Picking the right Business KPIs is fundamental in understanding the profitability of a business. This post discusses a simple way of picking KPIs for your business.
Knowing the performance of a business is a pretty fundamental aspect in making the business succeed for the long term. And business performance boils down to Profit. If you’re not making profit, you’re not going to be able to sustain the business for long.
So it’s true that a common goal of most business’ is to be profitable, and grow profits year on year. That’s a fine goal, but that goal alone won’t help in any way. Because profit is just a measure that happens as a result of business, after the event the business takes place.
Profit is actually a function of many other variables and dimensions acting with and against each other that all affect the end profit being positive or negative. So actually, the key to being in control and understanding how to grow profit comes only from measuring, reporting and analysing all the key factors that contribute to the end profit.
What is a KPI?
A Key Performance Indicator should be designed to do what it says on the tin. It is essentially a number which indicates the performance of one of the important dimensions that contribute to the end profit of the business. So a business should have a number of KPIs which collectively encompass all the main aspects of the business, to highlight the performance of each aspect in a quick and easy way.
I like to think of it as a series of levers, all part of a big machine which can be tweaked and adjusted to control the end output of the machine (hopefully profit). If you were sitting at this machine, you’d want to know what each lever did, and want to measure the effect each lever pull had on the machines output. Otherwise you’d be controlling the machine with no clue of what does what.
The important part in designing KPIs is to pick the right ones! The following process is a simple way of breaking it down.
Start with the fundamentals. Break down the business into its main actions, and write down the main objective of each particular business area. This should give you a list of the main levers of the machine, and reason the levers are there. They won’t necessarily all directly relate to creating profit, but will all indirectly lead to it.
Next, for each business objective, write down dimensions that will measure the particular objective. For example, if one of your objectives is to grow a customer database, the dimension will be the number of sign ups to a database.
Note – when assigning dimensions to business objectives, think about the sources you need to use to get the data. Using fewer sources will mean it is easier to create daily KPI reports. Overall, each dimension you picked should be tracked in some form. This process may surface gaps in your business tracking, which should be closed to allow for meaningful KPIs.
Finally, for each business objective you can now form KPIs using the dimensions assigned to each objective. A KPI will commonly be formed as a ratio of two or more of the dimensions. For example looking at the sign up example, a good KPI to show the performance of the sign up method would be the sign up rate, which is a ratio of the number of sign ups / total number of people seeing the sign up request.
Gather the dimensions on a daily basis and create reports which clearly show the KPIs, and how they are trending over time. This way, any changes can be tracked and observed to discover the effect of changes to the lever positions. Understanding the factors that contribute to profit, and growing it, is now a matter of monitoring the business KPIs and using them as levers to optimise the business performance.
For some KPI ideas see my KPI list of common online marketing KPIs
Next step is to put all these metrics and KPIs into a business dashboard. Post to follow.