Deciding how to measure a metric is tougher than you think. In key performance indicator (KPI) metric meetings I’ve facilitated, how to measure the metric takes much longer than picking which metrics to measure.
For example, should the metrics be measured as:
- A monthly amount or a YTD amount?
- The total of something or how much it changes?
- A count, dollar amount, or ratio?
I’ll give you some of the pros and cons of different ways to measure metrics.
Measure Metric as Total or Change?
Let’s assume you have a subscription service with 5,000 subscribers and a goal to grow that to 6,000 over the next year. Do you want to promote the goal as reaching 6,000 total subscribers or 1,000 additional subscribers? The total focuses on all subscribers, while a change goal focuses more on growth.
Measure Metric as New or Net Change?
The subscriber example also points to another choice: do you focus on just new subscribers or the net change in subscribers. You could increase your subscribers by 1,000 people either by adding 1,500 subscribers and losing 500 or by adding 2,500 subscribers and losing 1,500.
Breaking this down, you could track three numbers:
- New subscriptions
- Cancelled subscriptions
- Net change in subscriptions
The answer to which number to choose may be driven by which level of the organization the dashboard is for. For example:
- A company-wide scorecard may track net change
- A sales department may track new subscriptions
- A customer service department may focus on canceled subscriptions
Measure Metric as Monthly or YTD?
Should your metric be the goal for the month or a year-to-date goal? For example, is it more important to produce 10,000 units per month or 120,000 units over the course of the year?
YTD metrics lend themselves better to year-long efforts and annual incentive compensation. Monthly goals focus more on consistent performance month after month.
With some things, if you fall behind, you can catch up later. YTD metrics are good for those. Other times, if you missed goals one month, you can’t make it up later. Then use MTD goals.
Measure Metric as Amount or Ratio?
Some things are best measured as a raw count or dollar amount. Other times, it’s better to measure something as a ratio or percentage of something else.
For example, do you want to target a high gross profit or do you focus on maintaining a high gross margin, which is your gross profit as a percent of sales? Is it more important to cap expenses at a certain dollar amount or manage them to stay below a certain percentage of income? Do you care more about the amount of your sales or your percent of market share?
A benefit of percentages is that they show how well you manage something relative to the amount of something else. For example, is it right for you to stay below your budgeted expenses of $500,000 if sales end up being double what was budgeted?
A downside of percentages and ratios is that they are sometimes harder to understand. As the joke goes, “five out of four people are bad with fractions.” A number or dollar amount may be easier to understand, which makes them more motivational. Driving toward $1 million of profit is more motivational for many employees than driving toward 20% Return on Equity.
Like the three choices for new or net change, the choices may be different at the company level vs. different people or departments. Gross margin, which is gross profit as a percent of sales, might be a KPI to use at the company level. A sales department or salesperson may track the dollar amount of sales. A production department or person may track costs as a percent of sales or an average dollar cost per unit.
Measure Metric as Count or Dollar Amount?
A good example of this decision occurs with sales. Is it more important to measure the number of units sold or the dollar amount of sales? In internet marketing, you may want to measure the number of impressions and clicks instead of the short-term sales dollars from those clicks.
Objective or Subjective?
Finally, does a metric need to be an objective number? No. Sometimes the best or only way to measure something is a subjective assessment. A person or group may rate something on a scale of one to five or one to ten. Examples may be staff morale, customer satisfaction, or training effectiveness. Find the best informed or most objective person or persons to make this rating. Their rating must also be backed up with some evidence.
The choices and examples I’ve talked through give you an idea of decisions you must make when picking the best way to measure a KPI. These are only a few examples. You will run into many other choices. Here are some guidelines for deciding which way to measure a KPI:
- Does it focus on an aspect of a metric you most want?
- Can the person responsible for the metric control or mostly control it?
- Is it considered fair?
- Is the measurement easy to understand? If it’s not but very important, can you educate your staff on it?
- Is motivational?
- Would it ever incent people to do the wrong thing for the company?
Testing How You Measure Metrics
A good way to test how to measure a metric is to calculate the measurement for the past 12 to 24 months. Imagine it had been on your dashboard those past months. Did it provide clear feedback on the status of what you were trying to measure? Were the results easy to understand or require lots of explanation or context? Most importantly, would it have caused you to make good decisions?
One final note. You may want to measure a metric from data you currently don’t have. Start gathering that data now and testing the measurement with the questions I just listed. Implement it when you’re sure you have good data and it’s useful. Until then, you may want to measure the metric a different way or pick another metric to measure.
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