Key performance indicators (KPIs) are like a dashboard that shows how your business is doing. They can help you see where you need to improve or adjust your strategy.
They are essential tools in helping any business measure and improve its results, especially compared to those other businesses within the same sector. But what are KPIs, exactly?
Why are they important? And how can you use them to improve your own business’s outcomes? In this guide, we’ll look at all of these and more. Let’s get started!
Key performance indicators (KPIs) help quantify and qualify success. As a part of your business planning process, they can help you identify not only where you are now, but also where you want to be in 6 months or 1 year from now.
In other words, KPIs create a clear picture of your objectives and hold you accountable to those goals.
A good KPI should always have an element of actionability to it. It should give you something specific that you can work on, rather than just being another number on a page.
For example, we will improve our conversion rate by 5% and increase sales by 10%. The first statement tells us exactly what we need to do—improve our conversion rate—while the second one leaves room for interpretation. How will we improve sales? Through paid advertising? Word-of-mouth marketing? Social media outreach?
Whatever it is, when you write down your KPI, put yourself in a position to succeed by giving yourself something specific to focus on.
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What Is KPI
KPI stands for key performance indicator, and it is a tool used by businesses to measure their success against benchmarks.
KPIs are quantifiable metrics that help you evaluate your business’s performance so you can make adjustments as needed.
KPIs can also be applied in other areas of life, such as relationships, education, and fitness.
It’s important to note that there is no one-size-fits-all when it comes to KPIs. Everyone has different goals and expectations; therefore, there isn’t one standard set of measurements that works for everyone.
It’s up to you—and those involved with achieving these goals—to decide what measures will work best for you.
When choosing KPIs, consider asking yourself questions like:
- What do I want to achieve?
- How will I know if I have achieved my goal?
- What does success look like?
- How am I going to get there?
- Asking yourself these questions will help you identify which metrics are most relevant to your situation.
What are key performance indicators?
The term key performance indicators refer to a set of quantifiable values that can be used to measure and assess organizational achievements, especially compared to other businesses within the same sector.
There are five main types of KPIs:
Innovation, and customer loyalty.
The specific KPI you choose depends on your business’s goal. For example, an automotive manufacturer may rely on quarterly profits as its main KPI; a fashion retailer might look at gross profit margin or product turnover rate instead.
Whatever your industry, there is likely a KPI out there that’s relevant to you. However, before deciding which one(s) to use, it’s important to understand how they work.
The Benefits of Using Key Performance Indicators
Now that we know what key performance indicators are, let’s discuss why you should use them.
- They Keep Your Company Accountable
Every company should strive for success—and using KPIs ensures your team is focused on achieving those goals.
- They Help Your Business Adapt to Changing Circumstances
The world of business is constantly changing, and that means you need to be able to adapt quickly in order to stay ahead of your competitors. By setting clear and measurable objectives, you can monitor progress and adjust accordingly when necessary.
- They Allow You to Make More Informed Decisions
When you use KPIs as a guide for decision-making, it’s easier to prioritize tasks and allocate resources effectively. For example, if your KPI for customer satisfaction is at an all-time low, then it’s time to reevaluate your customer service strategy.
- They Help You Track Your Progress
One of the biggest benefits of using key performance indicators is that they allow you to measure your success over time. This means you can identify what’s working well and what isn’t—and make changes accordingly.
- They Can Be Used by Everyone
In Your Organization, Key performance indicators are beneficial for everyone in your organization because they provide insight into how each department contributes to overall success.
- They Are Easy to Understand
If you’re using KPIs, then chances are you want others in your company to be able to understand them as well. In other words, it should be easy for anyone who works at your company to look at a KPI report and know exactly what it means.
- They Help You Prioritize Tasks
In addition to helping you track progress, KPIs also help prioritize tasks throughout your business.
Examples of Key Performance Indicators
Bad Debt Expense to Sales,
and Employee Turnover ratios, are all examples of key performance indicators.
The Profit Margin on Revenues is a good indicator of how well a company is performing its day-to-day operations.
If an organization can identify operational issues by tracking key performance indicators then it’s possible to adjust its sales and marketing efforts accordingly in order to increase revenue growth.
How To Increase Your Business Performance With KPI
If you’re looking for other ways to improve your business’s performance, consider these four KPIs:
- Accounts receivable turnover ratio,
- days’ sales outstanding,
- cash conversion cycle and
- gross profit margin.
