In small business is it critical to set metrics that help to guide your enterprise to success. The common term for these metrics are KPI’s or key performance indicators. A business with solid KPI’s gets more traction as both founders, and employees, have clearly defined metrics. Conversely, a business without solid KPI’s, can fail as it tends to lack direction and focus. As a business leader, who teaches small business owners and solopreneurs, how to grow and sustain solid enterprises, it is very common to discover that the majority of people who are new to entrepreneurship do not understand what a KPI is or how to set them. This article contains everything you need to know about KPI’s.
What Is a KPI?
‘KPI’ stands for key performance indicator. It is a widely-used term in business where KPI’s are used to define and measure specific milestones. In business, it is essential to define your KPI’s and create a system by which you, and your team (if you have one) can hold yourselves accountable. When a business does not have clear KPI’s, it will likely fail as there is no specific way in which to decide which tasks are most important. As a result, the business owner will inherently try to focus on too many things at once and often not the tasks that lead to creating the desired result.
As a business owner, or CEO, your role is to set the KPI’s for the year. These KPI’s are specific and have measurable goals attached to them. You start by choosing your KPI’s and then attaching the quantifiable way in which you will chart the KPI.
Here is a list of 25 of the most common KPI’s:
- Increase Revenue
- Increase New Customer Acquisition
- Increase Profit Margin
- Increase Customer Satisfaction
- Increase Database
- Increase Mailing List
- Increase Social Media Followers
- Improve Internal Performance Systems
- Increase Innovation
- Attract Younger Customers
- Attract Older Customers
- Reduce Departmental Spend
- Reduce Debt
- Increase Productivity
- Increase Website Traffic
- Increase Conversions
- Improve Customer Care Response
- Increase Attendance at Events
- Improve Workplace Satisfaction
- Improve Employee Retention
- Attract The Best Employees
- Location Growth
- Increase Company Portfolio of Investments
- Increase the Number of Customers That Get a Positive Result
- Increase Referrals
Once you have identified your top three KPI’s, you assign a specific number to them so you can measure the progress of the organization and align your team with the objectives.
Here are 7 Common Examples of KPI’s With Quantifiable Results Attached:
- Increase Revenue for 2020 by 15% over 2019.
- Increase Profit for 2020 to 35% (up 3.5%) over 2019.
- Increase New Customer Acquisition by 30% over 2019.
- Increase Social Media Followers by 80% over 2019.
- Increase Customer Referrals by 5% over last quarter.
- Improve Customer Reviews from an average of 3 stars to 4 stars.
- Improve Customer Care Response from 5 minutes to 1 minute.
Setting your KPI’s and attaching a specific measurement will help you chart your course. It enables you to ask the right questions when making decisions. For example, if your top KPI is new customer acquisition, and you want it to grow by 30% over the previous year, then everything from your marketing, how you schedule your day, to the meetings you choose to attend, should be focused on this top KPI.
Once a KPI is set, it might change. These changes generally occur when a company has a change in direction.
KPI’s generally change for the following three reasons:
- The business has achieved specific goals and it must set new objectives.
An example of this might be a company that has set a KPI of location acquisition and conversion from a previous brand to a new one. Fuel networks like Chevron, Shell, Phillips 66, and others would have a model like this one. The company decides it will measure this KPI by the number of locations they acquire. If the target for 2020 was 200 locations, and they achieved it, they might decide that in 2021, they are going to assign the KPI of quality instead of location acquisition as they discover that they are at risk of losing some of their current locations.
In sum, they achieved the goal and must set new KPI’s to adapt.
- The management of the business has changed and as a result, there is a new directive.
When a company brings in a new CEO, there is often a new directive. An example of this was when Marissa Mayer was brought in as the CEO of Yahoo! Ms. Mayer decided the employee productivity was one of the new key KPI’s. As a result, she ordered many of the employees, who were working at home, back onto the Yahoo! Campus.
Think of some of your favorite brands, especially those that have endured. New leadership will change the KPI’s of a company and the result, as the consumer, might be one of your most-loved products being retired or getting a facelift.
The CEO generally drives the vision of a company. If you are a solopreneur, it is your job to set the KPI’s so that as you do onboard employees, and contractors, you can bring your team into synergy with the performance objectives.
- The overall objective of the business has changed and new KPI’s must be set to align with this objective.
If a company decides it wants to be acquired or go public, the KPI’s of that company will likely change. For example, if the company seems to be doing well in sales but not profitability, the KPI might shift to profit as opposed to solely on revenue.
An example of a KPI shift is Peloton, the home-bike platform. Initially their KPI was to create a quality interactive cycling experience. When they decided to go public, they knew they would be measured by user acquisition so one of the top KPI’s was expanding users. Introducing an app that didn’t require a bike, adding running, weight training, yoga, and meditation, allowed Peloton to expand its user database and increase the company value.
How Often Should You Set KPI’s?
Setting KPI’s is commonly done at an AGM (annual general meeting) where the board of directors of a company comes together to review the previous year’s results and look forward into the next year. It might also be done quarterly so that the business can adapt. Smaller businesses, and startups, are much more nimble when it comes to adjusting their indicators and might choose to follow a quarterly route as opposed to annual.
How Do You Know If You Have the Right KPI’s?
The answer is simple. You have the right KPI’s if they lead to business growth. All companies reach a point where they stagnate. CEO’s and founders who are honest with themselves at this point will shift the KPI’s and reposition the organization. If these are the right KPI’s, the company will grow.
An example of this is Starbucks. In 2000, Howard Schultz stepped down as CEO. Under his guidance, Starbucks had become a household brand. Within seven weeks, the shares dropped by 28%. The new CEO made the chief KPI of Starbucks to grow locations. The company spent so much focus on growth, and expanded so rapidly, that it lost its quality. During the recession, the shares plummeted 42%.
In 2007, Schultz stepped back in and changed the KPI to quality. He closed all stores for one Tuesday night and had the baristas return to their roots and learn how to create the perfect espresso. Schultz closed locations, got rid of non-aligning menu items, and Starbucks once again returned to glory.
KPI’s are essential to any business. They will guide a company to success or failure. Setting KPI’s is something that should be done without distraction, a solid review of data, and a tangible action plan that allows the company to live into those KPI’s.
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