How to create meaningful KPIs

Data can help you identify and set realistic business goals and develop plans to achieve them. Like many small and medium-sized businesses, your company is probably sitting on a treasure trove of valuable data, but you don’t know how to leverage it. You’re not alone, but sitting on data is like sitting on dollars. Leveraging data can help you increase efficiencies, better understand your customers and pinpoint the best tactics to solve everyday business challenges.

To best utilize your data, the first thing you need to do is to define what success looks like in the context of your business and the specific strengths, weaknesses, opportunities and threats you’re facing at this time. What do you need to accomplish? In other words, you must define and track your key performance indicators (KPIs). Studying your current data can help you create KPIs that are both actionable and attainable.

Formation of KPIs is often done poorly, unfortunately, and that sets your analytics efforts up to fail. Many people turn to statements like, “I want to increase profits,” or “I want to double my market share.” Naturally, these qualify as success, and you’d like to accomplish them, but they are not good, meaningful KPIs. Be specific. One of the most common mistakes in defining a KPI is ambiguity about what success is and how it will be measured.

Meaningful KPIs have these three characteristics:

1. Direction: Up or down?

2. Magnitude: By how much?

3. Time frame: Over what time period?

If your KPIs are missing any one of these elements, you won’t have a clear sense of how to measure them. Let’s take one of those same ambiguous KPIs again and add these characteristics: “I want to increase sales by 5% over the next six months.” The KPI is now measurable, manageable and achievable. “I want to decrease manufacturing costs by 10% in the third quarter.” This is a meaningful KPI.

“When you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.” Lord Kelvin, a 19th-century mathematician, said this in 1883, and it couldn’t be more true today. Creating and tracking meaningful, measurable KPIs can give you insights that can transform your business, but you’re still not done.

Properly structured KPIs tell you what and when to measure.  However, we’re still missing the how to measure. This is where the proper experimental design is needed, and this can only be accomplished when you stop sitting on data and start using it.

Now, we’ve introduced a construct that is related to KPIs but separate and distinct in its own right: experimental design. Simply put, experimental design is about attribution and proving that the execution of a given tactic is responsible for an observed result. (A deeper dive warrants a separate article for this important topic.)

For now, remember that for your KPIs to be meaningful. They need to measure direction and magnitude and have a specified time frame. What gets measured gets managed, so let’s make sure our measurements are accurate and help us achieve our goals.