What is a KPI?

When I talk to brands about KPI's, the most common response is "What's that?"

Then they think for a moment and usually come up with the right words for the acronym

That's hardly a full understanding, so I'm sharing this piece to help.

What is a Key Performance Indicator / KPI?

One of the most misunderstood and misinterpreted terms in marketing analytics and business measurement is the key performance indicator, or KPI. What is a key performance indicator? How do we know which metrics we measure are KPIs and which aren’t?

Suppose we’re on a road trip, driving from Boston to San Francisco in seven days. Our goal is a binary outcome: we did or didn’t arrive in San Francisco in 7 days. We achieved our goal, or we didn’t.

The KPIs of our trip are the most important metrics which tell us how our trip is going, and whether or not we’ll arrive at our destination successfully.

For example, on a road trip, what would be some KPIs which indicate whether or not we’ll arrive successfully?

  • How much money do we have left in our trip budget? If we run out of money, our trip is over.
  • How much gas does our car have? If we run out of gas, our trip is over.
  • How fast are we going? If our velocity stays at zero, our trip is over.
  • How many days are left in our trip? If we use up all our days stopping at every little tourist trap, our trip will end before we make it to San Francisco.

The common element among these KPIs is that they measure something so critical, our trip will end if those numbers hit zero.

We define a KPI as: If this number hits zero, you go out of business or get fired. (or at least suffer significant consequences)

KPIs are unique to organizations. Consider website traffic. Is website traffic a KPI? It depends on the business. If we’re Amazon.com and web traffic drops to zero, we go out of business. If we’re the local pizza parlor and our web traffic drops to zero, we may see a business impact but we’re unlikely to go out of business entirely.

KPIs are also contextual to the person. One person’s KPI is another’s diagnostic metric, and yet another person’s irrelevant data point. For example, an entry-level employee’s KPIs are likely to be “work done on time and with high quality”. Meanwhile, the CEO’s KPIs will probably look like net revenue or overall customer retention. While the entry-level employee’s KPIs do feed up to the CEO’s KPIs, they’re so far apart in large organizations that they don’t care about each other’s KPIs.

The most dangerous trap a company can fall into with regard to key performance indicators is to have non-impactful KPIs, to believe something is critical when in fact it’s not critical, or worse, to believe something is non-critical when in fact the life of the company depends on it. We must take the time and devote the effort to identifying what’s really important to our company, our department, and ourselves or else we’ll measure the wrong things and then watch as our performance tanks.

Remember, at the end of the day, key performance indicators are the ones that, if they drop to zero, we’re going out of business. Keep that in mind to help clear the air of confusion and distraction and we’ll focus on the most important work.

This first appeared on http://www.christopherspenn.com/2017/05/what-is-a-key-performance-indicator-kpi/

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