Each one of these metrics provides insight into areas that can be improved or optimized.
For example, a high accounts receivable turnover ratio may indicate that customers are having difficulty paying their bills on time or that invoices are not being sent out quickly enough after goods have been sold.
A low cash conversion cycle might mean there is too much money tied up in inventory or that suppliers are not delivering products when they should be.
A high gross profit margin could mean that some products are overpriced or that others need to be discounted more aggressively.
These KPIs will help you determine where changes need to be made so your business is able to grow even faster.
The first thing to consider when you’re creating a KPI is how you want to measure it.
There are several ways that a company can get data for KPIs, and each method varies in complexity and cost. For example, one of your KPIs could be engagement on social media platforms like Facebook or Twitter.
One way you could measure engagement is by looking at how many followers you have across those platforms and where they live on a map. Another way would be to use an online tool like Google Analytics to see how many people view your content.
There are many more ways to measure a KPI. The best way to understand what a KPI is and how it can be measured is by taking an in-depth look at one or two examples.
How do you use KPIs?
Once you’ve created your KPIs, you need to figure out how they will help your business grow.
Typically, companies use KPIs as a benchmark for their success over time. For example, if your company was launching a new marketing campaign and spent $5 million on advertising but only saw a 1% increase in sales revenue from that campaign, then your company would have failed to meet its goals with that particular campaign.
On the other hand, if your company launched a similar campaign and saw sales increase by 5%, then it would have succeeded.
By tracking these results over time, you can make decisions about whether or not to continue investing in certain areas of your business.
While it’s impossible to measure every aspect of your marketing and business strategy, here’s a breakdown of KPI categories you should be aware of
- Brand Awareness: Visibility in marketplaces is an important factor in building brand awareness. Whether through social media or traditional advertising, businesses must ensure they’re present across multiple channels if they want to reach consumers and stand out from competitors.
- Social Media Engagement: With over 2 billion users worldwide on Facebook alone, social media has become one of today’s most popular forms of communication for both companies and consumers alike.
- Sales Growth: Measuring your sales growth is a key factor in determining how well your business is performing.
- Customer Retention Rate: Keeping customers happy is just as important as gaining new ones, which is why it’s vital to know how many customers you have and how often they return to make purchases
- Cost per Acquisition: If your business model relies on attracting new customers through advertising or other forms of outreach, tracking your cost per acquisition will give you a better idea of whether or not your strategy is working.
- Productivity: Tracking productivity can help businesses determine how efficiently their employees are working and where there might be room for improvement. – Net Promoter Score: The net promoter score is a customer loyalty metric that measures whether or not customers would recommend your business to others.
What metrics should I focus on?
When creating KPIs for your business, there are several metrics that tend to be most important when gauging success:
- Revenue: This metric measures how much money has been made within a certain period of time. If you’re a retailer, revenue could mean how much money you made during Black Friday weekend. If you own a restaurant, it could mean how much food was sold during lunchtime on Tuesdays. The key here is to choose something specific so that everyone understands exactly what revenue means for your business.
- Conversion Rate: Conversion rate refers to how often customers convert from browsing to buying, once they get to your website or into your store. It helps businesses better understand where they’re succeeding and where they need to improve.
- Customer Acquisition Cost: This metric shows how much money a company spends on getting a customer. It helps businesses determine which channels are generating more profit per customer than others.
- Net Promoter Score (NPS): NPS is calculated based on responses to survey questions like How likely are you to recommend our brand/product/service? An NPS score ranges from -100 to 100, with 0 being neutral.
A positive NPS score indicates that customers are happy with your product, while a negative score indicates dissatisfaction.
Businesses can use NPS scores to gauge how well they’re meeting customer needs and identify opportunities for improvement. What else should I know about KPIs?
Before you start creating and measuring KPIs, keep in mind that having too many KPIs isn’t necessarily a good thing.
In fact, having too many can lead to confusion among employees and result in lower engagement levels overall. Instead of focusing on dozens of different metrics, try choosing 3-5 core metrics to watch closely every month or quarter.
Also, remember that different industries require different types of data to analyze their KPIs effectively. For example, if you’re in retail, you might want to track your average ticket size and conversion rate.
But for a B2B company, you might want to track your number of leads and how many of those leads turned into paying customers. Whatever KPIs you decide to use, it’s a good idea to test different metrics and see how they impact your business.
