Peter Drucker, famed management consultant, once said, “If you can’t measure it, you can’t manage it.” Insightful? Sure, but what he didn’t say was what to measure. Almost every company knows the importance of KPIs and metrics when it comes to making insightful and data-driven decisions, but many struggle to apply that knowledge and figure out what they need to be monitoring to meet their strategic goals and initiatives.
Whether you are still trying to figure out what KPI stands for, think you have this all figured out, or fall somewhere in the middle… you may want to take a look at our answers to the questions we are most frequently asked about metrics and KPIs. The answers may surprise you!
What Are the Differences Between Metrics and KPIs?
There is a common misconception that the terms “metric” and “key performance indicator” are interchangeable. While they are both quantifiable measurements, there is an important distinction between them. KPIs are strategic and metrics are tactical.
KPIs measure how successful a company, team, or individual is in accomplishing a goal or objective. They help you understand whether your business is on track or not by measuring performance. While departments may have their own KPIs, most companies have a single “north star” KPI that guides the business as a whole.
- Facebook: Monthly active users
- WhatsApp: Messages sent
- Airbnb: Nights booked
Did you notice a theme? None of their primary KPIs are something as basic as “revenue” or “sales,” which may come as a surprise. A quick Google search will yield millions of results for example KPIs for any industry. For those of you who have done this in the past, I’m sure you have seen plenty of resources that list sales revenue, net profit margin, and customer retention. While these are important metrics, they are not KPIs.
KPIs are tailored specifically to a company’s business model and objectives. Company executives can often monitor overall organization progress with just one or two strategic performance indicators and have a pretty good idea of exactly how their company is doing. If the number you are looking at doesn’t provide that level of value, it is not a key performance indicator.
That’s when metrics come in to the picture. Metrics monitor the success of activities or processes taking place to support the accomplishment of the KPI. When you notice something wrong with your KPIs, metrics can help diagnose the problem. They also suggest which actions need to be taken in order to get back on track. Metrics are wide, while KPIs are deep. Business metrics can be used to track all areas of business, from marketing to sales.
How Are KPIs Built?
Here are 5 helpful steps to building effective KPIs to get you started:
1. Establish Goals & Objectives: The first thing that you need to do when establishing goals and objectives is to understand your purpose as a company. What determines whether or not you are successful? After you figure out what results you want to achieve, it is easier to solidify a goal.
2. Determine Your Key Performance Questions (KPQs): After establishing your strategic objectives, you can start developing KPQs. You should have 1-3 open-ended KPQs for each objective that trigger a KPI in response, such as:
- How can we achieve this objective?
- What would success look like?
- What should the time frame be for achieving this goal?
3. Evaluate Your Existing Data & Identify Your Needs: Now that you have an idea for some KPIs that could potentially address your KPQs, you will need to evaluate the data that you currently have and will need. Ask yourself:
- What data do we have access to?
- What are our data sources?
- What metrics are already being monitored?
- What data would help answer the KPQs?
4. Find an Effective Way to Communicate Your KPIs: There are many different options when it comes to communicating your KPIs from reports to presentations to spreadsheets. However, the best way to make sure stakeholders are able to easily view key metrics and track progress on performance indicators is by using an interactive dashboard software.
5. Reassess & Review: You should be constantly monitoring your KPIs to see if they are improving your business’ performance. When starting out, you will only want to have as many KPIs as you can realistically keep track of. The recommended range is 1-3. If these KPIs are not helping you measure performance in relation to goals, you may need to revisit steps 1-4 and find a new KPI to take its place. If you do not follow up on the progress of your KPIs, they can turn into a disadvantage for your company.
Read next: Using Big Data to Refine Your KPIs
How Can You Ensure a KPI is Effective?
It’s easy to get caught up in vanity metrics like web traffic, social media engagement, or other data points that don’t deliver any actual insight into how the business is doing. When a company focuses on vanity metrics, it’s hard to properly attribute successes and failures as the numbers go up and down.
That’s why it is important to not only set KPIs, but also make sure they are effective. It is extremely easy to mistake a vanity metric as a KPI when you are first starting out. While they are easy to measure, it ultimately leads to more confusion when you can’t explain what is happening to your data or which actions to take next.
To ensure that your KPIs are actually KPIs (and not just wearing a clever disguise), be sure to follow the S.M.A.R.T. framework:
- Specific: Clearly defined and identified
- Measurable: A quantifiable measurement of success
- Achievable: Corresponds with available data
- Relevant: Helps you achieve your goals
- Time-specific: Adapts over time
What Are the Benefits of Defining KPIs?
1. Focus: It is far less confusing and overwhelming when everyone knows what metrics they should be focusing on.
2. Clarity: Get all of your employees on the same page by clearly communicating your expectations for individuals, departments, and the company as a whole.
3. Transparency: Establish trust by sharing vital KPIs with your key stakeholders and employees through reports or – if you’re feeling fancy — a live wall display.
4. Accountability: By focusing on KPIs instead of vanity metrics, you can more effectively determine what is happening with your numbers and how to fix it.