In Michael Lewis’ book and in the Oscar-nominated film Moneyball, Billy Beane overcomes the fact that he could not afford the players that had the highest batting average or drove the most runs. However, he utilized Proprietary Metrics to assemble a competitive baseball team of relatively “undervalued” players for the Oakland Athletics. He employed non-traditional metrics to recruit players who had a high on-base percentage (OBP) (the measure of how often a batter reaches base for any reason other than a fielding error or fielder’s choice) and slugging percentage (SLG) (calculated as total bases divided by total at bats).
But what exactly are Proprietary Metrics? Proprietary Metrics are so novel yet powerful, and ideally they are considered to be “owned,” and their use creates a competitive advantage. In baseball, Proprietary Metrics often evolve into industry standards. Still, the Oakland A’s leveraged innovative metrics to ultimately assemble a high-caliber championship team and revolutionized America’s past time.
Companies can use the concept of Proprietary Metrics to create a competitive advantage by applying the following guidelines:
- Actionable. Proprietary Metrics should provide actionable insights which give immediate guidance. For example, forecast accuracy alerts can signal as forward trends deviate from what is expected so that preventative actions can be taken. Such metrics enable companies to take specific and repeatable actions to course-correct.
- Unbiased. Metrics must be unbiased so that they do not skew responses. For example, the ideal metrics would not overweight either sales volume or margin. The results need to be quantifiable and measurable over time. Examples include Revenue per Available Seat Mile (RASM) (which may be calculated as average revenue per passenger mile multiplied by the percentage of seats sold) for airlines and Revenue per Available Room (RevPAR) (average daily rate times percent occupancy) for the hotel industry.
- Uniquely advantageous. Incorporating statistics that are unique to a given company may result in a competitive advantage. A Net Promoter Score (NPS) helps to measure the loyalty of a firm’s customer relationships, and is often correlated to organic revenue growth. A proprietary metric coupled with NPS would give insight into customer perception which could be leveraged in understanding the value-add of a brand, along with the behavioral observation in how customers choose between marketplace alternatives.
- Continuously evolving. Finally, a company’s Proprietary Metrics must constantly evolve as more data becomes available. In baseball, more data has become available that captures every pitch for every at-bat. Similarly, more data is available, such as competitor price and promotions so that companies can optimize their prices based upon measuring how consumers respond to the competitive offers. Market Response Models (MRMs) have been developed in many industries to continually assess how consumers make trade-offs with respect to product & price in a dynamic marketplace. Still, MRMs must evolve as competitive data and social data become more available.
Proprietary Metrics have tremendous potential to drive organic revenue growth and differentiate a company in the eyes of potential customers and investors.