KPI Development: 8 Steps with KPI Examples

Key Performance Indicators: KPI Development & Examples for Your Startup

In this two-part article, we discuss KPIs. Part 1 covers KPI meaning, how to develop them, and the importance of monitoring and using them to manage your startup. In Part 2, we discuss some KPI examples and walk through the process of designing key performance indicators to measure traffic and revenue to our startup Menyu (www.themenyuapp.com).

Without further ado, let’s dig into the first section of Part 1 titled KPI Meaning.

PART 1 – KPI Meaning & Development

KPI Meaning

KPI is an acronym that stands for Key Performance Indicator. A KPI is a performance metric that allows us to quickly measure how well we’re doing in one area. Most companies develop several KPIs with the group collectively indicating how the overall business is performing. Let’s breakdown the acronym to better understand its meaning.

  • Key – A crucial piece of information.
  • Performance – Measures success or failure in accomplishing a related set of actions.
  • Indicator – Suggests a desirable or necessary course of action.

In summary, a KPI is an indicator that measures a crucial area of our business by measuring our success or failure in accomplishing tasks (in that area) and then suggesting a course of action based on our past performance.

Since KPIs suggest a course of action and guide our business decisions, it’s important that we carefully development meaningful ones. The wrong KPIs can suggest the wrong course of action. Because of this, let’s dig into how we development them for our startup.

KPI Development

Like all businesses, startups exist in a wide range of industries providing a wide range of products and services. Because of this, each startup will need their own carefully crafted set of KPIs.

Since each indicator will measure our success or failure in accomplishing a specific set of actions, we need to choose carefully which pieces of information we measure. We want to encourage the correct actions and discourage the wrong actions. Correct actions would be those that drive our business forward by creating value. Wrong actions are those that don’t create value – think meaningless busy work.

Because the key performance indicators suggest a course of action, we use them to make difficult decisions like pivoting the business, closing operations, investing money in various resources, raising capital, selling the business, and so forth. We don’t want to make bad decisions from our KPIs monitoring the incorrect things. Because of their importance, we use an 8-step process to develop our KPIs, ensuring we’re thorough.

Let’s look at the 8 steps that can ensure we craft meaningful KIs.

8 Steps to KPI Development

1. Establish Goals & Objectives

Use a strategic plan to develop goals and objectives – what we hope to accomplish and how.

To develop meaningful KPIs, we must know what we want to achieve. Maybe we want to grow website traffic by 100% within 12 months. Maybe we want to surpass $500K in revenue within 2 years. Maybe we want to build a business and exit for $2mm within 5 years.

The point is, we all start a business for a reason. To begin crafting our KPIs, it’s very important to be honest with ourselves and know exactly what we want to achieve. Once we know (have our goals), we can create objectives to achieve those goals. For example, if I say my goal is to increase traffic on Menyu by 100% within 12 months, I could create an objective of adding 500 new restaurant menus per month in hopes of achieving the 100% traffic growth.

Once we have created goals and the objectives to achieve them, we can begin to consider what metrics will measure the success or failure of our actions.

2. Understand Alternative Metrics

Each goal we want to measure will likely have multiple metrics we can choose from. For example, if increasing web traffic is our goal, we could use impressions, total visitors, unique visitors, returning visitors, click through rate, or any number of metrics to gage whether our objectives are helping us reach our goal.

Jot down all the alternatives.

Next, go through each alternative and write down the pros and cons of using each. We need to make sure we thoroughly understand each alternative. Just like KPIs can influence positive actions, they can also influence poor actions. For example, if we deem returning visitors as critical to our success, but use total visitors as our KPI, we might be growing at our target rate of visitors, but they could all be new visitors, masking the fact our objective of increasing return visitors is failing.

3. Select the Right Metric

Once we understand the alternatives, it’s time for us to select the metric(s) that will become our KPI(s). Like mentioned above, we want to make sure we choose KPIs that don’t drive the wrong actions or can be gamed by us or our employees.

Once we choose, we want to document each KPI including:

  • What does it measure?
  • Why does it measure it?
  • How is it calculated?
  • What are its thresholds, or put differently what is considered good, bad, and neutral?

The documentation process ensures everyone in our startup understands the KPIs, why they’re important, and how their day-to-day actions and objectives influence the success of the business.

4. Set Targets and Thresholds

The last bullet above mentions documenting “What are the KPI’s thresholds?”. After we have chosen our key performance indicators, we want to set targets for them. Thresholds and targets help hold us accountable and question whether our objectives are moving us toward our goals.

