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How to define your KPIs in 3 steps

The definition of KPI (Key Performance Indicator) is: a metric chosen by you (Performance) that is relevant (Key) for your success (Indicator).

That means you shouldn’t just copy a KPI from someone else. It is a metric that already exists in any other situation, but you elected as important for your situation.

Seems complicated? Just imagine a number (or more than one) that will help you and other people to answer an important question for your business, product, or anything in life.

Think of a car cockpit. You basically see the actual speed, motor rotation and if there is fuel/energy. These are the “KPIs”, the relevant indicators for when you are driving. Any other information should be consulted while you are not driving.

To exercise, let’s take a look in each step with these 3 personas:

Going to the point, the steps are:

Hint: sometimes the test (step 3) will show you the numbers you choose (in step 2) must be redefined. In that case, remake the step 2 how many times as necessary.

Without objective there is no KPI.

Expand your business? Increase your sales? Be more profitable? Want to gain or lose weight?

This is the first and most important question you’ll set.

Which numbers could help you to seek your goal previosly set? How much do you know about your business, life or product? How much do you measure it?

A lot of indicators are important to be known. But watch out: only a few are REALLY relevant to be tracked. The more you track, the more pollution you may have.

Always remember:

His success here is to be lighter, to lose weight. Even if he doesn’t have a target number for his goal, he could measure the performance comparing his weight periodically. And also, to don’t lose the track of a good shape, how distribuited his weight is in his body.

For comparing his weight: easy: determine a period (day, week, month, …) and mesure the weight through the periods. Let’s say that he wants to know how successed he is weekly. Just compare his weight to the previous week: ([weight in week 2]/[weight in week 1]-1)*100 = rate of weight loss over week.

For how distribuited his weight is in his body: just capturing the % of body fat. Tracking this with the weight loss may show him that sometimes he will lose weight, not losing fat, but losing muscles.

Maria may not know, but for her objective, she is looking for vacancy and ticket $$. A view mixing her business revenue and number of customers may be a good starter guide.

For vacancy: is her restaurant working at maximum capacity? How does she know how “saturated” for customers it is? Start simple: get the number of people her restaurant can serve in a period (e.g. [monthly number of people served] / [monthly maximum capacity of the restaurant]. Voila: she now has a vancacy rate ;)

For ticket: how much is her restaurant selling? An easy metric is the average ticket. Simply sum up all revenue and divide by the customers in the period.

In that case, she is looking for two things: growth and use. Discover how many people have her product and how many of them are actually using it (maybe how many did the first purchase or how many use it monthy) may be enough.

For growth: once she knows how many total users her product has, she may look after an indicator that show her how much it is growing. Something like rate of growth over month could help her in this stage of the product.

For use: after knowing the total number of customers, she can easily calculate how many of them use it monthly. Simply divide the number of customers that buy at least once monthly by the total number of customers that have credit card.

The easiest, but longer part. Once you brang your numbers up, just try to imagine at least 3 scenarios for them. I like to test with 2 extreme scenarios: extremely bad and extremely good; and a “if everything go as planned” one. This simple exercise will show us how good or bad the numbers we chose in the step 2 are to mesure your objectives.

It will be like the number are whispering in your ears if you are are not going to achieve your goal.

Hint: Always force the numbers to be bad or good, not the scenario. The KPI will only pass the test if a bad number reflect to a bad scenario (or good number reflect a good scenario).

Let’s try it with our personas:

Test passed: pressing down only the rate of weight loss is really helping Joel to see if he is achieving his goal. In this case, he is rapidly gaining weight (not good for the goal) but without changing his shape (his body fate rate remained stable).

Test passed: forcing the body fat indicator with good numbers is leading Joel to good results. Here he is losing weight and getting extraordinary in shape.

Test passed: setting the indicators with regular numbers for weight loss and body fat reflected in achieving his goal as planned.

Test passed: In 4 months the average ticket stayed stable, but the vacancy dropped to it’s half! The indicator is clearly showing that her objective of boost the revenue is becoming impossible. Maybe it’s time to spend again in marketing.

Test passed: Good number reflecting in a good business situation. The revenue is skyrocketing! Perhaps her public is changing and she has the opportunity sell things with more value, like gourmet food or organic.

Test passed: These KPIs are indicating two things: her restaurant really has a good flow of customers, so she can sell for more customers to raise the revenue, the only way is to sell more for the same people; and her strategy in this scenario is working well for her objective as the average ticket is growing.

Test passed: Forcing down the indicator in this case showed Wang that her objective of reaching more people won’t be accomplished. Besides the rate of monthly buyers are healthy, she couldn’ expand her base. Something must be done here.

Test passed: The indicators are showing her that something odd is happening here. Is it normal that the buyers are growing so much at a stable rate of growth over month? Must be investigated.

Test passed: These KPIs are indicating that her product is expanding healthly and her customers are still using it monthly in the same proportion.

In a few words:

Hope it help you! Please, ask any question or comment this post ;)

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