I don’t mean that you just got to love them. You actually have to love them and here’s why:

There is a reason why the economic downturn has not affected internet startups in the same way as traditional businesses. The internet just passed 1 billion users and bandwidths are continuously increasing at the same time as online advertising and e-commerce is still growing strong. Simply put, the overall market is getting much bigger. Launching a new internet service today is so cheap and easy that it can be done literally for free and in just 24 hours. But putting together a product in as short time as that puts even more focus on measuring what the users actually are doing with the product. You will probably have one idea, but your users might have another. Through simple real time tracking of defined user metrics it is much easier today to make rational decisions based on actual user behavior.

After seeing a presentation by Dave McClure at Seedcamp this fall I got really interested in metrics for startups. According to Dave there are five different areas that are important to measure when it comes to a new internet service or product. In this post I will try to go through and give tips on how they apply to your business. The five areas are:

• Acquisition
• Activation
• Retention
• Referral
• Revenue

Acquisition

This one is quite basic when you first look at it. Let’s face it, if you have a website you’ll want users coming to your site. But how should you measure the differant ways you get them. The first single most important thing is also the most obvious. You should have a killer app. Focus on creating a service with one really crisp functional feature that works really good that your users love. But before we go into that let’s focus on the acquisition metrics. Try and find your different marketing channels may it be SEO, SEM, PR, Facebook, Email, Widgets or campaigns. Measure volume, cost per acquisition, and best performing conversion. Find your top 10-100 keywords that you should buy adwords for and use Google Analytics extensively. Set up goals and look closely at clicks vs. CPC vs. conversions of each goal.

Activation

Once you have your users coming to your site you need to get them to do something there. This has to do a lot with clear communication of what they can expect to do at your site. Here you need to measure any type of activation that seems logical for you, but keep the different metrics low in the numbers. Things to measure could be, clicks on links, sign ups, low bounce rate, pages per visit, and even mouse movement or eye tracking. Concrete tips on improving these metrics could be A/B testing which you can do with Google Website Optimizer, experiment with many different landing pages, and literally watching over the shoulder of a user when they enter the site. A great tool for this that I recently ran into was UserFly where you can record and playback the users’ sessions with mousemovements and clicks and everything you need. Crazy Egg is another good resource for heat maps of user clicks. The best way to start is to make a lot of dumb guesses of what might work and then iterate really fast on those that work.

It just struck me that you might be able to apply genetic programming techniques for the A/B testing. Create 20 different versions of a landing page. Then take the best performing 2 and combine them into 15 new versions that are similar to them, then create 5 that are based on them but include some sort of mutation. Do this for a couple of generations and you’ll probably have a pretty good view of what works or not.

Retention

How do you make your users come back to your site over and over again? Even if I usually don’t like when services sends me emails, it is still working because I go back to their site. Take facebook for instance. I get maybe 10 facebook mails per day which takes me back to the site because there is something I’m interested in there. Automated email marketing and alerts should not be underestimated. The only really important thing here is to make it easy for the users to unsubscribe. Emails could be sent quite often in some cases, but in others it only makes sense each month. Subjects could be the status of a user’s account, best of lists, or interesting news where something has changed. Just remember to keep 80% of the message in the subject line, and 20% in the body text. Other than email, blogging and news feeds are crucial to keeping your users incentive to come back high.

Key metrics here are to measure the distribution of visits over time. That is how many times a visitor comes back over a period of time and how fast the decay of visits is. This will show you how a full customer life cycle and measure its effectiveness. When it comes to email and news feeds, it is important to measure how many people actually open the email. You can do this by including server loading html or tracking images. You should measure the CTR and the total number of users coming to you through your emails. This can be done with for instance campaignmonitor.com. Relevant levels for this is of course dependent on your site and users, but goals could be 20% open rate with 2% CTR. You should use this tracking to try and identify you fanatical users that will actively promote your service. These are the users that can get virality going and you should pay close attention to them. With Google Analytics you can easily measure visitor loyalty and session length as well as conversions once you’ve set up your goals from landing pages.

Referral

Once you’ve found your fanatics and cheerleaders you need to have tools that allow them to easily refer their friends and followers to your site after they’ve had a happy experience visiting. This can be done with simple social “share this” buttons, or widgets that can be embedded on other sites and blogs. There is a really simple formula for measuring the Viral Growth Factor.

X * Y * Z

• X = % of users who invite other people
• Y = average # of people that they invited
• Z = % of users who accepted an invitation

A viral growth factor that is > 1 means that your organic growth of users is exponential.

And finally Revenue

This part is where the general tips stop to be important and you have to look at the combination of all of your other metrics to figure out what each new user is worth with your business model may it be AdSense, Freemium, Subscription, or Lead generation. For tips on business models you can have a look at The Business Model DataBase. There is a reason why this is the last area of measurement. It might be wrong to start with the revenue model when you develop your new service. Don’t let that hinder your progress in acquireing, activating and retaining users. It doesn’t matter if you have the best most innovative business model in the world, if you don’t have any visitors.

Keep your costs low, focus your development 80% of improving existing features and 20% on new features, all based on your super detailed metrics. And to cite Dave McClure:

Features don’t matter… Usability + [Measured] Conversion Matters