social-networking, lean-startup, network-effect, product-market-fit, innovation-accountingInnovation Accounting is mentioned in this book called “The Lean Startup” by Eric Reis at page 114.
In sales businesses such as “here is our product it costs this much” the metrics are similar if there is 10 users, and if there is 10 million users. But in network effect businesses the metrics change as more users start using it. The metrics change a lot if FB is used by 1 billion people instead of 1000 people.
How to use it efficiently in a network effect business.
In a network effect business a good way to structure the innovation accounting is to base it on Dave McClure's pirate metrics (AARRR!):
More information is available in the following slides.
After some more reading Eric Reis mentions this in pg. 118 of the book “The Lean Startup”
Summary of it is to focus on Retention as much as you can, that is the key metric network effect businesses should consider.
By contrast, a marketplace company that matches buyers and sellers such as eBay will have a different growth model. Its success depends primarily on the network effects that make it the premier destination for both buyers and sellers to transact business. Sellers want the marketplace with the highest number of potential customers. Buyers want the marketplace with the most competition among sellers, which leads to the greatest availability of products and the lowest prices. (In economics, this sometimes is called supply-side increasing returns and demand-side increasing returns.) For this kind of startup, the important thing to measure is that the network effects are working, as evidenced by the high retention rate network effects are working, as evidenced by the high retention rate of new buyers and sellers. If people stick with the product with very little attrition, the marketplace will grow no matter how the company acquires new customers. The growth curve will look like a compounding interest table, with the rate of growth depending on the “interest rate” of new customers coming to the product. Though these two businesses have very different drivers of growth, we can still use a common framework to hold their leaders accountable. This framework supports accountability even when the model changes.
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