“What gets measured gets managed.”
You've probably heard this quote before in entrepreneurial circles as it’s been repeated so many times it’s become almost cliche.
Now that technology has enabled us to track and measure pretty much every aspect of an online business, the idea remains true. The difficulty in having access to all this data, however, is that we constantly need to ask ourselves what exactly to focus on.
After all, when you see all these different metrics in your analytics dashboard it can be quite overwhelming to manage and gain actionable insight from the data.
That is why it’s so important to understand the difference between a metric and a key performance indicator (KPI).
What Is a Metric?
To put it simply, a metric is a category of quantifiable data.
In particular, a business metric is a category of quantifiable data that is relevant to the performance of a company.
A few examples of business metrics include:
However, since anything that can be measured can be considered a metric, this means that there are countless metrics that businesses keep track of, from website traffic, to conversion rates, to Facebook shares, the list goes on.
In theory, that sounds great. The more data, the better, right?
In practice, though, this overwhelming amount of data overload can often become a distraction.
It’s easy to get so caught up in trying to improve various metrics that you forget to ask yourself whether the changes will have any real effect add on to the your bottom line. After all, is getting more likes on social media really that important? Probably not.
That’s why you need to identify which metrics are key performance indicators so that you can prioritize them.
What is a KPI?
A KPI is a business metric that is directly relevant to a specific business goal.
For example, take a look at the these industry-standard KPIs below that Jesse Mawhinney shared in his HubSpot article “How to Choose the Right KPIs for Your Business”:
Professional Service KPIs:
- Revenue leakage
- Effective billable rate
- Monthly recurring revenue
- Cost per acquisition
- Average revenue per retainer
- Lifetime value
- Capital expenditure
- Customer satisfaction
- Sales per square foot
- Average customer spend
- Stock turnover
Online Media / Publishing KPIs:
- Unique visitors
- Page views
- Share ratio
- Social referral growth
- Time on site
As you can see, KPIs vary based on the business model and industry, although they all have a direct impact on a specific business objective.
What is the Difference Between a KPI and a Metric?
A business metric is a category of quantifiable data that is relevant to the organization’s standard business processes. One key difference between a KPI and a metric is that metrics don’t need to be tied directly to a strategic objective.
A KPI, on the other hand, is a performance metric that is directly related to business objectives. This could be revenue growth, user acquisition, and so on, but the key point is that the KPI is tied to a specific goal.
Everything that you track in your business is a metric, but only a few of these metrics are directly relevant to your main business goal, which makes them key performance indicators.
In other words, all KPIs are metrics, but not all metrics are KPIs.
How to Use KPIs in Your Business
Now that we’ve discussed the main difference between a metric and a KPI, you’re probably wondering how to identify which KPIs you should be using to grow your business.
Here is a three step process to help you identify which KPIs to use in your business:
Step 1: Pick One Business Goal for the Year
When people discuss KPIs, they usually talk about strategic objectives and business goals. Regardless of what the goal is, the first step is to have a clear understanding of exactly what you’re trying to achieve.
However, instead of simply creating a long list of all your business goals, consider setting one specific business goal for the year in order to provide more clarity and help you choose which KPIs to focus on.
For example, in his article “What I Learned Growing an 8-Figure Business”, the founder of AppSumo and Sumo, Noah Kagan, shares that in any given year the team has one clear goal.
Here are a few examples of their goals in recent years:
2014 - 1 billion visitors across Sumo
2015 - $1 million ARR (annual recurring revenue)
2016 - $5 million ARR
“I could ask anyone on the Sumo team — whether they work in marketing, support, customer success — and they know the goal,” explains Noah.
“Have one clear goal for your business and make it visible DAILY to EVERYONE on your team,” he advises.
What should that goal be? Of course, it depends on your situation, but here are a few helpful questions to ask yourself:
- Do you have a business that is already profitable? Set a revenue goal.
- Do you have a business that barely breaks even? Set a profitability goal.
- Do you have a venture-funded startup that you hope to turn into a unicorn ($1B valuation)? Set a user growth rate goal.
Also, keep in mind that while dreaming big is great, staying grounded in reality is also important, so make sure that your goal is something that you can realistically achieve in one year.
Step 2: Identify Which Metrics Have a Direct Impact on Your One Business Goal
Now that you have set your business goal for the year, it’s time to take a look at all the important metrics currently being tracked in the business.
