Definition: Key performance indicators (KPIs) are metrics that organizations use to track and measure the success of their business. Businesses have many KPIs depending on the industry and the requirements.
This blog post will discuss key performance indicators and explain how they are useful for an organization.
What Are Key Performance Indicators?
A key performance indicator is a quantifiable measure that assesses progress towards organizational goals. KPIs are unique and specific to the organization’s objectives and goals.
Some examples of KPIs are revenue, profit, employee turnover, customer satisfaction, and safety incidents.
Organizations use KPIs to track progress, identify areas of improvement, and make strategic decisions. For example, a company might use KPIs to track progress towards its goal of increasing revenue. Monitoring KPIs lets businesses know if they are on track or need to adjust their strategy.
KPIs are an important tool for small and large organizations. They can help small businesses track progress and decide where to allocate resources. Large organizations can use KPIs to measure progress across multiple departments or business units.
Basics of Using KPIs
Businesses should identify unique factors that are important for their success. After identifying the factors, they select the metrics to measure them. This step is important as it helps track the progress over time.
After the KPI and metrics are identified, goals and objectives are set. Businesses can track their progress through KPIs and see if the objectives are achieved and goals are met. If not, they will adjust the strategy.
An organization must establish a KPI tracking system, and this system should be easy to use and trackable.
How to Define a KPI
A key performance indicator is a metric that measures the business’s performance and how well the business is achieving its goals. But what makes a metric a “key” performance indicator?
Three characteristics make a metric a key performance indicator:
- A KPI should be quantifiable. This means the metric should be able to measure the KPI.
- A KPI should be relevant to the specific goal the business is trying to achieve.
- A KPI should be actionable. This means that the business should be able to change its course of action based on the metric results.
How to Write a KPI
KPIs are not business objectives or goals, but they help organizations track business goals and targets.
The process of writing a KPI is given below.
Understand the Strategic Objectives
Creating effective KPIs begins with an in-depth understanding of the organization’s strategic objectives.
The objectives should be measurable with a defined timeframe; for example, boost the gross revenue of an organization by 100 million USD by December 30, 2022.
Define Success Criteria
Once KPIs are identified, define the success criteria for each objective.
For instance, to achieve the objective of increasing the revenue to 100 million USD by December 30, 2022, the business has to:
- Expand the customer base
- Expand customer purchase transactions
- Increase yearly sales
- Cut down overheads
Create Questions on Key Performance
Creating Key Performance Questionnaires (KPQs) helps decide on a roadmap to meet the specific objective.
Below are the questions for KPIs:
- Is the outcome achievable?
- How do we define progress?
- How do we measure the improvement?
- What performance would lead to achieving the goal?
Data Collection Support
Collect the information and decide if any additional supporting information is required. Depending on the industry, the additional information could be a competitor analysis, demographics, industry trends, conversion rates, etc.
KPIs must be SMART, and answer the following questions:
- What is the desired outcome?
- How do we measure progress?
- Who is responsible for the outcome?
- What are the criteria for achieving the outcome?
- How will the improvement be tracked?
- Do the KPIs align with the objectives?
- Are the KPIs easily understandable?
- Are they measurable?
- Are the KPIs relevant to the company’s future?
How to Measure a KPI
The following points should be noted when measuring a KPI. First, identify the goal of the metric. Second, what is the timeframe for this goal? And finally, who is responsible for ensuring that the metric is met?
Let’s look at how to measure a KPI using the SMART method.
- Specific: A specific objective should be unambiguous. When setting KPI objectives, consider who, what, where, when, and why.
- Measurable: A measurable objective can be quantified. This means businesses can track the progress of the metric and see the performance.
- Achievable: An achievable objective is realistic and can be accomplished within the set timeframe.
- Relevant: A relevant objective aligns with the mission and goal of an organization.
- Time-bound: An objective should be achieved in a given time. This creates a sense of urgency and ensures objectives are not left open-ended.
