To know whether your business is headed in the right direction or not, having KPIs is essential. But knowing what to measure can be difficult. In this video, I'll share 5 KPI best practices that you can use in order to make sure that you are tracking the right metrics and taking your business in the right direction.
What is a KPI? A KPI stands for key performance indicators. These are key metrics. These are data points that are essential to the business. They help us determine whether or not we're headed in the right direction. That's what a KPI is for. It's like a compass for a business, and if we want to know that we're going in the right direction, we have to have measurements. We have to be able to track this stuff in order to know if what we're doing is working or not. Otherwise, we're going into things blindly.
Another thing to understand is KPIs are not universal. What may be a key performance indicator for one business may matter very little to another, and a lot of times, I've made thi mistake. We're trying to find the best way to move forward. We're trying to find the best way to do something, and so we Google, we search it, and we look. What are the top KPIs for marketing agencies? The top KPIs for a restaurant? The top KPIs for software company? They kind of give us ideas, but just because it's a key performance indicator for one business doesn't necessarily mean it's going to work that way for you. You need to be able to define KPIs that are specific for your business and that are really catered to what you're trying to achieve overall.
So let's get into five of those best practices, and number one is choose KPIs that are aligned with your business objective. This means knowing where you want to go first. You have to understand where you're headed, otherwise you're not going to be able to align KPIs into that direction. So here's some tips for aligning your KPIs. You want to select KPIs for different levels of management. Now, not all businesses may have this, but again, executives are interested in different things than a day-to-day manager is really looking for, so you've got to understand who these KPIs are for, making sure that you select the right ones for the different level management, and they also need to conform both top-down, the executives down, and also bottom-up, so the people doing the work day in and day out, to know if they're headed in the right direction. It's extremely important that you look at both sides of the coin here. Again, like I said before, you want to avoid cookie cutter KPIs. Don't measure something just because somebody else is. If it's not key to your business, you should not be focusing on it. Make sure you only focus on the things that drive value and that are aligned and attached to the overall success or failure of your company.
So number two is make sure your KPIs are attainable. We live in a world where we see people who are overnight successes, and I'm doing air quotes right now when I say that, because the reality is most of these overnight successes, you've heard this line probably before, took years and years and years and years to gain their status.
What happens is we see these big companies and they do these moon shots or they do these hard-reaching KPIs where they're going out there and doing what we call a stretch goal. Well, stretch goals are great because they do stretch us, but stretch goals should not be part of your KPIs. Key performance indicators, again, they're associated to business goals, so these are the things you want to make sure you can achieve, and make sure that your business is headed in the right direction and making sure that, you're going to have some momentum, because when you put these goals out here and let's say they're not attainable and you keep failing, that really stinks, and that drives down morale and the people on your team are frustrated and you get frustrated, and it drives you off course, but if you're KPIs are attainable and you're able to hit them, and again, you shouldn't make them super weak, but when you can hit them, it's going to start to build some momentum for your business.
Some questions to ask when developing these KPIs are what data points do we need to measure? Where are you going to get this information so you know that it's attainable? What technologies and processes do we need to implement to access them on a regular basis? Because you want to be able to see them. You want to be able to know if you're headed in the right direction. What technologies and process do we need to surface KPIs to relevant stakeholders? Does the executive suite need a dashboard or some sort of reporting tool that's going to allow them to see if we're hitting those KPIs, and how much will this cost and where are the potential returns?
Again, your KPIs have to be attached to your business goals. They need to be achievable, and they need to provide some ROI in that. They need to be able to help make sure that the business is going in the right direction and that there's a return on your investment in time and energy.
Number three, make sure you have accurate KPIs. You don't want to pull things out of thin air. You don't want to make up numbers. You also want to make sure you have clean data so that you know that you're headed in the right direction. Again, some questions to ask here. Do KPIs include all relevant information? Let's say you're looking at your customer lifetime value. You may have some customer information in your marketing tools, and maybe some in your CRM and your sales tools. You may have some in old Excel formatted files, and in order to understand, you're going to need access to all three sources of information. Without that, your KPIs are going to be incorrect, if you're only reporting off of one tool or one database when in reality your customer information is spread out across many different sources.
