The need for using data in your business or organization when making decisions cannot be overstated. After all, to be successful, you need to know where you are at the moment and where you are going. Measuring your current status forms the foundation of how to improve your performance in the future.
To achieve your objectives, you need to set goals.
After that, you need to share your company's goals with every team member so they can understand the specific tasks they need to perform to help achieve the set objectives. One way to measure the success of a company is using key performance indicators (KPIs). You need to select the best KPIs for your company to reduce your downtime and increase revenue.
This article defines the key performance indicators, why they matter, and how to choose the best KPIs for your organization. Read on!
What is a key performance indicator (KPI)?
A key performance indicator is a quantifiable measurement that gauges how effectively a company achieves its set objectives. In other words, a KPI helps determine the crucial operational and financial achievements as compared to other businesses in your industry.
You can use the KPIs in your organization to help your team members at all levels work towards achieving a common goal. KPIs offer an excellent way to determine whether you are spending your time and budget on the right tasks, tools, and strategies to achieve your objectives.
The best part is that KPIs can help measure performance at any strategic level.
For instance, you can decide to use one set of KPIs to measure the various functions in your business, such as marketing, sales, HR and operation, and finance, and use another set of KPIs to measure the overall performance of your company and performance of individuals, tools, campaigns, etc.
Are KPIs the same as metrics?
People often confuse KPIs and metrics. However, while you can use KPIs and metrics to measure your company's performance against a specific goal, they have a clear difference.
As earlier stated, KPIs measure key strategies with the most impact in moving the company forward. In other words, they provide a clear insight into what you need to measure and achieve in your company to achieve your long-term goals.
On the other hand, metrics help measure your company's standard business process — not the most crucial metrics that your company needs to measure and work towards to achieve your strategic plan.
More specifically, metrics help track and monitor measures that add value to your business but are not the most important measure for your company.
To help understand the difference between a KPI and a metric, look at the SEO KPI examples below:
- Measure the total number of page views a specific page has received
- Measure and monitor which pieces of content get the most viewers
- Analyze your keyword rankings to drive search traffic to the website
- How many customers come to your website from organic and paid search traffic?
As you can see, KPIs are clearly defined and help achieve a specific outcome. On the other hand, a metric is not as clearly defined as a KPI but helps feed your strategy outcome.
Types of KPIs
KPIs are categorized into different categories based on their purpose. Here we look at the four main categories of key performance indicators:
Every business (no matter the size) faces the challenge of improving customer experience. In such a case, they need to implement mechanisms that will help differentiate their offer and meet customer expectations.
This is where customer indicators come into play to help define, monitor and measure customer experience. More specifically, customers' indicators help to:
- Set KPIs that allow you to measure the customer experience and the success of the implemented strategy
- Define buyer personas that will help you understand what motivates your customers to interact with your brand
- Define the points of contact and how important they are
- Identify the moments that encourage interactions in the customer journey
While you can use several models as references for identifying the KPIs to consider when evaluating the experience for your customers, here are the main three groups:
- Acquisition: focuses on measuring the experience to boost the client base
- Efficiency: formed on the idea that a company can do more for less
- Retention: focuses on maintaining the volume of your client base you have already acquired
Indicators geared towards financials focus on profit margins and revenue. Net profit is the most measured financial indicator and represents the amount of profit obtained after subtracting all company expenses and taxes for a specific period.
To get your profit margin, you need to convert net profit into a percentage of revenue and is calculated as a dollar amount to be used in a comparative analysis.
As such, assuming the standard net profit margin for a particular industry is 60%, then any business in that space needs to work hard to meet that figure to remain competitive. Another profit-based KPI that you may want to use is gross profit margin — the remaining revenue after accounting for expenses associated with producing products for sale.
Another common financial KPI is the current ratio which is geared towards liquidity. You can calculate it by dividing your company's assets by your current debts. It's best to check the current ratio of other businesses in your industry to understand your current ratio better and determine your cash flow ranks among your peers.
Process indicators help measure and monitor the performance of a process and, if possible, facilitate the required changes. A great example of process indicators for support teams are KPIs geared towards customer support tickets.
