“KPIs don’t work for our business!” Does this statement sound familiar to you? Even in a business world there is no good understanding of what a KPI, a metric and a measure is and what the difference is between them. As a result, many executives have a long list of metrics; they call them KPIs, they put them of a visually appealing dashboards, but these efforts don’t provide any tangible effect on business performance. Not all metrics are KPIs! At BSC Designer we are also faced with this kind of misunderstanding. Let’s see if we can clarify the situation.
Before I start talking about KPIs, we need to sort it all out with words and their meanings. In my research I started with definitions given in a dictionary and followed the research by reading some authoritative articles on the topic and less authoritative, but still very useful, conversations on business forums and LinkedIn.
From a quantification to a metric
Let’s have a look at what a metric is and how it actually appears on our business dashboards.
Everything starts with a quantification. According to Wikipedia quantification is about mapping human observations into numbers.
- An example: we obverse a company and we know that managers invest in marketing to get new customers. We can count the number of new customers and the sum of the investments made into the marketing scheme. This process is called quantification and the result of the quantification is a measure.
As defined in Merriam-Webster dictionary a measure is “an amount or degree of something.” Let’s have a look at an example, to make things clear:
- As a result of a quantification we have two measures: “the number of customers acquired over a period of time”; and “funds invested in the marketing.”
What is a metric then? One of definitions in Merriam-Webster dictionary is that “a metric is a standard of measurement.” The definition looks very similar to the definition of a measure. In the business usage “metric” and “measure” overlap in meaning. One explanation that I find especially useful is that metric is a derivative of measure.
- An example: we use two measures “investments in the marketing” and “the number of customers acquired” to calculate a total cost to gain a new customer. That’s a metric. It is a derivative of two measures.
In BSC Designer
I’ve created a new indicator, clicked “Data source” button and selected “Use a formula for the value” option. In the “Formula editor” I’ve entered the formula for this indicator:
Download .BSC source project to check it out yourself and try creating your own indicators.
Benchmarking with metrics
As was said, a metric is a standard of measurement. It means that we can use it to compare our measurements with past results. Or, we can compare something that we measured in our company with measurements of another company. I’m talking about a process known as a benchmarking in the business world.
- An example: we can compare “a total cost to gain a new customer” with historic data to update company’s marketing strategy and choose a more cost-effective marketing approach.
What is a KPI? Why isn’t any metric a KPI?
KPI is a metric (it doesn’t imply that any metric is a KPI). KPI stands for Key Performance Indicator. These three words define the function of a KPI:
- Indicator. It should show the number. For example: “How good our customers are engaged” is not really an indicator; in opposite, “Average customer engagement score according to the monthly survey” is an indicator.
- Performance. It should be connected to a performance. “The number of computers in an office per an employee” is a metric, but it is not really connected to the ultimate business performance. If you will double the number of computers you don’t expect your profits to be increased.
- Key. It should be important for your business, department, team or whatever you current scale is.
A quick test: metric vs. KPI
Let’s say we have some metric and we need to decide if this is just another metric that contributes to the business performance in some way or it is a KPI.
- Ask yourself a question: would you pay a significant sum to get the value of this metrics two times higher (or lower)? If the answer is “no,” then we are talking about a metric, not a KPI.
An example: “a total cost to gain a new customer” might be or might not be a KPI. It depends on your business strategy. If your currents costs to gain a new customer are high and your team found a way to reach the same customers, but at a 10 times lower price, then it is an excellent KPI that will affect your ultimate performance significantly.
“Monthly website visitors” is not a KPI
Any online business wants to have more traffic to the website. The number of monthly visitors is a metric, but if it is a KPI? Let’s do a “metrics vs. KPI” test. How much would you pay in US $ to double the number of your monthly visitors? Don’t rush to come up with a figure, it’s not as simple. Any experienced website owner will start asking the questions: what SEO methods will be used, who will be these new visitors, where will they come from?
- For most online businesses the number of monthly visitors is an excellent metric, but it is not a KPI.
How can we possibly convert this metric into a KPI? Let’s have a look at the questions that I suggested an experienced website owner would ask. What if we are taking about visitors that come from search engines? They were searching using keywords that were highly relevant to our marketing funnel. We know that these visitors will generate us qualified leads that will be successfully converted into sales. For sure, we need to know what keywords are relevant and we need to filter only organic search engines traffic, but as a result we will have a KPI.
- The number of organic visitors for a relevant keyword might be a good KPI.
Why do we need a KPI?
KPI is abused in a business jargon. People tend to call any numeric value a KPI. In most cases this doesn’t make sense and as a result we hear something like “KPIs don’t work for our business.” That’s because those were not KPIs, but were simple measures or metrics.
The benefit of a real KPI is that it provides executives with meaningful information to make a better decisions. Let’s take “a total cost to gain a new customer” as an example:
- It helps to come up with a better lead generation strategy. A company might start promoting a low-cost or free product as a front end, making money on the back end product.
- It helps to choose of an appropriate marketing method and eliminate ones that are not cost effective. Once compared an efficiency of various marketing and PR methods, a company might decide to replace expensive advertisement in a magazine with targeted CPC campaign in AdWords.
- It helps to define a right pricing for a product. Knowing the cost to gain a new customer a manager can decide on the pricing of a new product or on the maximum discount that he can afford.
KPI best usage scenario
In the best case KPI will not only tell us a story about what’s going on in the business right now, but it will give a business time to react appropriately. Following an example above, if a company tracks its positions in search engines for the keywords that are the most relevant and best converting, then KPI will work as an early warning signal, telling a management that something is going wrong. Executives won’t be surprised by a sudden sales drop, they will have a time to react respectively.
Examples of a good candidates for KPIs
The metrics below are generally a good candidates for a KPI for any customer:
- EBIT (Earnings before interest and taxes) $
- Average shopping cart value
- Lead to sales conversion rate
- % of returning customers
- A total cost to gain a new customer
- Market Share, %
Bernard Marr in his article on LinkedIn suggests “The 4 KPIs Every Manager Has To Use.” Well, you won’t actually find there ready-to-use KPIs as, for example, it’s impossible to come up with a universal KPI for “Internal Process Quality,” I’d say that a company need to search its own KPIs in the four areas mentioned in the article: Customer Satisfaction, Internal Process Quality, Employee Satisfaction, Financial Performance Index.
Metrics and KPIs in BSC Designer
What do we have in BSC Designer? KPIs or metrics? BSC Designer is just a tool and you decide how you are going to use it. In BSC Designer with have a “KPIs” tab, but this doesn’t mean that what you enter there automatically become a KPI.
Download 30-day trial of BSC Designer and try KPI settings in action.
Some users load the software with raw data, other use metrics, good projects consist of KPIs. Hopefully, after reading this article you’ll be prepared to differentiate raw data, metrics and KPIs.
Do you have your favorite metric or KPI that usually provides you with business insights? Do you think that understanding the difference between a metric and a KPI will help your company?