There's a K in KPI
Successful entrepreneurs know their metrics. In conversation they will recall numbers with clarity and be able explain their context. Knowing their metrics doesn't just happen. To know what's going on, they measure, report and analyse.
The trouble is, there's so much you can measure. It's easy to drown in data. I've seen "KPI dashboards" which have so much data on them it takes half an hour to go through them.
There's a K in KPI. KEY Performance Indicators. Some metrics matter more than others.
How do you know you're focussing on the right KPIs?
Key means that the whole business will be going in the right direction if these key metrics are trending well. Key does not mean 20 different numbers. It doesn't mean 10 numbers. It's just a few numbers that matter most.
Focus on the outcomes
In my experience, before deciding what numbers matter most, the first question you need to ask is, "what outcome am I looking for"?
Example outcomes are;
- I can identify potential customers
- I can convert prospects to customers
- Customers have a great experience
- I have a profitable marketing channel
- Our customers return and buy again
- Our people our happy
Once you start framing the business challenge in this kind of language you will have a clearer idea of what you need to measure.
Outcomes change as the business evolves
For startups, there are a number of outcomes to achieve before the business becomes viable. There's a logical order in which these outcomes are best achieved before moving on to the next one.
For example, it makes sense to be have a product that people love before spending a lot of money on marketing the product. Net promoter score is a metric that can be used as a good measure of customer love. However, once the product is loved, the emphasis might shift to improving the conversion rate of prospects to buyers. After that, the switch might swing to optimising the cost of customer acquisition.
As such, the metrics that matter most will change until the business model settles. Once the company is in growth mode the outcomes needed will stabilise.
Revenue is an end result, not a KPI
This is important to understand. The amount of money you are making (or not) is the end result of your business activity. Focussing on revenue will not increase revenue. Focussing on the things that drive revenue will increase revenue. Sure, you need to track your revenues and reference them, but that doesn't make revenue a KPI.
Things that might drive revenue are things like; Net promoter score, repeat user rate, conversion rate, cost of customer acquisition, referral rate.
In fact, there's an argument that you should pick one metric above all others and choose that as the one to optimise for. Known in lean analytics as "the one metric that matters", this number changes as the business develops.
Metrics have a hierarchy
A useful exercise is to understand the relationships between the different metrics in your business. You can draw it out as a tree.
Let's take an example; conversion rate and net margin
You have 1,000 visits
You have 10 sales (1% convert)
You make £1000 in sales (Each transaction is worth on average £100)
You make £200 in net margin (You have a 20% margin)
What things can increase net margin?
Total visits can increase transactions (all else being equal)
Conversion rate can increase transactions (all else being equal)
Average sale value can increase total sales (all else being equal)
Margin % can increase net margin (all else being equal)
Map this out on a whiteboard. Understand what factors influence others.
This will help you to understand which metrics matter.
What timeframe?
Should you report on your numbers on a daily basis, a weekly basis or a monthly basis?
All of the above.
There are two principles to guide you;
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Think about what you need to measure daily, weekly and monthly based on how meaningful the data is across those timeframes. For some metrics, you need a decent number of events in order to get a meaningful number. For example, if you measured conversion rate on a daily basis yet only had a handful of visitors, the results would vary so wildly that they would be meaningless. You'd need a week of data to make sense of it.
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Think about how important it is that you react to changes in the observed numbers. If by observing something on a daily basis you can make a change that day that improves the performance the following day, then daily monitoring makes sense. Otherwise, some metrics might be better observed on a weekly basis.
Communication flow
KPIs are only useful if they are shared.
Consider how and when you share the data.
There are points in time that you can schedule to surface metrics for discussion and review. For example...
- daily stand up
- daily email
- whiteboard
- monitor screen
- weekly team meeting
- weekly email
- monthly management reporting pack
- board meetings
Aim to socialise the data in a way that helps the team make decisions.
Whilst real time dashboards and tools are useful, sometimes you need to consolidate the data into a single view.
As a COO, I liked using a Google Sheet to gather and record weekly numbers. We had a distributed team and specific team members were responsible for gathering and entering the data into the sheet. We had a Monday afternoon call each week to look at the numbers together and decide what actions we needed to take. By having the call, there was an incentive for everyone to complete their data collection in time.
I also liked having a historical view that was available on one sheet. I didn't need to go to different tools to look at the data, it was all in one place.
Data in, data out
Finally, it's worth noting that the data you get out is only as good as the data you get in.
Start with your outcomes and then ask yourself what tools, systems or processes you need to gather data to measure those outcomes. Don't start with the tools and report what they give you. Just because tools can measure metrics it doesn't mean that they are meaningful metrics to measure your business by.
Spend time testing your tools and making sure that the data is solid before you rely on it.
A word of warning
As Dan Ariely (author of "Predictably Irrational") pointed out in his HBR.org column ["You Are What You Measure"]((http://hbr.org/2010/06/column-you-are-what-you-measure/ar/1)...
Human beings adjust behavior based on the metrics they’re held against. Anything you measure will impel a person to optimize his score on that metric. What you measure is what you’ll get. Period.
Choosing the wrong metrics to focus on can drastically alter your behaviour and that of your team.
That's why it's so important to think carefully about what you are measuring and why. It can make all the difference. Choose the key things that really do matter given the stage in your company development.