Everything You Need to Know About Key Performance Indicators
|Defining Key Performance Indicators|
|What is the Difference Between KPIs and Metrics and Performance Measures|
|Types of KPIs|
|SMART Criteria for Choosing KPIs|
|Advantages of KPIs|
|Disadvantages of KPIs|
|How KPIs Can be Misused?|
If you have ever been part of any meeting, whether it is related to business, marketing, sales or anything performance-related, then you have probably heard someone mention key performance indicators. This is a term that is usually thrown around, but not many people – even the ones using it – can explain what it is.
However, no matter where you go, you will find it hard to escape this often misunderstood term. Key performance indicators are so important to any business that it can be hard to find an organization that can be successful without them. This is why it is important for anyone serious about business to know what they are.
If you have just had a meeting and are confused about what key performance indicators are, then you are in luck. Keep on reading to find out what they are so you go into the next meeting prepared.
Defining Key Performance Indicators
Key performance indicator is kind of wordy, so you will mostly hear people shorten it to KPI. So next time you are wondering what is KPI, just know that KPI stands for key performance indicator. But what is it?
A KPI is a management tool that enables a company or organization to measure how well it is performing in regards to its main goals and targets. KPIs are available at all levels of a company or organization, whether it is sales, accounting, marketing, customer service and human resources, all the way to upper management (where the big decisions are made).
They tell you how well a business is doing (where it is now versus where it needs to be) by giving you a numeric value for measurement progress. This is why they are such a big deal, as they shed light on the effectiveness of a company or organization – whether it is moving towards its strategic goals, stagnated or moving away from them.
What is the Difference Between KPIs and Metrics and Performance Measures
Now that you know what a KPI is, you should know what it is not. There are two terms that people usually confuse KPIs for. These terms are metrics and performance measures. It is vital for you to know the difference if you plan on making the most of KPIs.
KPI vs Metrics
A metric is the most common term that is often confused with a KPI. A metric is a value that helps you keep track of performance within a specific process in a business. As mentioned earlier, KPIs actually help you measure how well a business is achieving its goals. As such, KPIs can be considered to be more important than metrics since they are directly related to the business’s strategic goals.
An example can help shep more light on this difference. A KPI would be to increase customer retention rates by 25% in order to get repeat business. As you can see, this is directly related to one of the biggest goals of any business: increasing revenue.
On the other hand, a metric is something like a click-through rate for a PPC campaign. While it is important to track how many people are clicking on your ads, it is not directly related to outcomes that will get you closer to achieving your strategic business goals. However, it can be used to lead to the business outcomes you are hoping for.
KPIs can contain metrics. In the above example, the click-through rate can be a KPI metric.
KPI vs Performance Measures
Another thing to get right is the difference between a KPI and performance measure since others can also use the terms interchangeably. A performance measure is simply any numeric value that can be summed up and/or averaged. This can include anything from the number of sales made to the number of leads gained through SEO.
They are different to KPIs in that they don’t provide any specific context into why something is being measured. KPIs can also contain measures.
Types of KPIs
There are too many KPI examples, so it makes more practical sense to list the most important and commonly used ones. These can be grouped into the following types.
When you are looking at financial KPIs, it means that you are interested in ascertaining the performance of your financial department. Specifically, you want to know if your finances are on track with your company or organization’s financial objectives.
Here are a few examples of financial KPIs that businesses usually measure:
- Net Profit Margin (NPM) – This is a figure that helps you understand your profits by taking the total revenue and subtracting all expenses (operational, tax and interest).
- Monthly Recurring Revenue (MRR) – This is the monthly revenue that can be attained every month without having to invest a lot of extra resources.
- Working Capital – This is the amount of capital that a business has at its disposal (current assets - current liabilities) and is used in the handling of its day-to-day operations.
- Operating Cash Flow (OCF) – OCF is the cash that a business generates from normal operations. It is a KPI that determines whether a business is making enough money to sustain its operations and even scale without needing external funding.
- Current Ratio – This is a measure of how liquid a company or organization is in regards to meeting its obligations in the short term.
- Budget Variance – Budget variance is a numeric value that is derived from measuring the difference between a figure that has been budgeted and the actual figure.
A successful marketing campaign can breathe new financial life into a company by attracting new customers. This means that every marketing-based decision needs to be the right one to see a return on investment (ROI) on each marketing activity. This requires measuring the right marketing KPIs.
