Key Performance Indicators, or KPIs, are essential to an effective business. The biggest reason? Clarity. Most business owners’ primary goal is to generate revenue and turn a profit. However, beyond this, business owners and managers sometimes lack clarity in their goals. How are their goals of revenue generation achieved? Why do customers come to their brand instead of their competitors? What are employees doing that customers like? What actions should their companies take that will make them successful?
Beyond the need to drive revenue, owners and managers need to know why they succeed or fail, and this explanation is the central function of a KPI – to say that if they succeed in a certain action/behavior/statistic/result, their business will do well.
Because they’re so important, developing and identifying KPIs can feel like a daunting task, but a top-down approach makes the process seem manageable. Consider organizing your approach this way:
There’s no single way to identify and organize KPIs. However, for business owners looking to establish KPIs for the first time, taking a broad-to-narrow approach is convenient because it helps them move from obvious performance considerations to less-obvious metrics they might need to conduct more research on:
Financial metrics are usually the most obvious place to start. Total profit is the ultimate KPI, which can be broken out into revenue versus expenditure. There is a whole world of “behind-the-scenes” expenditure metrics, but for enhancing customer relationships, focusing on revenue metrics and how to enhance those revenue streams are most useful. Understanding total revenue, revenue broken out by product or service and other considerations like acquisition cost help to establish bottom-line KPIs and performance indicators.
Breaking revenue out into different revenue streams is worthwhile to remind business owners and managers of their core services, versus those that are peripheral. Most businesses have their core service(s) they provide, but then have other aspirational products or services they want to push. Sometimes, these aspirational products/services aren’t aligned with how their customers think of them, and seeing a revenue breakout is helpful for businesses to see themselves from a more neutral perspective.
Individual revenue streams also open a world of questions about consumers. Primarily, the question, “Why do our customers buy X product from us?” is important. When a business understands this, they understand the problem they solve for customers and their blueprint for success with future customers.
Understanding the motivations and customer behaviors that lead to a purchase helps managers convert opportunities into sales. Information such as customer satisfaction fuels important KPIs such as customer loyalty index. Businesses also need to understand the qualitative and quantitative characteristics/behaviors that lead to purchases so that they know when to promote a product or service to a customer. Understanding motivations, like why customers choose a company over their competitors, helps that business understand what aspects of their business are most valuable and most essential to success.
Once a customer or potential customer is well-understood, identifying actions a business should take to cater to that customer represents another level of KPIs. Pretend a company, which has a gaming console product, focuses on promoting to men ages 15-30. How much ad traffic are they generating online? How many of those that click on the ad download the promotional offer? How many new people in this demographic subscribe to their YouTube channel each month? Any of these could serve as a KPI for new customer acquisition. The actions a business takes, based on the customers they have and want, should show that the company is exploiting a major opportunity to increase revenue. Actions the company takes should motivate target audiences to see the value in their product and service, and move to action (purchase).
Finally, the way in which actions are performed, often through specific employee actions or behaviors, should support the action metrics above. Managers should consider when their employees present an offer to a customer, how they describe benefits to customers and where in the path to purchase the customer is when certain actions are taken. Additionally, soft skills regarding customer interaction are important in this type of KPI, and training the right behaviors can lead to major achievements for a company.
Despite being furthest down the line of action, these specific approach metrics affect the major goal of revenue generation and overall profit. The way the employee/company approaches customer interaction supports the action metrics, like sales conversion, they try to achieve. Similarly, converting sales and the actions they take are based on what they know about their customers, and what their needs are. Those factors combine to support the most important goals of revenue generation and company profit. Analysis for KPIs starts at the top, and once various KPIs are identified and measured through these different categories, a business can truly understand how well it is performing and drive a comprehensive customer experience that impacts the business’s bottom line.