Key Performance Indicators - What Are They, and How Can Your Small Business Utilize Them
December 1, 2021
You want to grow your business. You work hard to generate more sales, become more efficient, and succeed over the long run. How do you know if the investment is paying off? That answer starts with proper goal-setting.
Expanding your start-up involves setting concrete goals and tracking your progress towards them. Key Performance Indicators, or KPIs, represent the best way to accomplish these essential tasks. They let you understand your business better and fine-tune your operations over time.
But what are KPIs? And how can you use them to help your small business? Here, we'll provide a guide to these essential tracking mechanisms, giving you a crucial tool to achieve long-term success.
What are KPIs?
As we mentioned, KPI stands for "Key Performance Indicator." The phrase refers to a measure you can use to track how well your company did on a particular goal.
KPI stands for "Key Performance Indicator." The phrase refers to a measure you can use to track how well your company did on a particular goal.
You can use KPIs on the macro level, looking at company-wide performance. Or they can be used on a much smaller scale. You can apply these measures like a microscope, using them to understand the success rate of particular projects or even specific employees.
KPIs also provide meta value. To choose the optimal KPIs, you need to understand your business. You want to select the ones most closely associated with your long-term growth prospects. This allows you to pinpoint the true fulcrums of your operations.
Meanwhile, by defining KPIs, you specify your priorities and communicate these focal points to your stakeholders. You highlight your goals to groups like investors and employees. You let them know what specific parts of the business have your attention and you can give appropriate updates over time to let them know how when you are achieving your goals.
How do you select KPIs?
However, you can't optimize your business by focusing directly on these numbers. They don't have the nuance you need to make small-bore upgrades to your operations. Rather, you have to discover the statistics that have the most operational leverage and use these to channel your resources to the right areas of your business.
With that in mind, here are a few factors to consider as you choose KPIs for your startup. You want them to be:
- Relevant: A good KPI relates directly to an important part of your business.
- Quantifiable: You should be able to present the measure as a number.
- Relatively Simple: Some tracking stats can get complicated. But try to keep the figures as straightforward as you can.
KPIs can also manifest in different ways. Here are some categories of metrics you can consider:
Counting Stats: Here, you count discrete items or events. The number of customers would represent an example.
Percentages: In this type of KPI, you track changes. Growth rates provide examples of metrics reported as percentages.
Averages: Review stats like expenses and revenue in reference to another total. For instance, revenue and your number of customers are both counting stats. But you might learn more by looking at the average revenue per customer.
Rates/Ratios: Percentages and averages both constitute types of rate/ratio metrics. However, these are just the most common examples.
What are some example KPIs?
To get a better idea of how KPIs act in the real world, here are some common examples that come up in well-known companies:
Netflix is one of the world's biggest media players. And investors scrutinize the company's financial documents for one crucial statistic: subscribers. Whatever the company does in terms of revenue and earnings, its quarterly subscriber numbers go a long way to determining where its stock price moves.
Subscriber statistics provide an example of a counting number that can serve as a KPI. Netflix is a mature business that still spotlights its subscriber figures. But the statistic can prove even more important for a subscription-based startup, where revenue or profits won't accurately tell the growth story.
Average revenue per user (ARPU)
ARPU represents another pivotal statistic that often comes up when major companies release their financial information. Facebook represents a good example.
Rising customer totals and revenue amounts might let you know how well a certain product is performing. But how well are you monetizing each of those customers? ARPU will give an idea.
Sales conversion rate
A certain number of people come to your website. You can track that through traffic info. Meanwhile, you book a certain number of online sales. Your revenue figures will tell that story.
You might be growing traffic and increasing sales. But how good are you at turning those eyeballs into paying customers? You'll need a rate statistic for that. Like ARPU, conversion rates tell you if you need to get better returns from your investments.
How to track and measure your KPIs
Once you determine the right KPIs to use, you need to set up a process for tracking them. It's important to make gathering this information part of your routine. This requires an investment, but otherwise, you won't have the details you need to improve over time.
Here are a few tips for setting up a method of tracking and measuring your KPIs:
Perfect Your Data Collection and Analysis Processes
KPIs represent objective measures. That means they are based on hard data. How you collect and analyze these figures will determine whether your metrics are accurate and actionable.
As such, you need to maintain the highest-quality data system. By gathering trustworthy and meaningful raw statistics, you can be more confident in the KPIs you derive from those figures.
Get Your Employees Involved
Your employees will have opinions about your KPIs. In some cases, ratings of their individual performances (including things like raises and bonuses) could become tied to these measures. As such, they represent a good source of intelligence about the front-line impact of your KPI choices.
Stay open to feedback so you can make the best decisions possible.
Routinely Review Your KPIs
Your business will evolve over time. What seemed crucial to your growth as a startup might not remain central to your prospects as a mature company. Meanwhile, industry dynamics, changing product mix, and consumer priorities can all impact which KPIs you choose.
As a result, don't lock into a KPI without routinely reviewing its value. Look at how your chosen metrics have impacted your business and judge whether they have had a positive influence on your long-term chances of success.
Don't lock into a KPI without routinely reviewing its value. Look at how your chosen metrics have impacted your business and judge whether they have had a positive influence on your long-term chances of success.
Let KPIs inform your development
Achieving success in any area involves setting goals. In business, these objectives require more precision than in most other areas of life. That's where KPIs come in.
For your small business, the right KPIs allow you to create a roadmap for long-term success. You know where you want to go and can measure your incremental progress towards that destination. The information provided here will help you get started setting and measuring the ideal KPIs for your startup.