What Are KPI’s and Why Do I Need Them?

How does a small business owner really know how well they are performing in various areas of their business? What criteria do they use to figure this out? How do they know what to really look for to measure success? What does success look like?

These are all good questions that many small business owners face. However, in order to answer them the use of KPI’s is a very important tool. Sounds simple enough, but many business owners either do not use them, don’t even know about them, or do some of them but do not track and analyze them.

Let’s get a decent understanding of what KPI’s are and how to apply them to your business.

What Are KPI’s?

First things first. KPI stands for “Key Performance Indicator.” Wikipedia describes KPI’s as, “a type of performance measurement. An organization may use KPIs to evaluate its success, or to evaluate the success of a particular activity in which it is engaged.”

The success of any business depends on management identifying KPI’s and paying careful attention to what they are telling them. Having too much information from KPI’s can leave most managers drowning in a sea of data with no real insights, while having too little data can leave them lost and rudderless.Measure-Success with KPIs

KPI’s can measure virtually anything. They will differ from business to business and will usually result in some sort of metric that can be measured. They can be measured over a long period of time to see how well an area of business is performing, or short period to determine how a specific campaign has performed.

Some of the more common KPI’s in different areas of businesses are:

  • Net Profit
  • Gross Profit Margin
  • Average Purchase Order per Customer
  • Customer Lifetime Value
  • Cost Per Lead
  • Page Views and Bounce Rates
  • CTR and Conversions
  • Order Fulfillment Cycle Time
  • Time to Market
  • Revenue Per Sales Rep
  • Average Employee Tenure

What Should I Measure?

Before you start assigning KPI’s to everything you can think of, there needs to a clear understanding of your business objectives and strategic directions. Ask yourself, what is vital to the success of your business, customers, employees, business stakeholders or investors. You will find that you will have several different KPI’s that relate from financial measurements to customer satisfaction measurements.

Perhaps you are about to launch a new product or service online. The launch will involve, email marketing, pay per click, website and social media. Understanding what factors you will measure to determine the success of the launch is crucial.

Measure-Social-Media-SuccessIf the goal of your email marketing campaign is inform your existing customers of the new product or service, open rates may be the KPI that interests you the most. If you need customers to come to your website to view more information, then click through rates may be the benchmark you need. If you want free quotes or demos to come from the email campaign, then looking at both metrics plus conversion rates will be important.

Social media metrics may measure completely different objectives for the launch. Again, what is your objective? If you have a video that promotes the new product or service, is video views the objective? Perhaps you want to see how many people watch the entire video to determine if the video itself is engaging your target audience. Is social engagement, which can be more difficult to quantify, your objective? Are people sharing your content? How many people are actually engaging with you vs. shares or tweets?

Your Pay per Click campaigns will also provide you with valuable data, if you know what you want them to achieve. Are impressions (CPI or CPM) more important because you want eyeballs (typically for branding purposes) on your product or service rather than conversions. What ad groups or keywords drive the most conversions? This data can help you plan other campaigns designed around what people are searching for and know what the potential cost of those conversions will be.

As you can see, the importance of setting your business objectives and strategies before you launch anything will play a vital role in the success of the campaign.

What Makes KPI’s Fail?

If management cannot translate the importance and understanding of the businesses KPI’s to their employees effectively, they will most likely fail. Since it’s the employees who will carry out the actual work on the campaigns and report back to management, having no clear picture on what they are trying to accomplish will result in poorly executed campaigns and eventually useless data.This is Never-going-to-work

This one sounds easy enough, but is often overlooked. Knowing what is working and what is not working, and then taking steps to correct the problems. The lack of documentation to make these decisions is often missing or put together without any real understanding of what the data is telling them. Can the people who are required to compile the documentation understand how to compile it? Does management understand how to interpret the data an act accordingly?

Apart from what we just mentioned, no matter what metric you choose to measure, having an action plan in place to address the issues the data provides is also important. If the data indicates you need to make changes to any of your campaigns, management and staff must have bought into the program and be prepared to address the problems. The lack of follow-up and ability to change or tweak campaigns will doom it before it even has a chance to succeed.