What are KPIs?
KPIs, or Key Performance Indicators, simply put, are measurable values that businesses use to track progress to strategic or operational goals.
Think of KPIs like a diet
If I want to lose 20 pounds over the summer by ‘trying to eat healthier,’ there’s a really good chance my jeans will still be tight on Labor Day. I know what success looks like generally, but I haven’t identified the steps to get there, consistent behavioral changes I’ll need to make, or a way to hold myself accountable.
But if I download a meal and fitness tracker, I’ll have a much better shot! See, the outputs of those apps are metrics that measure my progress toward a committed goal, or, KPIs. For example, the following are all KPIs:
- calories per day (eat 15% less of these, say)
- hours of exercise per week (6 of these at least)
- % carbs/proteins/fats in a meal
I can review my efforts down to the meal/hour, and be able to tell if the changes I’m making are having an impact. If not, I can make course corrections and test those too! I can also communicate my results with my network of friends and family, and that will be powerful motivation.
How businesses can benefit
Businesses can benefit from the same detailed insights and accountability on the path to achieving their goals, and teams of any size know that transparency and the ability to communicate results quickly and clearly are invaluable to success. Without KPIs, small businesses seeking to bolster revenue, for example, are left with vague imperatives like ‘increase sales this year’ …and we know how that ends.
Do I really need KPIs though?
Let’s say you’re a SaaS company just beyond the start-up phase. Revenues grew steadily for 24 months, but now they’re plateauing.
- Are you bringing in enough new customers?
- Is the marketing working?
- Are more customers leaving than anticipated?
- Maybe new customers are coming in, but they’re at low price points?
- Are current customers refreshing/updating as estimated? Forgoing?
- Should you refresh those products and raise prices?
- Do your competitors keep track of this stuff?
You get the idea–without meaningful metrics to compare against the market, competitors, or your own past performance, how will you make effective decisions to pull out of the slump? How will you know what’s working and what’s a waste of resources?
Alright, so where do I start?
It might seem like common sense, but KPI needs to matter. Many businesses start out with great intentions, but fall victim to tracking anything that looks trackable in hopes of measuring general “progress.” When this happens, metrics lose meaning. Critical insights won’t emerge from raw data on their own, so engage your team (or your business partner, or for many small business owners, a mirror!) to agree on what’s most important for success. Brainstorm about what you think is the most pressing issue or critical goal in your field of vision (e.g. I want my product in at least one major retailer this year).
Ask these 5 critical questions
1. Is this KPI attainable?
- e.g. I’ve had a business in the past where this happened, or my competitors similar in size have done it
- This will help you set an overall goal.
2. Are we focusing on the right thing?
- e.g. last year we tried to expand by increasing the number of online resellers, but based on volume estimates, focusing on one big-box placement would be worth 15 of those
- This will add clarity to your goal and lay the groundwork for developing KPIs.
3. How will we achieve this KPI?
- e.g. two of my staff members will form a product team and develop detailed pitchbooks for potential resellers
- This will help outline the steps you need to take to start work.
4. What information do we have at our disposal to help make decisions?
- e.g. we subscribe to a data supplier who provides market segmentation data; we have sales records and forecasts, repeat orders, direct and indirect resellers and end-consumer feedback
- This will help you design the actual KPIs you’ll use (like new orders per month, repeat orders per month, volume by reseller, returns by reseller, etc.).
5. Who are key decision makers?
- e.g. I will make the final decision in agreement with my principal investor
- This will shape how/when/why KPIs are reported.
KPIs, by nature, are communication, so it’s an interactive (and iterative) process! Buy-in from the beginning is the soul of a successful, relied-upon metric, and robust conversation is the means to get there.
What about KPIs specific to my business?
KPIs can be (and are) created from scratch every day to help reach a seemingly limitless variety of business goals. And in the world of published and well-known KPIs, there are hundreds, if not thousands. Here are some common KPIs by industry/functional area to get you thinking:
- CAC (cost to acquire a customer)
- Sales by month/week/year
- CLV (customer lifetime value - how much profitability does the average customer drive? How often are they repeat customers?)
- Customer attrition rate (how often are customers leaving?)
- Average order/purchase value
- Average monthly sales per customer
- Gross margin (product level profit margin)
- Net margin (overall profitability after accounting for all overhead and fixed costs)
- Debt to equity ratio (how much debt a company is using to finance its assets)
- Budget variance % over/under (what is driving spending overage? Underage?)
- Accounts payable turnover (how fast are you paying suppliers?)
- Accounts receivable turnover (how fast are suppliers paying you?)
- Cost variance (vs. budget)
- Schedule variance (vs. budget)
- % cancelled projects
- % projects complete
- Headcount/project (resource efficiency)
Let Us Help You!
We get it, KPIs can be confusing, and there’s a lot to consider! But with the right analytical approach, and a touch of creativity, you can own your path to success every step of the way. And don't forget that Paro is here to help.
Bryce is a detail-oriented analyst who enjoys solving complex problems and using data to tell the story. As a litigation consultant for nearly seven years (damages in corporate lawsuits), he routinely crafted financial models to address a variety of complicated business issues. During his tenure, helped saved billions of dollars for companies ranging in size from a local accountancy to multi-national conglomerates. He is currently a Senior Finance Specialist for Intel Corporation, where efficiency is paramount. Bryce’s primary focus is ensuring that the business unit managers he supports have a full and informed view of the landscape in front of them. He received his MBA from Arizona State University with an emphasis in Finance in 2014, and bachelor’s degrees in both business (economics) and music (percussion and audio engineering) from Indiana University in 2008.