I know, some of this stuff is hard. It’s hard because there is a tremendous amount of information that you need to gather, often from many different sources. You need to understand average revenue per user and how long people tend to remain users, in order to calculate LTV. You also need to understand the costs of different channels for acquisition. And, if you don’t have any revenue yet, you need to understand how to estimate those numbers in the future.
It’s supposed to be hard. Understanding the fundamentals of how your product attracts users and makes money (or is projected to do those things) is complicated. But it’s critical to your ability to function, because it allows you to pick better metrics and make better decisions.
Mostly, though, this is important because it tells us what to work on and when to stop. Remember how the final step of the process is to learn and iterate? I get a lot of people who run various experiments—which we’ll get to later in the book—and they often ask how they’ll know when the experiment is valid. How do they know it’s time to stop iterating on something and start working on something else?
It’s a great question, and it’s very easy to answer when you understand the math. Your goal is to optimize your funnel to make the input lower than the output. At the very least, you need to get it to balance, or you’ll never get to break even, much less to profitability.
If you look at your funnel, and you’re losing huge numbers of people at a particular step, that’s probably a great place to start experimenting and making changes. You’ll want to keep going until you’ve plugged some of the holes in that part of the funnel or until you hit a point of diminishing returns. You’ll then want to move to the next most important step in your funnel until your algorithm is balanced.
The Dangers of Starting from the Business Need
I love funnels and algorithms, and you should too. Building a product without a fundamental understanding of the business need behind it is like driving a car blindfolded.
Unfortunately, there are some very common problems that can be caused when we start with the business need, and I know there are a few designers out there who have been yelling, “but what about the users????” for several pages. Since we just spent most of the chapter talking about how important it is to start with the business need, I want to address some of the problems with that strategy as well.
Don’t worry. Just because we’re starting with the business need does not mean that we’re ending there.
We start by identifying what the business needs to be successful, because if the business isn’t successful, eventually that ruins things for everybody. The startup dead pool is littered with companies that had wonderful user experiences but couldn’t make enough money to survive.
But identifying a business need doesn’t mean that we ignore user needs. In fact, the next few chapters are all about identifying the user need. Remember, we make better products when we find ways to improve things for our business by improving things for our customers. It’s wonderful to make our customers happy, but customers should be happy to pay for great products.
When you identify a friction point in your funnel, your next move is to understand why users are falling out and to find a way to improve things for them at that step. You use the funnel to identify the business need, but that’s not the end of the story. In fact, it’s only the end of Chapter 1.
EXPERT ADVICE from Christina Wodtke
Christina Wodtke is an author, speaker, teacher, and product expert. She has been a general manager, a design executive, and a startup CEO. She spends a lot of her time teaching business to designers at the California College of the Arts, design thinking to entrepreneurs in public workshops and at Stanford Continuing Studies, and OKRs to everybody who needs a better way to measure their team’s performance.
Her book, Radical Focus, Achieving Your Most Important Goals with Objectives and Key Results, is a business book in the form of a fable about a struggling startup. It’s also a really fun, quick read. It introduces readers to a technique called OKRs to set business goals in a way that’s measurable and actionable.
“OKR” is short for Objectives and Key Results. It’s a system invented at Intel for setting and managing goals that’s been used in companies like Google, LinkedIn, and Twitter. Unfortunately, as with any deceptively simple framework, OKRs are often used poorly. Christina shared a few tips and an exercise to help you learn to use them better.
Christina explained that companies fail to reach their goals for five reasons:
• They haven’t prioritized the goals.
• They haven’t communicated the goals obsessively and comprehensively.
• They don’t have a plan to reach the goal.
• They haven’t made time for what matters.
• They give up, rather than iterate.
OKRs give companies a framework for picking and prioritizing their goals, communicating them in a way that makes things concrete for every member of the team, creating a plan for each individual, and providing a way to effectively measure real progress. It’s not easy, but neither is reaching your goals with no plan and no way of measuring how well you’re doing.
EXERCISE
Set Team OKRs
Although most companies that are using OKRs set them at the highest levels and then spread them through the rest of the organization, Christina strongly recommends against trying to have the entire company using OKRs at once. Instead, you should start with a trial effort of one independent team.
“Trying to implement OKRs for the company, team, and individuals is just too complicated the first time,” Christina warned. “Try setting OKRs for a single big project at first. Do a small version and get used to how to set them. Set one OKR—this is the thing you’ll finally fix. Once you’ve gotten good at OKRs, you can evangelize their success and implement them more broadly.”
RUN THE EXERCISE: TEAM OKRS
TIME TO RUN
2 hours
MATERIALS NEEDED
Sticky notes, Sharpies, whiteboard
PEOPLE INVOLVED
Product managers, designers, researchers, engineers,
EXERCISE GOAL
Set an appropriate objective for your product team and identify the key results that you need to achieve and measure.
STEP 1: Set the Objective
First, you’re going to set your objective. An objective is never a feature, although that’s how people think about them far too often. “People are solution based,” Christina explained. “They’ll say ‘we want to launch a new sales portal.’ Why is that important?” She suggested continuing to ask why until you understand the actual objective of any feature.
For example:
We want to launch a new sales portal.
Why?
We want to support a larger sales team in multiple countries.