What Are KPIs?
Key Performance Indicators (KPIs) are quantifiable metrics or data points organizations and individuals use to measure and evaluate their performance against specific objectives, goals, or targets. KPIs are critical tools for assessing how effectively an organization or individual achieves their desired outcomes and can help make informed decisions and improvements.
Why KPIs Are So Important?
KPIs are metrics (measurable values) that show how effectively one moves toward their goals and objectives. They can monitor personal performance, a team's performance, or a company's §performance. At the same time, there are many indicators and performance indicators, but only a few key performance indicators one can use. Therefore, it's critical to select the right ones for your business.
Using the right KPIs is important because they track the business' progress, drive people in the right direction, and help you have valuable insight into your company's performance. If you choose poorly, the indicators will be either irrelevant or misleading. Instead of driving your employees in the right direction, they might induce a lack of motivation or responsibility, wrong behaviors, and confusion. Effective KPIs should help people make accurate decisions quickly and well-informed.
Here are additional ways to reflect on the importance of KPIs:
- Quantifiable Metrics: KPIs are typically expressed as numerical values, percentages, ratios, or other quantifiable measures. They provide a clear and objective way to track progress and assess performance.
- Strategic Relevance: KPIs are closely aligned with an organization's or individual's strategic objectives and goals. They focus on aspects that are critical to the success and mission of the entity, helping to ensure that efforts are directed toward what matters most.
- Measurable and Specific: KPIs should be specific and well-defined, making it easy to understand and measure progress. Vague or overly complex metrics can lead to confusion and misinterpretation.
- Time-Bound: KPIs often have a defined time frame or reporting period. This could be daily, weekly, monthly, quarterly, or annually, depending on the nature of the measurement and the goals being tracked.
- Benchmarking: KPIs are often used for benchmarking, which means comparing current performance to historical data, industry standards, or competitors' performance. Benchmarking helps assess whether an organization is doing better or worse.
- Actionable: Effective KPIs should provide insights that can guide decision-making and actions. If a KPI indicates a performance issue, it should prompt corrective actions or improvement strategies.
- Variety of Use Cases: KPIs can be used in various domains, including business, healthcare, education, sports, and more. They can cover multiple areas: sales, customer satisfaction, employee performance, financial health, and operational efficiency.
Elements of a KPI
KPIs are long-term companions. You must choose them well from the beginning because you'll use them to track progress and performance for a long time. They are core elements of any business and project plan. Without data continuity, you can't make good decisions. So here are the elements you should consider when defining a KPI:
- A formula or a metric: The role of KPIs is to measure; thus, you need a formula as specific and meaningful as possible.
- A measurable goal: Every KPI must have a target that corresponds to your measure and the duration of your aim. These are typically numerical values that you want to reach.
- Data source: KPIs are based on data; thus, you need a relevant data set. As KPIs are long-term measurements, choose a continuous, consistent, and coherent data set. Consider storage space, data security, and data management.
- Reporting frequency: Reporting needs may vary, but a decent rule of thumb is to report on them at least monthly.
- An owner: Setting expectations for who will be responsible for monitoring, reporting, and improving particular KPIs is helpful to your overall organizational plan, even though it is not a required component of your KPI statement.
How to Develop KPIs?
There are plenty of ready-to-use KPIs, but you can always define ones that fit your company's goals and culture. With the elements of a KPI in mind, follow the next steps to develop your KPI:
- Step 1: Focus on your objectives and find measurements that quantify their progress. Ensure your KPI is directly related to your goals, a timeline, and a data source.
- Step 2: Ensure that your KPIs meet the standards of a good KPI, aiming to keep things simple and follow a SMART approach
- Step 3: Assign specific people with the responsibility of managing each KPI. Assign an owner to each KPI and provide them with the resources required to transform the idea into reality.
- Step 4: Determine an evaluation criterion. How should the KPI be to promote progress and motivation? Remember that everything should be quantifiable.
- Step 5: Monitor and review progress consistently with the company setup. If something is not according to the timeline, readjust.
