTV as a present value of revenue or even gross margin of the customer instead of calculating it as net profit of the customer over the life of the relationship.

Reminder, here’s a way to calculate LTV:

Revenue per customer (per month) = average order value multiplied by the number of orders.

Contribution margin per customer (per month) = revenue from customer minus variable costs associated with a customer. Variable costs include selling, administrative and any operational costs associated with serving the customer.

Avg. life span of customer (in months) = 1 / by your monthly churn.

LTV = Contribution margin from customer multiplied by the average lifespan of customer.

Note, if you have only few months of data, the conservative way to measure LTV is to look at historical value to date. Rather than predicting average life span and estimating how the retention curves might look, we prefer to measure 12 month and 24 month LTV.

Another important calculation here is LTV as it contributes to margin. This is important because a revenue or gross margin LTV suggests a higher upper limit on what you can spend on customer acquisition. Contribution Margin LTV to CAC ratio is also a good measure to determine CAC payback and manage your advertising and marketing spend accordingly.

#6 Gross Merchandise Value (GMV) vs. Revenue

In marketplace businesses, these are frequently used interchangeably. But GMV does not equal revenue!

GMV (gross merchandise volume) is the total sales dollar volume of merchandise transacting through the marketplace in a specific period. It’s the real top line, what the consumer side of the marketplace is spending. It is a useful measure of the size of the marketplace and can be useful as a “current run rate” measure based on annualizing the most recent month or quarter.

Revenue is the portion of GMV that the marketplace “takes”. Revenue consists of the various fees that the marketplace gets for providing its services; most typically these are transaction fees based on GMV successfully transacted on the marketplace, but can also include ad revenue, sponsorships, etc. These fees are usually a fraction of GMV.

#7 Unearned or Deferred Revenue … and Billings

In a SaaS business, this is the cash you collect at the time of the booking in advance of when the revenues will actually be realized.

As we’ve shared previously, SaaS companies only get to recognize revenue over the term of the deal as the service is delivered — even if a customer signs a huge up-front deal. So in most cases, that “booking” goes onto the balance sheet in a liability line item called deferred revenue. (Because the balance sheet has to “balance,” the corresponding entry on the assets side of the balance sheet is “cash” if the customer pre-paid for the service or “accounts receivable” if the company expects to bill for and receive it in the future). As the company starts to recognize revenue from the software as service, it reduces its deferred revenue balance and increases revenue: for a 24-month deal, as each month goes by deferred revenue drops by 1/24th and revenue increases by 1/24th.

A good proxy to measure the growth — and ultimately the health — of a SaaS company is to look at billings, which is calculated by taking the revenue in one quarter and adding the change in deferred revenue from the prior quarter to the current quarter. If a SaaS company is growing its bookings (whether through new business or upsells/renewals to existing customers), billings will increase.

Billings is a much better forward-looking indicator of the health of a SaaS company than simply looking at revenue because revenue understates the true value of the customer, which gets recognized ratably. But it’s also tricky because of the very nature of recurring revenue itself: A SaaS company could show stable revenue for a long time — just by working off its billings backlog — which would make the business seem healthier than it truly is. This is something we therefore watch out for when evaluating the unit economics of such businesses.

#8 CAC (Customer Acquisition Cost) … Blended vs. Paid, Organic vs. Inorganic

Customer acquisition cost or CAC should be the full cost of acquiring users, stated on a per user basis. Unfortunately, CAC metrics come in all shapes and sizes.

One common problem with CAC metrics is failing to include all the costs incurred in user acquisition such as referral fees, credits, or discounts. Another common problem is to calculate CAC as a “blended” cost (including users acquired organically) rather than isolating users acquired through “paid” marketing. While blended CAC [total acquisition cost / total new customers acquired across all channels] isn’t wrong, it doesn’t inform how well your paid campaigns are working and whether they’re profitable.

This is why investors consider paid CAC [total acquisition cost/ new customers acquired through paid marketing] to be more important than blended CAC in evaluating the viability of a business — it informs whether a company can scale up its user acquisition budget profitably. While an argument can be made in some cases that paid acquisition contributes to organic acquisition, one would need to demonstrate proof of that effect to put weight on blended CAC.

Many investors do like seeing both, however: the blended number as well as the CAC, broken out by paid/unpaid. We also like seeing the breakdown by dollars of paid customer acquisition channels: for example, how much does a paying customer cost if they were acquired via Facebook?

