The Importance of a Holistic Approach to Choosing KPIs in Marketing: Goodhart's Law
Posted: Tue Dec 03, 2024 7:20 am
It seems paradoxical: the choice to assign an objective in the form of a KPI can be the source of very australia phone number list serious problems in a company. On the one hand, the objective measurement of the results of a department, an employee or an external consultant is obviously indispensable in a structured company; on the other hand, it could become the cause of incorrect behavior.
This is not a phenomenon that was born today, with marketing and online: on the contrary, it is a rule that has been known for about half a century, initially observed on macroeconomic phenomena, and which goes under the name of Goodhart's Law.
In practice, the human tendency to maximize profit (we would like to add: by minimizing efforts) means that the KPI chosen and given as an objective is then pursued even to the detriment of the real objectives of the company or more generally of the organization that established it.
As indicated by Goodhart's Law, in fact:
“When a measure becomes a target, it ceases to be a good measure”.
The KPI is an approximation, not reality
The central point, the one from which all subsequent problems originate, is this: a KPI is not an objective in and of itself, but an approximation of something else that is often not well defined.
We may want our company to acquire new leads, and think it is a good idea to make marketing as aware as possible of this point – perhaps by tying the number of new leads to production bonuses, or by tying the agency's reappointment to this parameter.
In reality, however, no company needs a large number of names that have a low propensity to purchase; focusing everything on lead acquisition, ignoring their quality, only results in a waste of resources. The agency or the internal employee could be encouraged to collect leads without adequate selection, with very little effect on the final results but significant in increasing management costs.
There are many examples of this phenomenon and they apply to practically any possible parameter. This is why we must instead have clear the final, real objectives of our company when we go to define the KPIs.
When it comes to business strategies, the real goal is (almost) always the growth of the company and its profitability in a sustainable way over time. This goal, however, is achieved only if several conditions occur simultaneously and if a series of micro-goals that are also qualitative are identified.
Even the objective of “increasing turnover” is wrong if it is separated from everything else: for example, very high levels of turnover could be achieved but by inflating costs too much, or by exposing oneself to excessive credit risks, or even with short-term operations that risk sinking the company over a longer time horizon.
Not surprisingly, this is the classic criticism levelled at certain speculative operations: maximising the immediate value of the company, but sacrificing (for example) its production capacity or relationships with stakeholders.
The use of aggregate KPIs
The holistic approach mentioned above translates, in other words, into the choice of aggregate KPIs: summary performance indicators, which take into account multiple parameters simultaneously and which can therefore give a much better idea of both the quality of work and the actual approach to company objectives.
Let's take some KPIs that are commonly used in marketing (and, in particular, in web marketing). Generally, the risk with these indicators is to make big numbers, but on a type of user who is not really interested in the product/service or who is unlikely to convert:
Number of new leads
Number of contacts from the web
Number of cold calls or recalls made
Number of email presentations sent
Marketing costs per contact or lead
Number of (positive) reports about the company in the media
Number of followers on social networks (Twitter, Facebook)
SEO positioning in search engines
This is not a phenomenon that was born today, with marketing and online: on the contrary, it is a rule that has been known for about half a century, initially observed on macroeconomic phenomena, and which goes under the name of Goodhart's Law.
In practice, the human tendency to maximize profit (we would like to add: by minimizing efforts) means that the KPI chosen and given as an objective is then pursued even to the detriment of the real objectives of the company or more generally of the organization that established it.
As indicated by Goodhart's Law, in fact:
“When a measure becomes a target, it ceases to be a good measure”.
The KPI is an approximation, not reality
The central point, the one from which all subsequent problems originate, is this: a KPI is not an objective in and of itself, but an approximation of something else that is often not well defined.
We may want our company to acquire new leads, and think it is a good idea to make marketing as aware as possible of this point – perhaps by tying the number of new leads to production bonuses, or by tying the agency's reappointment to this parameter.
In reality, however, no company needs a large number of names that have a low propensity to purchase; focusing everything on lead acquisition, ignoring their quality, only results in a waste of resources. The agency or the internal employee could be encouraged to collect leads without adequate selection, with very little effect on the final results but significant in increasing management costs.
There are many examples of this phenomenon and they apply to practically any possible parameter. This is why we must instead have clear the final, real objectives of our company when we go to define the KPIs.
When it comes to business strategies, the real goal is (almost) always the growth of the company and its profitability in a sustainable way over time. This goal, however, is achieved only if several conditions occur simultaneously and if a series of micro-goals that are also qualitative are identified.
Even the objective of “increasing turnover” is wrong if it is separated from everything else: for example, very high levels of turnover could be achieved but by inflating costs too much, or by exposing oneself to excessive credit risks, or even with short-term operations that risk sinking the company over a longer time horizon.
Not surprisingly, this is the classic criticism levelled at certain speculative operations: maximising the immediate value of the company, but sacrificing (for example) its production capacity or relationships with stakeholders.
The use of aggregate KPIs
The holistic approach mentioned above translates, in other words, into the choice of aggregate KPIs: summary performance indicators, which take into account multiple parameters simultaneously and which can therefore give a much better idea of both the quality of work and the actual approach to company objectives.
Let's take some KPIs that are commonly used in marketing (and, in particular, in web marketing). Generally, the risk with these indicators is to make big numbers, but on a type of user who is not really interested in the product/service or who is unlikely to convert:
Number of new leads
Number of contacts from the web
Number of cold calls or recalls made
Number of email presentations sent
Marketing costs per contact or lead
Number of (positive) reports about the company in the media
Number of followers on social networks (Twitter, Facebook)
SEO positioning in search engines