Tracking business success is difficult. And most people make the mistake of measuring what has already happened instead of the influences to those results. Setting personal, departmental or corporate goals is fundamental to most people, but measuring how we perform against those values is not enough. Measuring high level results such as revenue or number of customers rather than the Events that Cause those results is a mistake. It doesn't provide you with answers of how you got there and what should be done next. Instead, we need to evaluate the activities we perform that drive the results. Certainly, we can conclude that if Revenue increased to meet our goal, we succeeded, but we don't know what we did that caused it.
It's much more effective to measure the actions your customers or prospects take than the end result. These include conversions of web site visitors to paying customers and how well we are doing to influence that conversion.
I'm not saying we should forget about things like number of new customers acquired in the last month, or the number of items sold, but those are the Effects of the activities we had. If you want to influence change, you need to be measuring the Cause.
Understanding what to measure begins by appreciating the logical structure of decision making. It starts by appreciating the concepts and inter-relationship of goals, strategies, critical success factors, tactics and KPIs (key performance indicators). The important thing to note is that the subordinate activity is driven by the one above.
7 Steps to Establish Effective KPIs
Goal > CSF > Phase > Segment > Approach > Action > KPI
These seven elements are fundamental when establishing what to measure and how to track it, and they are all connected. Here are the definitions and relationships:
Map out actionable KPIs by moving through this step-by-step process:
1. Establish a Goal
Broad desired outcome. It states “what” we want to accomplish but not “how.” It states where you are going rather than how you will get there.
2. Critical Success Factor
This is something that is vital to achieve the Goal.
Stage or state we are addressing. For Marketing, it’s one of 4 phases (Engage, Acquisition, Conversion, Retention).
Targeted audience or function being focused on. For Marketing, it can be based on new or existing customers, age, gender, location, etc.
Short-term plan. Approach is what you do, and for every critical success factor, there may be a number of approaches.
Activity or business process required to be performed to attain stated goal.
6. KPI tracks the Action
Don’t use measures, but instead create actionable calculations; Ratio, Average, Rate, Percentage.
It is most effective to measure events represented as KPIs. If we are able to achieve the KPIs, each successive stage will also likely be attained and ultimately we will meet our stated goal.
Illustration of 7 Steps to Establish KPIs
Example of establishing a KPI using the 7 Step method:
Goal: Make our new patio furniture set a category leader in sales revenue by year-end.
Critical success factor: Increase store traffic
Segment: Active, middle-aged women
Approach: Promotion at local sports club
Activity: Advertise store coupon in sports club’s monthly magazine
KPI: Track coupons being used as % of those from other promotions
KPIs are the building blocks of all activities and are the easiest to measure. Ideally, they should be stated as calculated metrics, such as ratios, averages, percentages or rates, and should be compared over time. That way we can see how our activities are changing and what effect that has on our overall goals.