All these metrics are at least somewhat relevant to the performance of the company, but the reality is that the majority of them are not directly related to your primary business objective. This means that while you still want to keep an eye on them, these metrics don’t necessarily qualify as key performance indicators.
In this step you need to ask yourself which metrics are the most valuable when it comes to evaluating the progress towards your overarching goal.
As you can imagine, the most important KPI is the same metric that you are using for your goal, since it is the clearest indicator of progress. For example, if you have set an annual revenue goal, the most valuable KPI will be daily, monthly, and quarterly revenue.
Also, the common advice online appears to be to pick 5-10 KPIs, although Noah Kagan advises just picking 3 KPIs to focus on. After all, do you really have 5-10 metrics that are key performance indicators? Probably not.
Step 3: Create a Schedule for Reviewing KPIs to Ensure That You’re Progressing Towards Your Business Goal
Once you have identified three KPIs to focus on, you need to make sure that you review them regularly.
In particular, it’s often best to review your KPIs in the following three intervals:
That way, if you are getting off track, you’ll be able to quickly identify it and take the appropriate measures to correct course.
How to Set KPIs for Your Employees
You can’t expect people to improve their performance if they don’t know what criteria is used to evaluate performance.
That’s why in addition to setting business-wide KPIs, you should also identify KPIs for each individual role within the company.
For example, if you run a digital marketing agency, you may start out as a one-man or a one-woman show, but you will inevitably need to hire people as your business grows. At this point, you need to identify what their KPIs will be.
Here are a few ideas of KPIs for common roles in an agency:
Writers: You can evaluate writers based on producing an agreed amount of content per week, meeting deadlines, and the overall feedback that clients give their work.
Marketers: Marketers can be evaluated based on the effectiveness of their campaigns - for example, the number of backlinks per month, new email subscribers per month, the percentage increase in monthly traffic, and so on.
Salespeople: You can evaluate a sales team by the number of daily cold emails or cold calls, weekly sales presentations, and the number of new clients they acquire each month.
Also, you may want to consider developing a standard operating procedure for what should be done when an employee fails to meet a KPI target.
This will allow you to identify the cause of the problem, and provide the necessary support for employees (i.e. mentorship, additional training, etc.).
Why You Should Never Use a Single KPI to Measure Performance
“When a measure becomes a target, it ceases to be a good measure”, goes the adage known as Goodhart’s law.
What this means is that when you give someone an incentive to prioritize a specific metric, they will inevitably optimize for that metric, although this can often lead to unintended consequences.
In the article “Unintended Consequences and Goodhart’s Law”, data scientist Will Koehrsen provides an example that we’re all familiar with:
“High school seemed like one long series of memorizing content for a test, then promptly forgetting it all so I could stuff my brain full of info for the next one, without any consideration of whether I really knew the concepts”.
The author points out that although this strategy worked quite well given the way success in high school was measured, it’s probably not the best approach if you want a great education.
This happens in the business world as well.
Anytime you use one metric to evaluate someone’s performance, this can lead to employee’s trying to game the metric, often to the detriment of the company’s main objective. It’s not that the employee is trying to do anything malicious, it’s simply how humans often respond to incentive structures.
Koehrsen gives an example of a call center manager implementing a policy where the employees are compensated solely based on the number of calls they make. It seems like a great idea...until they realized that the policy unintentionally incentivized employees to be rude to customers!
This provides a good example of why you shouldn’t use a single KPI to measure performance. Instead, as Noah Kagan suggests, set three KPIs for the organization and three KPIs for each role within it.
By providing a more balanced incentive structure to the organization, this often leads to individual behavior that’s more conducive to achieving your primary business objective.
As we’ve discussed, you can’t grow a business without first having clarity on your goals.
In addition to making it clear to everyone in the company to prioritize, by setting clear business goals you can then identify which data should be considered a metric and which should be considered a KPI.
In particular, in order to identify which metrics are KPIs we suggest the following 3 step process:
- Set a single, annual goal for your business
- Identify several KPIs that will help you stay on track to hit the goal
- Consistently review those KPIs on a weekly, monthly, and quarterly basis and make adjustments accordingly
This approach may sound overly simplistic, but as we’ve discussed one the main benefits of differentiating between metrics and KPIs is to take the overwhelming amount of data at your fingertips and turn it into actionable insights that keeps your business on track.