How to Choose KPIs That Matter
If you tried to measure how well a child grew up, how would you do it? Would you measure how tall he grew in feet? If you decided that six feet was how tall you had to be to have “grown-up well”, and the child only grew to be 5 feet, you would say they did not measure up. What if they were a star athlete or college graduate? Your measure wouldn’t capture their success or failure in those areas that matter.
Similarly, it can be a struggle for entrepreneurs to choose the metrics that will accurately measure the performance of their startup. Those particular metrics, or KPIs (key performance indicators), play a big part in a successful venture. Unfortunately, poorly chosen KPIs can blind a startup to their opportunities for growth, and at worst can lead to eventual failure.
That being said, how can startups choose KPIs that will do the job right?
Start With the Goal
“We may be very busy, we may be very efficient, but we will also be truly effective only when we begin with the end in mind.”
Stephen R Covey
The first step is to identify your goals. A performance metric can only be effective if it helps you track your progress toward a clear destination. Also, just as it doesn’t make sense to have too many goals at once, you should only have a few KPIs (and the metrics to support them) that help you focus on your most important goals. If you’re not sure how a KPI can help you progress toward the goals you have in mind, try taking it back a step to find a more achievable goal that will move you toward your ultimate goals.
Get Familiar
Once you have a clear picture of your business goals and strategy, it’s time to choose the KPIs that will move you toward them.
In order to take that step, it’s important to make sure you have at least a foundational understanding of common startup metrics and KPIs. If you need some help getting started, I made this cheat sheet and this intro to metrics for that purpose! There are tons of other resources too, and I found this one and this one to be very informative.
Select Your Metrics (wisely)
If you’ve read through endless articles telling you which KPIs to pick and cautioning you against others, this step might seem daunting. Don’t worry! Even though there is no magic combination, you can follow a methodical approach (and perhaps some trial and error) to find what works for you.
- Consider the phase of your startup. Look at your goal, and then walk back through each stage or step you can think of to where you are now. If you’re in an early stage it might not be the right time to focus on growth, even if that is your eventual goal. Instead, you might focus primarily on engagement metrics that tell you when you’ve found product-market fit.
- Understand Your Customer Lifecycle. Dave McClure’s Startup Metrics for Pirates will break down everything you need to know about Acquisition, Activation, Retention, Referral, and Revenue (AARRR). Breaking down your customer funnel is an excellent way to pinpoint what KPIs to set.
- Don’t neglect your finances. Tracking those numbers isn’t just for accountants. If you think your cost and revenue metrics are only relevant when you’re ready to grow and scale, think again. No matter what your goal or current phase, you can’t afford to neglect KPIs in this area. This article from David Skok breaks how and why to track a key cost/revenue ratio.
The Final Step
Yes, there’s more. Once you have your metrics in mind, evaluate if they are SMART (Specific, Measurable, Actionable, Relevant, and Timely). In other words, make sure they will do the job you need them to. And lastly, make sure you have a plan for implementing KPIs and make sure you stay on top of them. Measuring performance and setting goals is a dynamic process, so don’t hesitate to re-evaluate and adjust as you go.
