Question

3.2.4 Noise and Signals

It always seems easy to spot the big winners after they are successful. It’s much harder in the early stages when there is less information. And, there are many false signals that lead managers astray.

DrawQuest

DrawQuest developed an app that created daily drawing challenges for users. The app was immediately popular. In 2013, its first year of operations, 1.4 million users downloaded the app and 400,000 used it at least once a month. DrawQuest’s storage vaults held eight million drawings, which it promised to maintain forever for its user-artists.

Do you think that user downloads or per-month users were good metrics for DrawQuest?

DrawQuest intended to make money by offering premium drawing tools and other services. Unfortunately, few users opted to pay and the company went out of business in 2014. Having lots of users and rave reviews is not the same as creating and capturing value. A better metric might have been the number or percentage of users who purchased their premium packages.

Twitter

More recently, there was some concern about companies like Twitter, which had large numbers of registered users but declining numbers of active users. In network businesses, users and advertisers value engaged and active participants. As one highly successful investor, Josh Elman, once noted: “The only metric that matters is customer engagement – are people using your product?”

This advice seems to contradict the DrawQuest story. What do you think is the difference between Twitter and DrawQuest that makes active users such a good metric for Twitter, but a poor metric for DrawQuest?

Answer 1

In my opinion, user downloads or per-month users were not good metrics for DrawQuest because it did not give information about the user conversion rate based on the marketing strategies adopted by DrawQuest and did not focus on increasing the customer base or the customer retention rate as well. It might be possible that the users are not retained and left in the first month itself due to customer services not available or specific customer needs not satisfied. Also the company did not focus on revenue generation and the customers who availed premium services, which must have been the prime focus of company.

The difference between Twitter and DrawQuest that makes active users such a good metric for Twitter, but a poor metric for DrawQuest is that the revenue of Twitter is dependent on the number of active users based on which the advertisers pay the company due to the popularity the application among the users. However the revenue generation in case of DrawQuest depends upon the premium customers who pay in order to avail the services of the company. Hence due to the basic difference between the revenue generation model of the two companies, active users is such a good metric for Twitter, but a poor metric for DrawQuest.