At minimum, we should set quarterly targets, but I prefer monthly. Assuming monthly targets, the target is the desired value for the KPI at the close of the month. We can get this by setting yearly goals and working backward.

For example, using a traffic goal of 1mm visitors in the next 12 months, we can use the following formulas to get our visitors KPI target:

Monthly Visitors Target = 1,000,000 / 12 = 83,333 visitors per month

We now know our monthly target is 83,333 visitors. Next, we want to set some thresholds. If we hit the 83,333 that’s fantastic, but we can still be winning if we get close. Let’s say we lose if we hit <= 50%, we're par if we are >= 51% and <= 79% and winning if we hit >= 80%. Using this criterion, we know the following:

Losing

83,333 * .5 = 41,667. Anything at or under 41,667 visitors is failing.

Neutral

83,333 * .51 = 42,500 and 83,333 * .79 = 65,833. Between 42,500 and 65,833 we’re not losing, but we’re not winning either.

Winning

65,834 and above means our objectives are having the intended effect.

With targets and thresholds set, let’s make sure we take the needed steps, if any, to ensure we have the data needed to calculate our KPIs.

5. Collect Data

Once the key performance indicators are set, we want to confirm we have access to the data needed to calculate them. Choosing website visitors as a KPI but having no access to website visitor counts obviously poses a problem.

A further example, if we want to track how many females in their 30s and males in their 40s visit our website in a given day, we need to make sure we have the sex data point and age data point stored for each visit to our website.

This sounds straight forward but depending on your startup and how complicated your KPI formulas get, this can become a real problem.

6. Calculate KPIs from Data

Next, determine how you will retrieve and calculate the KPIs from the data. Will you run manual queries? Will a software developer create reports? Will you use an existing package like Google Analytics?

For Menyu, we use a combination of Google Search Console data, Google Analytics, manual queries, custom web reports, and Excel formulas.

Using all these tools, we then store our KPIs along with their targets and thresholds in an Excel spreadsheet. Our KPIs are monthly, so we update the spreadsheet monthly and discuss where we’re winning and losing, why, and what steps if any we need to take to improve.

7. Confirm all KPIs Work Together

Like each KPI indicates whether we’re winning or losing in an area, all KPIs need to collectively tell us if we’re winning or losing as a business. We especially don’t want conflicting KPIs.

For example, let’s pretend we have a blog with two KPIs – an Articles Posted KPI and an Article Quality KPI. The KPIs are monthly measurements. Let’s also pretend we set a single goal – post 20 new high-quality articles each month.

Based on our resources we know 10 will be pushing it. To get the additional 10, we’ll need to publish lower quality articles. We’re going to see the Articles Posted KPI rise at the expense of the Article Quality KPI.

These two KPIs conflict with each other. One will rise at the expense of the other. This is OK if we know which takes priority. We could insist on both KPIs rising together but need to understand their relationship. When we see one dip at the expense of the other, we would need to either adjust our goal or invest in more resources to get the 20 high quality articles.

8. KPI Monitoring: Monitor Effectiveness

KPI monitoring is the last step of KPI development. We want to monitor our KPIs and adjust our goals and objectives as needed. Whether we’re winning, losing, or holding steady, we want to continually assess our progress and adjust accordingly. Below are some common actions that can result from monitoring our KPIs.

We’re Winning
  • Add Resources and focus even harder
  • Reinvest profits and expand products or services
We’re Losing
  • Change goals
  • Change objectives
  • Reevaluate, Reallocate, or add resources
  • Pivot operations
  • Shutdown operations
We’re Holding Steady
  • All options from Winning and Losing
  • Do nothing, keep forging ahead and executing

PART 2 – KPI Examples

In Part 2 of this article, we’ll walk through the 8 steps covered in Part 1 as we develop KPIs for our startup Menyu. Menyu is a platform website that has restaurants and their food menus. It generates revenue via ads.

Here is how a visitor ends up on Menyu’s website:

  • A potential diner uses Google to search for a restaurant’s menu.
  • Menyu has the menu on their website and appears at the top of Google.
  • The user chooses to click on Menyu’s result in Google’s search results.
  • The potential diner is now on our website and considered a visitor.

Below are some assumptions we’ll make about Menyu.

TIP: Please understand, although Menyu is a real startup and owned by us, all info in this example are fictional. These are not actual stats or objectives. They are for learning purposes only.

