Be Careful What You Choose to Measure
On Thursday July 26, 2018, Facebook set a dubious record: The value of their shares plunged 19% erasing $119 billion in market value – the biggest single-day loss in market cap ever for any public company. Mark Zuckerberg’s personal loss was $16 billion. Almost at the same time, Amazon posted a quarterly profit of $2.5 billion pushing its stock up over 4% as their market valuation inched tantalizingly close to $1 trillion. Jeff Bezos is by far the richest man in the world with a personal net worth of over $140 billion.
In my non-expert opinion, I feel the market may have overreacted to Facebook’s recent issues. That being said, the contrast in Amazon and Facebook’s fortunes did bring to mind how optimizing internal metrics that aren’t about customer value can eventually bite you.“...optimizing internal metrics that aren’t about customer value can eventually bite you.” -hughmolotsi Click To Tweet
Although financial metrics (revenue and profit growth) are the ultimate scorecard for publicly traded companies, investors and employees often look at other metrics to gauge performance. For one, many companies have attained stratospheric valuations without managing to make money. In fact Amazon barely managed a handful of profitable quarters in its first two decades of existence. Second, financial metrics tend to be after-the-fact and are generally not suitable for managing an organization in real time – it’s like trying to navigate a car forward by only looking at the rearview mirror.
Facebook has built a formidable business by amassing one of the largest user bases in history. An important metric Facebook tracks is monthly active users (those who have logged into Facebook during the last 30 days). As of the second quarter of 2018, Facebook had an astonishing 2.23 billion MAU, making it by far the most popular social network worldwide.
If we drill a level deeper, we realize Facebook doesn’t make its money from simply having users log in. Facebook’s formidable economic engine consists of ads, which require users to spend a lot of time on the platform. Facebook hasn’t recently disclosed how much time users spend in its apps but previous estimates indicate the average monthly user spends 27 minutes a day, and the average daily user, over 40 minutes per day. It makes sense that the number of active users and the average time spent on the platform would be internal metrics that Facebook would track to measure progress.
Furthermore, what makes Facebook’s ads so effective is that they can be precisely targeted to a particular audience. For targeting to work, Facebook leverages 98 personal data points about users including age, gender, ethnicity and income. So it also follows that the average number of data points per user would be another internal metric to track.
Facebook’s altruistic-sounding mission statement is “To give people the power to build community and bring the world closer together.” But when you consider the nature of their ad-driven economic engine, and their internal metrics, you get a picture how Facebook’s progress may run cross-purpose to their users’ interests.
Is it really good for users to be spending so much of their day on a social media platform? The data-tracking firm Mixpanel has even come up with the insidious-sounding addiction metric as a more effective alternative to MAU and DAU, which they call “bullshit metrics.” How does it make you feel to know that a firm is trying to optimize your addiction to their product?“How does it make you feel to know that a firm is trying to optimize your addiction to their product?” [email protected] Click To Tweet
Also, is it really in users’ best interest that their Facebook data is being used to help advertisers target them? Does getting really good at mining customer data for profit cultivate a culture where data can be inadvertently sold to bad actors like Cambridge Analytica?
And is Facebook really bringing the world closer together when optimizing news feeds for average time spent on the platform may also mean only showing people information they are likely to agree with and keeping users in their respective bubbles?
Now let’s take a look at Amazon’s internal metrics. Amazon’s approach is rooted in the philosophy that when customers win, Amazon as a company wins. Their vision statement is: “To be earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.” To that end, they’ve defined their top three metrics: offer wider selection, lower prices and fast, reliable delivery.
Through “wider selection,” Amazon strives to offer customers the ability to purchase just about anything they can imagine on their platform. Amazon’s first slogan was they were “the Earth’s Biggest Bookstore.” Fast-forward a few decades and Amazon is the world’s largest retailer taking on every product and service category in its reach.
Through “lower prices,” Amazon wants customers to be confident they won’t find cheaper prices anywhere else. Amazon is relentless in this pursuit and pioneered bot-driven pricing over a decade ago where they crawl competitor websites to ensure they always have the lowest price on popular items.
Through “fast, reliable delivery,” Amazon strives to deliver purchased products to customers as quickly as possible. Amazon has gone to great lengths to improve this metric through a successive series of innovations including: making fulfillment centers more efficient, setting up warehouses inside large metropolitan areas, and offering same-day shipping in places like London. I’m not sure how seriously we should take Amazon’s purported interest in delivery drones, but I wouldn’t completely write it off either.
In tracking metrics where customers win, Amazon doesn’t have Facebook’s problem where progress gained (as measured by internal metrics) also causes company behavior that works against customers’ interests.
Now this doesn’t mean Amazon has been perfect. Not by a long shot. Their relentless customer-centricity has often come at a steep cost to suppliers and third-party sellers. Amazon has also dramatically reshaped the retail landscape where department stores have lost 448,000 jobs in the past 15 years. To be a good corporate citizen, Amazon will need to be thoughtful about its societal impact and how it impacts all its stakeholders, not just customers.
The good news is Facebook is aware of the existential issues that spooked the market and has been making moves to address them. For instance, realizing that users spending all day on the platform is probably not good for them, they have started to experiment with tools to allow users to monitor their usage. Facebook has also been cleaning up the Cambridge Analytica mess by enforcing more restrictions on third-party access to user data. Facebook’s challenge going forward is finding a way to both serve their users’ interests while continuing to feed their economic engine.
As we come up with internal metrics for our own ventures, we can take this lesson from Amazon and Facebook: Optimizing for metrics that don’t align with your users’ interests may eventually put you in predicament where your practices are at odds with your users and your mission. Be careful what you choose to measure. You might just become really good at it.“Be careful what you choose to measure. You might just become really good at it.” [email protected] Click To Tweet
Thank you to Hugh Molotsi for contributing this piece. In their forthcoming book, Jeff Zias and Hugh are writing about how companies can drive growth by empowering employees to work on their own ideas.