KPI stands for Key Performance Indicator.
What is a Key Performance Indicator?
Key performance indicators, or KPIs, are quantitative metrics organizations use to track and analyze performance or progress toward business objectives.
Organizations typically 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 are another common KPI, including the growth rate of new users. Operational measures may also get tracked, for instance, including supply-chain metrics such as time to delivery.
KPIs help a business understand its performance in the most critical areas to its success.
What Are Some Examples of Metrics Used as Key Performance Indicators?
Any metric could be a KPI, but the metrics typically selected measure aspects of the business that matter right now and in the immediate future. KPIs usually change over time as the business matures and the strategic goals evolve.
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)
Product-specific metrics used as KPIs can look at how engaged users are with the product, such as daily or monthly active users, session duration, and actions per session. You can also track product quality KPIs, including customer service inquiries, bug reports, and uptime.
What Parameters Constitute a Good KPI?
Thanks to a proliferation of analytics tools and instrumentation, organizations can track almost anything related to their business. If you want to know how many seconds users spend on a page or how often sales reps dial for dollars and get a wrong number, or how many lines of code the development team writes each sprint, you can find out pretty darn quick. But is that information helpful?
It begins by determining if you’ll do anything differently based on what these metrics tell you. Does it matter how long your audience spends on a page as long as they eventually click something? Will you change your lead vetting process if wrong numbers exceed a certain threshold? Will you fire or promote a developer based on their volume of coding?
In the cases above, those are valid data points that you may utilize. However, they’re not particularly actionable, nor do they impact any of the business’s actual goals or objectives. Instead, legitimate KPI candidates directly link with those desired outcomes.
The ideal KPIs have several key characteristics:
- They align with the strategy—KPIs are tracked closely and communicated often. If what’s measured doesn’t closely relate to the strategic imperatives dictating everyone’s actions, then it shouldn’t be taking anyone’s attention away from metrics that do.
- There’s action underway to improve them—If the organization hasn’t prioritized any projects or initiatives that will directly or indirectly impact a metric, it’s not important enough to keep on the list.
- They measure something that changes—If a KPI merely ensures the status quo remains, it’s likely not that significant to warrant KPI-level focus. It also could reward inaction, or a lack of progress, which is not the message management wants to send.
- Those changes impact the business—Moving the needle on a KPI should be meaningful. If you can’t correlate the trajectory of a metric with the company reaching a goal or advancing its strategy, then it doesn’t belong in that category.
Ultimately, every good KPI links back to growth, revenue, profitability, cost savings, or customer satisfaction. If it’s not helping with at least one of those areas, it probably doesn’t matter enough to cut.
3 Steps to Set-Up and Track Key Performance Indicators
The specific quantitative metrics will vary for every business. However, there are some universal strategies for establishing and making the most of your KPIs.
1. Align each 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 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 decreasing the number of resources needed to support the development over time, freeing up hours for future product projects and initiatives.
The point is, you don’t want KPIs just for the sake of having something to monitor and report to the product team. Instead, those metrics should serve a larger strategic purpose for your company, giving you essential business intelligence to help 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 an extensive collection of related, actionable tasks. Allen instead suggests that you must first break it up into clear, actionable steps when tackling a project.
The same goes for developing KPIs. You don’t want to set one single, significant objective, such as increasing free-trial downloads by 10% in the third fiscal quarter. That can be your broad objective. But you also want interim steps and goals enabling you and your team to make progress toward that ultimate destination.
Setting 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 is one interim step. Now you have a short-term task that helps move toward your long-term KPI.
3. Regularly review KPIs with the team
One risk of establishing only long-term KPIs is that once you and your team agree on the target, everyone goes back to their separate roles and responsibilities. If you’re not meeting regularly with your team and reviewing progress toward this KPI, you won’t know until it’s too late if you need to course-correct and try new approaches.
Instead, first break your KPIs into actionable, shorter-term metrics to track. Then get 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 can adjust your expectations or change your tactics—or both—to achieve your KPI.
How Should Product Managers Choose KPIs?
Like any other department, product teams can choose from many possible KPIs to track and analyze. Our friends at UserVoice have suggestions for how product managers should narrow the KPIs they track, focusing on those metrics offering 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, identify the one number that means more than any other to the success of your product and your business. Identifying one number helps the team prioritize its limited resources and focus its energy on what nets the most significant value.
2. Determine which metrics matter most to your stakeholders
These might not be the numbers telling you the most about the health and success of your products. You might not be particularly concerned about them at all for the time being. But you still must build KPIs that ensure your team is working toward hitting the numbers your executive team or investors targeted.
3. Keep your list of feature-based KPIs short and strategic
If you’re basing your product’s success or failure partly on how well specific features perform, make sure you focus only on elements that move the needle. Concentrate on adding new users, keeping existing ones, and increasing positive word of mouth among your target market.
Are Key Performance Indicators Mission-Critical?
KPIs perform several strategically essential functions for a team, department, or business. First, they create alignment across the company by giving everyone a shared understanding of success. And because people know what they must contribute towards that success, KPIs encourage more ownership, focused work, and accountability.
Additionally, smaller, shorter-term KPIs provide teams with guideposts to track their progress toward the larger KPI. They also offer opportunities to celebrate small victories along the way to reaching it, boosting morale on longer duration initiatives.