The importance of KPIs and how to avoid analysis paralysis

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June 22, 2023

This week, Phuong and I discuss the importance of Key Performance Indicators (KPIs) for entrepreneurs. We emphasize the need to choose a limited number of KPIs to avoid analysis paralysis and prioritize actionable metrics. The primary KPI should align with the business model, such as revenue for most companies, and additional supporting metrics can provide a more comprehensive understanding of performance. We highlight the role of KPIs as a feedback mechanism to assess the effectiveness of strategies and suggest setting goals for the primary metric to drive growth. The episode emphasizes the value of being data-driven from the early stages of a startup and encourages entrepreneurs to start tracking KPIs as soon as possible.

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Transcript (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is definitely part of that effort. Today we're doing a single solo segment. We've got Fong Ireland on my partner to talk about KPIs. She always hits operational topics.

It's very practical and tactical advice. I think her content should be consumed by every first time entrepreneur. And frankly, just in case for a lot of it should be consumed by a lot of second time entrepreneurs. We're gonna run through KPIs in some depth. It's not a super long segment, so it should be straight into the point.

And hopefully it's helpful. Enjoy,

Phuong: to see you. Great to see you, mark. You're looking

MPD: great. I know you're being sarcastic cause I went to bed at 2:00 AM from a delayed flight. My joke for this is I'm grateful to my kids because they train me to be miserable without sleep. So I'm like actually used to it.

I think a younger me would've had trouble with this. But anyway, I'm here. I'm awake. And I wanna learn what do you got? What's today?

Phuong: All right, good for you. I have a topic here today that's really it'll be really easy for you to track if you're really tired. I'm gonna talk about KPIs.

MPD: Oh boy.

Here's a snoozer.

Phuong: Yeah, exactly. So today I wanna talk to talk about the importance KPIs, ones to track and drive. Now Mark, as KPIs stand for key performance indicators and our set of metrics that tell you how healthy your business is. So tracking the right KPIs will tell you whether you're doing awesome, just okay, or you're really sucking.

You need drastically change your strategy. Nothing keeps you more grounded in reality and motivated to do better than. Every day and seeing how they change or don't change over time, but how do you choose the right KPIs to track and how do you use them? Here are some tips to keep in mind. First tip is don't choose too many KPIs.

This is counterintuitive because I just told you how important they're, but tracking too many KPIs isn't helpful because you're trying optimize for them to drive your business and can't optimize for at one. Tracking too many metrics can lead to analysis paralysis and drive you and your team crazy.

Instead, choose one KPI known as the primary KPI to focus on. This should be the most direct measure of how much customers value, value your product, and how do you measure that? There's really only one way for your company, and it's probably revenue. Revenue is a good measure for most businesses because how much customers will pay for your product is how much value it.

So if you can get customers to fork over $50 for your product, that's how much they value it. But depending on your business model, there are a couple other options for your primary kpi. If you're an ad revenue based company, usage is probably the best metric because building a large audience is how you're going to monetize later on.

So daily average users or monthly average users is a good one. If you're an enterprise company, letters of intent or contracts signed to be your primary kpi. But your primary KPI doesn't tell your whole story. You need to break it down to another layer that you could use to understand the different ways to drive achievement of your primary kpi.

So for example, if you're not using your rev, if you're not meeting your revenue targets, how do you know which levers to pull to get there? That's why you need another set of three-year cell metrics that contribute to your primary metric and give you a complete picture of what's going on. Here's where you can be a little bit more creative, cuz this is really dependent on the type of business that you have.

Some options to think about are repeat customer rate, number of new customers, or if you're a marketplace, inventory is a good one. Next tip is to use KPIs as a feedback me mechanism. As you're tracking your KPIs, know that they act as a powerful tool to tell you whether your strategy is working. If you're doing something and your KPIs go up, great.

If you do something and things go down, stop doing it. That's why you should focus on KS and give you quick feedback and allow you to iterate fast. So for example, daily average users is probably better than monthly average users because wants order.

Next step is to set goals for your primary metric. So in the early stages, you have to be laser focused on revenue or whatever primary KPI you're tracking focused on, on that growth. So rally your team around the growth and use it to motivate yourself. You should be tracking week over week growth and a good benchmark for that based on the early performance of some successful startups is about five 7% week over week.

If you're doing 10%, you're doing awesome. Then the last tip is to use KPIs as a way to prioritize your time. As a founder, you never run outta things to do. There's always a massive to do to-do list, but prioritize the work that will give you your KPI goal. So every week, ask yourself, what's the biggest hurdle that's standing in the way of reaching my goal?

Think about how to overcome it, and then focus on those things. That's it. All I have is for the week,

MPD: Sarcastic at the beginning of the session about how this is a snoozer topic, but it is in all sincerity, super important and I think the point number one you made is the thing to hammer home.

The amateur move a lot of people do is they bake out 25 to 50 KPIs. I've done that way back. It's five or fewer, right? It's some, maybe in some cases it's a few more. And while that might sound paralyzing to folks when they're like, wait, but what if there's some underlying issue? Once you have those kind of guiding light KPIs that you're tracking, you can double click and say, Hey, this one's dipping y.

Okay. To assess that for the next X months, we're gonna start tracking two or three drivers of this K P I. And that's the key, is it allows you to focus on things that actually turn the, move the needle on the business. And then once that KPI's figured out, you can drop the underlying KPIs and you're back up to the top and move it again.

So it's not, it's meant to be this kind of flexible living kind of dashboard, but when people end up with 50 KPIs, everyone dreads calculating it. Yep. Everyone dreads reading it and it stops being actionable. And that last word, I think is the key thing that most people miss. You can just do the analysis paralysis, but every KPI should have a, okay, if this goes down, I'm gonna do something.

And if you can't think of anything you're gonna do, it may not be the right KPI to track. All of this needs to be super, super actionable. Otherwise it's not really a dashboard. Cause idea of a dashboard is, it's helping to guide you.

Phuong: Exactly. And I think you, you made a good point that it is, don't just choose KPIs and learn lot more about your time.

And it should be something that's I mean your primary KPI is your revenue. That's gonna be your key thing that you're driving. But as you learn more about your business, maybe there are other KPIs and you should be cognizant of that and be flexible.

MPD: A lot of entrepreneurs, less, I'm gonna say on this, don't start tracking their KPIs until after they raise venture funding.

They. They're just scrambling to stay alive. They know some of the numbers, and then the VCs come in and say, I have no idea what the hell's going on. Now. There's other people that I have to communicate with. And so it, it evolves towards this process. I recommend everyone starts this as soon as possible.

This is called being a data driven leader and veteran CEO CEOs. Start with this.

Phuong: Yeah, a hundred percent agree on that.

MPD: Very cool. Thank you, Fong.

I always love when Fong does her segments, I think, for building a library of very practical guidance for founders. So if you haven't checked it out, you can find out. A lot of you find a lot of other, start that over.

All right. I was love fog deserter segments. Cause I build, I believe we're building a pretty robust library, a very practical advice for entrepreneurs. You can find a lot of her other content on all of our podcast channels, including YouTube podcast ads, et cetera. But if you are a first time entrepreneur in particular, binge consuming what she's saying is a wise way to go.

Catch you next week.