How to Set KPI Targets that Drive Business Growth
Every business desire to grow and dominate its market. However, business growth hinges on consistently measuring performance to see how the business is doing and determine whether to optimize performance or implement change.
This is where KPI (key performance indicators) targets come in. KPI targets are short-term performance metrics that businesses use to track their progress toward achieving strategic objectives.
But how do you set KPI targets that drive business growth? This article will answer this question by exploring 7 steps that will help you set KPI targets that drive business growth.
At the end of this article, you’ll be one step closer to achieving your strategic objectives.
1. Identify the key areas that align with your business growth goals
The first step to setting KPI targets that drive business growth is to outline your growth objectives and identify business areas that impact those business objectives.
Doing this helps you focus on activities that will contribute towards achieving strategic goals instead of wasting time and resources on improving activities that do not move the needle towards achieving goals.
To identify key areas that align with your business growth goals, analyze your business performance and ask yourself these questions:
What does business growth mean to my company?
Is it improved market share, revenue, profitability, etc.?
After determining what business growth means to you, review all your business activities to identify the key areas that impact your growth objectives so that you can focus on improving these areas to optimize their contribution towards achieving your goals.
Once you have a clear picture of the key areas that impact your goals and the improvements they require to optimize their contribution, you can then set targeted KPIs on these insights.
For example, consider an online business whose main growth goals include improved customer acquisition and market share. When setting KPI targets, it starts with identifying key areas that impact those business goals so as to improve these areas.
It identifies “order fulfillment” as a critical area hindering its growth goals because its competitors fulfill orders significantly faster than it does.
It decides to focus on improving order fulfillment operations to acquire more customers.
To track the success of this effort, it set KPIs regarding order fulfillment time, such as how long it takes to process an order, deliver an order to the customer after processing, etc.
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2. Select Key Performance Indicators (KPIs) that directly measure progress toward your strategic objectives
After determining the key areas you need to improve for business growth, the next step is to decide on the KPIs to use in tracking progress toward the goals.
It is important to note that, even within the key areas, “not everything that can be measured needs to be measured.” For KPIs to be effective, they should directly measure progress toward your strategic objectives.
For example, consider a business with a growth goal of improving revenue. It may identify the focus area as “sales.” Good KPIs for it are those that directly measure progress towards achieving the “more revenue” objective.
These include sales KPIs like monthly sales growth rate, average purchase value, conversion rate, and sales target attainment. Customer satisfaction KPIs like customer lifetime value are also fine.
When the growth goal is “more revenue,” a sales KPI like “monthly sales growth” is more effective than a customer experience KPI like “direct traffic.”
True, direct/ website traffic is an important metric as it helps managers track visits to their websites. But it does not directly measure the business goal.
However, the “monthly sales growth” KPI directly measures the growth of your business, allowing you to spot sales growth problems quickly and act accordingly.
When selecting KPIs, it’s also important to know that different metrics could give a better indication of whether a particular objective is being realized.
For example, when pursuing the “more revenue” growth goal, a business should not use only the “monthly sales growth” KPI. Instead, it should track a couple of other sales KPIs to get a better picture of the progress it is making and where to improve.
You may also use the “average purchase value” KPI, as it can tell you whether you should incentivize existing customers to spend more.
Know that selecting KPIs for your objective is a time-consuming and expensive activity. You’ll need to review data from many sources and have countless meetings with teams to review these.
However, the strategy management software Kippy uses AI to automatically generate KPIs for objectives, making KPI selection easy-peasy.
The concept of stretch targets
The best targets for business growth are stretch targets, which push the boundaries of what is considered achievable. Stretch targets are ambitious but realistic targets that challenge a business to achieve results beyond its normal accomplishments.
For example, if a normal business goal is to achieve a 20% increase in sales, you may as well aim to get bigger and better wins by stretching the goal to a 60% increase in sales.
That does not mean that stretch goals are unrealistic. Instead, they are challenging goals that rely on novelty to achieve. That is, they force you to innovate and take a brand-new approach toward achieving your goals.