Again, how accurate is the KPI in reflecting your business performance? If you're not pulling from the right sources, if you don't have all the information, then they're not necessarily going to be reflecting the true performance of your business, and they're not going to help you predict or forecast forward. A lot of times we get into a tool that has a great reporting element to it, and that doesn't mean the tool is wrong. That tool is giving you some really good reports and dashboards based on its own setup. Hubspot has great dashboarding tools, but let's say you're not using your CRM. Maybe you're using Salesforce. Unless you sync both of those data sources together, and you begin to aggregate your customer data and your sales data across both platforms, you're not going to see the full picture. It's not going to reflect the truth, so to speak, of what the business is going after.
So these are important questions to ask when you're looking at the accuracy of your data. It can seem overwhelming, especially for a lot of businesses who are still running off spreadsheets and things of that nature, but even if you're doing spreadsheets, you may have more than one. You need to have some sort of master spreadsheet where you're pulling in all the sources together to when you run your reports and run your analysis that you're getting the answers to your questions and you're not getting partial answers because you're only using parts of your data.
Number four, select KPIs that are actionable. So you want to have good KPIs in a sense that they're attainable, that are based on a business, that are accurate. We also want to make sure that they can take action from those. Make sure that you can move forward. Questions, did you learn? Are you learning anything from these KPIs? And then what actions can you take based on what you've learned? Are these going to help you make better business decisions, or are they going to make you feel good? A feel-good KPI is something I would call a vanity metric. An actionable metric is something that helps you learn, but it also helps you grow and helps me steer the ship in the right direction.
Lastly, you want to limit the number of your KPIs, and you want to limit them to five to seven. A lot of times I'll see dashboards, and dashboards are great, but they have seven to 10 to 15 different metrics on them. The problem with those is you have too much information, and you'll get what we like to say, analysis paralysis. When you have too much to focus on, your default becomes to ignore it. That's the way the human brain works. We can't focus on more than one thing at a time. When it comes to KPIs, when you have too many of them, it really stretches what our brain can handle, and it doesn't allow us to obtain the knowledge that we need from the data that we have.
Some questions you want to ask and maybe some points here. You want to limit the selections of KPIs and you want to think hard and long about what is key, and that's key to your business. These metrics have to be critical to success.
Again, the fewer amount you have, the more you'll be focused on them. Another things is we talk about actionable, so we're continuously optimizing and figuring out the best way to approach our KPIs. If we have more than that five to seven limit, it can be very costly, because we're focusing on more and more areas and time and money and it really becomes almost impossible to monitor all of them, so this is why we really recommend you limit your KPI's, and it helps you stay focused and helps your team stay focused and makes sure that everybody's headed in that same direction.
All right, so just a recap here, we've got five KPI best practices. Number one, choose your KPIs.
We were talking about limiting your KPIs. You want to limit the selection of your KPIs and really think long and hard about what's key to your business. These are the metrics that truly matter to your success, and if you have too many of them, you're going to be all over the place, and you're not going to be focused on the true growth goal, right? You're not going to have a single point of truth and a single point of action that the business is headed toward. You're kind of going off in a number of different areas. That's why keeping them focused is really important. Again, the fewer you have, the easier it is to stay focused on them.
One thing is we have actionable KPIs we're going to be optimizing around, and if you have too many of them, it can be extremely costly, because it's going to take you more time and effort to make sure that they're up to snuff, that they're continually being tweaked and headed in the right direction. When you have too many things to focus on, you're adding more work that you're not going to see a return on investment for.
Just wrapping this up, KPI best practices. Here's the top five that I highly recommend that all business owners focus on.
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