@brentlarue on Dec 12, 2014
Welcome back to the inside scoop on General Assembly’s product management course. Today’s class was all about business models and metrics. Let’s skip the intro and jump right in.
Business Model Design
During the first part of class we learned about different types of business models, components of business models, how those components relate to each other, and how to develop a business model around a new product idea. Three common business models that dominate the digital world are e-commerce (Etsy, Amazon), subscription (Spotify), and ad-supported media (Gawker). And there are also companies with pre-revenue models (Snapchat, Instagram). More specifically, these business models describe the monetization of a larger business model canvas (or lean model canvas).
The lean model canvas forces you to think about all aspects of your product, from what problem you are solving to how are you going to make money. Once you’ve taken the time to fill this out, you should work to identify your biggest assumption categories. As with everything in product management, do your best to test any and all assumptions. This will reduce your risk and increase your likelihood of success.
For practice, think of an existing company or product and work through the canvas. It is easier to evaluate an existing product than it is to create a new one. We ran into a case during our exercise where the user and the customer were different. This resulted in the majority of our solutions only solving the users’ problems while the customers were the ones paying for the product. This required us to take a step back and work through two canvases, one for the user and one for the customer, to ensure that no needs were ignored.
“If you’re going to put your product in beta – put your business model in beta with it.” – Joe Kraus, Google Ventures
Lean methodologies teach us the way to validate those early assumptions are by creating a Minimum Viable Product (MVP). An MVP is the least amount of work you can do to learn the most of something. As I said before, this reduces risk and maximizes success, but it also provides faster feedback, reduces overhead, and creates measurable progress. You do not need to code to test something.
The perfect example comes in the form of a cupcake. When couples go shopping for wedding cakes, the bakery doesn’t whip up a whole cake, but rather lots of cupcakes each representing the different options. Some types of MVPs that exist in the technology world are concierge (delivering a service manually rather than automatically), wizard of oz (delivering a product where behind the scenes everything is manual), landing pages (to measure interest), and video (to demo a complex concept) MVPs.
See also the Top 10 Business Model Pitfalls.
In the latter part of the class we learned about how to identify the right metrics/KPIs, tools to use, the conversion funnel, and how the funnel stage determines what should be tracked. First things first, what is a KPI? A KPI or key performance indicator is a type of performance measurement. It is used to evaluate the success of a product, organization, or activity. When defining metrics, keep in mind that a good metric is always understandable, comparative, a rate or ratio, and behavior changing.
As Product Managers, there are many frameworks at our disposal, but one that has been readily adopted and used today is called Pirate Metrics. This framework developed by Dave McClure uses the acronym AARRR to represent Acquisition, Activation, Retention, Referral, and Revenue. Activation is concerned with getting the customer. Downloads or signups is a good metric to measure this. Activation gives them a positive experience with the product. The metric here is often contingent upon the product, but can be something like sharing a photo or posting a status update. Retention is all about bringing them back. Daily active users (DAU) over monthly active users (MAU) is a good metric for retention. Revenue is all about money. Metrics here are all centered around making money. Referral is about virality. Metrics include number of invites per user, conversion rate of invites, and the viral coefficient.
Metrics are not only for measuring success, but also can be used in prioritization. When identifying your key metrics, also determine what an appropriate target is for that metric. Do some research to identify what is an appropriate target. The book Lean Analytics provides a lot of useful ways to go about doing this. If you haven’t noticed already, Pirate Metrics sets up a conversion funnel. By identifying the areas on your funnel where your metrics fall short of the targets, you can begin to prioritize your efforts. Always start higher up on the funnel when making change to your product. If you aren’t making any money, you don’t want to change you monetization strategy until after you have found a way to drive people to your product.
It turns out cats don’t have much to do with product management. But they are awesome! Thanks for reading. Share and Tweet below!