Key performance indicators (KPIs) are quantifiable business metrics that track and measure an organization’s progress toward its strategic goals. More than just numbers, KPIs tell a story about how well a company is performing. These indicators vary by industry, company and even separate departments within a company. Which KPIs are right for your business? This overview details why KPIs matter, the characteristics of a good KPI and what you can learn from them.
What Is a KPI?
A KPI measures a company’s performance against its primary business objectives. High-level KPIs focus on a company’s overall performance, while lower-level KPIs focus on departmental processes, products and productivity. A company doesn’t need to monitor too many KPIs — no more than 10 is a general rule. After all, measuring everything clouds the picture of what matters most to the organization.
There are many different types of KPIs. Some focus on financial performance metrics, such as revenue growth rate and net profit margin. Others focus on customers, such as customer satisfaction or customer churn. Still other KPIs focus on operations, such as time to market and return on investment, while others concentrate on employee or talent management metrics, such as workforce retention and turnover. Together, and over time, KPIs uncover trends and other data-driven insights that inform decision-making.
Why Do KPIs Matter for Your Business?
KPIs track the metrics that are most important to achieving a business’s strategic goals. They are particularly meaningful when analyzed in the context of and alongside other KPIs, often in a dashboard that provides a comprehensive view of how different aspects of a company are faring. KPIs provide a variety of insights. Among the biggest, they:
- Monitor Company Health: KPIs can be grouped in a variety of ways — organizational or operational, leading or lagging, and by customer, financials, growth or process. Taken together, they indicate how well an organization is performing.
- Measure Progress: KPIs by their very definition measure progress on a company’s key business objectives. If one of a company’s goals is to increase annual sales by 20%, then KPIs like monthly sales growth and monthly sales bookings can help it gauge progress toward that goal.
- Adjust Goals and Targets: Before a company can choose its KPIs, it must first establish its objectives. But circumstances can change. By monitoring KPIs often, even daily, a company may realize an objective is unrealistic or no longer aligned with the business’s growth stage. This insight gives stakeholders a chance to revise their plans to work better for the organization.
- Identify Problems to Solve: KPI analysis can uncover an issue that might otherwise go undetected. For example, marketing KPIs related to the company’s website, such as a high bounce rate or a drop in daily active usage, can signal that pages are loading too slowly or contain broken links.
- Analyze Patterns: When KPIs are measured over time, such as month over month, patterns and trends often emerge that can inform decision-making. If sales for a particular product aren’t growing, perhaps a marketing campaign is in order. Or if the rate of product return has increased over a six-month period, that could indicate an issue with manufacturing.
- Process Efficiency: When KPIs are applied to business processes, companies can more easily identify bottlenecks and make resource decisions to improve efficiency. For example, if it takes 5 business days for inventory received to be available to sell then the company may want to consider additional investment in human or technology resources to reduce the time.
Elements of a Good KPI for Your Business
Choosing the right KPIs helps an organization gauge whether it’s on track to achieve its business goals. But what does a good KPI look like? What characteristics should you look for? Consider the following criteria:
- Goal Alignment: A good KPI reflects a business’s strategic goals. If the goal is to increase ecommerce revenue by 30%, a company might choose metrics that measure average order value, conversion rate and cart abandonment. KPIs can also align to the goals of different departments, teams and individuals. If the purchasing department wants to improve inventory management, the most effective KPIs might include inventory turnover rate and perfect order rate.
- Growth-Stage Alignment: A good KPI also aligns with a business’s life cycle. The metrics for a startup, for instance, might center around customer feedback and business model validation. KPIs for more established companies could be monthly recurring revenue, customer retention and cost per acquisition.
- Attainability: A good KPI measures achievable goals rather than unrealistic targets. This also means the data needed to calculate the KPI is available, accessible, trusted and presentable to stakeholders.
- Substance: Does the KPI concentrate on what truly matters to move your business forward? Or does it focus on surface-level vanity metrics, such as number of downloads or social media followers, that aren’t actionable? (More on that soon.) Good KPIs offer value, point to a trend or inform next steps.
- Quantifiable and Measurable: Good KPIs are easy to measure, based on clear, trackable goals. They can be expressed as ratios, percentages or rates. Analytics and reporting tools, such as dashboards, help centralize KPIs so a business and its teams can see at a glance where they stand, where they need to go, why something happened, and whether any corrective strategies are needed.
