Welcome to lesson two in Building a Goal-Oriented Team. Today, we dive into how to choose the right metrics and set business goals.
A quick note before we begin: This step applies to the company, each team, and even individuals. Begin at the top (company-wide level) and work your way down, repeating this step until every team member has clear metrics and goals they’re responsible for achieving.
Choosing the right metrics
You may be thinking: what the heck is a ‘good’ metric? You see, all metrics are certainly not created equal. We’ve all been guilty of slipping into the trap of vanity metrics at some point, but we’ll try and help you avoid that mistake.
‘Good’ can be broadly defined as metrics that show if you’re achieving your objectives (the ones you prioritized before). Fundamentally, good metrics have three characteristics.
- 1Good metrics are important to your company growth and objectives. Your key metrics should always be closely tied to your primary objective. A good metric example might be month-on-month revenue growth or LTV:CAC ratio. ‘Important’ is somewhat subjective since growth for one company may be centered around revenue while another company may focus more on user growth. The key point is to choose metrics that clearly indicate where you are now in relation to your goals.
- 2Good metrics can be improved. Good metrics measure progress, which means there needs to be room for improvement. For example, reducing churn by 0.8% or increasing your activation rate by 3%. One exception to this might be customer satisfaction - if you’re already at 100%, your team will be focused on maintaining that level instead of improving it.
- 3Good metrics inspire action. When your metrics are important and can be improved, you and your team will immediately know what to do or what questions to ask. For example, why has our conversion rate dropped? Did we make site changes or test a new acquisition channel? Why is churn increasing? By asking questions you can determine possible causes and work to resolve them right away.
There are two main types of metrics. Leading indicators measure the activities necessary to achieve your goals. Think of them as inputs such as activity per sales rep. Lagging indicators measure the actual results - they show whether or not you hit your goals. Think of them as outputs such as revenue closed. (Learn more specifics about leading and lagging indicators here.)
You’ll want to use a strategic combination of leading and lagging indicators as you choose good metrics for your company. If you use only lagging indicators, you won’t be able to make changes quickly enough to grow your company.
If you only measure revenue closed and at the end of the month you realize you’ve missed your goal, it’s too late to close more revenue. On the flip side, if you only track leading indicators, you won’t determine which activities lead to achieving your goals. You could be hitting your target number of visitors to your website, but without tracking the number of conversions or conversion rate, your revenue might be declining without you realizing it!
As you think about the key metrics you want to focus on, remember to keep an eye on other supporting or secondary metrics that show the overall health of your company. For example, if one of your key metrics is growing the number of new customers, you need to make sure you’ve acquired them in a sustainable way (measured by LTV:CAC ratio) as it’s in the overall interest of the company. Use supporting metrics to avoid manipulating or distorting metrics.
Understand that choosing your metrics is going to be an iterative process. Don’t expect to get it right the first time - no one does. The most successful entrepreneurs start out knowing that their metrics will evolve and actively adapt and tweak their metrics to achieve the best measure of their objectives.
Alright, let’s start actually choosing those metrics! Below are a variety of ways to approach this process. Each option is different and serves a unique purpose. Pick the one that best fits your needs and don’t be afraid to experiment.
- 1Pirate Metrics: The five metrics in this framework for online startups represent the different stages of customer behavior - Acquisition, Activation, Retention, Referral, and Revenue (AARRR). Check out this Beginner’s Guide to Pirate Metrics or these examples to learn more.
- 2IPA (Important, Potential Improvement, Authority): The IPA rule ensures you’re focusing on only important metrics that have potential for improvement and that you have the authority to improve.
- 3TIE (Trackable, Important, Explainable): Good metrics are always trackable, important, and explainable. This simple framework makes the complicated task of choosing metrics straightforward and easy to understand.
- 4KPIs (Key Performance Indicators): Use this option to select only the most important metrics that help you understand how you’re performing against your goals. KPIs are given context in terms of a target or benchmark which relates back to a business’s objectives and goals.
Learn more about specific key metrics for sales and marketing here.
All good metrics need goals. Without context or parameters, our ‘good metrics’ aren’t nearly as good. The parameters for our metrics can be either benchmarks (an industry average or internal reference point) or goals (growth targets we set for ourselves), or a combination of the two.
