What is a Key Performance Indicator (KPI): definition, metrics, and tips
In any executive meeting, performance review, or strategy session, the term “KPI” would be used numerous times. But even though it’s overused, it’s often misunderstood, and businesses that are using KPIs effectively are not so common. When used properly, KPIs can make a huge difference to the success of a company.
What is KPI?
A key performance indicator, also known as KPI, stands for a quantifiable measurement used to evaluate the success of a company or employee in meeting objectives for performance. In plain words, KPI is a measurable value that shows the progress against the desired result. In business, it’s used to improve performance and define success.
Key factors to consider when setting KPI
All KPIs have to start with several considerations, or else they will not be successful indicators. Generally, KPIs are numbers or ratios determined by the SMART principles, as they should be:
Having a clear objective is by far the most important part of developing a KPI. It’s crucial to be measuring key objectives – the ones that have a direct impact on your business’ success. Without being connected to a specific business objective, a KPI has no intrinsic value and usefulness.
KPIs must be regularly counted and compared to past numbers and objectives.
To implement KPIs, appropriate and realistic measures should be taken.
KPIs should be practical and pragmatic, as well as have genuine value.
KPIs must be under consistent check to be helpful. Some KPIs should be measured once every two weeks; others – quarterly or even yearly. But they all should be checked on a schedule; otherwise, the metrics are useless.
Making sure your KPI is sufficiently actionable requires five steps:
- Review business objectives and goals
When designing your KPIs, you have to know where you want to go before figuring out how to get there.
- Analyze current performance
Ask yourself questions: Is your current setup working? What is working and what is not? Is your current performance sustainable?
- Set short and long term KPI targets
If you have an extended time frame, it’s important to set up goals along the way to keep on track. These short term targets increase the chance your long term goal will be successful.
- Review targets with your team
Everyone needs to be on board with the goals in order to meet them. Getting insight from everyone is essential for success, too, as it can fill any chinks that may be missing.
- Review progress and evolve
Once you put KPIs into place, it’s time to watch your progress, analyze numbers, and see where improvements can be made. An unreviewed KPI is purposeless and helps no one.
Importance of setting objectives and updating KPIs
KPIs are based on objectives; otherwise, they have no real purpose. Once you’ve set an objective with a timeframe that’s further into the future, you can work on identifying the milestones you will need to mark to get there.
Let’s look at the following KPI example. You want to convert 3,000 leads into sales in the first quarter of the year. You will need to set monthly or even weekly milestones to get there. This way, you will be able to continually assess, reassess, and adjust the course to hit the long-term goal.
You could divide the targets equally according to each month. In this case, this would be 1,000 subscriptions in January, 1,000 in February, and 1,000 in March.
But you may want to get more specific. There are more days in January and March than in February, so perhaps you should set a target of 1,100 for those months. Or maybe you get more website traffic in February because your company has a popular booth at a large trade show. In this case, you could set a target of 1,500 subscribers in February, even though the month is shorter.
Whatever you do, break down your KPI targets to set short-term goals that will move you towards your long-term objectives more efficiently.
A KPI that is never updated or changed based on performance is going to become worthless. Reviewing your KPIs monthly (or, more ideally, weekly) will give you a chance to correct or even change the course completely. Sometimes, you’ll think of new, more efficient paths to your objectives and goals.
How to measure KPI?
Most commonly, there are five ways of KPI tracking:
Counting is the easiest numeric value to calculate – be that the number of customers who are satisfied, the number of sales, or the number of workplace accidents. Counts are useful in measuring something that doesn’t need any more context to show change over time.
Percentages are counts of the number of people or things that exhibit a target characteristic divided by the total population size. This number is then multiplied by 100. Click-through rate (CTR) and return on investment (ROI) are good examples of percentages.
- Sums or Totals
They might be confused with counts, but sums or totals are continuous variables that can take the form of numbers with decimals. For instance, the total time spent making sales calls this week was 42.5 hours.
Also known as the mean, it’s the sum or total of all the numbers in a dataset divided by a count of people or things upon which the sum was based. For example, you can measure the average sales revenue per sales call or the average customer satisfaction rating.
Ratios compare two numbers side by side, separated by a colon. But make sure only to use them if it makes sense to compare two numbers.
Wrapping it up
KPIs should not only match your industry, but also your company and strategy. The right KPIs for you might not be the right KPIs for other businesses. Make sure you’ve researched as many KPIs as you can to determine which ones are suitable for you.