Definition of Key Performance Indicators
The International Business Corporation (IBM) defines a key performance indicator as a quantifiable measurement of the improvement or deterioration in the performance of an activity critical to the success of a business. KPI.org, an online free resource sponsored by the Balanced Scorecard Institute, defines a KPI as the critical (key) quantifiable indicators of progress toward an intended result.
Lord Kelvin, a British Mathematician, defined KPIs as "When you can measure what you are speaking about and measure it in numbers, you know something about it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts advanced to the stage of science."
According to Investopedia, a key performance indicator (KPI) is a set of quantifiable metrics a company or industry uses to analyze or compare performance in terms of attaining strategic and operational goals. According to the definitions above, every KPI should be quantifiable and assess crucial characteristics that indicate whether the firm is progressing.
KPIs are a collection of measures that focus on the aspects of organizational performance crucial to the organization's success. KPIs are rarely new to an organization. They may have gone unnoticed or been gathering dust somewhere unseen to the current management team. Every business has goals or targets that it strives for. Attaining these goals would demonstrate that the company is succeeding and following the correct path. So, how do these businesses track their goals to see their performance trend and assess whether they have met their target? The answer is that they use key performance indicators.
Importance of KPIs in Measuring Business Success
Most companies have likely heard of the phrase "KPI" and have pondered adopting it to manage business performance. Let us first examine why KPIs are necessary before starting to generate and measure them for your firm.
Importance of KPIs: What gets measured gets done
Consider a group of people working in a factory toward achieving goal X. However, no one is measuring their production. People are simply working toward a goal, and at the end of the reporting period, there are wild guesses as to how much production was completed. What might happen in such a scenario? What are some of the threats that the company in question may face soon? How can you determine if something is improving or deteriorating without measuring it? This is when the initial significance of KPIs comes into play. Identifying and tracking key business drivers can guarantee that nothing falls between the cracks.
To illustrate my point, consider production output per hour as a key performance indicator. If the company in issue tracks manufacturing output per hour, it will be able to determine whether production is increasing month after month. This will assist them in devising plans to fill any gaps that may arise if their aim is unmet. Ultimately, the goal will be met, and what is measured will be done.
Importance of KPIs: Learning and Development of Employees
Measuring targets using KPI's opens an opportunity for learning and development within a company. According to Root Cause, the data created by measuring KPIs sparks critical debates in the workplace. Consider an organization's culture in which every goal must be tracked by measuring vital indicators. The vital signs are monitored for a year. The data may reveal trends that can help the organization improve through learning and development programs.
When you observe an unfavourable trend reading on a certain KPI, you can speak with the individual or team in charge of that KPI. This is an excellent opportunity for you to teach staff how to do things differently and perform better to meet goals. This will also aid in determining the reason for the bad trend. The organization might then decide to direct resources toward resolving the issue.
Additionally, you can analyze whether the set KPIs are an effective measurement and, conversely, make necessary modifications if the employee feels that the targets are unrealistic to meet. Unrealistic targets often demotivate employees, and a consistent negative trend may mean that the target set was too high, and adjustments will be made accordingly.
A key performance indicator that could help us understand this point is the click-through rate. The click-through rate is the percentage of people that clicked a link in your email compared to the total number of people who received it. A marketing department at company X uses click-through rate as a key performance indicator (KPI) to track the goal "increase the number of leads." A steady negative trend over a year may indicate that the target is too high or that we are targeting the incorrect audience. It could also indicate that the email was insufficiently compelling. Company X is tasked with training its staff to write persuasive marketing emails in this scenario. This would foster a learning environment for the staff.
Importance of KPIs: Manage Company Performance
Access to KPI reporting assists each member in maintaining personal, team, and department accountability. Employees with a sense of accountability are eager to take responsibility when goals are not accomplished. Employees are also fast to address issues that may prevent meeting goals. Individual accountability can help to improve communication and create positive performance. Furthermore, it promotes transparency by analyzing quantitative or qualitative data rather than depending on individuals to track and report on individual performance.
An example key performance indicator to explain this point is "net profit margin". Company X tracks net profit margin to achieve the goal of "Generate Profit." A regular unfavourable trend could aid in creating a complete story that will assist staff in determining where they are going wrong. If all departments could access the performance reports, they could accept responsibility and work together to improve the problem. Furthermore, if the company arranges workshops or training programs, participation will be high because there is a compelling rationale behind the necessity for these programs. KPIs are extremely useful in enhancing and managing corporate performance.