How to Report on KPIs
Data accuracy and representation are the keys to reporting KPIs. This means collecting data from all relevant sources and then organizing it in a way that makes sense.
After acquiring data, the presentation format is decided. This depends on the KPI and the information requirements.
For example, in tracking website traffic, businesses may create a line graph that shows traffic over time. Or, for customer satisfaction, a pie chart that breaks down the different factors contributing to satisfaction is useful.
Regardless of presentation, information should be easy to understand and provide context for interpretation. For example, when representing website traffic data, including the valuable traffic to the business. This will help organizations understand what the data means and how they can use it to improve their performance.
KPI Software Tools
There are many KPI software tools available to track and measure KPIs. Some popular software are Google Analytics, Tableau, and Klipfolio.
When choosing a KPI software tool, it’s important to consider specific needs and objectives. What is being tracked and measured? How often is the need to track and measure KPIs? What is the budget for a KPI software tool?
After answering these questions, businesses can narrow down their options and choose the best KPI software tool for their needs.
Regardless of KPI software, a few things must be kept in mind.
First, the right KPIs should be tracked. Second, baselines should be established for KPIs. Third, KPIs must have thresholds. These practices ensure that businesses get the most out of the KPI software tool and use it to its full potential.
Why Are KPIs Important?
KPIs are important for many reasons. Some of them are:
- They help businesses to understand if the strategy is working. Without KPIs, businesses cannot find what is working well and which process requires improvement.
- They help motivate employees. By setting targets and measuring progress, KPIs can help to keep employees focused and motivated.
- They help businesses make better decisions. By providing accurate data, KPIs can help businesses to make more informed decisions about where to invest their time and resources.
- They can be used to measure progress. By tracking KPIs over time, businesses can see how their performance is improving (or declining) and make necessary changes.
- They can help find areas requiring improvement. By highlighting areas where KPIs are not being met, businesses can identify areas where improvement is needed.
Types of KPIs
A few commonly used types of key performance indicators are:
- Leading indicators predict future success or failure. For example, if trying to increase sales, a leading indicator might be the number of new leads generated each month.
- Lagging indicators measure past performance. For example, if the aim is to reduce customer churn, a lagging indicator might be the percentage of customers who cancel their subscriptions each month.
- Input indicators measure the resources used in a process. For example, an input indicator might be the number of unique visitors per month to improve the website conversion rate.
- Output indicators measure the results of a process. For example, if trying to increase sales, an output indicator might be the total revenue generated each month.
- Quantitative indicators measure something that can be expressed in numbers. For example, if the goal is to increase sales, a quantitative indicator might be the sales per month.
- Qualitative indicators measure something that can’t be expressed in numbers. For example, if trying to improve customer satisfaction, a qualitative indicator might be the percentage of customers who say they’re “satisfied” or “very satisfied” with a product.
What are the Top 5 Key Performance Indicators?
When it comes to business, there are many metrics to measure success. However, not all metrics are created equal. Businesses can select the metrics based on their organization’s requirements.
Below are the top five key performance indicators.
- Revenue Growth: This is the most obvious metric to track. Tracking revenue can indicate whether the business is growing and how quickly it’s growing.
- Revenue Per Client: This metric is related to revenue growth. It provides details of the worth of business clients. This helps find valuable clients, and then businesses can focus their marketing strategy accordingly.
- Profit Margin: While revenue is important, profits are what really matter. Tracking the profit margin gives ideas about business efficiency and if there is room for growth.
- Client Retention Rate: This metric measures how many clients stick around. It’s important to track because it can explain how satisfied clients are with a product or service.
- Customer Satisfaction: This metric indicates how well a business is meeting its customers’ needs. Tracking customer satisfaction provides details on whether any area requires improvements.
By keeping an eye on these key performance indicators, organizations can understand how their business is doing and where they can improve further.
KPIs provide a snapshot of business performance at any moment. They allow businesses to track trends and make changes to improve their overall performance. Businesses should choose the KPIs that are most relevant to them and track them regularly to get the most accurate picture of their success.