Here are a few examples of marketing KPIs that businesses usually measure:
- Website Traffic Per Source – This a comparison report of all the online sources that are bringing traffic to your website. Usually, this means a comparison of the big three: search engines, referrals from people and direct web traffic.
- Marketing Qualified Leads (MQL) – A lead is anyone who has taken an interest in your business offerings. A MQL is a lead that the marketing team has identified as having the highest probability of being converted into a paying customer.
- Net Promoter Score – This is a numeric value between -100 and 100 that indicates how much a customer is willing to give a referral in regards to your company or organization’s offerings.
- Conversion Rate – This is a percentage of the people that take the desired action when they interact with your business online. For example, this can be the percentage of people who take action (buy or subscribe) when they visit your website.
- Traffic-to-Lead Ratio – This is the number of people who visit your website and have been converted into leads over a specified period of time.
- Organic Traffic – These are the people that are visiting your website through unpaid means rather than through paid ads.
A business performs sales activities aimed at generating revenue for the business. These activities are carried out by the sales team. By using sales KPIs, you can be able to tell if the sales team is performing as expected. If not, there is a need to take measures to make sure that sales performance is optimal.
Here are a few examples of sales KPIs that businesses usually measure:
- Monthly New Leads/Sales – This is the number of leads that you need to be generating over a specified period in order for the business to meet its revenue goals.
- Lead-to-Customer Conversion Rate – This is a percentage of the leads that you converted into paying customers. It is calculated by dividing the total conversions by the total leads and then multiplying the result by 100.
- Cost Per Acquisition (CPA) – This is the amount of money that it costs for you to use a particular campaign or channel to convert a lead into a paying customer.
- Sales Qualified Leads (SQL) – This is a potential customer that the marketing team has identified and the sales team has vetted. This is a prospective customer that can further be developed and guided down the sales funnel.
- Customer Lifetime Value (CLTV) – This is the amount of revenue that a company or organization can expect a customer to spend on them throughout their entire lifetime as a customer.
Over the years, we have seen the meteoric rise of e-commerce, forcing businesses that relied on traditional stores to create their own digital storefronts. There are a number of important KPIs to measure here as well to make sure that e-commerce efforts are successful. These include conversion rate, customer per acquisition and customer lifetime value.
Other extremely important e-commerce KPIs to keep an eye on include:
- Shopping Cart Abandonment Rate – When a potential customer is interested in buying an item on your e-commerce store, that item goes into the shopping cart. However, the potential customer might leave the website without completing the purchase, creating what is known as an abandoned cart. The shopping cart abandonment rate represents the number of people who do this.
- Gross Profit Margin – This is a KPI that reveals the amount of money your business has made from all the products it has sold after the expenses have been deducted.
- Average Order Value – This KPI is self-explanatory: the average value of your orders. You need to make sure that this number is as high as possible because the more it increases, the more money you make.
- Email Signup Conversion Rate – This is the percentage of people that are subscribing to the email newsletter on your e-commerce website, showing continued interest in your future offerings and promotions.
- Return On Ad Spend – This is the ROI you are getting for every ad dollar you spend in order to attract new customers to your e-commerce store.
- Cost of Goods Sold – This is the amount of money that has been used in acquiring or manufacturing goods being sold by the business over a specified period of time.
Customer Service KPIs
Customers are the lifeblood of any business. This means keeping them satisfied through customer service is extremely important for the survival of any company or organization. And you need to measure the right KPIs if you want to make sure that customer satisfaction is at an all-time high.
Here are a number of important customer service KPIs to pay attention to:
- Customer Satisfaction Score – This is a numeric value that tells you how satisfied customers are with your offerings.
- First Time Response – This measures how well customer service handles a customer’s call the first time they make contact.
- Average Resolution Time – This is the average time it takes customer service to handle a customer’s complaint. This is a number you want to be as low as possible in order to increase customer satisfaction.
- Customer Retention Rate – This the number of customers your business has been able to keep compared to the number of customers it started out with over a specified period of time. The opposite of this KPI is what is known as the churn rate .
SMART Criteria for Choosing KPIs
Knowing what a KPI is, what it is not and what the different types of KPIs are is all well and good. But one has to wonder how they would go about making sure that they pick the right KPIs to measure. Choosing the right KPIs is the key to making sure that your business has a compass that guides it towards its goals. Picking the wrong ones could send it on a tangent.