Current Traffic, Content, & Revenue Stats

  • Current traffic = 50K monthly visitors.
  • 1 visitor earns us $.005.
  • 1 menu = 3 visitors per month
  • We currently have 16,667 menus on the website.

1. Establish Goals & Objectives

We have two goals for the next 12 months. Each goal has an objective, or way we plan to achieve the goal. Both goals and objectives are listed below.

Traffic

Goal: Increase Visitors (traffic) from Google by 100%
Objective: Enter 1,389 new menus per month.

Revenue

Goal: Increase revenue per user by 100%
Objective: Find an affiliate offer to put on the site

2. Understand Alternative Metrics

Below are some of the metrics we could use to monitor whether our objectives are moving us toward our goals. Like the goals and objectives above, they are categorized by traffic and revenue.

Traffic

Visitors

We need 100K per month to achieve our goal.

Impressions

Higher search engine impressions typically translate to more traffic.

CTR

The higher the Click Through Rate from Google the more visitors we generate from impressions.

New Menus

New menus will drive much of the visitor growth.

Menu Age

In our experience a menu generates more traffic as it ages.

Revenue

Total Revenue

Total revenue dollars per month generated from the business.

Total Revenue from Ads

Dollars generated from ads on our site

Total Revenue from Affiliate Marketing

Commissions generated from affiliate offers on our site

Revenue per User

Measured in dollars, the amount of money we generate per visitor to our website

Advertising Revenue per User

Measured in dollars, the amount of advertising money we generate per visitor to our website

Affiliate Revenue per User

Measured in dollars, the amount of affiliate commissions we generate per visitor to our website

3. Select the Right Metric & 7. Confirm all KPIs Work Together

Knowing the startup well, all the above metrics will make useful KPIs. Together, they will tell a clear story of whether we are making progress toward our traffic and revenue goals or not. Because we made our objectives above very specific actions, they become very easy to measure.

The New Menus and Revenue Per User KPIs are the cornerstone KPIs. They will quickly tell us the overall health of our business. If either of these two begin to trend in the wrong direction, it’s a safe assumption our business is not growing as fast as we want.

The other KPIs do a nice job of supporting the two cornerstone KPIs. If our cornerstones are trending in the wrong direction, we can use the other KPIs to understand the reasons. This allows us to assess both the health of our business and the details, giving us an opportunity to realign our strategy.

4. Set Targets and Thresholds

We’re not going to discuss thresholds or targets for all the KPIs, but we will discuss our two cornerstone KPIs.

New Menus KPI

Target (we’re winning)

>= 90% of goal = 1,389 * .9 = 1,250 menus per month

Neutral (we’re not winning, but we’re not losing)

>= 70% and < = 89%
= 1,389 * .7 = 972 and 1,389 * .89 = 1,236

972 to 1,236 menus per month means we’re not achieving our goal, but we’re not failing miserably either. We likely just need to make a small push or adjust our resources to start achieving our goal.

Low Threshold (we’re failing)

< 70% = 1,389 * .7 = 972

With 972 or fewer menus per month being entered, we’ll finish well under our goal of 1,389. 417 menus short might not sound like a failure, but that is 5,004 menus per year. At 3 visitors per month per menu that equates to 180,144 visitors short of our goal.

When our goal is only 600,000 visitors, that’s substantial. And remember, that’s if we are hitting the 70% threshold – our highest percentage we deem failing. If we are only achieving, say, 35% of our goal the failure becomes even more pronounced.

Revenue per User KPI

Target (we’re winning)

>= 90% of goal = .01 * .9 = .009 or 9/10ths of a penny

Neutral (we’re not winning, but we’re not losing)

>= 70% and < = 89%
= .01 * .007 = 972 and .01 * .89 = .0089

.007 to .0089, although not judged a total success, is much improvement over .005. Even only .002 increase across hundreds of thousands of visitors can add up to lots of revenue gain.

Low Threshold (we’re failing)

< 70% = .005 * .069 = .069

As we get down under .007, we’ve decided we’re failing. If we hit a .069 the fractional cents could still add up and be a win for the business, it’s just not a win in the sense we expect to do much better.

5. Collect Data & 6. Calculate KPIs from Data

We want to review our KPIs and ensure we can (or already are) collecting the data needed to calculate and report the indicators. Below is our review, including how we will calculate each KPI.

Traffic

Visitors

Data

We use the Google Search Console clicks metric.