Key Types of KPIs
KPIs can monitor all parts of your activity, such as HR, sales, marketing, production, IT, customer service, etc. However, they fit into a few categories based on how they are computed and the period they address.
Based on the formula, KPIs may be:
- Numeric measurements: They track performance by counting items of a particular sort.
- Percentage measurements: They track performance by measuring the status of a particular activity or task in %.
- Comparative measurements: They track performance by measuring the increase or decrease of a quantifiable target.
Based on the period they address, KPIs may be:
- Leading KPIs: They predict how well the company will perform in the future. By computing a leading KPI at the present moment, you have a perspective over the future. And even if the future is still unpredictable, you know what may happen.
- Lagging KPIs: They evaluate the past and show how well the company did over a while. By computing a lagging KPI, you know what went wrong or well, where the business needs improvement, and how good your past actions were.
KPI Examples
The selection of appropriate KPIs is crucial because it ensures that organizations and individuals focus on what matters most and can continuously monitor and improve their performance. It's essential to periodically review and adjust KPIs as goals and circumstances change to maintain their relevance and effectiveness. Find below several examples of the key departments of a company.
Marketing KPIs
Number of advertorials
- Formula: Count advertorials in significant publications
- Goal: 5 articles per month
- Source: Excel file in the Public Relations department
- Reporting frequency: Quarterly
- Owner: Public Relations Manager
Number of distributed flyers
- Formula: Printed brochures minus remaining ones
- Goal: At least 80%
- Source: Administrative department reports
- Reporting frequency: Monthly
- Owner: Executive Marketing Manager
Events Participation
- Formula: Number of free and paid participation in industry events
- Goal: 10 events per year
- Source: Excel file in the Public Relations department
- Reporting frequency: Yearly
- Owner: Public Relations Manager
Number of visitors on social media
- Formula: Number of visitors on the company's social media platforms (Instagram, Facebook, etc.)
- Goal: 1,000 visitors/day
- Source: Content management system
- Reporting frequency: Monthly
- Owner: Social Media Manager
Website Traffic
- Formula: Number of visitors on the company's website
- Goal: 500 visitors/day
- Source: Content management system
- Reporting frequency: Monthly
- Owner: Editorial team
Manufacturing KPIs
Quantity of raw sourced materials
- Formula: Inventory of raw sourced materials
- Goal: Less than the maximum quantity
- Source: Acquisition department data
- Reporting frequency: Monthly
- Owner: Acquisition Manager
Amount of products per manufactured lot
- Formula: Inventory of products per manufactured lot
- Goal: More than the minimum quantity
- Source: Manufacturing department data
- Reporting frequency: Monthly
- Owner: Manufacturing Manager
Defects
- Formula: Number of products with defects
- Goal: Less than the maximum quantity
- Source: Manufacturing department data
- Reporting frequency: Monthly
- Owner: Manufacturing Manager
Stages in the manufacturing process
- Formula: Number of steps required by a particular manufacturing process
- Goal: Less than the maximum number
- Source: Manufacturing department data
- Reporting frequency: Monthly
- Owner: Manufacturing Manager
Sales KPIs
Number of new contracts
- Formula: Count new agreements over a period of time
- Goal: 50 new contracts per quarter
- Source: Legal Department inventory
- Reporting frequency: Quarterly
- Owner: Sales Manager
Money value for new contracts
- Formula: Add money value for new contracts over a period of time
- Goal: Value per quarter
- Source: Accounting Department reports
- Reporting frequency: Quarterly
- Owner: Sales Manager
Net Sales
- Formula: Add money value for all contracts
- Goal: Value per quarter
- Source: Accounting Department reports
- Reporting frequency: Quarterly
- Owner: Sales Manager
Average time for a sale
- Formula: Number of hours spent to make a sale
- Goal: Less than the maximum number of hours allowed
- Source: Sales Department reports
- Reporting frequency: Monthly
- Owner: Sales Manager
Number of initiated sales that went wrong
- Formula: Number of deals that didn't succeed
- Goal: Less than the maximum number of hours allowed
- Source: Sales Department reports
- Reporting frequency: Monthly
- Owner: Sales Manager
Financial KPIs
Revenue
- Formula: Sum all incomes over a period of time
- Goal: Target revenue
- Source: The accounting department reports
- Reporting frequency: Quarterly
- Owner: Accounting Manager
Gross Profit
- Formula: Revenue minus expenses
- Goal: Target profit increase
- Source: The accounting department reports
- Reporting frequency: Yearly
- Owner: Accounting Manager
Cash flow
- Formula: Sum all in and out cash flows over a period of time
- Goal: Positive
- Source: Accounting department invoices
- Reporting frequency: Monthly
- Owner: Accounting Manager
Payroll headcount ratio
- Formula: The total amount of money paid to full-time employees over the total amount of money paid to other people working for the company (e.g., collaborators, freelancers, part-time, etc.)
