What is a KPI? Definitions, Tips and Examples for Startups
A Key Performance Indicator (KPI) is a quantifiable measure of success. With a single agreed definition. Made visible across the organization. And used by business leaders to align the activities of individuals and business units. Working towards the achievement of strategic goals. There are many things that are measured in a business. However, not all are KPIs.
KPIs vs. Metrics – what’s the difference?
Let’s drill into key performance indicators (KPIs) further. in order to understand the difference between KPI and other metrics.
Strategic goals: each KPI is the highest level performance measure for a business (or business unit). Furthermore, it must relate to the most important goals
Single agreed definition: while businesses are free to define their own KPIs in their own way, they must be universally understood across the whole business, with a consistent definition
Alignment: if measures and metrics do not create alignment, and inspire action towards the common goals, they are not a KPI
Visible: visibility creates accountability. So, KPIs must be the most visible measures in an organization
Common mistakes with KPIs at startups and growth-stage companies
Startup founders and executives often find the concept of KPIs exciting but fail to implement effective ones for the following reasons:
Using someone else’s KPIs – there are some popular KPIs in each industry and there’s nothing wrong with using them, but they aren’t written for your specific goals. Use or create KPIs only after considering your own business’s strategic objectives. To that end, there are no shortcuts here.
Definition struggles – a KPI concept might be easy to understand but when it comes down to the nitty gritty, it’s often difficult to decide ‘what to include’ and ‘from what time period’. Certainly, experience is imperative here.
Data problems – KPIs must stem from real data from financial systems, CRM, and other business applications. As a result, it’s common for startups to have poor data quality or lack the specific type of data they need.
Visibility and accountability – despite good intentions, KPIs are sometimes abandoned or reviewed infrequently because of the data analysis effort required to populate them on a regular basis. Worse still, leaders sometimes fail to adequately share the KPI and hold their teams accountable to progress on a regular basis.
Too many KPIs – humans can only focus on a few things at a time. If there are 20 KPIs, you can be sure that the most important ones will be lost.
Failure to refresh KPIs – as business conditions change, businesses should update their KPIs immediately following any strategic planning process. This is often forgotten.
KPI definition process
The process of defining KPI always starts with the high-level business goals set by the executive team. For each business goal, the team should ask “how can we quantify this goal?” and “how will we measure progress towards this goal?”. The team should aim to define at most two KPI for each goal, and assign responsibility for each. Those responsible then examine data sources and propose (1) a definition, (2) additional data required, and (3) a procedure for data analysis and reporting. Once you agree on definitions and data, you can produce the first KPI reports and dashboards, and circulate them amongst the wider team for feedback. It is important to ensure the participation and buy-in from the stakeholders for each KPI.
Who is responsible for setting and tracking KPIs
For each KPI, one person should be accountable for performance. Then another person for measurement of performance. Often the CFO is in charge of measuring performance across all KPIs as CFO are highly trained in goal setting, data analysis and reporting. In companies without a CFO, a fractional CFO is usually hired to fulfill this function. Self-reporting should be discouraged.
Customer service: average customer satisfaction score
HR: Employee satisfaction ratings
Operations: production efficiency, inventory turnover
The best KPIs for SaaS startups
The SaaS industry is one of the most standardized when it comes to KPIs. The most commonly used KPIs are as follows:
CAC/LTV: the ratio of client acquisition cost to the lifetime value of a customer. This should be somewhere between 3 and 5. A lower number could indicate you’re not getting enough value out of each customer you sign up. A higher number could mean that you’re under investing in marketing and that more marketing spend could equate to higher growth.
Signups or Logos: the number of users signed up or number of companies signed up
User engagement: the extent to which users engage in using the product
NPS or Virality: the extent to which users are willing to share their experience with the product
How to track KPIs
To adequately track progress, you should update your KPIs on a regular basis. Sometimes weekly but at least monthly. To the extent possible, use automations and integrations to gather the data required to track KPIs and measure progress. This reduces the workload involved in reporting and decreases the chance of error. Take care to validate the quality of the data on a regular basis as part of compiling the KPI reports. Cloud-based systems (e.g. Quickbooks Online, Hubspot) can commonly integrate with lightweight reporting packages to simplify report creation. Ask an expert for help with this.
KPI reports and dashboards
To ensure visibility and good discussion around KPIs, it’s important to not bury analyses in spreadsheets. Dashboards are a great way to ensure visibility across the organization. Effective dashboard design means the viewer can easily see performance at a glance. As well as always being ‘live’. But dashboards don’t work if nobody looks at them. Ensure your dashboards are put on a TV screen in a common area or reviewed on every team meeting. KPI reports can also be useful, usually repeating the same information on the dashboard, but shared via email automatically. KPI reports often add a historical record of progress.
Getting help with your KPIs
Entreflow provides consulting around Goal Setting, KPI definition, and regular KPI reporting and dashboards as part of our fractional CFO service. Please contact us to discuss your KPI ideas.
Author: Helina Patience, Founder, CPA, CMA, BA (Hons), BEd
Helina is a CPA, CMA with over fifteen years of experience in finance & HR within multinational companies, across many industries. Also the CEO of entreflow consulting group where I help small to medium-sized businesses get organized, grow, and crush their goals. I hold vast global experience after living and working in Australia, India, the UK and Ireland. Connect on LinkedIn.
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