Defining your Startup Key Performance Indicator (KPI)

KPI’s and the Human Body

It is easy to understand what a Key Performance Indicator is by way of metaphor, because what the term KPI stands for, comes from our interactions with the human body. The most common KPI that is monitored in Western society is found by studying a person’s health condition, specifically by taking the body’s internal temperature. This is one of the most important indicators that can instantly tell us if someone may be sick or not. A gradual change in temperature or a quick fluctuation can indicate that the human body is recovering or fighting infection. There are several other indicators but only few of them are as important as the body temperature.  Body temperature therefore defines by metaphor what is known as the Key Performance Indicator.  In the study of Chinese medicine, there are other important KPIs which are measured to determine the human body’s condition. Demographically, the KPI is determined by a wide range of considerations, from the standards of measurement for the conditions of the prospective study, and from the background of the subject to the setting of the testing environment. These are all factors that contribute to determining the meaning of the KPIs we observe.

How Can KPI’s be Used in Lean Start-ups?

There are important biometric measurements that large companies use to study the performance of their employees. A lean startup should also consider implementing some of the same tools and techniques that mature companies use. Because of the wealth of information available out there, you would be wise to consult with a CTO about ways to study KPI’s so that you can create a better Minimal Viable Product.

KPIs in Mature Organizations

KPIs are commonly used by an organization to evaluate its success,  or perhaps to measure the success of a particular activity that a group of people have engaged in. Sometimes, because success is defined in terms of making progress toward strategic goals, KPI’s can be used to measure several levels within the organization – including business units and their divisions into departments and employees. In some organizations, KPI’s can be viewed online using a dashboard that the whole company can see and use.  The dashboard needs to be transparent so that everyone can observe how each business unit is performing. With this, each team knows how well they are performing compared to previous intervals and the even the top management administrators can use this tool to understand how the organization is functioning.

Defining the KPIs

Defining the array of KPIs that a company uses is a process.  The process starts by defining the company’s goals and identifying which are the most important indicators to observe from a business perspective. The process continues by then turning to look at what statistics are available to be gathered, which metrics can be defined as a KPI, and finally by defining which are the most important indicators to follow. This process can be described best in a funnel diagram:

Business Goals -> Statistics -> Metrics -> KPI’s

In eCommerce, a KPI is used to evaluate those common characteristics that define quantitative goals for the success of the business. Some more common eCommerce KPI’s are

  • Conversion rate – the probability that a visitor will end up purchasing something on the site
  • New account sign-ups – number of new customers that create a new account
  • The number of new visitors versus existing customers

Why your Start-up needs to have KPI’s?

KPIs have a different role in mature businesses than they do with startups. In startups, KPIs should focus on driving the product-to-market fit so that the startup will get on track as quickly as possible. There may be several KPIs that are needed to drive product development decisions, and mainly these are focused on studying customer habits and behavior.

How to define the  KPIs in your Start-Up

The initial stages of the process that can identify those startup success factors which will drive your product-to-market fit and thus put your startup on track. Success factors will therefore depend on the needs of the startup market and the unique business model of your product.

The success factors for a social network like LinkedIn may be:

  • Stickiness – What proportion of users continue to use the service once they have subscribed
  • Profit per user – How much revenue is made per user relative to the cost of acquisition per user

For a new eCommerce marketplace, the success factors will likely refer to:

  • Acquisition Cost – The amount that it costs to acquire a new customer
  • Customer Lifetime Value – The amount of revenue that a customer generates over their lifetime

The next stage of the process will then be to identify the set of metrics that best capture the data to the extent that the success factors can generate a KPI. There may be several rather than only one KPI which best represents this.

KPI’s Requirements

Each KPI that you choose should meet a number of requirements:

  1. The KPI needs to be relevant and measure something that matters to the business success.
  2. The KPI needs to be responsive so that when things go wrong the KPI value should change in a noticeable way. Vice versa, when things get better, the KPI value should indicate this. As with the  human body temperature, the KPI should be able to give a picture of the current status of body conditions and also indicate changes of direction when they happen.
  3. The KPI should be easy to understand and in no way ambiguous to users.

While looking for the overall set of KPIs set for your startup you should be able to get a comprehensive understanding of how you are meeting your success factors and most important be able to make development decisions based on the their combination.

How to assess your startup KPIs

Assessing your startup KPIs is an ongoing process that is best performed in short cycles (sprints). It is important to be able to make product and management oriented decisions at the moment the KPI’s change. The process of assessing your KPIs includes the following :

  • Qualitative Customer Research – Test your customers in different ways by using different testing tools. These real-time statistics can help you understand customer behaviors and speculate why these changes are happening. When you understand the customer’s requirements you will then be able to answer which ones are relevant and which are not – and why. Such tests can include customer surveys, customer interviews, walk-through tests and usability labs
  • Quantitative analysis –  Make in depth analysis of customer behavior by using a log and analysis tools so that you better understand where customer get stuck and how exactly they are using the product.
  • Use A/B and multi-variant testing to understate how different changes in the product may impact your KPIs and therefore help you make product development decisions
  • Make Decisions –  Based on the data that is collected, you can use the steps described above to direct your team.

These tools help you define what new features and changes should be made and in what priority they should be developed. According to the schedule of your product’s release date, the development cycles constantly through these processes. This mode of thinking will ensure that the time and effort you put into product development are aligned with the goals that your chosen KPIs define as factors for success.

Summary

KPIs are important for a new venture as well as for a mature company. A KPI can make sure that you are keeping to your goals by focusing your attention on several key business success factors. This makes your progress is aligned to the path towards success. The process of measuring your KPI need to be included in the continuing  process of the product development that cycles through your user testing efforts.

  Contact JumpStartCTO if you need help with your venture

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