Consulting Spotlight: KPIs - Measure What Matters
Advancements and innovations in technology have given business owners access to an unprecedented amount of data. Think about all the data sources a company can leverage to collect information about their business:
Social media • Point of Sale systems • Company Websites • Advertising Initiatives • Automated Internal systems • Third Party Research
More data is usually a good thing, but is there a point at which large volumes of data can actually inhibit good decision-making?
It is important that business owners distinguish between true growth indicators and "vanity" metrics - statistics that may make people feel good and sound successful but could be meaningless as true indicators of business health. A good example of a vanity metric is the number of Twitter (or any other social media platform) followers for a given account. Yes, a large social media following means broad potential reach, brand recognition, etc. -- the operative word being potential. Active engagement (interaction with other accounts), peer sentiment, or conversion statistics (how many followers became customers) would be much more relevant indicators than simply the number of followers.
Key Performance Indicators (KPIs) are like the MVPs of metrics. As the name implies, these metrics give business owners a true indication of the health and performance of their company. KPIs answer the key question "What is currently making or will make my business profitable?" So why don't companies focus only on KPIs and disregard all other metrics?
The answer is that KPIs vary across industries, and in some cases, even businesses within a given industry, depending on the company's strategic objectives, size, and numerous other factors. It requires skill and a little intuition to understand what factors will best predict success or failure in a given business model, since factors that are important in one business model may not be as important in another. A management team can reach consensus on what they believe their company's KPIs are, but it can be an expensive lesson if they get it wrong.
Here are a few things to consider when determining what KPIs your business should track.
Company Mission: Why does your business exist (besides "to make money")? Defining business goals by something other than profit can help steer the conversation in the right direction.
No man (or woman) is an island: Seek to understand your company's KPIs in a collaborative environment. Each department can bring a unique perspective about what information matters (or why it doesn't matter).
Set specific, concrete expectations at the beginning of the process. "Ad revenues will be $10,000 if our app has a 30% retention rate" is better than "A higher retention rate will generate more ad revenue." One is possible to measure; the other is just a hypothesis. Set quantifiable expectations and test them against real-world results. This enables you to follow the last piece of advice:
Analyze results and adjust periodically adjust expectations. Market share, public perception, and a multitude of other factors can change the relevancy of expectations. Maybe your business has moved from growth to sustainability in its life cycle, so a 20% growth rate target no longer makes sense. Don't be afraid to adjust expectations; just be careful that you keep your goals aggressive enough to stay ahead of or at least on par with competition.
What other advice would you give to entrepreneurs and startups when evaluating performance of their business model? Feel free to leave your comments or suggestions below and share this article if you found it helpful or interesting.
This article was published by ARKAY Group, a small business consultant providing assistance and solutions to clients across the United States. Find out more about our client and solutions at www.thearkaygroup.com
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