(0:00) It's completely fine to have a handful of KPIs. Think of them as supporting metrics that give (0:05) you a well-rounded picture of how your business is performing from a financial and operational (0:11) perspective.

This is Business Strategy, where I help the ambitious to build more profitable, (0:16) iconic companies using the principles I've learned while growing and turning around (0:20) million and billion dollar companies through coltivar.com. I hope you share and enjoy.

(0:26) Let's be real. As an entrepreneur, you obviously know that success doesn't just happen by accident. (0:31) In fact, it's the result of focused effort, strategic decisions, and very clear goals, (0:37) which I refer to as initiatives.

But here's the deal. One of the most powerful ways (0:42) to stay on track and achieve your company's purpose and strategy is by setting key performance (0:48) indicators, KPIs. Now, you might be thinking, Steve, come on, tell me something new here.

(0:53) Obviously, I should have KPIs in my business. And this is what I've realized is that it's not (0:58) that business owners lack awareness on the importance of setting KPIs, like you already (1:03) know this, it's they struggle in other areas. Specifically, number one, they know that they (1:08) need to set KPIs, but they don't even know where to begin.

Or number two, they have KPIs, but they (1:14) have way too many KPIs, so they lose focus on what really matters and what's really moving the needle. (1:20) Or number three, they have the wrong KPIs. They're just measuring random stuff.

So we're going to (1:26) talk about all these problems here, and I'm going to help you to get started in the area of setting (1:31) KPIs that will really drive value in your organization. There's the right way to set KPIs (1:36) and the wrong way. I've done both of them throughout my career.

I see a lot of business (1:40) owners struggle with setting KPIs, and I'm going to provide you with some best practices. And look, (1:44) over my career, I've been able to turn around a ton of companies by putting in place measures so (1:51) the organization can focus on the most critical parts and successfully execute their strategy.

(1:57) So let's go ahead and dive in. What are KPIs and why do they matter? KPIs are specific measurable (2:02) indicators that show how well your business is achieving its goal.

Okay, let's break this down (2:08) and be more specific though. KPIs are the top measure of an organization, and they measure the (2:15) organization's effectiveness at executing its strategy.

So that's step number one. You have to (2:20) have a strategy for your business. You have to identify where are we going to compete, how are (2:24) we going to compete, how are we going to win, and then from there, you have to build out a logic tree.

(2:29) This is what I do is I build a logic tree so I can dissect value into its component parts and (2:35) understand all the levers of value within an organization. So without mapping it out, essentially (2:42) you're just guessing at what KPIs to set. And some entrepreneurs will use ChatGBT or they'll google (2:48) what KPIs should they have in such and such industry, and that could be a fine approach, (2:54) but it's very generic.

And what I find is that organizations, they have these KPIs because (2:58) somebody told them they should have these KPIs, but they're not specific to the organization's (3:03) strategy or to the problems that the company is facing, and therefore they're just measuring (3:08) random stuff, right? And this shotgun approach can create a lot of confusion for the team and it (3:15) can lead you down a very bad path.

So let's keep going here. So KPIs help you to measure what (3:20) matters most to your company's success, and that's what strategy is all about.

It's about identifying (3:25) the biggest constraints in your business and then putting in place initiatives, actions, and results (3:30) in order to overcome those constraints and to unlock value.

So think of KPIs as the compass (3:36) that guides your decisions, helping you to stay aligned with your business's biggest initiatives. (3:42) Without them, it's very easy to lose sight of what really matters, and therefore you end up wasting a (3:47) ton of time and resources on things that are moving the needle.

In other words, things that are not creating value in your company. So here's why KPIs are so important.

(3:59) Number one, they help you to clarify your goals. KPIs help you to take your strategy and the big abstract ideas contained (4:04) within it into tangible numbers so you could track your progress in real time.

(4:10) Number two, they help you to align your team. When everyone in your company is working towards the same metric, guess (4:15) what? It's easier to create focus and accountability.

(4:21) And number three, KPIs drive better decisions. By measuring the right things, you can make data-driven decisions that steer your business in (4:26) the right direction.

(4:31) Because, hashtag real talk here, if you don't have KPIs in your business, you're just guessing, right? You are.

(4:36) You're just guessing. I don't know how I did it in the past. I think I just relied on like sheer grit, willpower, and just hard work to drive my business forward.

(4:42) But that's a terrible idea. I left a ton of money on the table, and I don't want you to make the same mistake.

(4:46) So put in place KPIs in your business. It'll make all the difference in the world.

(4:51) So you may be wondering, how do I get started? So when you think about KPIs, it can be very tempting to try to track (4:56) every possible metric.

(5:02) But here's the thing. Focusing on too many metrics can dilute your efforts and create a ton of confusion.

(5:09) So instead, start with just one key metric that directly ties to your business's overall purpose and strategy. So this will serve as your guiding star.

(5:15) So let's say, for example, you're running a subscription-based business. Your most important metric might be the (5:20) number of active subscribers or monthly recurring revenue, MRR.

(5:27) Or if you're in e-commerce, maybe it's conversion rate or average order value. But whatever it is, it should be something that (5:32) reflects how well your business is achieving its strategy.

