Key Performance Indicator (KPI)
What is a KPI?
A KPI, which stands for Key Performance Indicator, is a way for businesses, organizations or individuals to measure progress over time and whether they are on track to reach their goals. KPIs provide information about performance levels in relation to meeting strategic targets.
History and evolution of KPIs
The concept of KPIs dates back to the 19th century when the French engineer, Jules Dupuit, introduced the idea of measuring performance in railway companies. Over time, KPIs have evolved into a widely used tool across various industries to track and measure performance.
Why are KPIs important?
While extremely useful for evaluating overall performance, a KPI also helps when first setting goals for your marketing strategies. This is because you can use KPIs as a navigational tool, outlining which performance levels you should expect to achieve desired results.
Whether used in the business development decision-making process or as yardsticks to measure performance levels, KPIs help improve overall effectiveness. Measuring KPIs can positively impact starting a business or growing an existing one. When you know what success looks like, you can better achieve it.
Some widely recognized benefits of using KPI's include:
· Actionable insights that can guide businesses in making informed decisions about a marketing campaign or business decision.
· Helping businesses to focus on what matters most and prioritize activities that align with their goals.
· Enabling businesses to measure the effectiveness of their marketing strategies and identify areas for improvement.
· Providing benchmark for measuring progress and success of a business or specific product over time.
Main challenges associated with setting KPIs
Some of the main challenges associated with KPIs include selecting the right KPIs, avoiding over-reliance on KPIs, and ensuring that KPIs are not misinterpreted or misrepresented.
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Types of KPIs
Businesses and individuals often find it challenging to choose the right KPIs for their purposes. As the name implies, a KPI is only useful if it provides "key" and relevant information about your specific professional or personal performance levels. This means you need to use the right KPI to get accurate, relevant data that informs your strategic decision-making.
The most popular types of KPIs include the following:
High-level: Focuses on a business’s overall performance.
Leading: Focuses on predicting trends or changes in managing a system or process’s performance.
Lagging: Focuses on measuring performance of a business or project after they follow a trend or pattern; is used to verify trends in the long term.
Strategic: Focuses on monitoring trends or progress regarding an intended result.
Operational: Focuses on a quantifiable factor that expresses business growth within a short time frame.
Financial: Focuses on a measurable factor that shows how a company generates profits and revenue.
Sales: Focuses on the factors by which you evaluate your team's performance against your sales and organizational goals.
How to define the right KPI?
A defined KPI should associate a specific outcome with an accompanying performance measure. You need to define a KPI according to your critical or core objectives, such as those in your business plan. Consider the following questions when identifying a KPI:
What is the intended outcome?
Why is this outcome important?
How will progress be measured?
How can you influence the outcome?
Who is responsible for the business outcome?
How will it be known when the outcome is achieved?
How often will overall progress be reviewed?
How to measure KPIs
You should constantly measure your KPIs to ensure you are on track to attain your goals. One way to set measurable KPIs is by following the SMART goals method. Let's take the example of how to apply SMART KPIs while creating a website for a hypothetical athletic shoe line:
Specific: A key performance indicator for your successful website launch is getting 100 new site visitors per week, three months after launch.
Measurable: Your goal of getting 100 new site visitors a week can be measured as an exact metric via website analytics.
Achievable: You can achieve this KPI three months after launch as a baseline to devise a strategy to drive traffic to your website.
Relevant: Website traffic is a relevant goal for your new online store launch because the more traffic you get, the higher your chance of getting conversions and seeing sales.
Time-bound: You’ve set a time KPI for yourself that you hope to see within three months of setting it.
KPIs look different across industries and functions. Here are some common KPI examples you can use to craft your own:
Cost per lead: In a marketing campaign, one KPI can be the amount it costs you to generate a single lead. Your KPI can aim for a cost per lead that is lower than X amount.
Cost per click: When advertising, a KPI can be the maximum cost per click you’re willing to pay.
Total sales volume: A KPI can be to hit X amount in sales each quarter.
Sales cycle length: You can create a KPI around a key sales cycle length in which it takes you to close a sale.
Gross profit margin: This amount looks at the gross profits you’ve made. You can compare this to your competitors and have a KPI dedicated to having a fixed margin.
Free cash flow: To calculate this metric, you need to subtract your capital expenditure from your overhead costs.
Conversion rate: A conversion rate is based on the percentage of people who visited your site and converted to a lead or sale. A KPI can be to increase your conversion rate by X percent via A/B testing and optimizing your site accordingly.
Time on site: By measuring how long users spend on your site, you can indicate how relevant and engaging they find your content. A KPI can be to increase time on site by X minutes.
Key performance indicators FAQ
What are some best practices when setting and tracking KPIs?
Be sure to set clear and specific goals that align with your business or marketing objectives.Choose KPIs that are relevant to the goals and objectives of your business. Regularly review and update your set KPIs to ensure they remain relevant and effective. Use data visualization tools to present KPIs in an easy-to-understand format, so that future actions can be taken based on them.
What is the difference between a KPI and a metric?
A metric is a quantifiable measure used to track and assess a process's performance. A KPI is a type of metric that is specifically linked to achieving a business objective or goal.
How often should KPIs be reviewed?
KPIs should be regularly reviewed, ideally on a monthly or quarterly basis, to ensure they remain relevant and effective.