Counterintuitively, it turns out that costs typically go up as you try and reach a larger audience. So it might cost you $1 to acquire your first 1,000 users, $2 to acquire your next 10,000, and $5 to $10 to acquire your next 100,000. That’s why you can’t afford to ignore the metrics about volume of users acquired via each channel.

Product and Engagement Metrics

#9 Active Users

Different companies have almost unlimited definitions for what “active” means. Some charts don’t even define what that activity is, while others include inadvertent activity — such as having a high proportion of first-time users or accidental one-time users.

Be clear on how you define “active.”

#10 Month-on-month (MoM) growth

Often this measured as the simple average of monthly growth rates. But investors often prefer to measure it as CMGR (Compounded Monthly Growth Rate) since CMGR measures the periodic growth, especially for a marketplace.

Using CMGR [CMGR = (Latest Month/ First Month)^(1/# of Months) -1] also helps you benchmark growth rates with other companies. This would otherwise be difficult to compare due to volatility and other factors. The CMGR will be smaller than the simple average in a growing business.

#11 Churn

There’s all kinds of churn — dollar churn, customer churn, net dollar churn — and there are varying definitions for how churn is measured. For example, some companies measure it on a revenue basis annually, which blends upsells with churn.

Investors look at it the following way:

Monthly unit churn = lost customers/prior month total

Retention by cohort

Month 1 = 100% of installed base

Latest Month = % of original installed base that are still transacting

It is also important to differentiate between gross churn and net revenue churn —

Gross churn: MRR lost in a given month/MRR at the beginning of the month.

Net churn: (MRR lost minus MRR from upsells) in a given month/MRR at the beginning of the month.

The difference between the two is significant. Gross churn estimates the actual loss to the business, while net revenue churn understates the losses (as it blends upsells with absolute churn).

#12 Burn Rate

Burn rate is the rate at which cash is decreasing. Especially in early stage startups, it’s important to know and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses. As a reminder, here’s a simple calculation:

Monthly cash burn = cash balance at the beginning of the year minus cash balance end of the year / 12

It’s also important to measure net burn vs. gross burn:

Net burn [revenues (including all incoming cash you have a high probability of receiving) – gross burn] is the true measure of amount of cash your company is burning every month.

Gross burn on the other hand only looks at your monthly expenses + any other cash outlays.

Investors tend to focus on net burn to understand how long the money you have left in the bank will last for you to run the company. They will also take into account the rate at which your revenues and expenses grow as monthly burn may not be a constant number.

#13 Downloads

Downloads (or number of apps delivered by distribution deals) are really just a vanity metric.

Investors want to see engagement, ideally expressed as cohort retention on metrics that matter for that business — for example, DAU (daily active users), MAU (monthly active users), photos shared, photos viewed, and so on.

Presenting Metrics Generally

#14 Cumulative Charts (vs. Growth Metrics)

Cumulative charts by definition always go up and to the right for any business that is showing any kind of activity. But they are not a valid measure of growth — they can go up-and-to-the-right even when a business is shrinking. Thus, the metric is not a useful indicator of a company’s health.

Investors like to look at monthly GMV, monthly revenue, or new users/customers per month to assess the growth in early stage businesses. Quarterly charts can be used for later-stage businesses or businesses with a lot of month-to-month volatility in metrics.

#15 Chart Tricks

There a number of such tricks, but a few common ones include not labeling the Y-axis; shrinking scale to exaggerate growth; and only presenting percentage gains without presenting the absolute numbers. (This last one is misleading since percentages can sound impressive off a small base, but are not an indicator of the future trajectory.)

#16 Order of Operations

It’s fine to present metrics in any order as you tell your story.

When initially evaluating businesses, investors often look at GMV, revenue, and bookings first because they’re an indicator of the size of the business. Once investors have a sense of the the size of the business, they’ll want to understand growth to see how well the company is performing. These basic metrics, if interesting, then compel us to look even further.

As one of our partners who recently had a baby observes here: It’s almost like doing a health check for your baby at the pediatrician’s office. Check weight and height, and then compare to previous estimates to make sure things look healthy before you go any deeper!

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Effective team management: The 10 secrets you need to know

Posted by Jess Lawrence

Team management is not always easy. Most of the time it means navigating different personalities, work habits and motivations while balancing your own tasks and keeping the company goals in mind. It takes a lot of work to get this right, but we’ve put together a few secrets that are aimed to help every manager, from seasoned and senior through to those new to the role.

