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One of the most significant challenges for many businesses is choosing the right key performance indicator from a wide range of indicators. Whether your business performance improvement goals are related to marketing, sales, finance, or any other sectors, choosing the right key performance indicator to focus on that sector is the first step to improving the status quo. It is said that what is measured improves. So if you can quantify the current performance of your business, you can measure performance over a period of time and monitor the improvement, but how do you choose the right key performance indicator to focus on your business? The short answer to this question is that it really depends! Although there is no simple step-by-step process for selecting a key performance indicator, there are some issues you should always keep in mind.
In this article, Retiba’s editorial team discusses some of the factors affecting the selection of key performance indicators, as well as the most important ones for your business. Before stating these issues, it is necessary to review some points about key performance indicators.
What is the purpose of determining key performance indicators (KPIs)?
The question that is often preoccupies startup founders: Why do venture capitalists tend to target KPIs and constantly evaluate them throughout the investment period?
Venture capitalists generally pay attention to the key performance indicators (KPIs) of startups for two reasons: to carefully evaluate startups; and during the contract and mentorship process.
As stated in the comprehensive Startup Evaluation, while carefully evaluating the relevant data, venture capitalists seek to provide accurate answers to these questions by verifying the relevant data provided by the entrepreneurial team:
- Do the analyses conducted on Google Analytics and Webmaster confirm the growth of key performance indicators of the startup?
- Are the startup’s KPIs well chosen, given the nature of the market and the audience persona?
- Are the customer input channels and the sales funnel properly identified and designed?
- Are KPIs well calculated as CLV and CAC, and does the startup know about its growth lever(s)?
After making an investment contract, monitoring a startup’s KPIs can be run by venture capitalists for two reasons:
- In order to define the mentorship and growth counselling for startups, which is done in the form of smart money investors often promise to startups.
- In order to monitor the startup growth and pay the required capital to the startup. Most venture capitalists make their payments on condition that KPIs are realized, thereby they reduce the risk of their venture capital.
Types of Key Performance Indicators (KPIs)
The most important KPIs used in business analysis and evaluation are:
- Monthly Revenue
- Online Conversions Rate
- Average Revenue Per User
- Burn Rate
- Lifetime Value
- Average sales Cycle Length
- Repurchase Rate
- Customer Acquisition Cost
- Average Wallet Size
- Monthly Active Users (MAU)
- Average Time on Page
- Customer Retention Rate
- Bounce Rate
- Net Promoters Score
- Churn Rate
- Average Sales Basket Size
- Average Session Duration
Depending on the nature of the business, the maturity of the startup, the investor’s considerations and, of course, the various risks of the startup, the key performance indicators are selected.
Classification of Key Performance Indicators (KPIs)
Since the key performance indicators are criteria for assessing the current status and the rate of business progress, they can be defined and measured in different parts of the business. In general, key performance indicators are divided into the following four categories.
- Financial KPIs
Such as Average Revenue Per User, Revenue, Profit, Burn Rate, etc.
- KPIs Related to User
Such as Customer Lifetime Value, Monthly Active User, Daily Active User, etc.
- KPIs Related to Product
Such as Average Sales Cycle Length, Sales Velocity, Viral Rate, etc.
- Marketing KPIs
Such as market size, Customer Acquisition Cost (CAC), Conversion Rate, etc.
Categorization of KPIs
If you are a business owner, it may have occurred to you that some indicators, albeit their upward and good trend, do not contribute to your executive plans in achieving their business goals. In this regard, there is another classification for key performance indicators, which is described in the table below.