Think about tickets opened, tickets resolved, and average resolution that gives insights into customer support processes. You can then use the data you get to make changes in your support process to improve response time and efficiency.
Growth perspective refers to KPIs that measure returns on investment in staff, tools, and research to achieve the desired processes and long-term growth. Some great examples of growth indicators include customer acquisition costs, return on marketing investment, etc.
You can also decide to measure human resource (HRM) KPI, including your team's output and work efficiency. Examples of great HRM KPIs are processing cost per invoice, closed sales per salesperson, recruiting time, absenteeism, turnover, and much more.
Understanding leading and lagging KPIs
An important factor to consider when analyzing KPIs is whether they are leading or lagging indicators.
Leading KPIs are predictive. They help determine how a business will be in the future — in other words, leading KPIs play a crucial role in planning.
For example, a sudden decrease in sales might signal that profit will be lower in the future. That means businesses can use indicators such as unemployment levels or job growth to predict future possibilities in an organization.
Unlike leading KPIs, lagging KPIs measure the achievements of a business towards a goal for a specific time. In other words, lagging KPIs are geared towards measuring what has already happened.
For better results, consider combining lagging and leading KPIs for a similar goal. While lagging indicators look backward, they are easy to calculate. On the other hand, leading indicators (depending on how you interpret them) can provide an opportunity to change direction.
Operational vs. organizational KPIs
You can also categorize KPIs based on whether they are operational or organizational.
As the name suggests, operational KPIs measure daily business performance — operational processes, efficiency, and tactical. You can apply operational KPIs to individuals, teams, and processes. It includes things such as cost per click for a digital marketing campaign and sales by region.
These are geared towards measuring long-time goals critical for your company's values. This includes things like an increase in customer acquisition, revenue growth, market share gains, etc. You can decide to focus on a single metric that matters most in each phase of your product cycle in what is known as one metric that matters (OMTM).
Why does knowing your KPI matter?
There are many advantages of knowing your KPIs, including:
One advantage of knowing your KPIs is that it helps determine the results of a new initiative or changes in your processes. Ideally, it will give you insights into the effects of a change before and after implementing it. This way, you can make better long-term plans.
Define future strategy
The KPIs will give you a clear picture of the current status of the various processes or departments in your company. In other words, it will help you understand the current situation so you can strategize for critical future goals. As such, KPIs are a marker for future strategy.
KPIs are also great for setting industry-standard benchmarks. At a personal level, you can use KPIs to determine how your specific company departments are doing compared to your competitors.
Incentives for performance
You can use KPIs to give incentives to your employees. The idea is to look into different KPIs, i.e., efficiency, sales, etc., and provide incentives to employees who perform exceptionally.
Qualities of a good KPI
Your ability to monitor your progress towards an objective depends on the quality of your KPIs. That said, here is what makes a good KPI:
Your KPI needs to be detailed, simple, and clear—specific on what you want to achieve. For example, instead of saying improve website traffic, which is too broad, consider a KPI that states the amount of traffic you need to achieve.
Let's say, take organic traffic from 50,000 organic visits per month to 300,000 organic visits per month, which is more specific.
Your KPIs need to be quantifiable to help determine the level of success towards specific business goals. The best way to measure your KPIs is in percentages, dollar amounts, or even raw numbers.
As with goals and objectives, your KPIs need to be realistic and attainable. After all, setting unrealistic KPIs will only demotivate those working towards them and lead to burnout.
We cannot emphasize how important this is. As a rule of thumb, you should gear your KPI toward achieving the critical business objectives of your company.
For example, if you are working towards increasing organic traffic through SEO, your KPI should align with marketing objectives to ensure you achieve a larger key business objective.
No goal is open-ended. As such, you need to set a specific time when to measure the progress of your KPI. For instance, you may decide to attain a given amount of sales within three months or a year.
Setting your KPI is one thing. You need to evaluate it regularly to ensure you are still on your way to achieving the set objectives. Some of the questions to ask yourself during the evaluation include:
- What are the major things blocking your success?
- Is your KPI still relevant?
- Do you have the right tools, budget, and qualified individuals on your side?