(more…)

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Hotjar Alternatives: 21 Tools for Optimizing Your Website and Conversion Rate

Hotjar is a behavior analytics and website optimization software for marketers and user experience (UX) pros. Hotjar’s solution offers multiple ways to collect user feedback including: heatmaps, visitor recordings, form and funnel analysis tools, and surveys.

While Hotjar has plenty of satisfied users, some marketers may need analytics tools that are easier to use, offer more granular, in-depth data analysis, or offer more flexibility to A/B test webpage changes.

If that’s you—and you’re looking to replace Hotjar with a solution that better fits your needs—you’ve come to the right place. Below, we list 21 Hotjar alternatives, broken down into 5 categories, so you can find the right tool for you and your team.

Note: Looking for a website optimization tool that’s easier to use and offers more in-depth data? Sign up and try Crazy Egg free for 30 days to get access to heatmaps based on more visits and more granular data segmentation.

All-in-One Website Optimization, CRO, and A/B Testing Tools

When you want one tool that can do it all, the options below are ready to swoop in and replace everything Hotjar can do and then some.

Crazy Egg

Hotjar alternatives: Crazy Egg

  • Pricing: Starts at $24 per month
  • Trial: 30-day free trial on any plan
  • Unique feature: Snapshots

Here at Crazy Egg, we believe we’re one of the best alternatives to Hotjar. We’re, admittedly, a little biased—but that doesn’t mean we’re wrong.

For one, our Snapshots (that’s what we call heatmaps and clickmaps) take website analysis to another level, enabling you to dig deeper and understand the data behind the visual. You can filter clicks to see how up to 22 different segments interact with a page, and you can better understand where people are clicking.

Our software also ensures that you have maximum flexibility when it comes to sampling. We include all visits in our Snapshots and allow you to decide when and how to sample or filter as needed.

Plus, our tool offers the most flexibility with A/B testing, too. We’ve built A/B testing right into our product, but we also integrate with Optimizely, Google Optimize, and other A/B testing tools you may already use.

In other words, Crazy Egg offers marketers more flexibility and more in-depth data segmentation options than Hotjar.

Note: Sound good? Sign up and try Crazy Egg free for 30 days to get access to a website optimization tool that’s easier to use and offers more in-depth, granular data.

FullStory

Hotjar alternatives: FullStory

  • Pricing: Contact FullStory for pricing details
  • Rating: 4.5 on G2
  • Unique features: Top Opportunities

FullStory focuses on the entire end-to-end digital experience, with an emphasis on actively (and proactively) troubleshooting UX problems. That means they have stellar session recordings and allow you to monitor a user’s entire history with your website. Their unique Top Opportunities feature analyzes session recordings and shows you the greatest opportunities to improve your website’s UX.

VWO

Hotjar alternatives: VWO

  • Pricing: From $99 – $1,999 per month
  • Rating: 4.2 on G2

VWO is one of the most comprehensive platforms for optimizing the customer experience. With funnels, sessions recordings, heatmaps, surveys, form analytics, and more, VWO has just about everything enterprise marketers need to analyze and improve the customer experience.

Inspectlet

Hotjar alternatives: Inspectlet

  • Pricing: Inspectlet offers a free plan; paid plans start at $39 per month
  • Rating: 4.1 on G2
  • Unique features: Error Detection

Inspectlet is an all-in-one platform with an eye toward more technical, back-end optimization and troubleshooting. Their unique Error Detection feature proactively identifies bugs and errors and notifies you in real-time.

Website Optimization Tools

The website optimization tools below can take over the heatmapping, session replay, funnel analysis, and more. They’re the closest thing to a one-to-one replacement for Hotjar. Think all-in-one tool minus A/B testing and a few other small features.

Mouseflow

Hotjar alternatives: Mouseflow

  • Pricing: Starts ar $29 per month
  • Rating: 4.6 on G2

Mouseflow is another website optimization tool aimed at diagnosing why visitors don’t convert. With session replay, heatmaps, and funnels, the tool has many of the features marketers and CROs need to optimize for conversions.

EyeQuant

Hotjar alternatives: EyeQuant

  • Pricing: Contact EyeQuant for pricing details
  • Rating: 4.6 on G2
  • Unique features: Clarity Score

EyeQuant is designed to use research, AI, and data to improve website design, all while making the project management and sign-off process easier. They’ve put in the research to help users actually predict how website visitors will navigate and respond to designs changes.