|1||Vanity||High values of these indicators make good sense but do not indicate appropriate implementation methods. |
e.g. Number of Downloads
|Actionable||The results of these indicators cause some changes in the the behavior and business plans. |
|2||Qualitative||Qualitative indicators are usually information obtained from interviewing business clients. |
e.g. Weight of Each Product Problems
|Quantitative||Quantitative indicators show quantity. Information is obtained and evaluated quantitatively. |
e.g. Net Promoter Score
|3||Exploratory||Indicators used for unspecified analyses. |
e.g. Number of Search Traffic
|Reporting||Reporting indicators are day-to-day management metrics reflecting the status of the business. |
e.g. Search Queries
|4||Lagging||These indicators indicate something that happened in the past. |
e.g. Cumulative Revenue
|Leading||These indicators refer to the prediction of the future and issues that have not yet occurred. |
e.g. Revenue Run Rate
Selection of KPIs
The selection of key areas of performance by business owners as well as venture capitalists can be based on various criteria such as:
Startup business model
The nature of the startup business model and the indicators to be focused mainly will definitely be influential in selecting the key performance indicators of the startup. For example, if the startup under review is a social network, indicators such as the number of daily and monthly active users, NPS, and each user-based indicator will certainly be more important than key performance indicators such as sales and average shopping cart abandonment, etc.
The market in which the startup is operating, the competitors’ status and the competitive conditions of the market are other factors affecting the choice of KPIs for the startup. Sometimes, due to the conditions of the startup’s field of activity, it is necessary to consider the product related key performance indicators, and sometimes it is necessary to prioritize the key performance indicators related to sales.
Undoubtedly, another influential factor in selecting key performance indicators is startup maturity and its position in the business maturity cycle. At the early stages of the life cycle, startups often focus on product and user engagement; startups focus on revenue, growth and NPS at intermediate stages; and startups at the final stage often focus on gross profit margins and financial key performance indicators.
Tips to keep in mind when choosing key performance indicators:
1) Choose key performance indicators that are directly related to your business goals.
As we know, a key performance indicator is employed to measure the business situation in relation to some goals such as increasing sales, improving returns on marketing team efforts or improving customer service. Mark Hayes, Shopify Communications Director, has discussed some of his business goals and related indicators in an article. Take a look at some of the defined goals and related indicators mentioned below.
Goal 1 – Increase sales by 10% in the next quarter. Related indicators are Daily Sales, Conversion Rate and Website Traffic.
Goal 2 – to increase site traffic by 20% next year. Related indicators include Website Traffic, Traffic Sources, Click Rate and Bounce Rate.
As you can see, each key performance indicator in the example above is directly related to the core business goal. What are the main goals of your business? Have you identified the main areas for improvement? What are the available indicators associated with these goals?
2) Instead of focusing on a large number of indicators, focus on a few key performance indicators.
Instead of making a list of dozens of indicators, select just a few key performance indicators and focus on improving them. If you have a lot of indicators in mind, you may not get any results. Because each company, industry, and business model is so different, it can be difficult to pinpoint the right number of indicators, but usually, depending on the goal for the business, it seems appropriate to choose between 4 to 10 key performance indicators.
3) Consider the growth stage of your business.
As mentioned earlier, depending on the stage of your business growth, you may choose different key performance indicators. Typically, businesses that are in the early stages of growth often focus on indicators related to business model validation, while businesses in higher growth stage focus more on increasing sales and increasing customer lifetime value. The following figure shows the indicators that are measured for different business purposes.
4) Identify both leading and lagging indicators.
Lagging indicators are not necessarily better than leading ones, or vice versa. You just have to be more aware of their differences. Lagging indicators measure the output of something that has already happened such as last month’s sales, customers who have received professional services, etc. These key performance indicators are perfect for measuring results because they only focus on outputs.
On the other hand, leading indicators measure your progress, input, and likelihood of achieving goals in the future; these indicators act as predictors of what is going to happen in the future. Website traffic and conversion rates are examples of leading indicators. Because lagging indicators are easy to measure, most businesses only consider them.
You can, however, use leading indicators as your business drive, because they contribute to the prediction of achieving business goals.
5) Bear in mind that key performance indicators are different for each industry and business model.
As mentioned earlier, the key performance indicators you choose are influenced by the business and industrial model in which you operate. For example, indicators such as churn rate and customer lifetime value are the most important indicators in SAAS.