Management consultant and writer Peter Drucker is perhaps best known for creating one of modern management’s most famous quotes: “If you can’t measure it, you can’t improve it.”
While the quote may be a bit of an over-simplification, it reminds us that being able to measure progress towards our goals is critical if we want to understand what’s working, what we can optimize, where we can grow, and what we should do next
With that in mind, we’re going to examine the often-misconstrued key performance indicator (KPI), defining what it is, how to select appropriate KPIs, and how to report on them.
Is it a metric or a KPI?
Even the default Google Analytics implementation or most basic paid search campaign produces masses of data points. Dozens of metrics that can be broken down by myriad dimensions of varying granularity can make analysis seem overwhelming. That is why the KPI is so fundamental: it allows us to move beyond reporting on all our available metrics, distilling our measurements to an informative shortlist that aligns with our goals and informs us of performance at a glance.
The key to the KPI is the K. It is not just any performance indicator; it is the metric, or small set of metrics, that informs the appropriate audience of performance in the most appropriate way.
Different audiences may need to see a different set of KPIs or see the same KPI presented in a different format. Similar activities may be reported with very different sets of KPIs depending on their objectives but, ultimately, what makes a KPI more than “just” a metric is that it doesn’t just report on one element of a component process (although it may do that as well)—it gives you rapid insight into performance against your targets and benchmarks, and progress towards your objectives.
How to select appropriate KPIs
With so many metrics available, how do you select appropriate KPIs? Let’s consider paid search campaigns driving visitors to an ecommerce site as an example. We can start with an inventory of our available metrics: impressions, clicks, click-through rate, spend, cost-per-click, conversions, conversion rate, cost-per-conversion, quality score, impression share, bounce rate, new visitors, revenue… The list is extensive, and we can already start to see how reporting on all of them can lead to an overload of information, which loses its power to inform.
Perhaps the most important consideration for KPI selection is to ensure that the KPIs align with the objective. Before choosing the KPIs, the ultimate aim of the activity needs to be defined. Once this has been established, determining the KPIs from the metrics becomes much more straightforward.
In our ecommerce paid search example, we might start to think about the aims of generic and competitor keyword campaigns against those for branded product keywords. Our aim for the former may be to increase brand awareness and consideration earlier in the funnel, so click-through rate and new users could be two of our primary KPIs, giving us insight into how our ad copy performs in front of a less brand-aware audience and works to drive new visitors to our site. For our branded product campaign, the aim here is likely to drive sales, so revenue and conversion rate become the more relevant KPIs.
We can also begin to see the importance of selecting KPIs according to the needs of a particular audience. For example, a paid media delivery team will likely want spend as a KPI to make sure they can track progress to their monthly budget. The ecommerce director, on the other hand, may be less interested in the actual spend figure and much more focused on revenue and return on ad spend (ROAS).
Different stakeholders may also require their KPIs presented at different levels of granularity. Our ecommerce director may just need to see an overall ROAS for all paid media activity, whereas the delivery team might need exactly the same KPI at the campaign, ad group, or keyword level in order to best allocate budgets and optimize the accounts.
When selecting groups of KPIs, context is critical. Does the panel of KPIs chosen provide sufficient context to understand performance? Let’s take click-through rate (CTR) as an example. It often features in paid media reporting, but how informative is it without the support of some additional data?
As a diagnostic indicator, CTR can provide a measure of how well ad copy is resonating with audiences for particular search queries. But if driving CTR becomes a blinkered focus for optimization, the lack of context could hide a potential drop of performance. Improved CTR may be offset by a higher bounce rate or, if budgets are limited, that increased CTR may not result in an increase in clicks. Instead, budget caps are simply hit sooner, resulting in the same number of clicks but with less visibility from a lower number of impressions.
Combining data from multiple sources can also be valuable in ensuring that KPIs truly monitor performance against an objective. Returning to our ecommerce example, ROAS is a frequently used KPI for demonstrating paid media performance in ecommerce. However, ROAS and revenue do not necessarily align with profitability. If campaigns are optimized against these KPIs, perhaps more sales are from discounted and clearance items with higher conversion rates but lower margins. By combining media metrics with sales data and inventory data—such as cost of goods sold—a more complete picture of performance emerges.
Trying to report on too wide a range of metrics can lead to “cherry picking” the results that support a particular conclusion, or simply those that look good that month. A set of KPIs that has been carefully selected to align with business goals and agreed upon as the measure of performance can streamline reporting, simplify understanding, and lead to faster insights and actions.
Take a systematic approach to KPIs
Establishing the set of KPIs that underpin your measurement plan is not necessarily a straightforward task. As we have seen, objectives, audience, granularity, and reporting frequency all need to be considered when developing the reporting methodology.
However, the task need not be too arduous. By putting in place a measurement framework, you can approach the KPI selection process systematically, working through a series of questions and stages that dovetail with your organizational need. For example:
- Set clear objectives for the activity. What am I trying to achieve?
- Understand the needs of audiences. How do different stakeholders need to see the information? What data is necessary for them to make their decisions?
- Align on KPI selection and reporting framework. What information should be presented in what format to whom and how often?
- Implement reporting solution. Integrate and prepare data sources, build dashboards or template spreadsheets.
- Review KPI panels regularly and update as required.
Investing time in developing a robust measurement framework can seem like time taken away from building and implementing the activities themselves. However, it is most certainly time well spent, as the reporting and optimization gains over the duration of the activity will more than outweigh the initial efforts.
Defining a focused and appropriate set of KPIs before you press “go” on your campaigns may be the step that opens up the next level of analytics opportunities in your organization, helping to establish a data-driven, scientific approach to measurement that will contribute to continual growth.
Need a little help to make it happen? Let’s talk.