For instance, if increasing marketing efforts was your plan to achieve the “20% sales increase,” having a stretch goal of a “60% sales increase” may force you to adopt more innovative sales efforts like using resellers or implementing an e-business strategy.
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3. Analyze historical data or industry benchmarks to set realistic targets for each KPI
Many managers set unrealistic targets and end up frustrating strategic goals (instead of achieving them) because they fail to consider their existing work capacity and business environment. Thus, analyzing performance history and industry benchmarks can help you set realistic targets for your KPIs.
Unrealistic targets can make you lose sight of your goals and objectives, as they can cause a feeling of never achieving anything and a loss of motivation.
Historical data is used to establish your current work capacity. With this data, you can track your company’s performance over time, identify areas for improvement, and make predictions about future trends.
This prevents you from setting targets that are simply idealistic. Instead, targets will be anchored on what you can achieve in your situation with your resources.
While historical data looks at how you have been performing, industry benchmarks look at what is normal in your industry.
Analyzing industry benchmarks can reveal how far you are from your competitors, showing you the metrics you must hit to be successful in your market.
Analyzing industry benchmarks will help you answer the question:
Are you good enough to compete in the market?
This analysis can help you set stretch targets, thereby setting performance targets that may be very challenging to achieve but not impossible.
For instance, if the goal is to increase sales, a target such as “100% sales increase” may be too idealistic and unrealistic. Instead, you should consider past and current performance and market conditions to determine by what percentage you can realistically increase sales.
E.g., if your month-over-month sales growth figures in the past 6 months are 5%, 2%, 0%, -1%, 5%, and 1%, respectively, setting a 100% sales growth target may be unrealistic.
Also, consider market conditions and competitor activities that will affect the achievability of targets.
For example, the 100% sales growth may be unattainably high if there are many competitors in the market, competitors are actively slashing prices or implementing other “market-grabbing” strategies, low-priced product substitutes are flooding the market, etc.
4. Ensure that each target is specific, measurable, attainable, relevant, and time-bound (SMART)
Performance targets are more effective if you can structure them in a way that clarifies them and allow you to focus your efforts on achieving them. One of the best ways to do this is by following the SMART model.
Thus, when setting targets, ensure that each one is SMART - specific, measurable, attainable, relevant, and time-bound.
For targets to be specific, they should be clear and concise instead of vague or ambiguous. For example, rather than making the vague statement, “We need to grow our company,” you should be more specific with “We need to grow sales/ profits/ customer base.”
Making your targets specific helps you narrow your focus and attack what you are hoping to achieve instead of dancing around it.
In the example above, you will not be confused about what “growing our company” means.
Rather, you know what exactly you are growing (sales, profit, customer base, etc), and you can hone in on that.
For targets to be measurable, you should be able to track progress toward achieving them. For example, it is not enough to have a specific target like “Grow sales.” Instead, you should make it measurable.
This may involve including a measure for tracking your progress as you grow sales. Thus, a specific and measurable target will be “Grow sales by 20%.”
Adding “by 20%” to the specific target “grow sales” will help you track your progress and show whether you are achieving the target or not.
If sales grow by only 5%, you can reevaluate and make adjustments to push you toward the 20% target.
For targets to be attainable, they should be challenging but not impossible to achieve. To set achievable targets, consider the constraints of money, competencies, time, market conditions, and other internal and external constraints.
Thus, instead of an idealistic target like “grow sales by 200%,” a better target will reflect realities by being specific, measurable, and attainable (such as ”Grow sales by 20%. It’s feasible to achieve this given our available resources and current market conditions.”).
For targets to be relevant, they should be worthwhile to you (at that time) and align with your overall objective.
For example, if your overall objective is business growth, “increasing sales by 20%” does help you grow and is, therefore, relevant.
For targets to be time-bound, they should have a time frame when you want to achieve it. It is insufficient to state a target as “Grow sales by 20%.” Do you want to achieve the “20% sales growth” in 6 months or 2 years?