SessionCam

Hotjar alternatives: SessionCam

  • Pricing: Contact SessionCam for pricing details
  • Rating: 4.1 on G2
  • Unique features: Struggle Detection

SessionCam (despite the name) offers a lot more than just session replays. They also feature heatmaps, conversion funnels, and customer journey mapping. Their unique Struggle Detection features helps you identify areas of your site that leave customers frustrated—so you can fix them and boost conversions.

Lucky Orange

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  • Pricing: Starts at $10 per month
  • Rating: 4.0 on G2
  • Unique features: Chat

Lucky Orange offers heatmaps, session recording, funnel analysis and more—all designed to help users get to the heart of why visitors don’t convert. Lucky Orange is also one of the few conversion optimization platforms to include a Chat feature, making it easier to communicate directly and informally with customers.

Clicktale

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  • Pricing: Contact Clicktale for pricing details
  • Rating: 3.9 on G2
  • Unique features: Experience Center

Clicktale is one website analytics solution with, perhaps, the biggest emphasis on web analytics. With solutions for web, mobile, and apps, their tool includes session replay, heatmaps, and conversion analytics. Their unique Experience Center helps users get a high-level overview of the entire customer experience and how it affects business.

Decibel

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  • Pricing: Contact Decibel for pricing details
  • Unique features: Digital Experience Score (DXS)

Decibel Insight is the web optimization platform designed for continuous improvement. Their unique Digital Experience Score (or DXS) helps users get a bottom-line read on the experience customers have across your website or app. Plus, their data captures everything from mouse movements and scrolling to device rotations and pinching.

Reactflow

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  • Pricing: Business plans start at $69.99 per month
  • Rating: 4.4 on G2 (based on 6 reviews)

Reactflow is a website optimization tool with an eye toward diagnosing conversion blockers and building “distraction-free” funnels. With features like heatmaps, session recordings, funnels, and feedback, Reactflow is a solid option for replacing Hotjar.

A/B Testing Software

When you need to make changes to improve your website and test those improvements, the tools below are there to manage and report on experiments like A/B testing. Most of these can be used in conjunction with some of the website optimization tools above.

Optimizely

Hotjar alternatives: Optimizely

  • Pricing: Contact Optimizely for pricing details
  • Rating: 4.3 on G2
  • Unique features: Full Stack

Optimizely is on the top go-to A/B testing tools. Their Full Stack offering enables everyone from engineers to marketing to product teams to A/B test every aspect of their job. With Optimizely, you can make decisions based on their automated reporting or dig deeper to better understand why versions differ.

Mixpanel

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  • Pricing: Paid plans start at $89 per month
  • Rating: 4.2 on G2

Mixpanel is designed for constant improvement of the product. Their “innovation loop” design streamlines testing and iteration to continuously grow the customer experience and boost retention. Plus, an eye toward visual reporting makes decision-making a breeze.

AB Tasty

Hotjar alternatives: AB Tasty

  • Pricing: Contact AB Tasty for pricing details
  • Rating: 4.4 on G2

AB Tasty is one of the best options available for enterprise website and customer experience optimization. With platforms designed for both marketing and product teams, AB Tasty offers A/B testing on the client-side, and server-side, and solutions for personalized marketing, progressive roll-out, and more.

SiteSpect

Hotjar alternatives: SiteSpect

  • Pricing: Contact SiteSpect for pricing details
  • Rating: 4.3 on G2
  • Unique features: Services

SiteSpect is another top A/B testing tool that also specializes in personalization and other website optimization. What’s unique about SiteSpect is that users have the option to buy their services as well—completely offloading the task of testing.

Session and User Recording Tools

If you’re more interested in the qualitative data around how users interact with your website or app, session and user behavior recording tools may be just the ticket.

UserTesting

Hotjar alternatives: UserTesting

  • Pricing: Contact UserTesting for pricing details
  • Rating: 4.5 on G2

UserTesting is one of the original website optimization tools to focus solely on user recordings. The tool enables you to request real users to test your website or app, give them a particular task to complete, and ask specific questions about the experience.

Smartlook

Hotjar alternatives: Smartlook

  • Pricing: Paid plans start at $31 per month
  • Rating: 4.7 on G2
  • Unique features: Identify customers

Smartlook offers a website optimization platform with all the features customer support teams need, including session recording, customer journey mapping, and funnels. What’s unique about Smartlook is the option to use their API, in conjunction with other software to actually put a name to the user recordings and visitor behavior.