Calculation

This represents total visitors, new and returning, that visited our site organically through Google. This metric ignores social media traffic, other search engines, and direct visits. Although we do get substantial traffic from other sources, most is organic from Google.

Impressions

Data

We use the impressions metric from Google Search Console

Calculation

We report the above data. Again, this represents only organic data from Google.

CTR

Data

We use the CTR metric from Google Search Console, which is a percentage.

Calculation

This metric is calculated as Google Organic Visits / Google Organic Impressions * 100.

New Menus

Data

Stored in one of our proprietary database tables and pulled using a query.

Calculation

This is pulled using a query that checks for all menus added in the given month.

Menu Age

Data

Stored in one of our proprietary database tables and pulled using a query.

Calculation

We can tell when a menu was created, so we take the difference between the creation date and the current date. This is the menu’s age. We have a report that shows us each menu’s age and the overall menu age on our site.

Revenue

Total Revenue

Data

Monthly earnings from Google AdSense advertising account and monthly earnings from affiliate account.

Calculation

Google AdSense Earnings + Affiliate Account Earnings

Total Revenue from Ads

Data

Monthly earnings from Google AdSense advertising account

Calculation

Google AdSense Earnings

Total Revenue from Affiliate Marketing

Data

Monthly earnings from affiliate account.

Calculation

Affiliate Account Earnings

Revenue per User

Data

Monthly earnings from Google AdSense advertising account and monthly earnings from affiliate account.

Calculation

Google AdSense Earnings + Affiliate Account Earnings / Monthly Visits

Advertising Revenue per User

Data

Monthly earnings from Google AdSense advertising account.

Calculation

Google AdSense Earnings / Monthly Visits

Affiliate Revenue per User

Data

Monthly earnings from affiliate account.

Calculation

Affiliate Account Earnings / Monthly Visits

6. Calculate KPIs from Data combined with 5 above)

7. Confirm all KPIs Work Together (combined with 3 above)

8. KPI Monitoring: Monitor Effectiveness

– New Menus KPI

The New Menus KPI will let us know if we’re hitting our 1,389 menus per month target. If we win on this KPI, we should expect our Impressions KPI and Visitors KPI to rise, thus moving us closer to our goal. However, if we are achieving our new menus number, but impressions and visitors aren’t rising, we may have a problem with our objective.

Things we could check are:

  • Ensure impressions are translating to visitors via a CTR of 2 or better. If under 2, investigate. We might have an issue with the way we display in the SERPs or a reputation for a low-quality website, causing people not to click on our site’s result.
  • We could have low quality menus. We’re hitting the New Menus KPI target, but the menus are poor quality, meaning no one is searching for them.

  • We could have a lag. With new menus, most won’t rank high until 1-3 months old. This can make determining if you have an issue in real-time difficult.

Revenue Per User KPI

The Revenue per User KPI tells us how much money we generate for each person that visits our website. We’re currently generating half a penny ($.005) per visitor. We want to growth this by 100% to 1 penny. There are numerous revenue models and ways to generate income from a website.

We feel restaurant-related product offers from affiliates could make sense, so that is the objective we chose – open a second revenue channel utilizing affiliates and generate $.005 per visitor (on average) in commissions. If we open our second channel, but find revenue per user isn’t trending up, we need to use our other financial KPIs to dig in.

Things we could check are:

  • The affiliate offers we add to the site might not be attractive to our visitors. For example, if we add an affiliate offer from a furniture company to our restaurant menu website, we probably aren’t going to generate many sales. Our audience doesn’t come to our site looking to buy furniture.

  • After adding our affiliate offer and waiting a few months, we might see that our revenue per user is flat at $.005 per user. But, using the Advertising Revenue per User KPI and Affiliate Revenue per User KPI to dig deeper, we see that our affiliate revenue per user is .003 – substantial progress toward our .005 goal.

    However, our advertising revenue per user is down to .002 from .005, thus washing away our gains. This is a common scenario. We only have so much site space for ads and affiliate offers without degrading the user experience. Because of this, we often must remove an ad to add an affiliate offer. Our KPIs can help us manage this complex relationship between our two revenue channels until we find the perfect balance that will get us an overall gain of 1 penny.

Conclusion

I hope you’ve enjoyed learning how to develop KPIs for your startup. I also hope the KPI examples we walked through help you in developing your own. By developing carefully crafted KPIs, you can easier manage your business and make quicker decisions in a time when all businesses, especially startups, must move fast to grow and capture market share.



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