How to use Metric Hierarchy for selecting KPIs?
Before going into key performance indicators (KPIs) in internet businesses, let's establish two foundational concepts: Metric Hierarchy and Paired Metrics.
Applying the concept of Metric Hierarchy prevents the overwhelm of navigating through an endless list of potential metrics. It enables you to see how a few top-level metrics can break down into a systematic and connected hierarchy.
Why Choose a Metric Hierarchy Over a Simple List?
Metric Hierarchy is a structured way of organizing KPIs that reflects the strategic priorities and process flow of a business.
It helps in aligning metrics with the company’s goals and ensures that all levels of the organization focus on relevant data that drives growth and performance.
In essence, it's about understanding which metrics are fundamental and how they influence or relate to other metrics within the business operations.
How to Implement Metric Hierarchy:
☞ Start by identifying the core objectives of your business, or sub-part of business that you are building the hierarchy for.
☞ Then, break down these objectives into independent metrics that make up that objective e.g. breaking revenue into traffic, conversion rate, and average transaction value.
☞ Repeat this process for the next level of metrics e.g. breaking down traffic by channel; or breaking down conversion rate by funnel steps.
☞ Arrange these metrics in form of a tree or a hierarchy, from the top-most level down to the lowest level of metrics, ensuring each level supports the one above it.
☞ Regularly reviewing and updating this metric hierarchy is also critical as your business evolves.
Takeaway:
Metric hierarchy isn't just about organizing data; it helps align every part of your organization towards common goals.
By understanding and utilizing this idea, businesses can ensure that KPIs align with objectives & core drivers of those objectives. We will come to metric hierarchy of each part of the business later in this skilleton.