Introduction to KPIs

I am sure you have heard before that knowledge is power. The biggest companies in the world are successful because of the knowledge they gain over the years. However, we often fail to understand where it all comes from.

It all starts from data. Data = Knowledge = Power

All these companies collect data and use it to gain more power. Data from market research, their customers, products, employees, business processes. The more data the more power.

In smaller scale businesses, data can help with decision making and monitoring. When you have all the information you need, you will be able to make the right decision in a shorter period and monitor your results easier.

However, a lot of businesses do not really utilize their data. With new technologies and tools nowadays, you should not miss the chance to take advantage of this great opportunity to analyze your data and measure your business results.

So, what is the knowledge that you can take from your data and which results should you measure?

Let’s start with the basics!

What is a KPI?

A Key Performance Indicator – KPI – is a way of measuring the effectiveness of an organization and its progress towards achieving its goals (Macmillan’s Dictionary). Businesses use KPIs in different projects and levels to help them evaluate their success.

Of course, the most important performance indicators in every organization are turnover and profit. Behind this, however, hides an extensive list of measurable variables, all of which help explain how sales and profits are generated or even lost.

What is the difference between KPIs and metrics?

Let’s talk about a basic misunderstanding first. All KPIs are metrics but not all metrics are KPIs.

A metric is a way to measure things. For example, how many orders were there in the last month, how many new customers came to your shop, etc.

A KPI is a way to monitor the most important parts of your business that will help you decide on actions to improve it. KPIs are specific metrics that your business has identified as indicators or predictors of overall growth and performance. In other words, the key performance indicators are the metrics that really matter for your business.

Moreover, a KPI can be created from two or more metrics. For example, you have the below metrics.

Website traffic
Number of sales

If you combine them you have one of the most popular KPI in eCommerce called conversion rate.

KPIs should be measured and evaluated consistently so that you ensure business growth.

However, do not oversee your metrics. Many of them are worth tracking even if you don’t consider them to be KPIs at the moment. Someday, those numbers may be incredibly useful.

Why are KPIs important in eCommerce

Not having any kind of performance indicators may actually be harmful for your business, as you would need to make decisions on feelings, assumptions and subjective opinions. This is dangerous. When something goes wrong, you will have no idea why. If you are not tracking any KPIs, you will not understand the results of your strategies to be able to develop your business more and achieve your goals.

eCommerce KPIs allow you to make decisions based on real information, not just guessing. Based on the results of your KPIs you can take strategic actions on customer service, sales strategies, marketing, that are based on facts.

As mentioned before, having and analyzing the data can create knowledge that you can use to get a more powerful position in the market. After all, what gets measured, gets improved.

With the objectivity that the key performance indicators provide, you can achieve long-term success as you will always have the information needed to make the correct decision or make changes where needed. Ultimately, they will help you build your customer base and generate more revenue.

Plus, the data related to KPIs can be distributed to the larger team. This can be used to educate your employees and come together for critical problem-solving. It’s also more likely to please your managers, senior stakeholders, shareholders and lenders too.

How do I define my KPIs

Defining your key performance indicators can be time consuming and tricky. You cannot just use the most famous ones that your competitors use and hope that they will work for your business.

The most important word in KPI is “key”, because every KPI needs to be related to a specific business result that can be accurately measured. KPIs need to be defined based on core business objectives. It would help if you answer the below questions to define your KPIs:

What is the desired outcome?
Why does this outcome matter to my business?
How am I going to measure progress?

How can I influence the outcome?
Who is responsible for the business outcome?
How will I know I have achieved the desired outcome?
How often will I review progress towards this outcome?

There are so many KPIs available to choose from, sometimes even categorized by market so that you can choose the one that fits your business more. But not every KPI will help you succeed in your eCommerce business. When the time has come to choose, you should focus on:

Your business goals: Choose KPIs that directly impact your business (e.g., net-income), support your strategy and your overall performance.
Easily measured KPIs: Choose KPIs that provide you with unique insights into the progress and results your business made.
The growth stage of your business: Choose KPIs based on your business’ growth stage. Some KPIs are more important than others, depending on the current growth phase of your eCommerce business (e.g., start-up, maturity, decline phase).
KPIs that reflect your reality: KPIs differ among eCommerce businesses. Therefore, it is important to choose metrics not based on what’s trending in your industry or another business but on what’s most relevant to your business at the time.
Short and effective: Less is more. There’s no point in tracking tons of (irrelevant and unnecessary) KPIs. The best KPIs for your business provide meaningful and actionable insights to you.

However, as Albert Einstein said, “Not everything that can be counted counts, and not everything that counts can be counted.”

Wrapping up

Operating a successful ecommerce store requires your attention in many ways — from building your store to defining your brand to creating your product to offering high quality customer service.

KPIs can feel confusing and difficult to apply. But the effort that you put into tracking and understanding them will pay off.

Remember – knowledge is power. So, make sure to work to understand your business’ data and take actions that will help you improve.

Keep in mind Our next article with the most important KPIs for eCommerce is on its way!