Key Performance Indicator (KPI)
What is a Key Performance Indicator?
Key performance indicators, or KPIs, are quantitative metrics that organizations use to track and analyze performance or progress toward business objectives.
Organizations typically choose to monitor KPIs they deem mission-critical to the overall success of the company. These could include financial metrics, such as revenue or profit targets, customer metrics, such as the growth rate of new users, and supply-chain metrics, such as time to delivery.
Simply put, KPIs help a business understand how it’s performing in the areas most important to its success.
What Are Some Examples of Key Performance Indicators?
Different teams across a business might identify and track multiple key performance indicators. Every department in a company—product, marketing, sales, design, support, etc.—can and should have its own KPIs to track. That way, they can gauge their performance relative to the things that matter most to their success.
A few examples of KPIs include:
- Reduce churn rate of existing accounts
- Lower customer acquisition cost (CAC)
- Increase monthly recurring revenue (MRR)
- Improve the company’s Net Promoter Score (NPS)
3 Steps to Set-Up and Track Key Performance Indicators
Although the specific quantitative metrics will vary for every business, there are some universal strategies for establishing and making the most of your KPIs.
1. Align the KPI with a larger business objective.
For some companies, it might make sense to set a quarterly revenue target or a goal for a specific month-over-month percentage increase in revenue. For example, a business with a product just entering its growth stage might want to track these metrics.
But for a product team overseeing a mature product, the most important KPIs to track might have more to do with lowering churn or lowering the number of resources needed to support the product over time to free up resources for future product projects/initiatives.
The point is, you don’t want to create KPIs just for the sake of having something to monitor and report on. Instead, those metrics should serve a larger strategic purpose for your company and give you important business intelligence to help you make informed decisions.
2. Make sure your KPIs are actionable.
Productivity expert David Allen points out that nobody can “do” a project. That’s because a project is a large collection of related, actionable tasks. This is why Allen suggests when you have to tackle a project, your first need to break it up into clear, actionable steps.
The same goes for developing KPIs. You don’t want just to set one large objective, such as increase free-trial downloads by 10% in the third fiscal quarter. You can have that as your broad objective. But you’ll also want to draft interim steps and goals that let you and your team make progress toward that broad objective.
So set a target to increase the traffic from your pay-per-click advertising by 10% each month to drive more people to your trial download page. Now you have a short-term task that can help you move toward your long-term KPI.
3. Regularly review your KPIs with the team.
One risk of establishing only long-term KPIs is that once you and your team have agreed this is your target, everyone goes back to their separate own roles and responsibilities. If you’re not meeting regularly with your team to review your progress toward this KPI, you won’t know until it’s too late if you needed to course-correct and try new approaches.
This is why we suggest first breaking your KPIs into actionable, shorter-term metrics to track. It’s also why we recommend getting together regularly, monthly, or even weekly with your team to review where everyone stands with their contributions to the broader KPI. This way, if it’s clear the team is falling short of its more immediate goals, you will either need to adjust your expectations or change your tactics— or both, to achieve your KPI.
How Should Product Managers Choose KPIs?
Like any other department in an organization, a product team can choose from many possible KPIs to track and analyze. Our friends at UserVoice have some suggestions for how product managers should narrow the KPIs they track, focusing on those metrics that offer the most strategic value. These strategic metrics could be:
1. Identify the One Metric That Matters (OMTM).
Although you’re not limited to selecting one metric for your product team’s KPI, it’s a good idea to identify the one number that means more than any other to the success of your product and your business. This helps the team prioritize its limited resources and focus its energy to result in the greatest value.
2. Determine which metrics matter most to your stakeholders.
Take note that these might not be the numbers that tell you the most about the health and success of your products. You might not be particularly concerned about them at all, at least not now. But you need to build KPIs that help you make sure your team is working toward hitting the numbers that your executive team or investors will be looking at.
3. Keep your list of feature-based KPIs short and strategic.
The idea here is that if you’re going to base your product’s success or failure partly on how well specific features perform, then you should make sure you focus only on those features that will really move the needle; add new users, keep existing users, and increase positive word of mouth among your target market.
Are Key Performance Indicators Mission-Critical?
Key performance indicators (KPI) perform several strategically important functions for a team, department, or business. First, they help across the company so that everyone has a common understanding of what success will look like. And because people know what they are expected to contribute towards that success, KPIs encourage more ownership, focused work, and accountability.
Finally, the smaller, shorter-term KPIs can provide a team with both guideposts to let them know how they’re progressing toward the larger KPI and the ability to celebrate small victories along the way to reaching it.