(5:39) This one metric doesn't need to be overly complicated, all right? Just keep it very simple, please.

(5:44) It just needs to be very clear and meaningful.

(5:50) So your top KPI should help you to measure the results that matter most to your business and whether or not you are creating value, whether you're generating value with your strategy.

(5:55) So whether it's growth, profitability, or customer satisfaction, just make sure it ties back to your strategy.

(6:00) Now, here's the deal. I'm not saying you only can have one KPI in your business.

(6:07) While having one key metric is important, you don't have to stop there. It's completely fine to have a (6:13) handful of KPIs as long as they support your overall strategy and are not too overwhelming.

(6:20) That's the key. Think of them as supporting metrics that give you a well-rounded picture of how your (6:26) business is performing from a financial and operational perspective.

(6:32) So for example, if your main KPI is active users, you may also want to track customer retention rate, average session (6:38) duration, or customer of lifetime gross profit, LTEQP.

(6:45) These secondary metrics will give you more context about what's driving your primary KPI and where to focus your efforts next.

(6:51) That's where that value tree is really powerful for me because I'll start with value, then I'll break value into its (6:57) component parts, and I'll see all the drivers on a piece of paper, and then I'll narrow in on the (7:01) value drivers that are going to have the biggest impact for the business.

(7:06) So the key here is balance. You want enough KPIs to give you valuable insights, but not so many that it becomes impossible to (7:11) track and analyze them all.

(7:17) A good rule of thumb is to keep it under five or six main KPIs. This will help you to stay focused without getting bogged down in too many numbers.

(7:23) So hopefully by now you understand why KPIs matter and how to focus on your most important metric.

(7:30) So let's dive into how to figure out which KPIs are right for your business.

(7:36) Now for every business it's different, right? It depends on your strategy, it depends on your shared aspiration, what does winning look (7:41) like for you, and the constraints you're dealing with.

(7:46) But here's just a generalized process to get you started. So hopefully you'll find some value in this.

(7:52) Number one, align with your purpose. So ask yourself, what does success look like for your business?

(7:56) That's your shared aspiration. What's the purpose for the next year, for the next five years?

(8:02) Your KPIs should be directly linked to your business's overarching purpose, which then ties to your overarching strategy.

(8:09) Number two, think about what drives your success. What creates value?

(8:15) What is the core factor that drives growth for your company? For a SaaS business, it could be user engagement.

(8:20) For a retail business, it might be sales conversion. Identify that key driver and make it your primary KPI.

(8:27) Number three, make it measurable. Your KPI should be something that you could track with numbers.

(8:31) This could be revenue, customer retention, churn rate, and any other metric that quantifies progress.

(8:37) If it's hard to measure, it's probably not the right KPI. So just keep it very simple.

(8:42) Number four, keep it actionable. Your KPI should lead to decisions. It should lead to modifying behavior.

(8:48) The worst thing you could do is to have a bunch of KPIs that don't influence behavior.

(8:54) So in my monthly financial strategy review meetings with companies, we look at the financials (8:59) of the company for the prior period.

(9:04) And then we look at key performance indicators. And then using this data, we make adjustments to the strategy.

(9:10) So literally in the meeting, we'll look at gross margin. We're like, oh, it's dipping for the last three months.

(9:14) Let's look at our pricing. So let's go back to our pricing model and make sure that it's dynamic enough for the holiday season or whatever it may be.

(9:18) But we define actions to take based on the KPIs. So make sure your KPIs are actionable and your team knows how to modify its behavior in order to improve the KPI.

(9:24) Number five, revisit and adjust. So as your business evolves, your KPIs may need to evolve too.

(9:30) And that's totally fine. Keep track of how your business is growing and changing, and don't be afraid to adjust your KPIs if necessary.

(9:37) So kill a KPI if it doesn't make sense anymore. The worst thing you want to do is just have this dashboard where you keep adding KPIs and a lot of the KPIs aren't relevant anymore.

(9:42) So remember, KPIs help you to stay focused on solving constraints. So once you solve a constraint, maybe that KPI goes away and another KPI comes into the dashboard.

(9:47) So in conclusion, setting KPIs, as you can see, I'm super passionate about this, is one of the most powerful ways to ensure your business stays focused and on track.

(10:09) By defining the one metric that matters the most to your success, that's a good starting point, you can create a clear path forward.

(10:15) And then once you have that one metric in place, use that logic tree I was talking about to understand the key drivers in your business.

(10:20) And then you can create some supporting KPIs to give you more context.

(10:25) But the key here is don't overly complicate things. Keep it very simple and focused on what truly drives value for your business.

(10:29) All right. Remember, KPIs aren't just numbers. They're a way to measure success and to measure the effectiveness of your strategy.

(10:34) So they'll help you to hold your team accountable and to drive growth.

(10:40) All right. So I love KPIs. That's all I'm going to say. I'll leave you with that.

(10:45) If you need help with KPIs in your business, or you just want to talk about strategy for your company, you can always reach out at coltivar.com.

(10:49) Thanks for joining me for this episode. Until next time, take care of yourself. Cheers.