KPIs became widely known to business managers in the ’90s when Norton and Kaplan launched the Balanced Scorecard, a management system aimed at translating a company’s objectives into a set of indicators. Key Performance Indicators (KPIs), sometimes just called metrics, have since then been applied to a growing number of organizations, not least by startups thanks to their flexibility and ease of implementation.
The interpretation differs depending on who you’re asking, but in general, KPIs are said to show you how you are doing on a particular activity to achieve a given level of outcome. It is also generally considered that metrics can be financial or non-financial and lag or lead:
- Lagging indicators measure what has already happened, for example, your company’s revenue for June 2018.
- Leading indicators say something about the future of the business, like for example a Net Promoter Score.
But why should anyone care about measuring performance, isn’t it better to just focus on executing the performance? Isn’t analyzing metrics a waste of energy and time when you would rather work on your app’s UX?
Good old Lord Kelvin covered this subject already in 1883:
“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind”
This is also true for startups.
You have probably sometime in your life during a management course heard about any version of the Management Loop. It might have been called the management process or project workflow. I like to call it the Management Loop formed by the three activities of Plan — Action — Measure. In Eric Ries’ book “The Lean Startup” focusing on product development, it’s called the feedback loop and consists of Build — Measure — Learn. As you can see, measuring is a highly important part of the Management Loop, which is where your KPIs come in.
Startups tend to be eager to plan, by doing their market research and create high-set goals, and take action, by building and executing. But what differs the good startups from the great startups is that they are continuously measuring their results and ultimately adjusting the plan to improve the action. Without measuring the results of the action, failures and causes to poor performance might not be identified, and you will, therefore, keep on making the same mistakes over and over again. When you measure your results, you can learn and improve to better plan and execute your business.
Another important reason to implement KPIs to your startup is the sometimes overseen effect that they have on the team’s behaviour. KPIs are fantastic in that way that when used correctly you can turn founders’ and investors’ strategic goals into motivation and guidance to the entire team. But, it is important that when not taking the behavioural effect into account, and the implementation of KPIs can hit very wrong.
A typical example might be the marketing team. When measuring the performance of the team only on the number of new users, the risk is that they will start to acquire users but at any price and any type of user. You might end up with an expensive customer acquisition cost and quickly churning users. This won’t lead to a healthy base of users to build growth. Instead, a typical marketing team should pair multiple metrics to accurately indicate what the expectations of the team are in accordance with the strategic goals. For example, you can add customer acquisition cost, retention, and lifetime value of users to the mix of marketing metrics.
On top of this, well-implemented KPIs also change the culture of the company and make your co-workers more autonomous. When a startup is appreciating a data-driven culture instead of an opinion driven, where objectivity and hard facts are premiered over subjective ideas, the need for managers to closely manage employees disappears. A startup that bases its decisions on numbers doesn’t need managers’ authority, to actively take everyday decisions. This allows a company to implement a flat and efficient organization, and that would any company benefit from it.
Using metrics in a startup can also help you to avoid bias. People tend to share their hypotheses and believe that those are facts when they don’t know. What is fantastic in today’s technologically intense world is that you can let your clients decide for you. With digital solutions, for example with AB-testing, each action made by a user can be studied and be a basis for decisions. With their actions, your customers tell you what they want. When testing your hypotheses with a user group and then improving the product based on the results, you will organically tweak your customer offer into something that is demanded.
The number one reason why startups fail, according to a summary of their founders’ post-mortem essays, is “no market need.” What if these startups had a market that needed the product? It was just that it was not in the right form to meet the customer demands? By studying your customers’ action with the help of several metrics, and then changing your product accordingly, your product will step by step take the form of what customers need or prefer.
A brilliant example is Airbnb that at the beginning of their entrepreneurial adventure discovered that listings with photos taken by professional photographers performed 2,5 times better in terms of bookings. This made the founders invest in building a fleet of professional photographers and was one of the important cornerstones in building up the trust between guests and hosts to allow for fast growth. Without analyzing the performance of different listings to track certain characteristics, Airbnb might not have been where they are today as US’s second most valued Unicorn.
Hopefully, this article has made you curious to know more about KPIs. If you want to learn more about how to find your KPIs check out the article “How to Get Started with Metrics in 5 Steps”