Benefit
Great for teams that want a simple, mathematical framework of how one metrics relate to another.
What is the Focus Metric Framework?
The KPI Tree is a framework used to help structure and break down Key Performance Indicators (KPIs) into manageable, interconnected components. It's akin to a tree structure where the main goal or primary KPI is at the top, and it branches out into secondary and tertiary metrics, and beyond. This hierarchical approach aids in understanding how different metrics contribute to the overall goal and how they interrelate. KPI trees are essentially mathematical equations shown in a top-down hierarchy. If branched well, adding or multiplying the branches should sum up to the parent branch, like a mathematical equation (e.g. # of Paid Users X Average Revenue Per Paid Users = Revenue).
Here's a breakdown of the KPI Tree components:
- Primary KPI (Trunk): This is the main goal or objective of the product or business. It's a high-level metric, such as overall revenue, amount of users, or number of products sold.
- Secondary KPIs (Large Branches): These are directly connected to the primary KPI and are significant contributors to it. For instance, if the primary KPI is revenue, secondary KPIs might include average order value, customer acquisition cost, or conversion rate.
- Tertiary KPIs (Smaller Branches): These metrics support the secondary KPIs and are more detailed. Following the previous example, if a secondary KPI is conversion rate, tertiary KPIs could be website traffic, click-through rate, or bounce rate.
How should the branches be defined?
To define the branches in a KPI Tree, we need to consider the most important drivers that contributes to the parent metric. There isn't a pre-baked template for what metrics a KPI Tree for product or growth should be comprised of, but metrics that are commonly considered are:
- # of Users - # of paid users ← # of active users ← of visitors
- Averages - Average Revenue per Paid User ← Average Revenue per User ← Average price per purchase ← Average # of items per purchase
- Conversions - Conversion to paid ← Conversion to active user
Strengths and Weaknesses
Strengths
- Easy to understand: KPI Trees are easy to understand, due to its visual hierarchical nature, as well as it's mathematical nature of branches summing up to the bigger branch.
- Problem diagnosis: If implemented well, KPI Trees allow you to understand the exact metric causing the an issue to your overall metrics.
- Great framework for non-product metrics: The framework can be used for any category of KPI management that can be broken down into a formula, such as sales, hiring, or customer support tickets.
Weaknesses
- Oversimplification: Customer behavior can vary significantly across different regions, age groups, content preferences, and devices. A KPI tree focusing on broad metrics like revenue may miss these crucial nuances.
- Hard to execute: Teams who apply KPI Trees often realize that there are too many ways to branch a given metric, and deciding to branch it in a single way results in neglecting to consider certain aspects of a metric (e.g. # of paid users can be branched as [New vs Current paid users] or [region] or [plan type]).
- Views the product only in the lens of revenue: KPI Trees often only focuses on revenue metrics, and what revenue metrics are comprised of. While revenue is the most important outcome metric, this often results in the neglect of early indicators such as whether users are engaged and are gaining value from the product.
