By Fernando Berrocal
Due to their adaptability and simplicity of use, Key Performance Indicators (which are commonly referred to as KPIs in the business world) have been adopted by an increasing number of businesses of different industries and sizes–including startups. When the authors Norton and Kaplan introduced the Balanced Scorecard concept (a management method meant to turn an organization's objectives into a collection of indicators), it rapidly gained worldwide popularity among business managers in the 1990s.
Many claim that KPIs can show you how you are performing on a specific business activity to accomplish a given degree of the outcome. Remeber: each individual's perception varies. Context can differ from one entrepreneur to another. Metrics might be financial or non-financial, lag or lead, according to a business consensus. While leading indicators provide information about the future of the firm, lagging indicators measure what has already occurred in the organization. But why should anyone care about performance measurement when merely performing the performance would be beneficial? Analyzing analytics seems like a waste of time and effort when you could be improving the user experience of your application. However, this is not the case, and we will go over its main importance in the following paragraphs.
You have probably heard about some version of the Management Loop concept. Sometimes it is referred to as “project workflow” or a management process in other business literature. It is made up of three main activities, which are:
It is also referred to as the “feedback loop”, and is composed of the steps build, measure, learn in Eric Ries' famous book (The Lean Startup). This book is considered required reading in many business environments. It focuses on product development, specifically how it can be done faster (while wasting fewer resources). As you can see, the Management Loop heavily relies on measurement–which is where your KPIs should come in!
Startups frequently have a strong desire to plan by conducting market research, setting ambitious targets, and acting by constructing and executing. But what sets good startups from outstanding ones is the practice of regularly monitoring their performance before modifying the plan to enhance the main activity. You might not be able to identify failures and the reasons for poor performance without measuring the main results–which means you'll be repeating the same errors over again. By tracking your progress, you may get better at planning and running your business.
The observed impact that KPIs have on team behavior makes them a valuable tool. KPIs are great in that when used properly; they can be implemented to inspire and direct the entire team toward the strategic goals of the founders and investors. However, remember that the implementation of KPIs might go drastically wrong if the behavioral effect is not taken into account.
A marketing department serves as a primary example. The concern is that the team will begin to gain users if performance is exclusively measured by the number of new users. You can have high client acquisition costs and rapid user turnover. This won't result in a strong user base upon which to base future growth. Instead, a normal team should combine several KPIs to clearly show what is expected in line with the objectives. To the mix of marketing data, you can add Customer Acquisition Costs (CAC), Retention Rates, and Customer Lifetime Values (CLV). Additionally, properly implemented KPIs alter the corporate culture and give your co-workers more business autonomy. The need for managers to closely supervise people vanishes when a startup embraces a data-driven culture, where objectivity and concrete facts are prioritized. A startup that makes decisions based on business data doesn't require management to actively make decisions daily. Any business can profit from being able to adopt a flat, effective organizational structure thanks to this business approach.
You can avoid bias at a startup by using business metrics. People regularly believe their theories to be true, and spread them around without hesitation. In today's highly technological world, it’s great that you can let your customers select. With digital solutions, such as AB-testing, every user activity can be examined and used as the basis for choices. Your customers communicate their desires to you through their activities. Your client offer will naturally change into something that is demanded if you test your hypothesis with a user group and then make product improvements based on the outcomes. There is "no market need," which is the main cause of startup failure. What if there was a demand for the product these firms were developing? Just that it wasn't in the proper form to satisfy the needs of the clientele? Your product will gradually assume the shape that customers require or desire–if you analyze your customers' behavior using a variety of metrics (and then modify your product accordingly).
An excellent example is Airbnb, whose leadership determined early on that that listings with images taken by professionals performed two and a half times better in terms of bookings. One of the key pillars in establishing the confidence between guests and hosts to enable rapid expansion was this epiphany, which in turn led to investing in a fleet of professional photographers. Without monitoring specific features in the performance of various listings, Airbnb could not be the second most valuable unicorn in the United States (as well as a global success).