To that end, many experts advise that you should make sure that your goals must be defined by what is known as the SMART criteria. This means every goal should be Specific , Measurable , Attainable , Relevant and Time-bound . If you make sure that your goals meet these criteria, you will probably be able to identify those KPIs that will help you run a successful business.
The SMART criteria can be frame into the following questions:
- How Specific are our business objectives?
- Is it possible to Measure them against our goal?
- Is the goal Attainable in a realistic sense?
- Is the goal Relevant to our organization?
- Can the goal be achieved in a reasonable Timeframe ?
Advantages of KPIs
As you have probably seen by now, KPIs come with a number of advantages that make them useful for businesses. Businesses use KPIs because they:
Help Set Performance Targets
With KPIs, a company or organization is in a better position to tell which targets to shoot for in order to advance its goals. In other words, it helps businesses keep their eye on the ball and only measure what truly matters with accuracy. For example, if the goal is to increase revenue, then KPIs help management measure the performance of revenue-generating activities.
Help Management Make Informed Decisions
It is often said that if you don't measure something, you cannot manage it. If management doesn’t have a clear picture of whether the company or organization is making progress towards its strategic goals and meeting its targets, they can not take corrective action if need be. By looking at KPIs and measuring performance, management can make informed decisions to keep the business moving with a forward momentum towards its goals.
Help Evaluate Performance
When there is no way to measure the performance of employees, teams and departments, it can be hard to express where they are falling short. By looking at KPIs, everyone in the organization can see if their performance is benefiting the overall strategic plan or not.
Help Improve Employee Behaviour
No one wants to see that they are underperforming since it reflects poorly on their work ethic. When people know that their performance is being measured against something, their behavior becomes more in tune with the business’s goals. They make sure that everything they do is leading the company closer and closer to goat attainment. In other words, KPIs can make employees work harder rather than just keep busy.
Disadvantages of KPIs
As much as KPIs have pros, they also come with their own set of cons. It is best for you to know what these are so you don’t make mistakes when using KPIs. Here are the biggest disadvantages of KPIs that you need to be aware of:
Can Measure Wrong Targets
It is possible to measure the wrong targets with KPIs. This can set the business on a different trajectory from the intended one, causing it to move further away from the goals. If it is discovered that KPIs being measured aren’t important to the strategic goals of the company, it is up to management to replace them with those KPIs that will align their business activities with their goals.
Can Degrade the Quality of Work
When employees know that KPIs are being measured, it can shift their focus from doing quality work to getting as much as possible done. They will be under pressure to meet targets and start focusing on quantity over quality. This can seriously lead to a degradation in the quality of work.
How KPIs Can be Misused?
As KPIs are being discussed, as they often do in business circles, it is easy to assume that no one can misuse them. However, it is rather easy to misuse KPIs and have them work against the business rather than for it. Here are the most common ways in which KPIs are being misused:
Not Acting on the KPIs
It takes a considerable amount of time and effort to identify all the necessary KPIs and align them with your business goals. The same can be said when it comes to measuring them. When all this has been done and the KPIs aren’t being used to help management make informed decisions, all that time and effort that was put in will go to waste.
Measuring Only the Easy KPIs
People fall into the trap of focusing on easy KPIs – ones that use the fewest resources (time, money and effort) to measure. However, for KPIs to help your business succeed, they have to be relevant to the business objectives, otherwise, you are just wasting resources.
Another time and effort waster is trying to measure every KPI imaginable. Sure, having a lot of information can be beneficial, but too much information can be hard to analyze. Sometimes, analyzing it can be so difficult that it ends up being useless. It is important to pick your battles and only stick to measuring KPIs that have the most significant impact on the success of your business.
Not Aligning KPIs to Business Strategy
To make informed decisions, they need to have an impact on your business strategy. This cannot happen if the KPIs and business strategies aren’t in alignment. By looking at your business objectives and what the company or organization is trying to achieve, you can determine which KPIs are important for you to measure.
Incentivizing KPIs can be a bit of a double-edged sword. On the one hand, it can motivate people to work harder and align their activities with the business’ strategic plan. On the other hand, incentives could make them lose sight of the true purpose of KPIs. They could start doing whatever it takes to get the incentive, even to the point of manipulating the results of their activities.
The next time you enter a meeting and hear people discussing KPIs, you will be in a much better position to understand what is being discussed and chime in. It is easy to misunderstand what KPIs are if you only rely on information in the room. By reading this article, you have been armed with the knowledge that will ensure you won’t be confused about KPIs the next time you hear them being mentioned.