What Are KPIs and Why Do I Need Them?

How does a small business owner really know how well they are performing in various areas of their business? What criteria do they use to figure this out? How do they know what to really look for to measure success? What does success look like?

These are all good questions that many small business owners face. In order to answer them, they use KPIs. Sounds simple enough, but many business owners either do not use them, don’t even know about them, or have some of them but don't track and analyze them.

If you prefer to have someone else look at this stuff, then I would recommend looking at our article about why should I consider hiring a marketing agency for my small business.

Let’s get a decent understanding of what KPI’s are and how to apply them to your business.

What Are KPIs?

First things first. KPI stands for “Key Performance Indicator.” Wikipedia describes KPIs as, “a type of performance measurement. An organization may use KPIs to evaluate its success, or to evaluate the success of a particular activity in which it is engaged.”

The success of any business depends on management identifying KPIs and paying careful attention to what they are telling them. Having too much information from KPIs can leave most managers drowning in a sea of data with no real insights, while having too little data can leave them lost and rudderless.

KPIs can measure virtually anything. Marketing metrics to performance indicators are some of the more common categories. However, they will differ from business to business and will usually result in some sort of metric that can be measured. They can be measured over a long period of time to see how well an area of business is performing, or short period to determine how a specific campaign has performed.

Examples of KPIs

• Net Profit
• Gross Profit Margin
• Average Purchase Order per Customer
• Customer Lifetime Value
• Cost Per Lead
• Page Views and Bounce Rates
• CTR and Conversions
• Order Fulfillment Cycle Time
• Time to Market
• Revenue Per Sales Rep
• Average Employee Tenure

How To Choose The Right KPI 

Before you start assigning KPIs to everything you can think of, there needs to a clear understanding of your business process, goals, objectives and strategic directions. Ask yourself what is vital to the success of your business, customers, employees, business stakeholders or investors. You will find that you will have several different KPIs that relate from financial measurements to customer satisfaction measurements.

Some steps to choosing the right KPIs for your business include:

• Clearly define your business processes
• Set goals for those business processes
• Determine a method of measurement that is quantitative and qualitative
• Set target goals for those measurements and adjust your process to meet your short-term objectives

Perhaps you are about to launch a new product or service online. The launch will involve, email marketing, pay per click, website and social media. Understanding what factors you will measure to determine the success of the launch is crucial.

If the goal of your email marketing campaign is inform your existing customers of the new product or service, open rates may be the KPI that interests you the most. If you need customers to come to your website to view more information, then click through rates may be the benchmark you need. If you want free quotes or demos to come from the email campaign, then looking at both metrics plus conversion rates will be important.

Social media metrics and KPIs may measure completely different objectives for the launch. Again, what is your objective? If you have a video that promotes the new product or service, is video views the objective? Perhaps you want to see the number of how many people watch the entire video to determine if the video itself is engaging your target audience. Is social engagement, which can be more difficult to quantify, your objective? Are people sharing your content? How many people are actually engaging with you vs. shares or tweets?

Your Pay per Click campaigns will also provide you with valuable data, if you know what you want them to achieve. Are impressions (CPI or CPM) more important because you want eyeballs (typically for branding purposes) on your product or service rather than conversions. What ad groups or keywords drive the most conversions? This data can help you plan other campaigns designed around what people are searching for and know what the potential cost of those conversions will be. Even the return on investment can be an effective KPI.

As you can see, the importance of setting your business objectives and strategies before you launch anything will play a vital role in the success of the campaign.

What Makes KPIs Fail?

If management cannot translate the importance and understanding of the businesses KPIs to their employees effectively, they will most likely fail. Since it is the employees who will carry out the actual work on the campaigns and report back to management, having no clear picture on what they are trying to accomplish will result in poorly executed campaigns and eventually useless data.

This one sounds easy enough, but is often overlooked...Knowing what is working and what is not working, and then taking steps to correct the problem. The lack of documentation to make these decisions is often missing or put together without any real understanding of what the data is telling them. Can the people who are required to compile the documentation understand how to compile it? Does management understand how to interpret the data and act accordingly?

Apart from what we just mentioned, no matter what metric you choose to measure, having an action plan in place to address the issues that the data provides is also important. If the data indicates you need to make changes to any of your campaigns, management and staff must have bought into the program and be prepared to address the problems. The lack of follow-up and ability to change or tweak campaigns will doom it before it even has a chance to succeed.

A couple of useful resources to help you stay on top of KPIs are, why should I hire a marketing agency for my small business and 5 reasons to use retainer agreements. Both of these articles will explain the need for outside help when you can't do it on your own.