Setting KPIs in Your Business
Where do you begin when setting Key Performance Indicators (KPIs) in your business? What most business leaders do is look at what others are doing in their industry and copy this, or simply make them up based on what they think they should measure. And whilst this can be useful, it is not a very strategic approach and therefore it’s very easy to miss out tracking an important KPI or to track KPIs that aren’t actually helping you get to your goal. The adage goes “what gets measured gets managed” and this is true of setting KPIs.
Having a Clear Goal
One of the most important places to start with setting KPIs is looking at your goal, for example a Software As A Service (SAAS) business might have a goal to be acquired on a multiple of their monthly recurring revenue (MRR) or a goal to drive profitability instead of being acquired. These are two distinct approaches and would require tracking slightly different KPIs in order to get there.
Finding your North Star(s)
The next step in the process is to find the key lagging metric(s) that are important to the business, in our example above MRR could be the lagging metric. SAAS businesses are often bought on a multiple of MRR so driving this number up is an important part of achieving a high valuation on the business. The problem with this lagging metric though is that there is a delay between seeing the metric and identifying any potential issues.
The KPI Chart
The next step in the process is to identify the leading metrics that make up our North Star (or lagging metric). For example, MRR is underpinned by Average Monthly Recurring Revenue per client (AMRR) and No. of Subscriptions (NOs). Tracking these already allows us to respond sooner and identify how we can reach our MRR target.
It’s worth noting that the same metric might actually be calculated or termed differently in different businesses, for example, in a SAAS business we might be interested in Average Monthly Revenue, but other businesses might use Average Order Value (AOV) (which focuses on each order received, rather than a per month figure) or Average Revenue Per Account (ARPA) (which focuses on overall spend for each customer across a time period, which might include subscriptions, but also might include other income). Even within SAAS businesses, some will focus on AMRR, whilst others will look at Average Revenue Per Subscriber (ARPS).
Similarly, a SAAS business might use Number of Customers (NOC), rather than Number of Subscriptions (NOS). These numbers can be different if a customer has more than one subscription, makes a one-time purchase (e.g. for some training or custom software development) or if the SAAS business sells multiple products to the same customer. This means they tell slightly different stories.
The key here is that each business needs to look at the ultimate goal they are trying to achieve and set metrics that identify if they are on track towards this.
Delving Deeper
Things can get trickier after this, as these leading metrics (AMRR and NOS) can also be broken down into more leading metrics based on what influences them.
Average Monthly Recurring Revenue (AMRR)
This is influenced by:
- The current average price of a new subscription
- The current price of existing client subscriptions
- Upsell (upgrading usage)
- Cross-selling (selling other services)
Not every influencing factor can have a metric against it, but many can depending on what you want to track. So if you wanted to analyse cross-selling, you could look at this based on:
- The opportunity to cross sell - Number of available cross-sell opportunities
- The activity from an account manager - Number of contacts made with existing clients to cross-sell service X
- How many clients naturally buy additional services - Percent conversion from single to multiproduct
As you can see, there are lots of metrics that can be used depending on what you are trying to track.
Number of Subscriptions (NOS)
This is influenced by:
- Retention of existing clients
- Acquisition of new clients
But we could take this another step further again, looking at the leading metrics for these. So, you can analyse whether you are likely to have good retention looking forward by reviewing:
- Likelihood to refer
- Number of complaints
- Number of bug fixes in the software compared with bugs
- Number of new features released
- Relevance of new features
- Customer perception of brand
You get the point! This could go on and on across all areas of the business. Some of the metrics won't be critical, whilst others will. Some you’ll want to track long term because they are the foundation of whether your business will be a success, whilst other metrics you’ll track for a period of time while there is an issue, then once the issue is solved (hopefully permanently) you’ll stop tracking the metrics.
Putting it All Together
One of the easiest ways to work out appropriate metrics is to design a KPI chart. This is just a visual representation of what KPIs underpin your North Star Metric. You may have multiple KPI charts if you have multiple North Star Metrics, but you should never have more than three.
If you would like to learn more about anything you have read in this blog, or if you would like help setting KPI's for your business, please contact us today.
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