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How to set meaningful and effective KPIs

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Aside from an office dog, KPIs might just be the best thing you introduce to your company. After all, they give you the power to measure performance and ultimately improve.

But, like an office dog, KPIs should be chosen carefully. Otherwise they can distract teams, damage morale, and generally cause chaos.

To help you avoid the pitfalls and get the most from KPIs, here are some tips for setting them:

1. Base KPIs on your strategy

By setting a KPI you encourage your team not only to measure it, but act on it. And their actions will lead the business in a certain direction. For this reason, you have to link KPIs back to your strategy, rather than setting them on their own merit.

For example, a business’ strategy might be to go upmarket and focus on higher value customers. So Marketing would want to focus on Average Transaction Value, rather than Number of Leads as their KPI. And Customer Support would want to focus on First Response Time for enterprise customers, rather than overall Customer Satisfaction (CSAT). This way, both teams are working towards the same goal.

The main point here is to have a solid strategy before you build your KPIs. And when your strategy changes, change your KPIs too.

2. Involve your team

KPIs are there to help your team, not judge them. So they shouldn’t be “bestowed” on them from above.

Always involve your team in the setting of their own KPIs. This way, they’ll have:

  • A better understanding of your company’s goals. And better ideas of how they might contribute
  • A sense of investment and ownership. By having a say in their KPIs, your team will hopefully feel more motivated and want to achieve them
  • More effective KPIs. Your team are closer to the work, so they can say what’s doable and which metrics they’ll actually find useful

3. Don’t just rely on off-the-shelf KPIs

It’s useful to look at other businesses and KPI examples for inspiration. And for certain teams and industries there’s a fairly standard set of metrics. For example, customer support teams will generally track Customer Satisfaction (CSAT); most sales teams will track Leads and Revenue, and most SaaS (Software as a Service) companies will track Monthly Recurring Revenue (MRR) and Churn Rate.

However, you’ll often need KPIs that are unique to your business.

Sometimes you’ll have to use a custom KPI because you’re tracking a very specific project. For example, if Customer Support are trying to reduce the billing related enquiries they have to handle, they’d need to track Number of Billing Tickets as a KPI.

But more than being necessary, a custom KPI is better for your business. Because, if it’s chosen well, it has the power to rally your entire company around a particular strategy.

Take YouTube. They could have measured Daily Active Users (DAU), but instead they chose to focus on Watch Time as their KPI. This radically changed which projects the team do and don’t work on. So instead of trying to increase overall views, they try to get people to watch for longer. The other clever thing about focusing on Watch Time is that it ties perfectly to their advertising business model. So the longer people watch, the more ads they can sell.

4. Consider unintended consequences

Worse than wasting effort, poorly chosen KPIs can encourage the opposite behaviour to the one intended. An effect known as the perverse incentive or Cobra Effect.

For example, imagine a customer support team whose mission is to provide amazing customer service. They plan to improve customer experience by reducing Response Time, so they set Average Hold Time (AHT) as a KPI. But, by focusing on this they accidentally pressure agents to rush calls. Which leads to lots of unhappy customers.

You should always try to anticipate side effects like these when you’re setting KPIs. And the best way to prevent them is by keeping your main goal in mind i.e. providing amazing customer service.

You can also avoid unintended consequences by tracking health — or supporting — metrics. These go alongside your KPIs (the things you’re actually trying to improve) and help you keep an eye on the overall picture. So, in the case of customer service, you might measure CSAT (Customer Satisfaction) as your health metric. And this way you’d spot the problem caused by focusing on AHT, before it got out of hand.

5. Ask whether your KPIs are practical and easy to measure

Sometimes, your dream metric will be virtually impossible to measure.

For example, it would be great to know how many people subscribed to your product after seeing you speak at an event. It might just prove that flying to the Bahamas for that conference is worth it.

Unfortunately, you have no way of tracking which of your subscribers went to the event. And there’s no way to tell if they subscribed because of the event or something else like a retargeting campaign.

Metrics like these just aren’t practical.

Then there are metrics that are easy to measure, but the information they give isn’t useful as a KPI. For example:

Lagging metrics

Lagging metrics give you slow feedback on the results of an activity. They don’t let teams quickly see the impact of their actions and adapt. So they’re not very motivating, and shouldn’t be used as the team’s only KPI.

Take a product team who are working on a project to improve the conversion rate of trialists. If they just used Conversion Rate as a KPI, and the average time it took someone to convert was one month, they’d have to wait at least that long to see any impact.

Volatile metrics

Naturally “spikey” metrics make it difficult to spot any trends, so they’re bad as KPIs too.

These tend to crop up if you’re dealing with small numbers. For example, imagine you only make a few enterprise sales a month. How could you tell if four sales this month is bad, compared with five, three, and seven in the previous months?

Volatile metrics also make life difficult if you only expect to make modest improvements to your metrics. Say you’re expecting to boost Conversion Rate by just 10%. If it naturally varies by that much anyway then you couldn’t be sure that you’d made an improvement.

The trick in this particular example would be to increase the time frame. In other words, you’d track Enterprise Sales per quarter rather than per week. However, this would make it a lagging metric, so you’d only do this if you weren’t relying on it for quick feedback.

In most cases though, the solution for impractical metrics is to use proxy metrics. More on these below.

Proxy metrics

KPIs should closely mirror the thing you care about. But often the thing you care about is impossible to measure. And even if it can be measured, it might be too lagging or variable to make a good KPI.

Cue proxy metrics. These are stand-in metrics, related to the things that matter.

Example

You want to see the impact of a new ad campaign on Revenue. But, your product has a trial period so you have to wait 30 days before the impact on Revenue can be seen. To complicate things further, your pricing structure means that one or two big deals could cause a spike in Revenue anyway. So, the solution is to use Signups or Qualified Leads as faster proxy metrics for Revenue.

Things to watch

Proxy metrics are one step removed from the thing you care about, so they can cause problems. To avoid side effects, you should:

  • Check that your proxy metric strongly correlates with your goal i.e. doubling Signups should double the number of customers
  • Keep checking the correlation over time. For example if you started targeting more customers you may end up with lower quality leads. So Leads would have a weaker relationship to Revenue and be less valid as a proxy metric

In summary

A carefully considered KPI is a powerful thing that doesn’t come off the shelf.

Choosing them isn’t rocket science though. And as long as you set health metrics and frequently evaluate your KPIs, you can’t go far wrong.

So, keep experimenting. And if you’re ever stuck on a KPI, get in touch: we might be able to help!

Extra reading

You need a solid strategy before you even think of KPIs, so we’d recommend these books first:

  • Good Strategy/Bad Strategy by Richard Rumelt — a jargon-free guide that explains what strategy is and isn’t
  • Lean Analytics by Alistair Croll and Benjamin Yoskovitz — aimed at startup founders, and packed with case studies, this book helps you validate your strategy

Once you start setting your KPIs, these books are full of practical advice:

  • Practical Performance Measurement by Stacey Barr — this is the ultimate guide to KPIs, along with the Measure Up blog
  • KPI Checklists by Bernie Smith — a step-by-step guide for setting KPIs, with helpful exercises for you and your team
  • The Practice of Management by Peter Drucker — the Management By Objectives bible, with a great explanation of why teams should own their KPIs

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