We talk to startups and investors, you get the value.
Once, there will be a moment, when your startup will stop being an imaginary project or a side work. You will mastermind a business plan, create an MVP, attract an investor, register a company and start paying salaries to the team members. And on one fine day, you will come up with a question about the effectiveness of your employees: is it worth paying them bonuses so as not to offend or insult anybody? The objective answer to these questions is KPI — Key Performance Indicator or key indicators of effectiveness.
We talk to startups and investors, you get the value.
I came across the KPI two years ago, when I started my job as a chief editor on the financial portal. Before that, I worked according to a plan — my bonuses depended on whether I would prepare a certain number of texts within a month or not. Since the bar was quite low, it was almost impossible not to fulfill the plan. I worked on such a system for several years, and when I switched to another job, I was a little surprised that efficiency can be measured in a completely different way.
So, I had to build up my work and work of a journalists team, grounding on 5 metrics — views of all news materials for a calendar month, the number of all unique news visitors per one calendar month, the number of entries to the news feed from browsers, the number of entries from Yandex.Dzen and the number of new material visitors per month. The first month was hard as I didn’t fully understand how I and my new team could influence these metrics, however, as soon as we managed to define preferences of the audience, figure out how browsers and Dzen work, things took a favourable turn.
The motivation system was designed so to give bonuses to the team members when they achieve specific goals — and it worked. During the year, the news traffic increased by 9 times, this enabled the company to attract more advertisers, and for me and my team — to influence the size of the salary. But if the team had worked in the old way “according to a plan”, we would have remained at the old level and would have thought that we were doing everything we could. So KPI can help the company to increase the team’s work efficiency exponentially, and also indirectly affect the company’s profit and weight in the market.
KPI — performance metrics of a team or of a separate employee, which help the company to achieve specific goals, define the employee’s work effectiveness and results.
An interesting fact: in some countries, for example, in the USA, Germany, Japan, Malaysia, Korea and Singapore, Key Performance Indicators system is considered as a national idea and underlies in the work of all companies.
The aim of the KPI is to create a project, where employees act as a team and without any conflicts. All team members work effectively, they are satisfied and motivated, as they receive bonuses for this.
However, if to look in particular, then the aims of implementing KPI in a project are the growth of the project’s income, consolidation of the positions on the market, creation of the info-database, which would allow to analyze the project’s work and to make decisions grounding on the data in perspective.
In the startup case, KPI also defines actions, which in the result, may help the project to take off. In this case, KPI pushes the team to experiment and use new methodologies.
A correctly developed startup’s KPI can:
1. Make the founders’ life easier.
You don’t need to worry that the employees at some moment can interact like Swan, Pike and Crawfish in the famous fable. Each team member will understand what the aim of the project and his specific role in the team are. You will know the work effectiveness of every employee and, of course, you will be able to give him bonuses, taking into account objective factors.
2. Make the project more respectable in the investors’ eyes.
When a potential investor sees that you don’t just have a business plan and a team, but also a smart approach to the work organization, when he sees that you have defined key metrics, you calculate them monthly and spectate a positive dynamics, then it is likely, that he will agree to look closer to your project, and maybe he will do a soft commitment, relying on the current traction.
3. Make the teamwork more efficient.
When a team knows, what the project is aiming in the nearest month/quarter, every team member knows what is the method to count his efficiency and how he can influence it, results are not long in coming. In most cases, people are interested in leathering away their job, especially if it has an impact on salary.
4. Motivate the team in general and every employee in particular.
See point 3: there is no better motivation than a bonus for a good performance during a month, and if it is supported by non-material bonuses, like a career promotion or a possibility to learn, then people would be at 110% output.
5. Allow delegating the tasks.
Each employee becomes his own boss: he requires of himself a lot to fulfill the KPI and receive the desired bonus.
There exist many practices and requirements for calculating key performance indicators but principally you need to remember two main points, which lay on the basis of KPI. In order to develop the necessary requirements for them, you need to:
define the metrics, which influence your income the most;
define who and how influences these metrics in your startup.
There is no complete set of parameters, they’re individual for every business. For instance, if your project receives income from the online sales, then it means, that the key metrics for you will be a PPC (price per click) and website conversion. If you have a call center, then it is more expedient to take into account call duration and correlation between calls and the quality of orders.
Below are the main directions, derived from the unit-economy, which will help a startup to track results and influence them.
It is the key aim of every business, and for a startup it is vital. The sooner it starts receiving revenue and the faster it grows, the more trustworthy your startup will be for potential investors.
At first stages, the startup may operate at a loss, spending on the client attraction more than these clients bring profits. For example, if you have an investment business model and your goal is to capture the market share (as companies like Uber, Yandex.Taxi did), you will most probably compensate for promotion expenses after some time.
If talking about specific metrics, I would like to mention Profit and Margin. In KPI, for example, we can set the goal and achieve the income in the first three months after the sales start, and demonstrate a monthly growth in a fixed (in monetary equivalent or in percents) size after all.
