Choosing KPI Metrics
This is part 1 of a 5 part series on Choosing KPI Metrics.
Key Performance Indicators (KPIs) are the most important metrics at your business. They measure the health of your business and drive all major strategic decisions you make. As a result, choosing those KPIs is one of the most critical decisions you will make.
It’s harder than it sounds! Any business has dozens of potential KPIs to choose from, ranging from revenue to margins to customer satisfaction. Tracking too many KPIs will lead to confusion and a lack of clarity about how you are doing at any point in time. If you have a dozen KPIs, it’s likely that on any given day half of them are up and half are down, so you could get mixed messages on your business!
How do you choose a small handful of metrics that will be critical to your business? This week we’ll walk through how to do that and what to consider along the way.
Tomorrow we’ll get started with the most important consideration: your vision for the future.
Choosing KPI Metrics: Turning your company vision into KPIs
This is part 2 of a 5 part series on Choosing KPI Metrics.
It is tempting to start with “industry standard” metrics when choosing your KPIs. There are countless articles about exactly which metrics are the most important based on the industry you are in and how your business works.
However, your business is unique. Your vision for what you want your business to become is unique as well, and the path you take to growing your business will also be unique. If you start from that vision, you will be sure to choose the metrics that are the most important in reaching your goals and move you towards that vision.
Let’s walk through the process of starting from your vision and choosing the critical metrics that will become your KPIs. As an example, we’ll use the fictional company Doug’s Drones which wants to take on Starbucks by delivery coffee via drones. We’ll start with the vision for Doug’s Drones and use it to figure out the KPIs it should choose.
|Your vision is what your business is building towards in the future.||Allow anyone, anywhere to have a latte when they need it by using drone delivery.|
|Your goals are the next few steps along the path to your vision. These steps are what will give you confidence that your vision is achievable and that you are on the right path.||Reach 100 deliveries per day in San Francisco, CAReach 20,000 paying customersLaunch in 3 more cities|
|Our KPIs are simply the metrics we need to track to measure our achievement of the goals we set.||Total deliveries per dayTotal paying customersCities with active customers|
As you can see, starting from your vision ensures that the KPIs you choose are directly related to the goals you have set to achieve that vision. Instead of relying on general wisdom, you can choose the right KPIs for your business.
How many KPIs should you have? We’ll talk about how many tomorrow.
Choosing KPI Metrics: The top 5 KPIs for your business
This is part 3 of a 5 part series on Choosing KPI Metrics.
Choosing KPIs is, admittedly, difficult. Often companies will avoid making hard decisions and end up with more and more KPIs. This is dangerous, because the more KPIs you choose, the less clear of a signal they will provide. If you have a few dozen KPIs, on any given day it’s likely that half of them will be up and half will be down, making it hard to understand the overall message!
It’s also unlikely that there is a single metric that captures everything about your business. So, what is the right number of KPIs? As few as possible is the best rule I can give you. Most companies will end up with around 5 KPIs that reflect each of the 5 core drivers of most businesses:
- Acquisition – How quickly do you acquire new customers?
- Engagement – How engaged are customers with your product and service? Are they happy?
- Retention – Do your customers come back again?
- Revenue – How much money does your business collect?
- Cost – How much does it cost to generate that revenue?
The metrics you choose to measure each of these drivers depends on your business and your goals. For example, a retail store might measure retention as “Repeat Purchasers”, while a subscription software service might measure “Annual Contract Renewals”. Your objective is to have KPIs that measure all of the most important aspects of your business so that you have covered all of your bases.
The shorter your list of KPIs the more useful they will be, so if you can choose less than 5 I encourage you to do so. If you are able to choose a single metric please let me know as I’d love to hear how you were able to do it!
Tomorrow we’ll cover how to avoid choosing the wrong metrics for the right reasons when we cover the difference between good and bad KPIs.
 Dave McClure has a much funnier version of this called Pirate Metrics that I recommend reading as well.
Choosing KPI Metrics: Difference between Good and Bad KPIs
This is part 4 of a 5 part series on Choosing KPI Metrics.
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.
Choosing KPI Metrics: How metrics change with growth
This is part 5 of a 5 part series on Choosing KPI Metrics.
The KPIs you choose for your company today are not necessarily the same you would choose in a few years. Your business is constantly changing, and hopefully growing, so the metrics that best represent the business and its core components will change as well.
Consider this abstracted view of the growth trajectory of a company:
During each 10x increase in the size of the business the KPIs will change to reflect the business. Let’s consider a software company starting from nothing (zero) through each of these stages and the most important KPI they would track:
|0-1x||Customer growth is the only thing that matters, because the business has no customers to start with and needs to grow fast enough to survive.|
|1x-10x||Customer retention becomes critical so that the company doesn’t lose customers faster than it adds new ones.|
|10x-100x||Margins become the critical factor as growth and retention are running well, and the question becomes how profitable each customer is for the business.|
|1000x+||Customer Growth once again becomes the most important metric, as the business has proven to be a strong profit engine and the biggest question is how big that engine can become.|
You see this progression every year with new companies that launch, grow and go public. To ensure that you are using the current KPI to measure your company you need to revisit them consistently. Here are some common times when it makes sense to re-evaluate your KPIs:
- Before your business planning process, either annually or quarterly.
- After launching new product lines or changing the pricing on your existing products.
- Whenever you enter a new market.
- Before raising new capital for your business.
There is a balance between evaluating your KPIs too often (distracting) and too little (misleading). You will need to find the right balance for your company.
In Review: Your KPIs are the most important metrics about your business, the ones you will check everyday. Choosing a small number of high quality metrics that capture the biggest drivers of your business is a critical decision. The best place to start is your vision, which will help you choose the best KPIs.