The answers you get from these questions will help plan the next steps to take to achieve your objectives.
After evaluating your KPI, you may decide that it is necessary to readjust your KPI to ensure it is relevant, achievable, and in line with your current company objectives.
How to choose your KPI
Do not let your eyes get away from your core price (your specific goals) when creating your KPIs. Be realistic and do not shift from your objectives.
Base your KPIs on your company's vision and then pass them to all levels of your organization. In the end, you will have a KPI for individual employees. That said, here are the steps to follow when creating KPIs:
Have clear objectives
As earlier stated, your KPI needs to be clear, relevant, and achievable. As such, the first thing to do when creating your KPIs is to establish a clear objective. The catch is to ensure that your KPI is connected to a key business objective critical to the organization.
After all, without a clear vision, your time, energy, and resources might go to waste. Consult your managerial team to ensure you have the right goals and hear their say on your KPIs.
Ask the right questions
Asking key performance questions or KPQs will help determine whether you have met your key objectives. However, don't ask questions that require "yes" and "no" answers. Instead, ask thought-provoking questions such as:
- How can you market your products better?
- Why is it crucial to achieve a specific outcome?
- How can you reach your end goal?
These are some of the questions that you can ask. However, before you assign metrics to address your KPQs, check whether another department has some of the information you are looking for. You can use the existing information to set a realistic goal for your KPI.
Collect additional information
Next, collect supporting data. This can include demographics, industry trends, conversion rates, email performance, etc. The information you get will be helpful when setting up key performance indicators.
Some people make the mistake of measuring the same KPIs as their competitors. Avoid this mistake at all costs.
Remember, what might work for one business does not necessarily mean that it will work for you, as every business is unique. Conduct some research to determine what metrics are critical for your business based on the available opportunities, strengths, and weaknesses.
Define a goal for each KPI
You also need to set short- and long-term goals for the KPI. For example, suppose you want to increase website traffic from 50,000 visitors to 1,000,000 visitors per month in a year.
In that case, the best approach is to break down your goal into short achievable milestones.
For instance, you can decide to increase your visitors by 150,000 every month so that by the end of the year, you will have achieved 1,000,000 visitors per month.
Setting short- and long-term goals helps in many ways. Firstly, it ensures that you are not overwhelmed with tasks, and secondly, it provides a way to rate your progress as you go, among other things.
This way, you can know where you need to improve and whether you need to make any adjustments in your strategies or expectations.
Know when to measure each KPI
It is also important to determine when and how you will measure the progress of your KPI, including the tool that will help in this process. Remember your KPIs need to be updated depending on how your business is changing.
As such, ensure to monitor each KPI regularly to ensure it still helps monitor the information that meets your goals.
Share KPIs with the right people in your company
Next, communicate strategies, progress, and outcomes to the appropriate people in your organization to contribute to your company's success. Let the leadership and staff know what you are measuring and the objectives.
The best approach is to assign all team members a specific task to ensure they have a clear picture of their role.
When every team member is aware of the objectives, they can put all their effort towards it and provide useful feedback to help in assessment, data collection, monitoring, and interpretation.
A KPI report contains more data points at performance levels. In other words, it provides more detailed information to help in the analysis process. KPI reports contain data to help identify industry trends and help in qualitative analysis around performance.
That said, here is what you should include in your KPI report:
- Objectives: The main reason for tracking a KPI is to monitor the progress of an objective (high-level company goal) to ensure it is met. Your objective needs to be brief and straightforward and don't require excessive details at this level.
- Metric: What KPI are you using for measurement purposes?
- Intent: Why do you choose a given KPI, and how will it help your company achieve its core objectives?
- Source: Where did you gather the information? Also, share how you calculated the data.
- Frequency: How often did you measure the information, and when will you re-evaluate it.
- Visuals: How are you going to present the information? For easy understanding, consider using a graph, table, or chart.
- Owner: Who is responsible for tracking the KPI? Establishing the KPI owner will help promote accountability.
Measuring KPIs is a crucial step to help keep your company running efficiently. By choosing the most important KPIs to your business, you can monitor your business operations, measure their effectiveness, and make the necessary changes.