Related: Key Performance Indicators: A Guide for Employers
Choosing the Right KPIs
Companies wishing to track KPIs to measure business success are frequently concerned about selecting the correct KPIs for their business. Choosing the correct KPIs frequently begins with defining your company's goals and objectives. It is critical to select KPIs that are closely tied to your company's goals. A KPI could, for example, be linked to your aim of boosting sales, improving the return on investment of your marketing activities, or finances, customers, and workers. They can also specialize in specialized areas such as sales, procurement, or human resources.
Related: Key Performance Indicators by Functional Area
A good mix of KPIs that reflect diverse aspects of the business helps to provide a picture of the company's overall health. They also aid in team and employee focus and enable improved data-driven decision-making. Once goals have been established, management can select KPIs to track the organization's progress toward fulfilling them. What are your company's objectives? Have you found any significant areas for enhancement or optimization? What are your management team's top priorities? By answering these questions, you will be one step closer to determining the best KPIs for your brand.
Another aspect to ensure when choosing the right KPIs is that they are actionable and measurable. For KPIs to track progress, goals must be specific and quantifiable. An example key performance indicator that is measurable is "lower customer acquisition cost by 15%", unlike "lower customer acquisition cost". KPIs for this goal might include conversion rate and lead generation cost by channel.
There are numerous KPIs to choose from. They can be financial, focusing on the net profit to sales ratio or the assets to liabilities ratio. Common KPIs include revenue growth, profit margin, cash flow, and client acquisition cost. Customer-based key performance indicators include evaluating customer retention or satisfaction. They can also highlight specific products, processes, employees, and teams.
Common Types of KPIs
KPIs can be grouped into many different classes based on several attributes. In this section of my white paper, I have covered the common types of KPIs.
Common Types of KPIs: Quantitative indicators
Continuous or discrete numbers express quantitative indicators, such as ratios, percentages, or whole numbers, that reflect values such as rating scales, money, or weight. They are frequently used to track progress toward specified numerical targets since they are easily measurable and comparative over time. They provide accurate, data-driven insight into a company's or organization's performance. Because they give direct numerical values, these indicators are the most straightforward quantitative performance gauges. Examples of key performance indicators under the quantitative class are sales revenue and net profit margin.
Common Types of KPIs: Qualitative indicators
Qualitative key performance indicators are used when measuring subjective or descriptive characteristics such as customer or employee satisfaction, looking for insights into customer or employee experiences and perceptions, and measuring the effectiveness of communication or engagement strategies, among other scenarios. These indicators are provided as feelings or opinions rather than numbers. An example of qualitative data is an employee satisfaction survey in which performance is based on input. Key performance indicators under the qualitative class are customer loyalty and brand perception, to mention a few.
KPIs can also be classified based on the departments they fall under in an organization. Ideally, every department or cluster in an organization will have other KPIs unique to its department. Under this type of classification, we have the following example key performance indicators.
- Customer KPIs: Customer KPIs show your company's relationship with its customers and vice versa. Customer retention is an example key performance indicator under this category. It is converting existing consumers into repeat customers who continue to purchase from your firm rather than turning them into competitors. You can also utilize tools like net promoter scores, which poll a group of customers to determine how likely they are to suggest your company to others.
- Operational KPIs: Operational KPIs can assist a company in determining how pleased their employees are with their workplace. Employee dissatisfaction may result in a greater employee turnover rate, which implies more money your company spends on training new staff.
- Financial KPIs: Financial KPIs can assist you in determining your company's profitability or financial health. For example, key performance indicators in this category include net profit margins, gross profit margins, accounts receivables, and inventory turnover rate. These are some of the greatest KPIs for examining how your organization spends resources, resulting in better money management.
- Marketing KPIs: Monthly website traffic, qualified leads, and call-to-action conversion rates can all show how successful or unsuccessful your company's marketing activities are. These KPIs might help your marketing team determine how to expand or improve their current approach.
- Sales KPIs: Lead-to-sale conversion rates are an example of a key performance indicator in this category, and they can be a strong measure of your sales funnel's effectiveness. Furthermore, a KPI such as customer lifetime value will provide basic insight into how much money a client is expected to spend with your company over their lifetime.
- Employee KPIs: Key performance indicators under this class are employee satisfaction and employee turnover rate.
It is important to note that key performance indicators can also fall under the quantitative and qualitative classes as they are master classes. In the next section of this white paper, I will look at examples of effective KPIs.
Examples of Effective KPIs
With several key performance indicators being thrown in every corner of the internet, people are often stuck on the question, which ones are the most effective? There is also an emphasis on the number of KPIs being measured and tracked by a business should not be too many, as there is a risk of losing focus. Therefore, companies are left with the option of choosing the most effective KPIs to track their performance effectively.
