Choosing KPIs: Difference between Good and Bad KPIs
So far this week we’ve talked about frameworks for choosing KPIs, but there is always a danger that you can choose the wrong metric for the right reasons. There are Good KPIs and Bad KPIs and being able to spot the difference will greatly help your use of data.
Bad KPIs are…
- Metrics you can directly manipulate. Even if you are not malicious, it can be difficult to resist manipulating your KPIs to make you and your company look better. For example, if a KPI for a sales organization is number of phone calls, they can start making dozens of meaningless phone calls which have no chance of converting just to make that KPI look better.
- Too narrow. If you are a restaurant chain, you would not choose a single location to measure the health of your entire business! KPIs that track only a small part of your business can give you a distorted view of the overall health.
- Lagging Indicators. Metrics that will not reflect changes in the business until days or weeks have gone by are not useful KPIs because it will be too late before you know what is happening.
Good KPIs are…
- Measuring customer-driven events. It is very difficult to manipulate customer behavior so customer-driven metrics are often the best KPIs. For example, you can lure people into your store but you can’t force them to buy something, so total customer purchases and revenue are great KPIs.
- Consistent. Many metrics in your business may fluctuate wildly, but your KPIs should be fairly consistent over time in order to be useful in making decisions. The consistency of a good KPI not only makes you confident that you know how your business is doing today by having a reliable historic comparison, but makes it easier to predict what will happen in the future.
- Leading Indicators. Metrics that anticipate or predict further changes in your business are the best KPIs because they help you get ahead of problems. The sales of cardboard boxes are a great leading indicator of the shipping industry (since most packages are shipped in cardboard boxes) and there might be similar metrics available for your business.
Here are some examples of what you might want to measure and examples of good and bad KPIs for doing so:
Example 1: How much money are we making?
Bad KPI: Gross Revenue. It is amazing how many accounting tricks you can use to inflate your total (gross) revenue, since it ignores important factors like the cost of generating that revenue.
Good KPI: Net Profit. The net profit takes into consideration both revenue and cost, giving you a clearer picture of the health of your business than just gross revenue.
Example 2: How high is our customer engagement for our e-commerce site?
Bad KPI: Total Visits. It is far too easy to increase the number of visits to your website by paying for more advertisements, even if that traffic will not convert.
Good KPI: Total Purchases. You cannot force someone to buy something on your website, so you can’t manipulate this metric. Even better, in order to purchase the customer needs to find you, enjoy your user experience and find what they are looking for which means this metric consolidates a number of different aspects of your service.
If you are objective in your analysis, it should be straightforward to identify any bad KPIs and remove them from consideration. Should you realize later that a given KPI you chose is bad, change it as quickly as possible to a better KPI. The only thing worse than having no KPIs is having bad KPIs that give you the illusion of information but are really misleading you!
Tomorrow we’ll cover how to handle the fact that your KPIs will change over time as your business grows and evolves.
Quote of the Day: “I may not have gone where I intended to go, but I think I have ended up where I needed to be.” ― Douglas Adams