- Actionable: An actionable KPI indicates measurable tasks that lead a business toward its goals. Without a goal, the KPI is just a metric, not an indicator. KPIs can inform decisions, such as whether to adjust a sales plan based on how well a product is performing in the market. They also reveal trends that impact future strategies.
Choosing KPIs Related to Your Business Goals
Before a business can select its KPIs, it must first establish its overall goals. Goals will vary by the type of company, such as business-to-business (B2B), and business model, such as software-as-a-service (SaaS). KPIs focus on various aspects of the business, such as finances, customers and employees. They can also focus on specific functions, such as sales, procurement or human resources. Once goals are set, management can select KPIs and then monitor the organization’s progress in meeting them.
How to Choose the KPIs That Matter for Your Business
What makes a key performance indicator truly “key” for your business? It depends on your goals. Best practices also say less is more. Important questions to consider when selecting KPIs include:
- What are the goals of your business? KPIs should align with business goals, so knowing what you want to achieve is the starting point. A general rule is no more than 3-5 company goals in a 12-month period. KPIs monitor how well the organization is tracking toward its goals during a defined period of time.
- How can you make that goal measurable? For KPIs to track progress, goals must be specific and quantifiable. For example, “lower customer acquisition cost by 15%” is a measurable goal but “lower customer acquisition cost” is far less so. KPIs for this goal might include conversion rate and lead generation cost by channel.
- What vanity metrics can you avoid? Vanity metrics appear to cast your product or business in a successful light, but they aren’t actionable. Examples include a high number of downloads for a free app, registered website accounts or social media followers. Vanity metrics can also be misleading. For instance, a high number of app downloads could be due to a recent marketing promotion, not usage or popularity. Most of these users may also not become paying customers.
- What top metrics truly matter? The answer varies by organization, industry, department, region and other factors. The most effective KPIs are quantifiable, actionable and align with a company’s goals and growth stage. Common metrics that matter to most businesses include revenue growth, profit margin, cash flow, employee turnover and customer acquisition cost.
- What are your leading and lagging indicators? KPIs fall into two
categories: leading and lagging. Leading indicators predict what may happen in the
future. For example, an increase in deal size or employee headcount may portend revenue
growth. Leading indicators offer businesses the opportunity to prepare themselves and,
if required, adjust their strategies.
Lagging indicators reflect past results, measuring the aftermath of actions. Monthly recurring revenue and employee turnover are examples. Lagging indicators can uncover trends, help companies evaluate their progress and influence future decisions.
- What trends can you leverage? Over time, KPIs help illuminate trends that indicate how well a company is meeting its goals and whether it needs to make adjustments . For instance, if sales of a particular product increased over the past three quarters, a company may decide to target buyers with an upsell campaign.
KPIs monitor whether a business is on track to achieve its strategic goals. KPIs tracked in customizable dashboards can inform decision-making by uncovering areas of strength or areas that would benefit from improvement. Whether leading or lagging, good KPIs are easy to understand, balance short- and long-term needs and can be measured and reported in a timely manner. Above all, KPIs should align with a company’s objectives and be limited in number to keep a business focused on its highest priorities.
How to Choose KPIs FAQs
How do you choose good KPIs?
Businesses have a wide variety of KPIs at their disposal. The key is to choose the ones — and not too many — that best align with strategic goals. A healthy mix of KPIs that reflect different areas of the business help paint a picture of a business’s overall health. They also help teams and employees stay focused and enable better data-based decision-making.
How are KPIs set or determined?
KPIs are based on a business’s strategic goals and should align with its growth stage. By their very definition, KPIs are quantifiable and measurable. They should be relevant, to drive a business forward, as well as uncover any issues that would otherwise go undetected.
What are the main KPIs?
There are many KPIs to choose from. They can be financial, focusing on the ratio of net profit to revenue or the ratio of assets to liabilities. They can be customer-based, monitoring customer retention or satisfaction. They can also shed light on individual products and processes, as well as employees and teams. Common metrics include revenue growth, profit margin, cash flow and customer acquisition cost.
How do you establish KPIs?
A company must first determine its goals and objectives before it can choose KPIs. Otherwise, it risks losing time, money or resources on work that doesn’t align with them. KPIs must also be actionable, meaning they indicate measurable tasks that can help a company achieve its goals and aid decision-making.