We have to talk. If you have a 2-page list of “KPIs”, we’re calling them the wrong thing. Not all metrics are KPIs, but KPIs are metrics. Let me explain…
Both metrics and KPIs can help leadership get a pulse on company performance, but one of them is much more crucial to achieving strategic goals. Many people inadvertently use these terms interchangeably. Every KPI is a metric, but not every metric is a KPI. Learn the critical differences and how to create great KPIs in this short guide.
Metrics track and measure performance. A list or group of metrics is essentially a report. These figures are important to know because they monitor specific processes and results for the business. Generally, metrics are updated on a regular schedule, such as weekly, monthly, annually, or even daily.
While they can provide helpful insights into a team’s performance, metrics don’t show a path to hitting the company’s overall strategic goals. For SaaS companies, website traffic is a great metric. It’s useful to know how many visitors the website is getting and it shows whether certain marketing efforts are leading to an increase in traffic. However, website traffic doesn’t necessarily dictate an increase in customers or revenue, which are likely strategic objectives.
Metrics are important to monitor, but they aren’t the most critical information nuggets that a company can focus on.
KPIs, or key performance indicators, track a company’s progress towards achieving strategic initiatives. KPIs are metrics that clearly show which goals the business needs to meet in order to keep progressing towards long-term success. Similar to metrics, KPIs are generally tracked on a regularly defined basis: daily, monthly, quarterly, or annually. Because KPIs relate directly to the company’s long-term goals, they’re critical measures that allow leadership to focus on what matters most.
Website traffic may be a useful metric for SaaS companies, as mentioned before. However, it’s not likely considered a KPI because it isn’t a direct path towards increasing revenue or growing the customer base. Instead, a KPI may be the number of new customer trials for the software or the revenue per new customer. Those measures clearly show whether the company is on the right path to growing revenue and customer base.
Tips to Creating Great KPIs
Since KPIs are the easiest way to measure the company’s progress towards hitting its strategic goals, it’s important to track the right data from the beginning. By having the best KPIs in place early, companies can better manage their progress and maintain a clear focus on what’s important.
Keep it Limited
When a company tries to measure everything under the sun, it loses focus on the critical metrics. Instead, limit KPIs to around 5-7. Though that may seem low, the company likely only has a couple of critical strategic initiatives. KPIs should relate directly to those limited goals.
Set a Target
Measure what the company needs to track in order to hit their targets. Define what needs to be monitored and what’s crucial to the business plan. The KPIs should clearly show what a company hopes to achieve but should be kept realistic.
Create Parameters for Data and Tracking
Make sure data is consistently pulled from the same accurate source. The source should be clearly defined to maintain the integrity of the KPI. Additionally, the frequency of the KPI should be consistent so it is being compared at the same time interval. This ensures the data is uniform and can be easily analyzed. It’s best to have one person in charge of the KPI to create a sense of ownership and reliability.
Decide on Leading and Lagging Indicators
There are two categories that a KPI or metric can fall into: leading indicators and lagging indicators:
- Lagging indicators are historic numbers that are difficult to influence. They indicate whether a company has achieved its goals. Examples include revenue and number of customers.
- Leading indicators are forward-focused metrics that, while more difficult to measure, are much easier to influence. These indicators show a business what factors need to be improved in order to meet certain goals. Examples include new customer trials and level of subscription service that a customer purchases.
These two types of indicators complement one another. Where a lagging indicator can clearly define whether a company has achieved its goals, a leading indicator can help the team focus on the types of activities that improve the lagging indicators.
Using the examples above, a company may hope to improve revenue and the number of customers they have for their software subscription. Those lagging indicators focus on past data and answer the question “did we achieve our goals?” In order to improve the number of customers, a company can focus on improving the leading indicator of how many new signups they have for a trial or consultation. To generate more revenue, the company can work to have customers sign up for a higher subscription tier.
Look at Push and Pull
Metrics take on a push and pull method. Push metrics are pushed out to employees who then interpret the data and take action based on that information. Pull metrics require someone to dig for the data and analyze its meaning.
Efficient KPIs are the kind that can be automatically pushed out to key players at the right time based on timing or thresholds being broken. For example, the sales team may be tracking their travel spend for the year. Perhaps when their travel expenses reach a certain threshold, the department leader wants to be notified. If that process is automated, then the sales manager can receive that KPI at the exact time it becomes crucial, when travel expenses reach an undesired threshold.
Most metrics and KPIs create a loop of push and pull. The Finance Team may pull data in order to create a KPI. Then, that KPI is pushed out to the key employees who benefit from its knowledge. From there, the employees can make adjustments in order to guide that KPI figure in the best direction.
Metrics can help a business keep its eyes on the prize with KPIs being the best place to focus. Where metrics can measure process performance, KPIs show the direct path between performance and meeting strategic business goals. That’s why it’s best to keep KPIs limited to just a few – measuring only what matters to helping a business achieve its goals.