What is a key performance indicator (KPI)?
It’s simply how you measure your goal. For example, if your goal is to lose weight, then you’re KPI could be kilograms lost or the number of miles run -depending on what your goal is and what you intend to measure. In case you need a refresher on the difference between goal, strategy and tactics (we’ve got you covered)
Are all KPIs the same?
They do the same thing which is measure progress towards your goal but not all KPIs are equal or reliable to determine how far you are in achieving your goal. That’s why we have a hierarchy of goal to help you navigate the “best” and “not so best” goals to have when you’re optimizing growth in your business. Tom from CXL shares some perspective on this.
Clicks → it’s not hard to get people to click on your ads. Simply put in a weird picture, make the size big, or even use a giphy format to make things more visible and people will click through your ads - but is clicking alone a sign your business is growing? - not really.
Behaviour → if clicks don’t work, what about behaviours? E.g if a customer lands on your blog post and decides to read through all of it or spend more than 5 minutes on it - that’s a sign they like your content, but does that mean they’ll convert? - not really but it is better than holding on to clicks though!
Transaction → if someone browses your blog and finally decides to buy some of your designer custom made t-shirt. Kaching, it’s actually a transaction! People actually gave their money to you! It’s a good sign you’re heading towards a good business growth - but wait, what if you measure transaction as your only KPI and tons of returns come? Still, think it’s the perfect KPI? Not really
Revenue/user → this is getting interesting, isn’t it? What if your KPI is revenue/user and you want to boost up this metric really bad. You could technically keep your best-paying customers and oust out the rest smaller customers. That would immediately boost up your revenue/user! But of course, if one of your big customers leave, and then you’re game over - talk about risky!
Potential lifetime value → this is what many people call the ‘gold plated standard’ of growth marketing metric. In some sense it is, lifetime value of a customer as a KPI will help you do two things: take a longer view on your customers (as opposed to just milking them for one sale) and also keep investing in your product or content to make it engaging over and over again to customers in different parts of their journey. That’s why companies like Amazon, Shopify and etc focus a lot of LTV as a metric for their growth.
So what’s the perfect KPI you should set for yourself?
Simply put there is no one silver bullet for KPI. no matter how smart you think you are setting KPI - always remember Goodhart’s law: when you set something as a target, there is always a freaking way to game it. No matter what.
So what should you do?
Pick a KPI that you feel you can swallow. Meaning if you’ve just started an online blog, measuring lifetime value of a customer is going to be a little hard. But measuring behaviours like the number of minutes spent on pages is always a possibility! So when in doubt, ask yourself what’s my goal or intention here and ask yourself how can I best measure it knowing it wouldn’t be perfect.
What if my KPIs conflict?
Yes, if you’re working in a big organization you’ll always find this problem happening over and over again. For example, if you run a t-shirt factory you’ll notice the people working in the factory would just want to keep producing t-shirts that are the easiest and fastest to produce - if they are getting paid by the number of t-shirts produced. While the people working on the sales side might want to only sell high-quality expensive hard to make t-shirt since they get to charge a premium on it and make more commission of it. Notice how KPI drives behaviour and behaviours can be misaligned even if they are under one roof?
So what in the world can you do?
Introducing the Overall Evaluation Criteria (OEC) which is just a fancy word as a big overarching goal that everyone can rally towards. For example, in the t-shirt factory, an OEC could be profitability -that way no matter if you’re just producing t-shirts or selling them, you gotta keep the profitability in mind. Ideally of course!
Does OEC have to be one single metric?
Not at all. OEC can be weighted meaning instead of choosing a single overarching target for everyone, you could pick 5 major KPIs within the organization and give them a weightage to derive a combination of KPIs leading to one OEC.
For example, OEC for this t-shirt company could be:
20% (production) + 40% (commision) + 40%(cost reduction) = OEC specific for t-shirt company.
How do I decide what KPIs to include and what to not include in my OEC?
We thought you’d never ask! Answer: you don’t. Well, you don’t without doing anything - you will decide once you run an A/B test to see which factors have a positive effect on your ideal OEC and then which don’t.
So why is this important?
Well - a couple of things. When you have staffs working for you and you need to start compensating them - then you ought to start thinking about how you’ll measure them. This is going to not just help you run a more effective business but also keep the culture of your organization transparent and fair across different employees. So thinking about your KPIs in a way that can help them is going to be key!