What is the one thing that investors and entrepreneurs want?
The answer is traction.
Walk into any investor’s office with the beginnings of a hockey-stick curve and you’ll create a Pavlovian response where they’ll sit you down and try to understand your business model.
Notice I don’t even label the y-axis in the picture above. That’s how powerful the signaling effect of the sharp inflection point in the hockey stick curve is…
When things quickly start trending up and to the right — it indicates that good things are happening — that people other than yourself, your team, and possibly your mom care about your idea. The problem is that traction means different things to different people. And it too can be gamed.
Quick: Which of the 2 charts below communicates progress?
You probably instinctually picked the the chart on the left. But look a bit closer. Both these charts were plotted using the same data set!
The chart on the left plots the cumulative number of sign-ups over time which can flatline but never go down. This is your classic vanity metric. The chart on the right normalizes the data and plots sign-ups by month which is a more accurate progress indicator — but maybe not the better story you want to tell.
This type of charting trick used to work, but it doesn’t anymore. A more sophisticated investor will see right through such a facade. This means you have to level up your game and get smarter about traction.
What Is Traction?
Traction is the rate at which a business model captures monetizable value from its users.
The right traction metric needs to signal business model growth. In other words, traction is the output of a working business model.
“A business model describes how an organization creates, delivers, and captures value.”
— SAUL KAPLAN, THE BUSINESS MODEL INNOVATION FACTORY
While you need to create value for customers before you can capture value from them (aka get paid), capturing value is what makes the business model work which is why I emphasized it in the traction definition.
That said, I want to emphasize that monetizable value is not the same thing as revenue. Revenue is an after-effect of value creation and not all that actionable by itself. In order to grow your business model, you need to uncover the key activities your users do that serve as leading indicators for future revenue. That is the concept of monetizable value.
This is a subtle, but critical, distinction to internalize. I’ll illustrate with a case-study.
Starbucks: The Third Place
Inspired around a vision of bringing the Italian coffeehouse tradition to the United States, Howard Schultz turned a single coffee shop that started in Seattle into a fast growing company. Like any other coffee shop, they were in the business of selling coffee. You could measure traction in terms of number of coffee cups sold, but like revenue, that’s an after-effect and not all that actionable by itself. It doesn’t tell you how to make people buy more coffee. Their billion dollar insight came by studying what key activities caused people to come to Starbucks and buy their coffee.
They started noticing that a number of people came to Starbucks, ordered a coffee, and instead of leaving, pulled out a laptop and started working. Pretty soon they were joined by others for a meeting. This repeated throughout the day with multiple groups. This was at a time when Starbucks was not all that comfortable a place to work — there was no artwork on the walls, the chairs were not comfortable, you had to pay for wifi, and the bathrooms required a key.
While this behavior (of not leaving after an order) may have annoyed some store managers, using sales data the company quickly realized that the lifetime value of these customers was a lot higher than their typical customer who simply bought coffee and left. In other words, time spent in store correlated with money spent.
To test if this correlation was causal, Starbucks probably studied a few test stores more closely, before mobilizing a massive rebranding campaign with the tagline around creating “A third place between your home and office”. Rather than turning the growing freelance population away, they invited them in — essentially launching the first co-working space before it was even a term. Over time they upgraded their stores to provide more comfortable sofas, artwork on the walls, free wifi, and yes they also unlocked the bathrooms.
This insight led them from a fast growing coffee shop into a multi-billion company. Today Starbucks doesn’t sell just coffee. They have breakfast, lunch, and dinner items including beer and wine in some select stores — doubling down on their key insight of not just selling coffee but creating a third place.
Business Model Archetypes
Starbucks is an example of direct business with one actor: the user who becomes a customer. In this type of a model, your traction metric is determined by the rate at which you create customers and your leading indicator is tied to the key activity that drives this.
There are 2 other business model archetypes: multi-sided and marketplace.
Facebook is a classic multi-sided model with users and customers. Here too, you don’t need dozens of data points to communicate traction. Facebook uses just 2 metrics: daily active users and average revenue per user.
In these types of models, users represent a derivative asset that are monetized by your customers. In the case of Facebook, the derivative asset is user data triggered by repeat visits. This asset if monetized through advertising measured using metrics like CPM, CPC, and CPA.
Marketplaces are a special case of multi-sided models where you also have 2 actors but instead of users and customers, you have buyers and sellers. Airbnb is a classic marketplace model. This model is the most complex of the three because you need to manage both sides simultaneously. Value is only created for buyers and sellers when they conduct a transaction and you can’t rely on a proxy metric like number of listings. A marketplace with lots of inventory but no transactions is not healthy.
Airbnb uses a single metric to communicate their business model growth which directly ties to the traction metric: number of nights booked. If this number is going up and to the right, the business model is working.
What about other models?
You can extrapolate any type of business model using these three basic archetypes. As an exercise, I’ll leave you to think how you might categorize an enterprise software model and a non-profit. You can leave your answer in the comments below.
- Categorize your business model into one these three archetypes.
- Identify your traction metric.
- Then start plotting this metric weekly to measure progress.
This was an excerpt from my last book: Scaling Lean where I dissect traction even further. If you’d like to understand how to uncover your aha or north star metric like Starbucks did, check out the book here.