One of the first things we do when we onboard new clients at Audeo is help them articulate their broad business goals into Key Performance Indicators (KPIs).
In the simplest terms, KPIs are metrics that help you chart your progress against your company’s strategic goals. Business KPIs, which can vary by department, may help gauge a company’s long-term performance against its own targets and industry standards.
Why Set KPIs
The importance of KPIs can’t be understated. They enable you understand the performance and health of your business so that you can make critical adjustments in your execution to achieve your strategic goals.
Key Reasons Why KPIs are Important
- They help you monitor company health: KPIs are a scorecard for company health. However, you should only measure the metrics you want to impact so your energy is focused on where you want to effect change. We’ve found that it’s important to measure a few KPIs in each of these 4 categories: Employees, Customers, Processes, and Revenue.
- They help you measure progress over time: Setting the right KPIs help you measure your progress towards your long-term goals and how well you’re executing your business strategy. Businesses should track key performance indicators like revenue, gross margin, number of orders, ratio of key costs to revenues, etc. Set targets at the beginning of each year and each quarter, and use weekly/monthly KPIs to measure your progress toward those goals.
- They help you make adjustments & stay on track: Your business needs leading indicators to let you know when you’re in danger of missing those targets before it’s too late. Leading indicator KPIs help you predict what will happen in the future and your future results. They let you know if you are on track to achieve the results you want.
- To analyse patterns over time: If you measure the same KPIs monthly/quarterly over several periods, you can begin to detect patterns in your numbers. There are countless ways these patterns can help you in your business. For instance, you can predict when your slowest periods will be and use that time to deploy seasonal tactics like sales promotions.
- To solve problems and harness opportunities: The right combination of KPIs in a dashboard will highlight the information you need to solve problems or harness opportunities. For example, in a sales slump, identifying a handful of KPIs that can help you turn the tide, and tracking them weekly to see if you’ve found the right lever, might help you generate more predictable sales.
What to Note When Setting KPIs for Your Business
The first thing to remember when setting KPIs is that they’re meant to measure your most impactful indicators. It’s not everything that can be measured that should be measured. You and your organisation should only select indicators that align with the broader business goals.
- Set Specific Goals – Knowing the business goals of your product is a prerequisite for selecting the right KPIs. But it’s not enough. To effectively apply the indicators, analyse the resulting data, and take the right actions. And the goals must be specific and realistic.
- Use Quantitative and Qualitative KPIs – Quantitative indicators, such as daily active users or revenue, measure the quantity of something rather than its quality. This has the benefit of collecting “hard” and statistically representative data. Whereas, qualitative indicators, such as user feedback, help you understand why something has happened, for instance, why users aren’t as satisfied with the product as expected. Combining the two types gives you a balanced outlook on how your product is doing.
- Avoid Vanity Metrics – Steer clear of vanity metrics and measures that only make your product look good but don’t add value. For example, while the number of app downloads is nice to know, this tells you little about how successful the product is in meeting customer needs. Instead of measuring downloads, you should choose a relevant and helpful metric, such as daily active usage or referral rate.
- Employ Lagging and Leading Indicators – Lagging indicators, such as revenue, profit, and cost, are backward-focused and tell you about the outcome of past actions. Leading indicators help you understand how likely it is that your product will meet a goal in the future.
- Look beyond Financial and Customer Indicators – In our experience, financial indicators, such as revenue and profit, and customer metrics, including engagement and referral rate, are the two most common indicator types. While these metrics are undoubtedly important, they are not sufficient. For example, while your business may be meeting its revenue and profit goals with high levels of customer engagement, the team motivation may be low and this can lead to problems in the present and future. Organisations should look beyond financial and customer indicators and complement them with the relevant product, process, and people indicators.
About Audeo
Audeo provides business intelligence that helps our clients succeed. We help you set, track and measure your performance against your strategic goals, using accounting and other financial data from your business.
Audeo works with businesses across every sector of the economy. Contact us today to learn how we can help you on your journey of success.