Data has become the backbone of many businesses, including some that had never used to rely on it in the past. Today, sophisticated technological tools empower us to achieve more significant insights into how our companies operate so that we can make more informed decisions in pursuit of growth and higher efficiency.
Not all data is of equal value, though, and data isn’t an essentially good thing in itself. What’s important is to find a way to gather good data, set it in an appropriate context, and present it in a way that’s both understandable and capable of supporting better decisions.
To that end, we employ key performance indicators (KPIs) and benchmarks, often used interchangeably but should be treated and applied differently. What are the differences between KPIs and benchmarks? How should your firm be using them?
KPIs vs. Benchmarks: The Basics
KPIs and benchmarks have an essential quality: They help us cut through the “noise” of data. No business leader has time to sort through every data point, so our attention needs to be directed to the most helpful information.
KPIs and benchmarks are both capable of guiding this attention. KPIs serve as valuable indicators of how a particular element of your business performs. For example, you might study the conversion rate of one of your website’s primary landing pages to determine how well it’s generating revenue.
Benchmarks are precisely measured metrics that help you evaluate whether you meet a given business goal. For example, you might have a model that says landing pages in your industry typically have a 2.3 percent conversion rate.
If your page generates a conversion rate higher than that, you know you’re doing all right.
Tips for Using KPIs
How do you use KPIs in your business? First, you should understand that KPIs ought to follow HAATT criteria:
- Helpful. Every KPI you measure should be beneficial in some way. It should function within the context of your data analytics strategy and provide meaningful information you can act upon.
- Agreed upon. There’s an inherently subjective element to analyzing KPIs, so the most critical metrics tend to be ones that everyone can agree on. Do all your stakeholders and decision-makers stand in alignment?
- Applied. KPIs should be accurate and successfully applied to your business goals; they shouldn’t exist in isolation.
- Timely. All your KPIs should be timely and in line with your vision for business growth.
- Tied to long-term goals. Finally, every KPI should somehow be aligned with your long-term business goals. How does it help you achieve your vision?
Some additional tips:
- Narrow your focus. More data is always better, right? Not necessarily. Some business leaders are tempted to track as many KPIs as possible to have more information that would supposedly drive better decisions. It’s usually more productive to narrow your focus, however. Three solid KPIs may quickly provide more meaningful information than 50 KPIs of questionable value.
- Compare apples to apples. When you track KPIs, always make sure you compare apples to apples. In many cases, it doesn’t make sense to measure one KPI against another.
- Monitor consistently. The more consistent you are with your KPI measurements, the more knowledge you’ll develop and the better decisions you’ll make. As you gain more experience, you’ll develop an intuition for gauging these metrics.
Tips for Using Benchmarks
Let’s turn to benchmarks.
- Choose appropriate targets. You can gather your benchmarks from a variety of sources. You might be interested in comparing your business performance to that of a competitor, industry averages, or past achievements. All are viable, but some will be more appropriate, depending on the context.
- Keep the context in mind. It’s not enough to study data in a vacuum; you have to understand the context of your data. For example, companies in different industries tend to see highly different email open rates; comparing your firm to one in another sector may not be helpful. Also, seasonality and unexpected events may require you to interpret the data differently.
- Define success and failure. Your benchmarks will be of no use unless you have clear definitions of success and failure. A competitor reports a conversion rate of 5 percent; does that mean your 4.9 percent performance is unacceptable? If you see a 5.1 percent conversion rate, should you stop optimizing?
A better understanding of the use cases for KPIs and benchmarks can significantly improve your data analytics strategy. Given better measurements and applications, you can develop a firmer grip on how your business is performing – ideally, guide it in a more profitable direction.