LiveSession

Hotjar alternatives: LiveSession

  • Pricing: Starts at $99 per month
  • Rating: 4.7 on G2
  • Unique features: Engagement Score

LiveSession is a great option for session replays and proactive troubleshooting on your website or web app. Filters, Inspect Mode, and Engagement Score make it easier to get to the heart of the data you need—without spending hours watching irrelevant replays.

Surveys and Customer Feedback

Surveys and other user feedback tools are ideal for drawing in more in-depth information around what customers and users experience when using your website or product.

RightMessage

Hotjar alternatives: RightMessage

  • Pricing: Starts at $29 per month
  • Unique features: Personalization

RightMessage is one of the top tools available for surveying website visitors and putting their answers to work for you. Everything RightMessage does—from surveys, to email, and landing page segmentation—is designed to personalize your message for better conversions.

Survicate

Hotjar alternatives: Survicate

  • Pricing: Paid plans start at $59 per month.
  • Rating: 4.6 on G2

Survicate focuses on a more holistic approach to customer feedback—charting everything from website feedback to Net Promoter Score (NPS) and mobile app surveys. Their goal is to empower teams across the organization with the customer feedback they need to make the right decisions.

Ramen

Hotjar alternatives: Ramen

  • Pricing: Paid plans start at $39 per month.
  • Rating: 4.7 on G2 (based on 3 reviews)

Ramen’s customer survey tool focuses on getting feedback from the right customers at the right time—while they’re actually using your website. The tool offers robust targeting options to help you find the right customers to ask and enables you to proactively mitigate churn and lost customers.

Find the Right Website Optimization Solution

With so many tools and solutions available to marketers, engineers, product teams, and customer support pros who want to better understand the behavior of visitors on their website, there’s no reason to stick with one that doesn’t work for you or your team.

One of the Hotjar alternatives above may just be a better option for improving your website, app, or product.

How do you choose which tool to use? The questions to ask are:

  • What features do you need around data segmentation, A/B testing, funnel analysis, and more? Which features are you better off without?
  • Which tool’s user interface seems like the most intuitive one for you and your team?

Or, you can try Crazy Egg free for 30 days and see why we’re convinced we offer the best alternative to Hotjar.

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8 Lessons Product Managers Need to Learn From Clayton Christensen

Clayton Christensen is one of the greatest business minds of our time. His recent passing caused me to reflect on all I learned from him. His life was dedicated to his family, his faith, and the theories he taught. He personified servant leadership.

Almost every single topic he taught is relevant to the work of product management. Here I share 8 key lessons I’ve learned from his work that have helped me be a better product manager, leader, entrepreneur, husband and father.

  1. The Theory of Disruptive Innovation
  2. Jobs to be Done
  3. Don’t Outsource Core Capabilities
  4. The Pitfalls of Best Practices
  5. How You Measure Success Matters
  6. Relationships Matter
  7. The Importance of Strategy
  8. Success Beyond Work

1. The theory of disruptive innovation

Clay’s seminal work deals with this question:

Why do big companies with lots of resources miss out on innovative solutions?

Disruptive innovation is the theory that explains the answer. I encourage every PM to read the book

    and read some of his best articles. Here are 3 I recommend:

    • Disruptive Technologies: Catching the Wave — the original
    • What is Disruptive Innovation — this one is a good clarifier
    • Surviving Disruption — about long-term disruption

    The theory of disruptive innovation is nuanced and often misapplied. His theory doesn’t describe all “innovation”.

    The key lesson from disruptive innovation is that what ends up being disruptive technology starts by looking inferior. They are cheaper solutions that usually appeal to another segment of the market. The technology that makes them disruptive is unappealing to the current leaders at first.

    Blockbuster vs Netflix. Hotels vs Airbnb. Taxis vs Uber.

    The new solutions seemed a lot worse at first, but the technology and improvement over time made them much more successful over time.

    So what do you need to do?

    “Managers must beware of ignoring new technologies that don’t initially meet the needs of their mainstream customers.”

    Question who your customer is and realize that unmet needs in new segments can represent massive opportunities.

    At its core, the concept that future growth and potential are worth more than current status. It’s an incredibly powerful idea about how the world works. Used well this theory governs not just the rise and fall of companies, but also how we need to think about potential in all domains.

    “It’s important to remember that disruption is a positive force. Disruptive innovations are not breakthrough technologies that make good products better; rather they are innovations that make products and services more accessible and affordable, thereby making them available to a much larger population.”
    source

    Existing businesses you need to invest in more than ideas that have obvious, immediate returns. Disrupt yourself by developing low-cost ways to serve customers that seem to cannibalize your existing market.


