Getting to know KPI’s
In the world of analytics, the terms metrics and KPIs are thrown around and sometimes seem to be used interchangeably. But they aren’t the same thing. They are both important data points, but they serve different functions.
Think of metrics like the overall health and vitality of your body. KPIs (that stands for Key Performance Indicators) are your blood pressure, heart rate, or complete blood count. The metric shows performance and progress over time. The KPIs are the indicators of the processes that make the metric possible.
KPIs can be an early indicator of trouble.
You can also use KPIs to benchmark against others in the company. And when it comes time to raise capital, they will be key to attracting investors or obtaining a loan.
Efficiently tracked financial and non-financial KPIs will aid you in tracking the health of your company. Think of it like standing on the bathroom scale. Sometimes you don’t like what you see, but when you see it you know you must take action.
The ability to identify KPIs largely depends on the current level of your business. Naturally some KPIs are self-evident, take for example gross profit. This KPI needs to be tracked by every type of business. There are also industry standard KPIs and KPIs for certain business functions.
For example, if you are a SaaS company, Recurring Revenue is an important KPI, retailers need to look at Sales per Square Foot, and healthcare providers or insurers might track Average Hospital Stay.
No matter your industry, there are also KPIs to track by function. For example, Marketing might track Cost per Lead and Sales might track their Lead to Conversion rate.
Early stage companies will most likely be extremely focused on acquiring customers, assessing the goods to market fit, and determining if the business is viable.
As the company grows, some of these initial KPIs will be substituted by other KPIs.
For example, a high growth digital business might be focused on acquiring new users through aggressive marketing to establish their own market share before rivals even make it to market. In the initial stages, profit isn’t the highest concern. However for the business to succeed long-term, profit would eventually need to be a KPI.
Make sure your KPIs measure what’s important. Like vanity metrics, false KPIs don’t measure what’s important.
For example, an eCommerce business might use traffic as a KPI, but traffic doesn’t mean success. What good does it do to drive traffic to a landing page that doesn’t convert?
Not sure where to start? You can speak to fellow industry association members, discuss with your CPA, or even use the services of a business consultant.
Your KPIs won’t do you any good if you don’t keep an eye on them. A thermometer just measures the temperature. A thermostat measures the temperature and then takes action based on the measurement.
KPIs must be thermostats and not thermometers. Regularly review your KPIs and take action based on the review. These reviews can be as frequently as every month for a fast-paced organization or quarterly for others.
A KPI isn’t eternal. KPIs will come and go, but the KPI process will remain the same. There are 4 stages in the KPI lifecycle: selection, tracking, reporting, and review. Remember the thermometer to thermostat comparison? With a KPI you are setting the temperature you want, measuring the temperature, reporting that temperature to the HVAC system and adjusting the temperature as appropriate, and finally deciding if that is the ideal temperature to keep the occupants in the room comfortable. Let’s look at each stage.
Selection. Select KPIs that measure your goals. For an eCommerce business, if the goal is to increase sales by 10% then KPIs might measure conversion rates and daily sales.
Tracking. Now you need to take measurements. This means capturing data points. Software is crucial to success in this step.
Reporting. Once you’ve captured the data it should be reviewed by decision-makers and action takers.
Reviewing. The review step gets skipped all too often. You’ve got to assess whether the KPI is still aligned with the business strategy. When strategy changes, KPIs should change as well.
Your entire team should spend about 1 ½ hours every quarter to go through your KPIs and determine if they are providing the data you need to guide you to your long-term goals. If they aren’t, it’s time to look for other KPIs.
The time spent and frequency of course is just a guide and isn’t appropriate for all business models. If you are a B2B business or have a long sales cycle, a semi-annual review might suffice.