Why Many "Digital" Firms Must Use Non-Traditional Proxies for Success

There is a good reason why many applications use non-traditional metrics for measuring progress: the sources of their value do not map with traditional financial metrics in a direct way. We sometimes think that is true of “software” companies or “digital” firms, but that is partly a coincidence. 

The internet, layered software and virtualization allow most firms to conduct their existing businesses in different ways, without changing the traditional performance metrics. 

Platform businesses, on the other hand, necessarily must account for their success at creating ecosystems of value creation, which are not measurable using standard accounting conventions. 

That is why we often see metrics that are proxies for user engagement, such as daily active users or monthly active users. We might see citations of time spent on the platform. Perhaps we see data on conversions of visits to sales of merchandise. 

Uber might cite gross bookings paid by rider, or the number of trips riders take, the number of drivers or the number of riders per day or month. 

Airbnb might cite nights booked, gross booking value, host earnings or average daily rates as evidence of success. 

Amazon Marketplace and eBay will cite gross merchandise volume. Amazon might point to units sold, customer satisfaction ratings. 

Ebay might track active buyers or seller ratings. 

Since network effects are critical, we might see numbers about growth in the number of producers, merchants, properties, drivers, listings. We might see evidence of success in terms of growing gross merchandise sales, rides, rentals or other metrics about buying volume. 

User abandonment of the platform also could matter, so we might see evidence provided about churn rates declining. 

Connecting domains in the internet era provides an example of the “death of distance” in wide area networking. 

But non-GAAP metrics have grown in importance, even for firms not using platform business models. Competitive local service providers once cited metrics such as “voice grade equivalents” to show sales progress, at a time when service providers were early into the process of measuring bandwidth supplied--rather than voice lines in service--as a proxy for performance. 

Average revenue per account, or average revenue per unit, now are proxies for progress in boosting revenue. Churn rates also became important in competitive markets, where lost customer accounts also tended to mean that a competitor gained an account. 

For similar reasons, customer acquisition cost became an important and relevant metric. 

These days, marketing battles are fought over metrics such as internet access speed, rather than voice quality; outage performance rather than voice quality. 

Consider also that wide area transport of data was charged using distance and capacity as the cost drivers. These days, distance is basically not a significant driver of cost. Instead, interconnection bandwidth tends to drive prices. 

In fact, large domains often agree to “peer” without major recurring cost, exchanging traffic between domains without costs related to traffic volume, as it is expected that inbound and outbound traffic will roughly balance on an annual basis. 

None of those are standard financial reporting categories, but are important proxies for business success.