    2. Jobs to be done.

    The Jobs to be Done concept is similar to user stories or job stories, but with some important distinctions. It’s more effective to answer the question “What job are you hiring this product to do?” compared to the plug and chug user stories or job stories alone encourage.

    The example of the milkshakes is one of my favorite examples to share. It’s common for non-product people to think that gathering user insight can be done by running a survey and adjusting the product according to the overall results. But in-person observation and interviewing find distinct use-cases that could then be optimized to serve those customers.

    Many organizations have unwittingly designed innovation processes that produce inconsistent and disappointing outcomes. But firms don’t have to continue down that path. Innovation can be far more predictable—and far more profitable—if you start by identifying jobs that customers are struggling to get done. Without that lens, you’re doomed to hit-or-miss innovation. source

    One of the first rules of product management is to be obsessed with your customers (thank you Hiten Shah). In a world that supports in-person relationships less and less, Clay was an advocate for getting out of the room and being with the people.

    Key questions you can ask to apply the theory to your product include:

    • Who is hiring this product?
    • What are they hiring this product to do?

    This simple reframe and examples from Clay help product managers as they seek to become not just a delivery team or a feature team, but a real product team solving real problems for users.


    3. Don’t outsource core capabilities

    This principle is applicable to product managers from a talent standpoint, both for your own company’s abilities as well as your own personal skills.

    It’s the classic tale of middle managers who no longer know how to do anything real. It’s easy to build a habit of always passing the grunt work along. While delegation is critical to leadership and potentially the biggest blocker to company growth, so outsourcing everything is a path towards skills irrelevance.

    One of the surest ways to rise in a company is to find something that no one else understands and do it better than anyone else. This is how Jeff Weiner got his rise through the ranks of Warner Brothers. It’s also how Mark Cuban put himself in a prime position to build a company and trade tech stocks to make his billions.

    Doing the hard work no one else wants to do is a path to success. Clay found over and over again companies that failed to do so, outsourcing the “boring” or “mundane” work which eventually led them into irrelevance.


    4. Following best practices doesn’t always work

    Just because something looks like it should work doesn’t mean you understand the underlying principles and mechanisms.

    Consider how our ancestors thought about approaching flight. They believed that feathers and flapping wings were the answer to how we would fly. The solutions that ended up actually working (based on the principles of flight vs just the outer look of birds) are very different than they expected.

    “[Using] robust theory to predict what will happen has a much greater chance of success.”

    For product managers, this is a clear invitation to avoid relying only on what the competition does or what customers say as fuel for your product concepts. Understanding the theory underneath problems (the why) is powerful.

    “That’s a hallmark of good theory: it dispenses its advice in “if-then” statements.”


    5. How you measure success matters (resource allocation)

    You get what you reward for.

    SonoSite had developed a new portable ultrasound machine. The CEO tagged along with a sales meeting. The sales rep wouldn’t pull the machine out of his bag and was laser-focused on selling the current, larger solution. The CEO later realized that the rep’s incentive plan wasn’t aligned with an important future shift for the company.

    Another example of this is the story of an archaeological discovery in the 1940’s:

    … a team led by Ralph von Koenigswald had found another group of early humans which became known as the Solo People, from the site of their discovery on the Solo River at Ngandong. Koenigswald’s discoveries might have been more impressive still but for a tactical error that was realized too late. He had offered locals 10 cents for every piece of hominid bone they could come up with, then discovered to his horror that they had been enthusiastically smashing large pieces into small ones to maximize their income.

    Unintended consequences happen with rewards. What you reward (both consciously and unconsciously) has incredible influence on the work.

    “The only way a strategy can get implemented is if we dedicate resources to it.”


    6. Relationships matter, especially on product teams

    This is especially critical for product managers because of a trend to be arrogant. Product managers need to be very intelligent. It’s one of the hardest and most critical roles in a company. It requires an incredibly broad skill set to manage a product. A PM helps the team figure out the right problems to solve and decide which bets to place.

    But PM is a role that can’t be done on an island. Without a team willing to follow, nothing happens. Investing in relationships is key.

    PMs can be attracted to the field because they believe the old myth that the PM is the CEO of the product. I have actually heard aspiring PMs say they are pursuing the role because “I want to be able to make all the decisions” or “I want to call the shots”. If you think you’re in charge, you have a long road ahead of you. Even at companies where the PM role is well respected and giving generous authority, you will find much more success by inspiring and working together with those around you vs telling everyone the “right answer”.