That way, you can pinpoint what’s working and what’s not. And you can always adjust your KPIs accordingly.
One of the most important things to keep in mind when it comes to KPIs is that they are all part of a larger business strategy. Business strategies will have many goals, which might have KPIs built into them, so it’s essential to understand how they align with overall goals.
For example, there might be a business goal that stipulates how much profit you want to make. In order to accomplish that goal, you might set up two KPIs: 1) profitability and 2) revenue growth.
Profitability is your bottom line; it’s what will determine whether or not you can achieve your overall goal of making money.
Revenue growth helps measure whether or not your strategies are working—and if they aren’t, it gives you insight into what needs to change in order for them to work better.
How can I use them in marketing strategies?
KPIs are used to gauge how well a business is performing, allowing you to compare various results.
For example, if you’re looking to get more people to subscribe to your email list or follow you on social media, then you might use KPIs like new followers or email subscriptions per month as a metric for measuring performance.
This allows you to compare your performance against yourself and other companies in your industry. As a result, you can adjust your marketing strategies accordingly.
The best thing about using KPIs is that they help provide an objective view of what’s working and what isn’t—so it makes them perfect tools for A/B testing different marketing strategies to see which one works best.
As long as you have access to data on these metrics across time periods, it should be relatively easy to test different approaches with statistical significance.
For example, if your goal is to get more people subscribing to your email list, then you can use a KPI like email subscriptions per month as a metric for success. Then, after running two separate campaigns over two weeks or so, compare how many new subscribers each campaign generated.
If one campaign had twice as many subscribers as another did over those two weeks, then you know that approach was more effective than another one and can focus your efforts there in future campaigns.
Why are KPIs important?
KPIs help businesses understand what is working and what isn’t, enabling them to shift their strategies and focus on improving specific aspects of their business.
The KPIs are used by a wide range of industries to measure goals.
Understanding these key measures will ensure you have a solid foundation from which to make your business decisions.
If you don’t know where you stand, how can you know where to go? Use KPIs as an important tool in your arsenal when making strategic choices for your company.
In fact, if you don’t already have some sort of KPI process in place at work or within your organization, now is good to start one!
How Do I Create a KPI Report?
The first step to creating your KPI report is to evaluate your business goals and objectives. A good rule of thumb is that if you haven’t already defined company-wide KPIs, it’s a good idea to create them.
Your KPIs should encompass both short-term and long-term objectives.
They should also reflect short-term results, as well as account for factors such as your workforce capacity and available capital. Once you have established your KPIs, you can start collecting data on these metrics.
Depending on how granular you want to get with your reporting, there are several ways to do so: by gathering information from internal sources or using external tools like Google Analytics or Business Intelligence software.
Once you have collected all of your data, it’s time to put together a report based on what has been gathered from previous months/years.
This process will vary depending on what type of report you’re compiling, but in general, you will want to highlight key performance indicators that indicate success or failure within each department.
For example, if one of your KPIs is revenue per employee and another one is revenue per customer visit, then in your final report you would want to be able to compare those two metrics. Finally, once you have compiled your report, it’s important to share it with other members of your team. This allows everyone involved in decision-making to stay up-to-date on key business metrics.
What Is a Good KPI?
A good KPI is one that directly impacts your business’s success and profitability. The two most important things to look for in a KPI are relevancy and actionability. A KPI should be relevant to your company’s goals, but not so specific that it hinders strategic planning.
It should also be actionable, allowing you to make adjustments quickly when necessary without wasting a lot of time and money. And finally, it should be measurable; if you can’t measure something, how will you know if it has been successful?
If you have trouble identifying what KPIs are right for your business, start by looking at some common ones used by other companies within your industry.
Make sure they align with what’s important to you and then tailor them as needed. Once you have a few KPIs in mind, set up tracking systems or dashboards that allow you to view these metrics on an ongoing basis.
This will help keep everything organized and ensure that no areas of performance slip through the cracks.
As your business grows, it’s a good idea to regularly review which KPIs are still effective and which need updating. Also, don’t forget about setting goals: Some people confuse KPIs with objectives or targets, but there is actually quite a difference between them.
While many KPIs are standard across businesses, others are unique to a specific industry or company.
KPIs are also commonly grouped into a few key categories: strategic, financial, and operational. As you start to track KPIs, think about how they align with your company’s goals, industry trends, and overall vision for growth.