Thus, to perfect this specific, measurable, attainable, and relevant business growth target, you should make it time-bound by adding a time frame for achieving the 20% sales growth.
The fully SMART target will be “Grow sales by 20% in 3 months.”
Making targets time-bound gives you a deadline for achieving them. First, this increases your motivation. It also enables you to create a schedule for achieving them.
5. Cascade the targets throughout the organization, aligning them with relevant departments and teams
Your business probably has different departments. But the various operational units must stay connected and work towards a common goal for business growth. So, for KPI targets to be effective, you should cascade them to all levels of your organization.
Cascading your targets throughout the organization connects company-wide targets to the teams that will execute your strategies. This ensures that everyone and everything in your organization aligns with your strategies.
When cascading targets, you establish targets at the highest level of the organization, then set supporting targets for teams and individuals within the organization. This establishes a connection between strategic targets and employees.
It also creates ownership, as everyone can see what they need to accomplish for the organization to achieve its overall targets.
Thus, cascading your targets down the organization increases employee engagement and can help you develop your team to improve performance.
For example, consider setting a strategic objective of increasing profits by 20% at the end of the second quarter.
You can then proceed to set supporting targets for relevant departments as follows:
Sales: Increase sales by 15% before the end of Q2.
Operations: Cut production cost by 20% by the end of Q1.
Design: Fix bug in feature “X” of the product.
You can proceed further by setting supporting targets for individuals within departments. For example, you may set targets for the sales team, such as “close 10% more sales before the end of Q1.”
6. Communicate the targets to stakeholders and employees
Employees cannot execute strategies they know nothing about. Thus, after setting objectives and cascading them to all levels of the organization, it is important to communicate these targets to employees.
It is not enough to connect company-wide targets to teams and individuals. It is also important to get the performance targets of each department to the individuals.
You have a better chance of achieving your targets if your teams know what their expectations are and agree on them. Review targets with employees and ensure they know how their individual or team KPI targets relate to the lower-level or higher-level KPI targets.
To motivate everyone to perform optimally toward achieving targets, you may also offer incentives. Incentives should be attractive to your employees to be motivating. But they should also be consistent with your targets.
For example, when the company-wide objective is product development, you may offer incentives that promote creativity and curiosity, such as training opportunities.
With incentives aligned with KPI targets, employees can see that exceeding expectations on activities that impact organizational goals will bring them extra rewards.
This reinforces a performance-driven culture, as employees will be motivated and increase their productivity in their individual roles.
7. Continuously monitor performance and adjust targets as necessary
Another vital key to setting KPI targets that drive business growth is continuous improvement. Business success requires continuously reviewing progress toward achieving your targets and making adjustments as necessary.
When you set targets, the last thing you want is to discover in the 5th month that you cannot meet your 6-month target.
Constantly assess progress toward each KPI target. Make it collaborative by reviewing progress with your team members and other relevant stakeholders. If the review reveals that you’re not meeting the targets, adjust them to reflect reality and try again. When readjusting targets, ensure the new ones are more realistic.
Takeaway: Use Kippy to set KPI targets that drive business growth
Tracking progress toward achieving strategic objectives is key to your company’s success. KPI targets will help you track your progress and determine whether to optimize performance or make adjustments.
The seven steps discussed above are tested and trusted to help you set KPI targets to drive your business forward.
They include identifying business areas that align with your growth goals, selecting KPIs that measure progress toward your objectives, analyzing historical data and industry benchmarks to set realistic targets, and setting SMART targets.
They also include cascading targets throughout the organization, communicating targets to all employees, and continuously monitoring performance and making necessary adjustments.
The strategy management tool Kippy will make your job easier when implementing these steps.
Kippy automatically generates accurate KPIs for your objectives. You simply enter your objective, and Kippy will furnish you with the best KPIs in seconds, saving you weeks of research.
Want to put your strategy and KPI targets at the heart of everything your teams do? Let Kippy help you. Book a demo with Kippy today!