Key performance indicators (KPIs): What they are and how to use them
When running a small business or marketing campaign, your gut instinct plays a role. But being able to measure and quantify success is truly critical. That’s where key performance indicators (KPIs) come in.
KPIs let you “see” the success or failure of specific campaigns and business tactics so you can continually improve and build on those ideas moving forward. In other words, KPIs are accurate and unbiased measures of success.
How to use KPIs to boost business
For small businesses, KPIs like revenue growth rate and growth profit margin, for example, are all reliable indicators of the health of your company. To get clearer insight, precisely define those KPIs and all the other ones you want to measure. But how?
Chances are you’ve heard of the SMART goals concept, which has been around for decades in one form or another. It stands for Specific, Measurable, Attainable, Relevant and Time-bound. Here’s how to use SMART goals to define your KPIs.
- Specific. Be specific about what you expect to achieve.
- Measurable. Use measurable metrics to make it easier to track how your project is performing.
- Attainable. Make sure your goals are realistic. Pie in the sky is great, but you want to set achievable milestones.
- Relevant. Are your metrics pertinent to your project? If you’ve identified your expected objectives, this should make it easier to determine whether or not the KPIs are relevant.
- Time-bound. Set a time frame. Have a beginning and end so you can set baselines and milestones. This set interval will also help you to identify things like seasonality, migrations, product releases and more.
Examples of KPIs
While there are many different KPIs used for measuring success, here are some common examples and how they’re used:
Growth profit margin
GOAL: Get a quick snapshot of your company’s financial viability. To calculate this, take your total revenue and just subtract the cost of goods sold. These costs do not include numbers like operating expenses, interest payments or taxes. Now divide that number by total revenue. The higher the percentage, the better, generally speaking.
Cash flow forecast
GOAL: Forecast any potential problems (surpluses/shortages). To see your cash flow outlook, take all your projected income and revenues, minus all your expenses and costs. The forecast can be yearly, weekly or monthly. Seeing issues with cash flow early on lets you make any necessary adjustments. It’s also meaningful for tax planning and business loan applications. If you want to compare cash flow from a long time ago to now (e.g., 2005 vs. 2019), you would use real cash flow, which compares cash flow for a certain period but adjusted for inflation.
Revenue growth rate
GOAL: Get insight into how quickly your startup is growing. It’s also used to observe and anticipate business trends. Revenue growth rate compares current total revenue for one period, with that of a previous period (quarter to quarter, year to year) Say you earned $100,000 in 2018 and $250,000 in 2019.
To calculate yearly revenue growth rate, subtract 2018’s revenue from 2019’s. Divide that number by 2018’s revenue and multiply by 100. Your growth rate would be 150%.
($250000 – $100,000) / $100,000 x 100 = 150
Website traffic metrics
GOAL: Measure the success of your website. It’s critical to know what’s working and what’s not on your website. After all, it’s the face of your business. Using metrics gives you better insight into the experience visitors are having, and how many are coming:
- Monthly and yearly traffic. Year over year (YoY) and month over month (MoM) numbers show changes between each time frame. What actions benefit or negatively affect your traffic?
- New versus returning visitors. This statistic is an indicator of how well your content is engaging your user base. Does it bring them back for more?
- Channel share. What is the percentage of total traffic coming per channel? Understanding how traffic is coming to your site can help you identify strengths and weaknesses — playing to your assets helps when launching a new product.
- Average time on page. This measurement indicates how well users digest your content.
- Conversion rate. Depending upon the type of content, the conversion rate can be one of the most powerful KPIs. It measures the percent of visitors that are turning into a conversion. For example, your site gets 300 visitors in a month; 30 of them buy something. Your conversion rate is 30 divided by 300, or 10%.
SEO/organic search traffic
GOAL: See if you’re being seen. When people search for a product or service online, does your company appear in search results? If so, what happens afterward? You can gain insight via these KPIs:
- Organic search traffic. This number shows how many visitors click in from search engines like Google and Bing to your site. For the most part, the more the merrier.
- Page authority. Want to appear higher up in search engine result pages (SERPs)? This SEO score is a good indicator of how well your page will rank. You can use this to compare specific webpages to one another on your website and across other domains.
- Conversion rate per keywords. Even if you have a lot of organic visits to your page, it doesn’t mean those visits are driving conversions (see conversion rate above). If conversions are low, this can indicate you need more engaging content, or that it’s ranking for the wrong keywords.
Paid digital marketing
GOAL: Lead generation. One of the ways to attract new customers (generate leads) is via a paid ad campaign. Here are a few common KPIs used to track and quantify quality leads:
- Cost per lead (CPL): How much money are you spending to get a lead? Is that lead a quality lead? Does it make sense, or should you look at changing things up?
- Cost per conversion (CPC): Cost per conversion should be a bit higher than the cost per lead but should validate your return on investment (ROI).
- Time to conversion: How long is your consideration cycle? This interval should be based on your industry and the cost of your line item. Consumer conversion cycles are typically shorter because they don’t cost as much as business products.
- Retention rate: How many of your conversions or users are repeat customers?
- Cost per acquisition (CPA) is integral to understanding whether or not your paid ads are providing a good ROI.
- Click-through rate (CTR) is the percentage of visitors that see your ads (impressions) and click on them. You can use this to understand how your SERPs and imagery are performing. Other things that should be taken into consideration when looking at CTR are positioning and ranking. The top spot typically garners the most clicks, but it also costs the most. You need to find a balance between improving your CTR and budget. That’s where CPA comes into play.
GOAL: Brand awareness. You need customers to associate a great product or service with your brand. But how can you find out if it takes place? Here are some ways businesses can measure it:
- Branded content engagement: Look for time on page, CTR, minutes of video or specific engaging content consumed.
- Search terms: You can look at the volume increase in search for brand terms over time.
- Listening: Some KPIs include positive/negative sentiment.
On a closing note: a picture is worth a thousand words. When measuring KPIs, try using data visualization in the form of colorful charts, diagrams or images to get a full 360-degree view. You’ll better understand how each KPI is performing and how it aligns with your overall marketing and campaign goals. m
The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.