Your position in the market directly depends on how many of them you have and how loyal they are to your product. If you calculate how much you earn from one client on average and what expenses you incur, then you can calculate how much you will earn from the customer flow. These numbers will help you understand when you can scale a business and — most importantly — if it is worth it.
For this parameter, the metrics can be the following: the number of users attracted (UA), cost per acquisition(CPA), average revenue per user (ARPU), average revenue per one paying user (ARPPU). In the KPI, we can set requirements to attract a certain number of new users and retain old ones every month; or to the growth of average income from a client.
To start selling your product, you need to produce it, and then promote it to your target audience. All these are expenses. In order not to spend all your or investors’ money before receiving first income, you need to count ahead all your expenses and to understand how you can influence them.
The main metrics are the following: cost of goods sold (COGS), fixed business expenses (Fix COGS), marketing expenses. As a KPI measure, there may be a reduction by a certain number of percent of the cost of each sale on a monthly basis.
First of all, it’s the “from top to bottom” principle: in other words, firstly, you define high-level project goals, and after that you “go down” to tasks, which are set for each separate team member.
Secondly, the main goal shouldn’t be tied to financial success; it is better to arrange things in a way, that the income growth would be subsequent. This will help a startup not to go into a skid at the first stages of work under KPI approach. Connect your main goal to the place on the market (to enter top-3 or top-5 in your segment) — its accomplishment will also positively influence the income, and besides, it will positively illustrate the progress of your project.
Thirdly, while developing the KPI, take into account the performance of each employee, and do not connect all bonuses to the results of a team; a marketer can’t influence the work of a developer, and sales manager can’t influence the designer’s performance. “Team” bonus may lead to a conflict on the project and as a result, to level out all bonuses for a startup after implementing the KPI system. That is why, it is better when each employee has his own KPI, which he can influence.
Features of the correct KPI system:
during the month, a project member sees what he has done and what he has to do to meet the requirements;
the employee understands how he can influence his performance.
Food for thought
At the beginning of 2000th, Harvard Business Review journal published results of the research, which was dedicated to studies of the employee work performance and their motivation. According to the report, in the average company, only 5% of the company’s employees always work well and approximately the same number of people always do their work badly. The performance of the other 90% directly relies on the correct task setting and on the control of their accomplishment.
Many projects didn’t benefit from implementing the KPI, and it is not because it doesn’t fit them. The reason is pretty simple: the KPI wasn’t developed correctly and as a result, it didn’t influence the performance of the team. These are the most common mistakes:
Mistake №1. The KPI of project members are not coordinated and do not lead the project to the common goal. In the end, we have a disorientated team, each member of which is struggling to do something but it doesn’t do any good.
Mistake №2. Poorly developed system of motivation, absence of a “variable” part in the salary. The salary of an employee should include usual (salary) and variables (bonuses, rewards) parts, both bonuses and rewards should be directly tied to the KPI, and be a significant part of the salary. Non-material motivation is also important, the access to the expanded social package for employees, who showed the best results during the quarter, a career growth possibility, access to the educational programs for those specialists, who prove themselves to be good.
Mistake №3. Vaguely set goals. The essence of KPI is to implement a transparent system of tracking work performance and employees’ motivation, it is supremely effective and it is tied to the figures. Including metrics that are hard to calculate and hard to influence on, is eroding the KPI system in general and the motivation of a separate employee in particular. The KPI measurement can’t be “attracting new clients”, but rather “attracting 20 new clients within a month”. The same goes for an abstract formulation like “creating a quality product” — it is way too objective.
Mistake №4. The goals are unreachable. You want too much from your employees in the short period of time — it demotivates and makes people sad, and in the end, the work results may happen to be even lower than they were, as the employees will consider their efforts to be useless and they can’t influence anything, so there are no bonuses to receive.
Mistake №5. The KPI is developed and implemented without taking into account the project’s work statistics. If the goals are “taken out of a thin air”, then this will lead to exorbitant or erroneously lowered targets. The first is impossible to achieve, while the second, is vice-versa, are way too easy to achieve; as a result, a company will spend money on the easy-earned bonuses, without getting the desired outcome.
Key Performance Indicator is an element of management that can lead your startup to success. If you correctly formulate your project’s aims for the nearest month, quarter and year, tell each team member how they can help the project to achieve these aims, and the most important, how they will be rewarded for that, then the result will be amazing.
While developing KPIs, it is important for them to be achievable, clear and objective, and would follow the main goal of the project. There are no universal metrics, which would suit each and every startup, however, there are indicators that may suit many. KPI should be derived from Profit, Users and Expenses. In this way, we can set ourselves a goal to enter on a specific profit in the first three months after the sales start, regarding users — we can attract a specific number of new clients in a month, and regarding expenses — to lower the cost of sales by certain number of percent on a monthly basis.