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VANITY METRICS: A WORD OF CAUTION
To see the danger of vanity metrics clearly, let’s return once more to the early days of IMVU. Take a look at the following graph, which is from the same era in IMVU’s history as that shown earlier in this chapter. It covers the same time period as the cohort-style graph on this page; in fact, it is from the same board presentation.
This graph shows the traditional gross metrics for IMVU so far: total registered users and total paying customers (the gross revenue graph looks almost the same). From this viewpoint, things look much more exciting. That’s why I call these vanity metrics: they give the rosiest possible picture. You’ll see a traditional hockey stick graph (the ideal in a rapid-growth company). As long as you focus on the top-line numbers (signing up more customers, an increase in overall revenue), you’ll be forgiven for thinking this product development team is making great progress. The company’s growth engine is working. Each month it is able to acquire customers and has a positive return on investment. The excess revenue from those customers is reinvested the next month in acquiring more. That’s where the growth is coming from.
But think back to the same data presented in a cohort style. IMVU is adding new customers, but it is not improving the yield on each new group. The engine is turning, but the efforts to tune the engine are not bearing much fruit. From the traditional graph alone, you cannot tell whether IMVU is on pace to build a sustainable business; you certainly can’t tell anything about the efficacy of the entrepreneurial team behind it.
Innovation accounting will not work if a startup is being misled by these kinds of vanity metrics: gross number of customers and so on. The alternative is the kind of metrics we use to judge our business and our learning milestones, what I call actionable metrics.