Goals can be defined as the specific target (i.e. dollar amount, number, percentage, etc.) you wish to reach. Goals should always align with your overall objective and are most effective when time bound. For example, if one of your key metrics is Churn Rate - currently at 4.2%, then your goal might be to reduce churn to 3.5% by the end of this quarter.
Below are two different approaches that are helpful for setting clear goals for your key metrics.
- OKRs (Objectives and Key Results): This is a two-part process where you identify the outcomes (objectives) you wish to achieve over a specific period of time and the specific indicators (key results) of success or progress to your desired outcome. This framework is for teams who are committed to aggressive growth and want to push the limits of what is possible cohesively.
Objectives and key results (OKRs) were invented at Intel and popularized by Google. John Doerr, VC at Kleiner Perkins Caufield & Byers and one of Google’s board members, presented OKRs to Google’s leadership in 1999 - less than one year after Google was founded. The team had built a solid product and found product/market fit, but they needed a way to continue driving exponential growth and keep their ever expanding team focused on the same goals.
By setting really aggressive objectives and measuring their progress towards them with very specific, trackable metrics, Google has been able to consistently grow at an accelerated rate. One of the secrets to Google’s success in a rapidly changing industry was that they were “…almost irresponsibly aggressive in growing key objectives with a talented group of people,” shares Niket who joined Google in 2011.
One of the critical components of OKRs is aiming for targets that aren’t easily achievable. They’re intentionally stretching. Google believes that if you’re accomplishing all of your objectives, you’re not thinking big enough. This posture towards growth allows them to keep pushing the boundaries of what is possible with laser focus on growth.
Here are some resources to help you achieve similar results with OKRs:
How Google Uses OKRs (video)
Startup OKRs (template)
SMART Metrics: Used as a guide or checklist for goals, SMART stands for specific, measurable, attainable, relevant, and time-bound. This is a good foundational criteria for teams or individuals choosing goals. Dive deeper into the meaning of SMART here.
Benchmarks will vary widely depending on the industry and growth stage. If you seek out industry benchmarks, ensure they come from companies with a similar business model and stage of growth. A quick online search will generally provide some helpful statistics for your particular situation and metric, but don’t get too hung up on what other companies are doing.
At the team level, benchmarks will be very specific to your company, so don’t try to compare externally. Instead, focus on internal benchmarks - i.e. how your company performed last quarter or last year. An example might be to increase the average lifetime value (LTV) of customers by 10% next quarter.
If you don’t have enough data to set internal benchmarks (i.e. an early stage startup), work backwards from your 6-month or 12-month goal to identify what goals you should be hitting each month in the interim using some basic benchmarks.
Sean Landry, Creative Director at TripAdvisor, takes pride in building great teams that work well together. The most powerful aspect of his team’s design process lies in setting goals. Sean shares how goals bring clarity and focus to his team in an interview with InvisionApp:
“We set goals right at the beginning. Establishing a list of user and business goals at the start is a simple, powerful, and effective way to keep the project focused. Once that’s in place, it’s the designer’s or writer’s job to produce work that balances all the goals. Whenever I’m in a discussion where there are disagreements, it’s often because there’s some misalignment around the goals of the project. Having the goals restated during those conversations leads to less subjectivity and better feedback.”
Setting growth targets might feel like guesswork, especially if you don’t hit your target. But don’t get discouraged, you simply need to draw a line in the sand! Learn as you go - not only about setting goals, but about your company and your customers. The more you understand your business, the better you’ll be at setting growth targets for your team. However, you have to start somewhere. Having goals that you might not hit is better than not having goals at all because you’re too scared to draw a line in the sand.
We cut our average customer support ticket response time in half by setting and visualizing our goals.AJ Franchi, CIO, Gold Star Financial
Sidenote: In this course, we’re talking about ‘visible data’ - the metrics you and your team will monitor on a daily basis. However, there is certainly a time for deeper data analysis - looking at more granular metrics (what you might call ‘invisible data’). Granular metrics will tend to be more complex and not necessarily understandable to everybody in a business. Hence, why we’re not discussing them here. Examples of this might include more complex financial metrics such as EBITDA.
Ready to choose your key metrics and score some audacious goals? Just get started and don’t worry if you need to tweak them in the coming weeks. Have fun with it!
Have any questions? Drop me a line and we’ll do our best to help you!