Why your Key Metrics should be compound metrics
Look around you, some of the most critical data points around you are Ratios, which are essentially Compound Metrics, i.e metrics made from 2 or more metrics. For the stock market, some of the popular metrics are ratios like the Profit to Earning percentage, Earnings Per Share, Moving averages (averages are ratios too), and more. From Debt to GDP ratio to gross margins, most of the critical metrics/indicators are ratios.
Yet, most of the metrics we measure and talk about are singular. From page views to Users, GMV to Rides they are the most singular metrics which can be gamed (they usually are) and do not give the overall picture.
Great KPIs are usually compound metrics
- Arpdaus (Average Revenue Per Daily Active Users)
- Apru ( Average Revenue per User)
- Avg order value
- Retention rate
- repeat purchase rate
Unlike single metrics, compound metrics usually have the added benefit of being harder to game/manipulate, which is the single most important function of compound metrics, that also makes them great KPIs. In addition, they also showcase how the system is defined and control levers for performance improvements.