What is a Key Performance Indicator: crazy definition works like a charm

Short version:

What is a Key Performance Indicator (KPI)?

KPI – Key Performance Indicator – is what its name is: tell you how well your business performs. The right KPI meaning should be “core metric”, whose solely purpose is to help business owners figure out the soundness of the business strategies.

However, online gurus usually mentioned KPIs in marketing, finance, sales, IT, and customer service as “industry standard” KPIs while this set of metrics are way too generic and most likely not help you justify your strategic operations. And thus, following the industry’s well-known KPIs without looking back at your business model could be one of the biggest mistakes you wish to make. Instead, look deeply at your business and judge whether the KPI:

  • Gives actionable insights: will you act differently given these insights? – This is the most important question you need to ask! Ideally, the KPI should have a correlation, or better yet, causal relationship with your business goal.
  • is a leading or lagging indicator: leading indicator allows you to prevent unfortune from happening, such as your biggest customer churns! While lagging indicator only shows you what already happened. You would need both but isn’t it that leading indicators can save your business?
  • is an exploratory or reporting metric: exploratory opens up business opportunities that you don’t know you don’t know, while reporting shows you what you don’t know.

Long version:

What does KPI (Key Performance Indicator) mean in business?

KPI stands for Key Performance Indicator. A business owner uses KPIs to know how well her business performs at a particular period. Other also use KPIs as a business goal, such as revenue increase this year.

In short, it’s a flexible term and varies by company and company.

Ok, but what does KPI mean?

The right KPI definition

I would personally want to define it as a “core metric”. (And KPIs and metrics are two different animals.)

KPIs are the core metrics that should be used by business owner(s) only to answer this question: Do I need to change the current business strategies? And that should be the main focus of KPI meaning!

While metrics, in general, are used at a lower level and by a specific functional team such as marketing, finance, etc. That’s why we heard a lot of “KPI” in finance such as profit margin, which in fact doesn’t give many insights into the soundness of the current business strategies.

Normally, a business needs up to 5 core metrics but should track as many metrics as possible.

Why Key performance indicators (KPIs) are important

KPIs are important because if you do right, you’ll have an unfair advantage over your competitors.

Why that advantage?

Keep reading, you’ll get the answer in a few minutes!

Choose the right Key performance indicator (KPI)

It’s so easy to catch articles that tell you the “good” KPIs for your business as they are commonly used!

For example, most businesses track profitability, sales, marketing efficiency, etc.

I agree they are essential. However, they shouldn’t be KPIs but just metrics.

So, how can you choose the right KPIs for you business? For-your-business is a key here, meaning that the answers for these questions varies from your business model to another, and even from a business stage to business stage.

Here are the questions you need to ask before deciding on any KPI:

Does the KPI give actionable insights?

Good KPI has to answer your question “Do I need different strategies?”. If all it does is stroke your ego, it won’t be the right KPI.

Ideally, it should have a causal or correlation relationship with your business goal, but this requires multiple experiments to find out (and it takes time to come to this eureka).

Causal relationship allows you to change the future outcome by adjusting the present. Correlation relationship is still good but not as powerful as the causal relationship: you still can predict the future outcome (but can’t affect it at all).

Finally, good KPI shouldn’t have any pattern by nature, such as web traffic is an increasing number if you keep marketing your website. User base would normally go up if you keep acquiring new users.

Here are the examples of 7 “KPIs” that could stroke your ego more than help you achieve your goal:

  • Number of page views
  • Number of visits
  • Number of unique visitors
  • Number of followers / likes
  • Time on site / Number of pages
  • Emails collected
  • Number of downloads

Is the KPI a leading or lagging indicator?

Leading indicator predicts what is likely to happen in the future, and thus, help you prevent an unfortune from happening, such as your biggest client churns!

While lagging indicator shows you what already happened.

Then, what to choose? You’ve asked. The answer is: you would need both.

Use leading indicator to growth hack and use lagging to examine what was right or wrong with the current operations (and thus, what you can do differently!). the question left is resource constraints. Focus on the leading one if you have limited resources.

Is the KPI exploratory or reporting?

Reporting metrics show a capture of the business now or in the past. These metrics can justify the facts that you know (for eg, your business generates more sales during the holiday months), or answer a question that you ponder (for eg, whether Facebook advertisement generates more sales than Google one).

These metrics are good when you just started your business and are going after what you know.

But, in the long run, what opens room for your growth is exploratory metrics. Dive in the data and find out what you don’t know you don’t know, and you could find your unfair advantage!

Donald Rumsfeld’s “Known knowns” quote, chart by Lean Analytics.

KPI examples

Let’s assume you’re a business owner of a fintech startup. Then, what should be the right KPIs set for your business?

Here’s a reference for you:

Business phaseKPIsReason to choose
Launch User active time
User churn
This phase you’re most likely want to focus on the product-market fit (which is to make sure the users like what you’ve built!), thus the core metrics at this phase should be those that measure whether users find the app helpful.
GrowthViral coefficientHopefully you’ve reached product-market fit, now your focus is growth, which means you’ll want to scale customer acquisition. This metric is the lever for your user base so should be the core metric at this phase.
ProfitabilityCAC/CLVNow your product has been proved with a large enough user base, your focus at this point should be profitability. Then, the core metric should be CAC/CLV
CAC = customer acquisition cost
CLV = customer lifetime value

Above is a really simple example of KPIs. In the following posts, I’ll analyze case studies so you’ll have better understanding of the core metrics (KPIs) concept we talk today.

Conclusion

KPIs are generally referred as metrics to show how well a business is performing, and thus sometimes can be used as a business goal. But, to really gauge the most out of KPI, I’d define it as a “core metric” which is to be used by the business owner to justify the business strategies she applies to her business at a specific stage.

A lot of articles give you the most common KPIs a business needs but that probably could be the worst set of metrics you can pick. Ask yourself questions about the actionability and the insights the KPI provides before you choose it.

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