If you’ve been in the business industry for quite a while, you’re probably already familiar with the rather popular acronym: KPIs, which is also known as key performance indicators. After all, it’s one of those terms that people often throw out in conversations. But despite its rampant use, not many people truly understand what they are, much less how to measure them.
On that note, this article will discuss the basics of KPIs, starting with a definition.
What are key performance indicators?
Experts and dictionaries have varying definitions of the term KPI. But, ultimately, key performance indicators are any measurable value that shows how well an organization is doing on a particular operation or objective. Basically, it’s a way to measure progress on a goal, which can be anywhere from increasing traffic or reducing IT costs.
Now you might be wondering, is it then okay to call KPIs as metrics? Well, no, because despite how some people use them interchangeably, they’re not one and the same.
Difference between KPIs and metrics
If you look up metrics in a dictionary, you’ll find that it refers to a value that measures something. It may have an awfully similar meaning with KPIs, but in business, these two are different. To further clarify, a metric is anything that measures something, but KPIs are metrics that specifically gauge a value that represents progress on an objective.
Suppose you have a sales report example or template. Upon closer inspection, you’ll find that there are several metrics in the sales report. The following are a few examples:
- Total revenue
- Customer lifetime value (CLV)
- Net Promoter Score (NPS)
- Cost per lead
- Return on investment
- Opportunity-to-win ratio (1)
These KPIs may have value to your business, but does the total revenue tell you anything about the progress of your sales efforts? No, it doesn’t, which is why it shouldn’t be called a KPI.
A key performance indicator would be a metric that represents substantial information concerning your progress on an objective. An example of a sales KPI would be the number of new customers over the period of one week. It shows how well your sales are doing and measures your progress on a specific objective, which is customer acquisition.
But you must remember that not all KPIs fall under the same category. Rather, there are different types of KPIs, each of which has different characteristics and usage.
Different types of KPIs
Most people associate KPIs with a numerical value, but specific KPIs don’t necessarily involve a number. In fact, KPIs may fall under several categories.
With that said, here’s a closer look at the different types of KPIs:
The quantitative type is the most commonly-used KPI in this list. As the name suggests, it involves a numerical value, which can be a decimal, integer, or a whole number.
Examples: Time spent per call, number of new customers, cost per new customer, etc.
Unlike the previous type, a qualitative KPI measures a value but doesn’t use a number to do so. Instead, it’s a characteristic of a business operation or objective.
Examples: Customer experience, employee satisfaction, etc.
Leading KPIs are metrics that show what might happen. They’re not always accurate, but it gives you a rough estimate of the possible value on a specific metric. Their primary purpose is to predict the ups and downs of a particular objective.
Examples: Number of webinar participants, number of products sold, etc.
Lagging KPIs are the exact opposite of leading KPIs in that they represent a value taken in the past. This type of KPI allows you to take measures to improve that specific metric.
Examples: Total revenue, cost per product manufactured, etc.
Input indicators are those that quantify the resources necessary to accomplish a particular task. People often use it to allocate funding or staffing for a business operation.
Examples: Cost to create one product, staff needed for a marketing campaign, etc.
An output indicator tracks the result of an activity. It can be helpful in evaluating whether an operation is a success or a failure, and it can be quantitative or qualitative.
Examples: Products manufactured, customers obtained from a marketing campaign, etc.
Take note that a specific KPI can belong to several categories. For example, you can consider cost-per-customer as both a quantitative and an input indicator. It’s a numerical value and represents the resources necessary to accomplish a task.
It may complicate things, but choosing the right type of KPI based on the business function is a critical step in the process. Remember, you’re more likely to miss opportunities if you only focus on one type over others. If you focus solely on numbers, for example, you’re bound to miss anecdotal feedback, and the same applies to other types of KPIs.
Now you might wonder, ‘Why would you want to track these types of data in the first place?’
The significance of KPIs to a business
KPIs may be a piece of data, but it can be pretty difficult, or even costly, to measure a particular KPI. Moreover, it takes time to train your employees to make use of KPIs. As such, not all business owners track these types of data.
However, KPIs have a massive significance to a business and can be beneficial in many ways. Here are some examples of these benefits:
- It allows you to find a pattern that can help with your objectives
- You can make adjustments to your plans
- An increase in KPIs can boost employee morale
- You can monitor company health
- KPIs can help you establish business goals
- You can handle your finances more efficiently
How do you define or come up with KPIs?
The SMART criteria are one of the most popular tactics as far as KPIs are concerned. It consists of five goals that you must follow when creating KPIs. These goals include the following:
Rather than creating a KPI to measure the overall business health, like total revenue, it’s much more crucial to be specific when defining and measuring KPIs.
Take note that not all KPIs are easy to measure. Some may require an advanced tool, which can cost a lot. The easier it is to measure, the better the KPI.
When attaching a goal to a KPI, you must make sure it’s attainable. For example, rather than going for a customer churn rate of 2%, it might be better to settle for a more realistic number, like 7.5%. By doing so, you can easily achieve that goal without burning out your employees or exhausting your funds due to its utter impossibility.
Due to the promised benefits of setting and measuring KPIs, many business owners tend to define KPIs without much thought of how they will affect the business.
As a result, they often set KPIs that are unrelated and useless to their original purpose. If you want to create the perfect KPIs, make sure they’re actually relevant.
This criterion answers the question, “When will you achieve the goal for your KPIs?” If it takes too long, it’s safe to say that it’s not the perfect KPI.
On top of these five, some experts add two more criteria, namely Explainable and Relative. Explainable means that your employees can easily understand the KPI; Relative refers to the correctness of the KPI’s format (e.g., percentage, integer, etc.) relative to its function.
Once you have your KPIs ready and set, what’s left is to track them constantly. Unfortunately, that may also prove to be difficult, but it shouldn’t be impossible.
How do you track and measure your KPIs?
It may be a bit tricky, but it’s entirely possible to track and measure your KPIs for business purposes without many issues, especially with the right strategy.
If you’re operating a small business, it should be possible to track and measure KPIs manually by looking at the reports yourself. But, as you may imagine, it may take some time. If you don’t have that much time to spare for manual work, it might be best to use a tool to help with this business process. Hopefully, it’ll make things easier for you and your employees.
Ideally, you need some analytics and reporting software. These tools collect data and present them in the form of a graph or chart so it can be easier to review and analyze the data. Google Analytics is the perfect example of such tools, but many others may suit your goals better. Nevertheless, a tool would most certainly help when measuring KPIs.
Despite its ubiquity in the business world, only a few people have a deep understanding of KPIs, while the rest only have a general gist of it. Unfortunately, if you want to take your business strategy to the next level, KPIs will be an essential component of your plan. Hence, a guide such as this should be plenty of help, especially if you’re not exactly the most knowledgeable in this topic.
- “8 Sales and Marketing KPIs to Track,” Source: https://www.formstack.com/resources/blog-sales-marketing-kpis-to-track
- “Why You Need to Use Qualitative and Quantitative KPIs to Grow Your Business (+ Examples),” Source: https://www.brightgauge.com/blog/quick-guide-to-11-types-of-kpis
- “Why are KPIs Important? The Importance of KPIs and How to Choose Them.,” Source: https://www.rhythmsystems.com/blog/5-reasons-why-you-need-kpis-infographic
- “THE IMPORTANCE OF SETTING SMART KPIS,” Source: https://www.trindent.com/importance-setting-smart-kpis
- “Key Performance Indicators (KPIs),” Source: https://corporatefinanceinstitute.com/resources/knowledge/finance/key-performance-indicators-kpis/