A KPI must be simple in two respects to be truly useful. It must be both understandable and measurable. Sales revenue is an example of a financial KPI. Calculating the sales revenue for a certain period is simple by adding up all of our sales. It is a straightforward KPI that anyone in the financial department may calculate. Each member of staff participating in a goal should understand how to implement a KPI. If the goal is clear, such as "increase revenue," employees can take proactive steps to affect the outcome. You want a KPI to increase the campaign's overall exposure without interfering with daily operations.
Effective KPIs "cascade from...strategic dashboards to tactical and operational dashboards," according to a Data Warehousing Institute metrics report. This means that KPIs should cascade down from an organization's top strategic goals to the daily operations of the employees affected by them. While some businesses focus on attracting an increasing number of clients, this may not be in line with the company's broader mission. For example, a company that focuses on customer service would prioritize client retention over acquisition. Ensure that KPIs are always supporting the organization's overarching aims.
Related: A Guide for Developing Key Performance Indicators
Implementing and Tracking KPIs
The most popular approach businesses have taken toward implementing KPIs is as follows:
- Determine the part of business performance that you want to track: KPIs are often aligned with corporate goals and can be used to track financial performance, business growth, health and safety management, customer happiness, and staff retention.
- Create a system for measuring and reporting key performance indicators (KPIs): You have nothing to measure positive or poor performance against unless you have a stated goal. Instead of saying that "the business needs to increase its customer base," a particular aim would be that "increase revenue by $10,000 in the next twelve months."
- Compare current performance to the defined target: Taking a snapshot of current performance provides a starting point for measurement and allows the overall target to be broken down into smaller goals, such as " to achieve overall goal X, performance must improve by Y each month."
- Assigning responsibility for data monitoring and analysis: It is critical to delegate responsibility for data monitoring and analysis to certain personnel inside the firm. Examining how performance in the area being measured by the KPI has changed in the initial implementation can help identify more realistic goals and suggest whether performance improves or declines at specific times of the year or after specific events, assisting you in managing these aspects following your objectives.
- Determine an acceptable period between each KPI review: The frequency with which KPIs must be examined varies depending on the area of business performance being measured. Accurate performance measurement is only possible if a periodic review schedule is set and properly followed.
- Based on the KPI findings, make data-driven decisions: Measuring KPIs reveals previously unseen information. As a result, the corporation will make business decisions based on these insights, such as if the KPI
Frequently Asked Questions about KPIs: What are key performance indicators examples?
I have compiled a list of some popular KPIs in many companies. Find them below.
- Sales Revenue
- Conversion Rate
- AdSense Revenue
- Percentage of debtors over 30 days
- Organic Traffic
- Return on Investment
- Net profit margin
- Click through Rate
- Events Attendance Rate
Frequently Asked Questions about KPIs: What is an example of a high-level KPI?
Employees have no direct influence on high-level KPIs, which show overall performance. They are the result of cross-departmental collaboration. As a result, returning these performance data to them will evoke minimal interest or engagement. The following are some high-level KPI examples.
- Relative Market Share
- Annual Growth
- Annual Yield
- Mean Time to Failure
Frequently Asked Questions about KPIs: Difference between KPI and Metrics
Are KPIs and metrics the same thing? Everything you track in your client's business is a statistic, but only a few are directly related to their main business goal, making them key performance indicators. Put another way, while all KPIs are metrics, not all metrics are KPIs. KPIs are particular measurements used to track progress toward key and strategic objectives. Metrics, on the other hand, can be any form of data gathered as part of ordinary business activities.
According to Magnyfi's owner, Jacob Hicks, KPIs enable us to demonstrate our worth to the client. There are fundamental KPIs like spend, clicks, impressions, ranking, and so on, but every client wants to know whether the true KPIs are leads or sales. We like to include both in our monthly reports. Finally, what is the return on investment from our efforts? When you can demonstrate this month after month, it boosts your retention rate and keeps clients paying you month after month.
Every aspect of a client's normal business procedures can be linked to metrics. However, one significant distinction between a KPI and a metric is that metrics do not have to be explicitly linked to a strategic purpose. Some examples of metrics that clients often want to see include:
- Website Sessions
- Goal Conversion Rates
- Social Media Followers
Related: Metrics vs Key Performance Indicators
Frequently Asked Questions about KPIs: What is an example of a smart KPI?
SMART KPIs provide clarity in terms of performance expectations and progress. They are specific, measurable, attainable, relevant and time-bound. Ultimately, they enable your employees to be successful and your business to flourish.
Key Performance Indicators should be SMART. Key performance indicators are very useful in measuring the success of the company. For them to be effective they have to be aligned to the company's overall strategic goals.