Recently, I have had many discussions with founders, partners, employees and investors who all talk about the importance of measuring a business’ key performance indicators (KPIs), otherwise known as the numbers that provide an indication about how a business is performing.
I’ve been thinking a lot about these conversations because at first glance, this seems relatively simple, but the more I dug into the topic, the more and more challenging it became. However, once I finally dug so far that I reached the bedrock KPIs, the rewards were exponentially greater than the effort.
One story that triggered this deeper thought on KPIs: Jim Collins book Good to Great and more specifically the Walgreens example of measuring profit per store visit rather than profit per store. This is a subtle distinction, but has major implications on the convenience store business.
How long did it take Walgreens to determine that this was the right metric in the face of a classical store-by-store approach? How many people fought this change within Walgreens just because they wanted to protect the status quo? How much value was created by setting this KPI and executing well against it?
One metric that often is confused for a KPI is revenue per employee, a typical metric that people throw around as a gauge of a company’s health. Seems logical enough to have total revenue divided by the number of employees.
However, I’ve been questioning the value of this metric at a company like Stripe because so much of their revenue goes right out the door as payment fees. Similarly, the per employee number is fairly arbitrary since a single more expensive employee could do the work of 3 much less costly employees and this, therefore, can unduly influence the per employee result.
To turn this metric into a KPI for Stripe, one idea could be net revenue (total revenue minus payment costs) divided by the fully loaded cost per employee (salary plus bonus plus benefits). This results in a net revenue per dollar of total compensation (NR/DTC). By stripping out the pass-through costs, which are substantial, a more true determinant of the business results from the calculation. Since 70% of a tech company’s costs are usually people, focusing the cost side on the total compensation component gives a better reflection of the impact of hiring decisions and sales successes.
With all this said, I don’t believe that this NR/DTC is the single KPI by which I would measure my business, but it’s certainly a KPI that provides a key insight into how a business is performing and that’s what the goal of a KPI is in the first place.
What are your favorite KPIs to measure an online business?