Choosing Business KPI’s

Imagine that you’re sailing across the South Pacific on a yacht.  You sip champagne as you slice silently through tropical seas and watch epic sunset after epic sunset.  Congratulations, you’ve made it.  

Your big challenge is that you rely on a satellite internet connection to get information about your business  Every week your general manager emails you a short update with a handful of metrics.

What metrics are in that email?

This is the role of KPI’s- to provide an at a glance set of numbers that reflect performance.

Most business owners understand the idea that KPI’s are leading indicators.

In this post, we’ll build on that understanding, by examining three questions that determine what makes for an effective KPI for measuring overall business success.

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The Money on The Table

What is better: making a sale worth $5 or making one worth $5,000,000?

Got your answer?

If it’s $5 or $5,000,000 it’s wrong.  The correct answer is:

It depends on how much it costs you to fulfill the sale.

If it costs you $.25 to fulfill the $5 purchase and $6,000,000 to fulfill the $5,000,000 purchase then you should snap up the small money and run from the million dollar “opportunity.”

Logically, we know this.  It’s a “no duh” answer.  That’s how profit works: revenue – COGS = gross margin.

However, in practice, we tend to be blind to the cost of opportunities and fixate on the upside.  

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Success, Snowballs, & The Left Side

I have this fantasy of myself giving a Ted talk on success.  I open my talk by saying, “The secret to success is to be really successful early on.”  Then I walk off the stage.

It makes me laugh, but it’s true.  Advantages and disadvantages tend to accumulate.  The rich do get richer.

On the surface, it’s a worthless insight.  Who wouldn’t choose early success if they could?

However, there is utility in having a deep understanding of this idea because it provides a more powerful paradigm for long term decisions.

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Cost Versus Growth Hiring

When I hired my first employee it was because I felt like I didn’t have any options to do otherwise.  I didn’t have 6 months of retained earnings sitting around and I wasn’t doing highly profitable work.  But I felt like it was better to risk failing than it was to keep going as I had been.  

The common advice would have been to figure out a way to earn more profit, save some money, and then hire with that safety net beneath me.  This is cost based hiring.

I didn’t end up going out of business with my new hire and I actually made more money.  Unintentionally, I had executed a different hiring strategy: growth based hiring.

Entrepreneurs gravitate towards cost based hiring because it’s clear and safe.  But it can drastically limit your potential and carries hidden risk beneath its conservative demeanor.

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Navigating The Murk

Several years ago, in a small hotel conference room, I watched Dan Martell chart out a startup’s path.

He had a big a-frame writing pad and on the bottom left he started a line that went up and to the right.  Initially the line was straight, but after a couple of inches he started to scribble, and then take the line into a yarn ball of turns and twists.  Then the line started to straighten out to its original trajectory and eventually became true and finished on the top right of the poster board.

He tapped his yarn ball at the beginning of the line and said, “This is the murky middle.  After the initial optimism of your new startup you end up here.  Nothing is clear.   And you make an endless series of pivots to try and get your business to work with no idea of what will work and when it’s going to end.”

I come back to that illustration time and again.

It’s emblematic of what it means to be an entrepreneur because it is our quintessential problem.

The Murk is the fog of uncertainty where there are no known routes to success. It’s a problem that cannot be solved by reading a book or getting advice from someone who has been there.

Being able to navigate The Murk successfully and come out the other side is one of the core skills of entrepreneurship.

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How to Choose Where To Put Your Attention

As an entrepreneur you work without the constraints that face most people in their work roles.  This is actually a double edged sword, because without that structure it’s easy to waste your time.

Because of this, one of your recurring challenges is simply knowing what to pay attention to.

The core entrepreneurial skill that addresses this challenge is being able to organize at the right level.  

Organizing at the right level is taking a variety of goals, obstacles, and data points and shifting your perspective again and again to determine what few priorities deserve your attention.

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Outperform Businesses of Your Size

Striving to achieve any business goal you encounter walls.  

Often, these are financial in nature: you don’t have enough money to hire a marketer, buy more inventory, or develop a product.  

Most entrepreneurs stop at these problems, believing that you can only address them once you have either earned more cash or taken on funding.

These are often false limits though and you can surmount them if you apply your entrepreneurial skill in creating value.

Doing so, enables you to “punch above your weight class” and perform at a higher level than similar businesses of your size.

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$80K From a Bit of Thinking

Back in January I wrote about the Profit Window and the process of profit optimization.

I used that writing as a prompt to look at our business again and identify areas where we weren’t as efficient as we could be in generating profit.

Based on that thinking, we implemented a handful of changes.  It took about a week’s worth of work to execute.

Now, in June, we’re on track to capture $75 – $80,000 in additional revenue with margins of over 50%.  

To provide a concrete example of how boosting efficiency works, I’ll explain my thinking and how this came about in this short case study.

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Fear in Business

I spoke with an entrepreneur out of Detroit named Ray recently.  Ray owns an Allstate agency.  He drives a brand new Escalade that is a fleet vehicle from a side hustle transportation company he started.  He’s in the process of buying a large building for his agency.  Most of the space he’s going to lease to other businesses.  And he’s planning on having his company build him a house to live in which he’ll rent from the company.  

All of this is bank funded.  Ray exhorted me to take out a loan and buy something.  “It’s free money! Whatever you’ve been dreaming of doing you can do it!  Start a transportation company and buy that $100,000 Lamborghini you always wanted.  Develop some assets.”  

In my imagination, I was watching the bank take Ray’s home because his business had run up against some loss he hadn’t foreseen.

How affected by fear do you think you are?

How does fear impact your business decisions?

For myself, I’ve almost never felt scared or anxious in business, but fear has had a larger impact on my choices than any other factor.  Bigger than luck, bigger than the market, bigger than the limits of my skill or knowledge.

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How to Approach Product Ideas

The first product I created was a poll over email plugin for a CMS.  

The idea came from a discussion I participated in as part of a tech user group about how to decide on a course of action affecting the group.  I thought, “If someone could just send a poll over email, we’d be able to come to a decision immediately.”

I was looking for a product idea and leapt on this.

Over the next 9 months, I wore myself down writing the plugin in my evenings, weekends, and vacations.  I traded work with a graphic designer to create a polished website design to sell it and build that too.

I launched it to crickets. After a month working on the website and marketing and was able to improve my 0 sales to 2 purchases.

It sucked hard.

Ideally, product opportunities organically present themselves to you:  

  • You scratch your own itch.  
  • You build something for a client that everyone needs.  
  • Your boss tasks you with building something that’s not in the market (looking at you Bezos.)

But most of the time, for most of us, that’s not going to happen.

So how can you deliberately identify product ideas that are winners?

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