Thursday, February 07, 2008

Online KPIs – Back to Basics

Those who have been doing web analytics for a while know how important it is to define proper online Key Performance Indicators (KPIs). But believe me, there are a lot of marketers who are confused about online KPIs, difference between KPIs and metrics and how to define them. So I am going back to basics with this post.

What are KPIs

Web analytics tools collect a lot of data and provide a lot of metrics and reports. In fact most of the web analytics tool vendors proudly talk about number of reports that can be created in their tool. These reports, metrics and data might look interesting but we all know interesting is not necessarily important. KPIs, on the other hand, are the important metrics; the metrics that provide a view into the health of the business and are tied to the business goals. They allow business owners to focus on the things that are important to drive their business. Key Performance Indicators tell a business owner whether he or she is meeting their business goals or not. Good KPIs provide context and hence are usually represented as ratio, percentage, indexes etc and not as raw numbers. KPIs drive actions within an organization.

KPIs are specific to a business role. So, not all people in the organization have the same KPIs though all the KPIs should ultimately be tied to overall business goals. The CEO has a set of KPIs, a merchandising manager has a set of KPIs and a marketing manager has yet another set of KPIs. However, all of the respective executives (departments) need to be defined keeping overall business goals and CEO’s KPIs in mind.

Another way to understand KPIs is that they are the metrics that make people freak out when they go in the reverse direction from the expected and call for immediate actions.

Since so much is riding on the KPIs, it is very critical that you pay due attention in defining your KPIs. Understand what business goals are and then think about what activities and/or user behaviors relate to your business goals. Put together a list of all the metrics that will measure those activities and/or user behaviors. Weed out the unimportant metrics, figure out what are important metrics and what are critical few (and hence KPIs) that have an impact on the business goals. Note: For your analysis you will need to look at more than your KPIs to provide you a bigger picture. Remember, all KPIs are metrics but not all metrics are KPIs

Characteristics of KPIs

Dennis Dennis R. Mortensen lists following 7 KPI characteristics on his blog “Visual Revenue”
  1. a KPI echoes organizational goals

  2. a KPI is decided by management

  3. a KPI provides context

  4. KPI creates meaning on all organizational levels

  5. a KPI is based on legitimate data6. a KPI is easy to understand

  6. a KPI leads to action!

Those are all great characteristics of KPIs. I however differ a little on point number 2. In my opinion great KPIs are those that are agreed upon by those it directly impact and will be taking actions so they are not just handed down by the upper management. And as I said above they should all be tied to overall business goals.

How many KPIs should you have?

I don’t think there is any rule but in my experience you should limit it to no more than 6.

Reporting on KPIs

KPIs should be presented in an easy to consume dashboard. Web Analytics tools have built in dashboards but most of them are limited in terms of the functionality and flexibility. My recommendation is to present KPIs in a separate dashboard that not only shows KPIs but also trending and brief analysis. Without trending and analysis the KPIs might not provide a complete picture. Excel, PowerPoint or third party dashboard tools work the best for reporting the KPIs. Since they are outside the web analytics tool they also allow you to integrate other data sources, as needed.

Books on Web KPIs

Eric Peterson has a great book on the subject, called The Big Book of KPIs

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