Why are secondary metrics important for businesses?

Secondary metrics are crucial because it's often difficult to directly brainstorm how to improve a primary metric like revenue. These supporting metrics, forming the base of a metrics pyramid, influence the top KPI and are where companies brainstorm features and focus optimization efforts weekly.

How does Airbnb define its key performance indicators?

Airbnb's primary metric is revenue, with a startup goal of reaching breakeven. Key contributing secondary metrics include the amount of inventory available, the average price of that inventory, host responsiveness, and website performance like search result speed.

Should I use custom or standard KPIs?

For your primary KPI, it's highly recommended to use one of the standard types (revenue, usage, contracts, milestones) to allow for easy comparison with other similar companies, especially for investors. However, secondary metrics can be more custom and unique to your specific product or business.

What is the relationship between primary and secondary metrics?

Primary and secondary metrics can be viewed as a pyramid. The single primary KPI sits at the top, indicating overall business success. The secondary metrics are 3-5 metrics below it that significantly impact the primary KPI and are the focus of weekly optimization and feature development.

Key Moments

Michael Seibel - How to set your KPI?

Y Combinator

Science & Technology4 min read4 min video

Feb 1, 2021|31,688 views|1,094|50

YC Y Combinator

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Key Moments

TL;DR

Most startups pick revenue or usage as their main KPI, but success hinges on 3-5 essential secondary metrics that feed into it.

Key Insights

Most companies' primary KPIs fall into four categories: revenue, usage (DAUs/WAUs/MAUs), enterprise contracts (LOIs, pilots, signed deals), or technical milestones for science/moonshot companies.

Secondary metrics form the base of a 'metrics pyramid,' directly influencing the primary KPI, and are the focus for feature brainstorming and weekly optimization.

Airbnb's primary KPI is revenue, with key contributing secondary metrics including inventory availability, average listing price, and host responsiveness.

Choosing a standard primary KPI (revenue, usage, contracts, milestones) is crucial for effective comparison with other companies, especially for investors.

Secondary metrics should be tailored to the specific product or business, focusing on the 3-5 most important drivers of the primary KPI.

Features and product development efforts should be brainstormed and optimized around these secondary metrics, not the primary KPI directly.

Selecting your primary key performance indicator

The foundational step for any startup, particularly those going through Y Combinator, is to define a single Key Performance Indicator (KPI). This metric serves as the ultimate judge of a company's success. Michael Seibel outlines four primary categories for this top-level KPI: 1. Revenue (encompassing monthly, recurring, or annual figures); 2. Usage (commonly measured by Daily, Weekly, or Monthly Active Users, suitable for ad-based or social platforms); 3. Enterprise contracts (for B2B companies, this involves Letters of Intent, free or paid pilots, and signed contracts); and 4. Technical milestones (for science, biology, or moonshot companies, this could be successful experiment data or manufacturing achievements). Choosing one of these established metrics is vital for benchmarking against competitors and for investor evaluations, as it allows for clear comparative analysis. Deviating from these standard metrics can make it difficult for external parties, like investors, to understand and assess your company's performance relative to industry peers.

The role of secondary metrics

While a primary KPI provides a high-level view of success, directly brainstorming how to improve it, such as 'increasing revenue,' is often too abstract and difficult to act upon. Good companies, therefore, establish a set of 3 to 5 secondary metrics. These metrics function at the base of a 'metrics pyramid,' with the primary KPI at the apex. The belief is that these secondary metrics significantly impact the primary one. It is around these secondary metrics that founders should brainstorm new features and rigorously optimize their efforts on a weekly basis. This approach breaks down the complex goal of increasing the primary KPI into actionable, manageable components.

Illustrating the metrics pyramid with Airbnb

The case of Airbnb effectively demonstrates how a metrics pyramid operates. Their ultimate goal is revenue, and at one point, their primary objective as a startup was to reach breakeven. To drive revenue growth, Airbnb focused on several key secondary metrics. Crucially, they tracked the 'amount of inventory' available on the platform; low inventory directly hinders revenue potential. Another vital metric was the 'average price of the inventory,' as unrealistic pricing deters bookings. Host 'responsiveness' was also critical; long delays in host replies to booking inquiries negatively impact conversion rates. Furthermore, metrics related to website performance, such as search result speed, also contributed to overall revenue. These lower-tier metrics, when optimized, directly feed into the higher-level KPI of revenue, making decision-making and feature development more targeted and effective. So what, this highlights that abstract business goals like revenue are best achieved by meticulously improving their constituent, actionable operational metrics.

Tailoring secondary metrics to your business

While the primary KPI should align with industry standards for comparability, the secondary metrics offer an opportunity for customization. These 'base of the pyramid' metrics should be unique to your specific product or business model. The goal is to identify the three to five most critical operational levers that directly influence your primary KPI. These custom metrics are where you can truly innovate and differentiate your approach to growth, as they are deeply tied to the unique value proposition and operational realities of your company.

Investor perception and KPI choice

The choice of a primary KPI is not just an internal exercise; it has significant external implications, particularly when interacting with investors. Investors often evaluate startups within a specific industry by comparing their core metrics. By selecting a standard KPI, such as revenue or user growth, you provide investors with a familiar benchmark, enabling them to easily assess your company's performance relative to others in your cohort. Opting for an unconventional primary KPI can create ambiguity and hinder an investor's ability to conduct these crucial comparisons, potentially putting your fundraising efforts at a disadvantage.

Iterating and optimizing based on metrics

The process of setting metrics is not a one-time event but an ongoing cycle of measurement, analysis, and action. Founders are encouraged to brainstorm features and make product changes with the explicit goal of moving these secondary metrics. Each week, the performance against these key drivers should be reviewed, and adjustments made accordingly. This iterative approach ensures that the company's efforts are continually focused on the most impactful areas for growth, ultimately leading to the desired movement in the primary KPI.

Mentioned in This Episode

●Companies

●Organizations

Setting Your KPI: A Quick Guide

Practical takeaways from this episode

Do This

Choose ONE primary KPI for your business (revenue, usage, contracts, or technical milestones).

Define 3-5 secondary metrics that directly impact your primary KPI.

Brainstorm features and optimize your secondary metrics weekly.

Use standard KPIs for easier comparison with other companies.

Be creative with secondary metrics as they are unique to your business.

Avoid This

Do not get creative with your top KPI choice.

Do not choose a creative KPI that is hard for investors to compare.

Do not limit yourself to only one metric; use a pyramid structure.

Common Questions

The main types of KPIs typically fall into four categories: revenue (monthly recurring revenue, annual revenue), usage (daily, weekly, or monthly active users), contract signings (LOIs, pilots, signed contracts for enterprise companies), or technical milestones (achieving positive data in experiments or manufacturing accomplishments for science/moonshot companies).