How To Measure Performance: What is a KPI?
The world of business is full of abbreviations, acronyms and sector-specific terminology that can be confusing at the best of times and frustrating at the worst. You’ve probably come across KPIs, or ‘Key Performance Indicators’, in the past – but did you realise just how important they are to business owners?
Breaking down what a KPI is and how you can set them effectively will have an instant impact on the way you run your business. So, lucky you, I’ve done just that – making it simple for anyone to see why KPIs are so important and how you can choose your own measurements to help you scale successfully.
What is a KPI?
A key performance indicator is a measurement that tracks something crucial to your business’ success. But wait, Michelle, isn’t everyone tracking their sales? Why call it something fancy? Whilst tracking overall revenue may be a sensible idea, it’s not as effective as setting and tracking relevant KPIs. To see what makes a KPI unique, we need to break it down into its component parts…
An indicator is a measurement associated with something in your business. This isn’t, by default, a positive factor – you could arguably class ‘number of toilet breaks taken by team members’ as an indicator. To be useful, it needs something more…
Adding performance into the mix means you’re setting a context for the indicator. Whatever is measured, it must be something that affects business performance – whether that’s sales made, time spent on tasks, customer enquiries resolved…as long as it affects your overall growth, it’s a performance indicator.
The key to a good KPI is identifying which performance metrics are actually key to your business goals. It might be useful to track menu downloads on your restaurant’s website, but if the key to your growth is the number of table bookings, downloads are hardly a KPI.
To be as clear as I can – a KPI is a quantitative measurement associated with the fulfilment of your business’s goals. It is something defined, trackable and directly related to success.
How to choose what to measure
If a KPI gives you a defined measurement of performance, how do you know what to actually put one against? Knowing what a KPI is and how it works is irrelevant if you can’t prioritise what you should measure.
This isn’t as simple as you might think. Sure, everyone wants to increase sales or revenue – but there are lots of other things a business might class as important that aren’t as relevant to your specific business. Some companies, for example, have lofty goals around corporate social responsibility or brand reputation – which may be great for established enterprises, but are less valuable for an ambitious scaling business.
To choose which measurements you’re going to need, you need to understand the fundamental idea of setting an effective KPI - which is in established effective, measurable goals…
How to set a KPI around your goals
Even the most common types of KPIs, such as conversion rate, should still be created in the context of your business, rather than taken from an online list of ‘good KPIs’. The goals and success factors for your business will be unique to you, so your KPIs need to be built around them instead of taken from elsewhere.
To set great KPIs, I want you to re-evaluate your core goals. As I’ve discussed in the past in my article about setting SMART goals, your business goals have to be measurable. Setting KPIs will therefore be a case of distilling each measurable goal into a set of indicators and then focusing on the most important ones.
For example, if my goal was to increase my e-commerce business sales by 200% in one year, I’d set KPIs around conversion rate, site visitors, check-out completions and basket value. All of these are performance indicators that are crucial to this goal, so they’re all worthy of being set as KPIs.
Wherever possible, KPIs should be something measurable through data. Rather than relying on something subjective, a KPI with a data source gives you access to a factual truth. In the example above, conversion rates and the other KPIs are all directly trackable through most e-commerce analytic platforms.
Once you’ve defined your KPIs, you also need to set up a timeline for monitoring and reporting on them. It’s easy to set lots of KPIs when you’re enthusiastic about a new goal – but it’s then just as easy to lose track of them over time. From the beginning, I’d suggest setting up responsibilities for each KPI – whether that’s assigning certain members of your team to specific KPIs or just creating calendar notifications to check them yourself at certain intervals.
To summarise, I’d say that setting a good KPI involves this simple process:
- Identify a measurable goal in your business
- Map the indicators associated with the goal and highlight those that are most key
- Check that these potential KPIs can be monitored through data
- Assign responsibilities for monitoring and reporting on the KPI
- Review and improve as you grow
KPIs and your team
I’ve talked about KPIs mainly in the context of your overall business – but what about KPIs set against employees or team members? Just like mapping a KPI against a measurable goal, you can also use KPIs as a way to gauge an employee’s progress in the context of said goal. For example, you might have new website visitors as a KPI for your marketing team.
Whilst KPIs are an important part of the management process, I’d warn you against making them seem punitive. An employee can easily see KPIs as a scary thing – something to weigh heavy over them and lead to punishment if they fail.
Your job as a good owner is to demonstrate that a KPI is tied to business goals, not just employee progress – which means no team member is going to be solely responsible for success or failure and, subsequently, being punished for it.
Let me help you with your KPIs
Well, I think that’s all I need to say about KPIs for now. Hopefully, this has given you something to think about and implement in your own business. If you’re still unsure, why not contact me and see how I can help you with goal setting, KPIs and establishing a culture of measuring success on your growth journey. Get in touch here to learn more.
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