    The impact to both the work and the team is powerful when we take Clay’s advice:

    “If you want to help other people, be a manager. If done well, management is among the most noble of professions.”

    Help others. Don’t just try to look like the smartest person around.


    7. The importance of figuring out and communicating the strategy

    Getting aligned and staying aligned as a team is difficult. Too many product teams waste time and money because they lose sight of why they are building something and fall into the trap of becoming a feature factory.

    Activity ≠ Progress

    Figuring out which bets are worth making, which experiments should be run, and how to optimize for fast learning isn’t always straight forward.

    Clay warns:

    “93 percent of all companies that ultimately become successful had to abandon their original strategy”

    “[Successful] senior executives need to spend a lot of time articulating clear, consistent priorities that are broadly understood throughout the organization.”


    8. Don’t let personal work success become the driving force in your life.

    I’ll let Clay’s words speak for themselves:

    “Work can bring you a sense of fulfillment—but it pales in comparison to the enduring happiness you can find in the intimate relationships that you cultivate with your family and close friends.”

    “Don’t worry about the level of individual prominence you have achieved; worry about the individuals you have helped become better people.”

    “I have a pretty clear idea of how my ideas have generated enormous revenue for companies that have used my research; I know I’ve had a substantial impact. But as I’ve confronted this disease, it’s been interesting to see how unimportant that impact is to me now. I’ve concluded that the metric by which God will assess my life isn’t dollars but the individual people whose lives I’ve touched.”


    If you haven’t taken time to carefully study his theories, I encourage you to do so. I’ve included links throughout this article as a reference point for those wanting to read his thinking for the first time and for those wanting to review them again.

    If I could summarize the lesson Clayton Christensen has for every product manager, it is this:

    The way you architect your work and your life make a meaningful long-term difference, for success or failure. Success isn’t always gained by pursuing what is immediately obvious.

    Thank you, Clayton.

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How SMEs and Scale-Ups Can Afford the Very Best Executive Directors on a Budget

Key Takeaways

For an SME or scale-up to succeed, its board and executive team needs to be at the top of their game. They’re responsible for business strategy. They have to find the plans and processes which will allow the firm to grow. Adding more experience, knowhow and skill to the pool of decision makers is a great way for any firm to progress.

Unfortunately, the very best executives don’t come cheap. They’re often out of reach of smaller businesses with more limited budgets. That is, if those businesses want to hire them full-time. Taking on executive directors on a part-time or interim basis is a far more viable option. It allows SMEs to enjoy the knowhow and abilities of the very best executive directors. All on a budget.   

 

Running a scale-up or an SME is a continuous balancing act. The long-term aim of any such company is always to grow and progress. Growth and progress can often only be achieved with significant investment. For a business to survive in the here and now, however, it must also live within its means. The budget of most SMEs is limited at best.

Decision makers at smaller companies have to find innovative ways to move forward. They can’t endlessly invest more money in an effort to grow. That would be a mistake that could prove terminal. When frugality is a must, there are a surprising number of creative solutions which SMEs can turn to. 

Read on and you’ll learn about a creative way in which SMEs can still get the very best executive directors. The kind of high-level decision makers that can be key to a firm’s progress. Hiring such individuals in the traditional sense is often beyond smaller businesses. They can be brought on board on a part-time basis, however. 

Part-time directors can provide invaluable assistance when needed. Below, you’ll learn all you need to know about outsourcing to bring part-time directors on board.     

What Are Executive Directors?

Executive directors are members of a company’s board. They also have management responsibilities within the firm. They are company employees at the senior executive level, as well as being board members. On top of their day-to-day duties within a firm, they also contribute to the decision-making of the board. They are tasked with helping to determine the business’s overall strategy. As well as performing the other functions of their role.

Executive directors are joined on most boards by non-executive directors. They’re board members who do not have responsibility for daily management or operations. They’re employed by businesses purely to help with the big picture. To contribute to overall strategy and aid the board’s decision-making. What exactly, though, do different executive and non-executive directors do for a firm? 

What Do They Do?

