ModCloth CFO: Four Metrics That Mean More Than Money

December 20, 2013, 12:41 AM ET

ModCloth CFO: Four Metrics That Mean More Than Money

By Jeff Shotts

People think the job of a CFO is to obsess over a company’s money matters. Financial reporting, budgets, and compliance are our stock in trade. But across a career at companies like eBayEBAY +2.21% and fashion e-tailer ModCloth, I’ve grown to appreciate the critical importance of a handful of non-financial measures that can be more important indicators of the health of a business than financial metrics. Here are four indicators that power a high return on investment on the time a CFO spends to understand them:1.  Engagement. It behooves the next-gen CFO in consumer-facing businesses to understand what actions people are taking on your site and in your apps over time.  In the Web 1.0 days, this concept was often referred to as “stickiness” and was measured by many companies as time spent on site.  In today’s world of multiple devices, engagement activities can include actions as wide-ranging as “like,” “love,” “share,” leaving a review, uploading a picture, or endorsing the skills of someone in your network.

Engagement, now defined broadly as user actions other than an actual purchase, has been proven time and time again to: (a) increase the average lifetime value of a customer and (b) drive powerful solutions to otherwise intractable business problems – both of which help an organization thrive.

During the early days at eBay, there was a lot of concern about the need to ensure listings on the site were legal and met our policies. With little prompting from the company, we found the community was willing to do a lot of policing of listings themselves. By creating a tool that allowed community members to report listing violations, we were able to leverage the power of the community to monitor millions of listings in a way that created a safer, better experience for our users at low cost.

The more engaged your customers are, the more value your business can create and the more flexibility your business will have to solve problems in a unique and differentiated way.

2.  Quantity and quality of relevant User Generated Content (UGC). UGC get short shrift from the business end of many organizations which don’t have reviews as a core offering (like Yelp! or TripAdvisor). While it often requires a significant financial investment, systematically collecting and then amplifying users’ personal expression has the potential generate significant business value if it is relevant to the community and the business model.

Over the past several years at ModCloth, we have collected customer reviews of our products that include the option for users to submit their measurements (such as their height) in their review to help other community members assess the potential fit of the product.  With high engagement of our community (more than 80% of our products have reviews and more than 55% of reviews have measurements), we have assembled a large amount of highly relevant UGC on how our products fit women of different sizes. We now use this data to help users find products that were a good fit for other customers with similar body types in our just-launched iPhone App feature, Fit For Me. The combination of deep community engagement and rich UGC at ModCloth creates financial value as it enables us to drive a significant amount of our new customer acquisition through unpaid marketing channels.

3.  Signals from underserved markets. If you have direct connections with your customers and listen well, they will tell you when you have the potential for a break-through offering in the market.  I learned the importance of watching such signals early in my career, when eBay noticed that people were listing Ferraris and other used cars on the site. This was very counterintuitive, given that the site was so new and no one expected people would list something as high in value as a Ferrari on it! EBay leveraged this insight around a then-underserved segment (car collectors & used car sellers who were previously limited to a local market) to build the eBay Motors business, which hit over $1 billion in revenues in its first year of operation.

To gather these signals in my current role, I spend as much time as possible seeking out direct information from our customers. Through our net promoter score surveys, I understand trends across customer segments and regularly review the qualitative comments our users make that bring the numbers to life. I spend time on the front line with our customer care team to hear what our customers are saying through live calls and also connect with themes the team is seeing across thousands of interactions. Finally, I calendar time to listen to our customer in their own words and actions on our experiences, through reviews on our site, posts on Facebook, and more.

4. Ratio of rules broken to rules followed. CFOs are natural-born rule-makers and followers, not breakers. And that’s as it should be – we play the lead role for financial and regulatory compliance in most organizations. But I’ve also learned this: it’s increasingly necessary to break the rules of the game for operating a business in your industry to generate break-through value for shareholders.

During my time as director of finance for eBay France, we faced competition from a local classifieds player that did not charge consumer sellers for its services. In response, we decided to adjust course and test eliminating insertion fees (the price a seller paid to post a listing) for consumer sellers in France. This led to a significant increase in overall activity and sales—so much so that eBay has since rolled out this “free listings” model to the U.S. and other countries for consumer sellers, breaking the long-standing practice of charging consumers to post their inventory on the platform.

The very nature of creating a lasting and innovative start-up requires that you break the rules of an industry (or rules across industries) in your business model. For some start-ups, this rule-breaking mindset plays out in a “pivot” to a new strategic or product direction. In others, it remains critical that you continue to challenge assumptions on business operations, test new approaches and avoid status quo thinking.

On the other hand, there are rules (like for financial reporting) that you cannot break as a CFO.  Following these rules creates significant value for shareholders.  As a strategic CFO, it takes an innovative mindset to understand where to break rules while following rules in other places. I have found that simplifying rules into compliance and operating spheres is a useful organizing structure to guide which mindset to use in different circumstances.

Jeff Shotts is the Chief Financial Officer of ModCloth, a San Francisco-based online retailer, and former head of strategy for eBay Marketplaces.