Executive director is a catch-all phrase. It describes a range of different roles within a company. All executive directors sit on the business’s board and play a role in high-level decision making. Exactly what they do for their organisation, however, depends on their specific role:

  • Chief Executive Officer (CEO) – A firm’s CEO is the man or woman in charge. They’re responsible for the business’s overall operations and performance. They must maintain corporate policy and help shape a firm’s long-term strategy. Sometimes, a business’s CEO will also be the chairperson of the board. 
  • Managing Director (MD)The MD of a company plays a similar role to the CEO. In fact, the two roles are often confused. An MD is one of the most senior positions at any business. Unlike a CEO, though, they’re often more focussed on managing the day-to-day operations of a company. They will generally report to the chairperson of the board. They still also play a key role in high-level strategy decisions.
  • Chief Operating Officer (COO)A COO is another high-ranking member of any business’s board. Their duties are typically threefold. They’re responsible for day-to-day running of key departments. Such as manufacturing, sales and distribution. They also work to implement processes which improve the efficiency of those departments. Finally, they report back operational information to the CEO.
  • Strategy DirectorThese directors focus on a firm’s position in the wider industry. They collect and evaluate information about the industry and wider market trends. They then use that information to inform discussions and decisions regarding business strategy. Their overall aim is to define a path toward success and keep a business on that path.
  • Chairman and other Non-Executive DirectorsIt’s obvious that non-executive directors are different to executive directors. It’s worth mentioning them, though, as they also play a key role on company boards. They’re board members who aren’t a part of your executive team. Instead, they’re focussed on planning, policy making and monitoring performance.  

How Much Are They Paid?

It should now be clear that executive directors are high-level employees. They’re skilled and experienced individuals who take on lots of responsibility. The way they’re paid reflects that responsibility and the high-level skill set they have.

Take the position of CEO as an example. According to recent statistics, the average salary for a CEO in the UK in 2019 is £89,020. On top of that, they’re also typical rewarded with an average annual bonus of £19,918. Alongside around £35,000 in other remuneration. That represents an average outlay of close to £145,000 per year for a firm to their CEO alone.

Plenty of CEOs earn more, of course. Other executives also typically command a lower average salary. Those stats do reveal something important, though. That is that taking on new full-time executive directors isn’t viable for many SMEs. There is a way, however, that those firms can still afford the very best executive directors.  

How Can SMEs and Scale-ups Afford the Best?

You may think that the high remuneration commanded by executive directors puts the best people beyond the reach of SMEs or scale-ups. Fortunately, that isn’t the case. Due to an innovative and increasingly popular practice. The practice of outsourcing senior company positions to part-time operatives.

A smaller enterprise is able to bring on board a CEO, COO or strategy director for a fraction of their usual cost. They can choose how often and how much the director’s services are available to them. For instance, an early stage business with a low budget might bring the part-time Director on board for say only one day per month. More established companies might prefer 2 or 3 days a week. They can still benefit from their expertise and perspective without breaking the bank.

It’s not all about salary, either. There are other ways in which hiring part-time directors is kinder on an SME’s budget. Outsourcing a senior position does not incur a recruitment fee, which employing full time often can. Unlike hiring a full-time board member. An SME also doesn’t have to worry about negotiating an annual bonus or benefits package. 

The executive directors SMEs and scale-ups can afford on a part-time basis can be of a higher grade. Their operating budget is no longer an obstacle. They can benefit from the skills and knowhow of the best executives. Cost-efficiency isn’t the only benefit of the part-time director route, either.     

Other Benefits of Part-Time or Interim Executives

Hiring part-time executive directors allows SMEs access to a higher level of executive. That’s not the only benefit of choosing to outsource a senior board position, though. The following are other reasons why interim executives may be a better option for SMEs:

  • Flexibility – A firm’s relationship with a part-time director can be tailored to their exact requirements. The business can scale up or down the level of advice provided as needed. Ending such a relationship is also far more straightforward. Part-time Directors can be hired on a fixed term or monthly review basis. If things aren’t working out, an SME has an easy exit available.
  • Specific Expertise – Taking on a full-time director often takes months. Hiring an interim executive can be done in a matter of days. Outsourcing in this way, then, is a great way for a business to respond to a particular problem or challenge. For example, a board might be facing an issue that falls outside their field of expertise. They may have a problem with their digital marketing, infrastructure or technology. To nip the issue in the bud, they could quickly hire an interim director with digital expertise     
  • Focus – Experienced and skilled executives brought onto a board on a part-time basis can give an SME’s issues their full attention. A full-time executive may have other duties. A part-time or interim director can focus on strategy and planning to meet a firm’s challenges. Often, such high-level executives can get three or four days’ worth of work done in two days or less.
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