- Goal: Lower than the target ratio
- Source: HR app
- Reporting frequency: Quarterly
- Owner: Accounting Manager
Customer Service KPIs
Number of customer support tickets
- Formula: Count how many support tickets were open over a period of time
- Goal: 20 tickets per month
- Source: Customer support app (e.g., Jira)
- Reporting frequency: Monthly
- Owner: Customer Service Manager
Number of returned products
- Formula: Count how many products were returned over a period of time
- Goal: Less than 10%
- Source: Customer support app
- Reporting frequency: Monthly
- Owner: Customer Service Manager
Average time for closing a ticket
- Formula: Divide the time required for closing all tickets by the total number of tickets
- Goal: Less than the maximum allowed time
- Source: Customer support app
- Reporting frequency: Monthly
- Owner: Customer Service Manager
Customer satisfaction
- Formula: Average customer rating over a period of time
- Goal: Higher than the minimum target rating
- Source: Customer support app
- Reporting frequency: Monthly
- Owner: Customer Service Manager
- Formula: Number of employees leaving the company
- Goal: Less than target
- Source: HR app
- Reporting frequency: Yearly
- Owner: HR Manager
- Formula: Number of absenteeism events over a period of time
- Goal: Less than target
- Source: HR app
- Reporting frequency: Monthly
- Owner: HR Manager
Cost per new hire
- Formula: Amount of money spent for hiring a new employee
- Goal: Less than target
- Source: Accounting reports
- Reporting frequency: Monthly
- Owner: HR Manager
Training cost
- Formula: Amount of money spent for training a new employee
- Goal: Less than target
- Source: Accounting reports
- Reporting frequency: Yearly
- Owner: HR Manager
Customers KPIs:
Customer Lifetime Value
- Formula: Expected revenue from a particular type of customer
- Goal: Higher than target
- Source: Marketing reports
- Reporting frequency: Monthly
- Owner: Customer Manager
Market Share
- Formula: Percentage of market share
- Goal: Higher than target / Higher than in the previous period
- Source: Market research data
- Reporting frequency: Yearly
- Owner: Customer Manager
Number of customers
- Formula: Number of customers retained over a period of time
- Goal: Higher than target / Higher than in the previous period
- Source: Sales data
- Reporting frequency: Yearly
- Owner: Customer Manager
Operations KPIs:
Overtime
- Formula: Number of overtime hours
- Goal: Less than the maximum overtime allowed by labor law
- Source: HR app
- Reporting frequency: Monthly
- Owner: HR Manager
Employee benefits usage
- Formula: Percentage of benefits used by employees over a period of time
- Goal: At least 50%
- Source: HR reports
- Reporting frequency: Monthly
- Owner: HR Manager
- Formula: Average of satisfaction scores given by employees
- Goal: Higher than 50%
- Source: HR app
- Reporting frequency: Yearly
- Owner: HR Manager
Workspace utilization
- Formula: Percentage of space used for offices, storing goods, manufacturing, etc.
- Goal: Target workspace environment
- Source: Administration data
- Reporting frequency: Yearly
- Owner: Administration Manager
Tip: Learn more about operations management: functions, roles and principles.
Top Business KPIs Examples
As the CEO or general manager, monitoring performance indicators that align with our strategic goals and objectives is important. Below, you will find 15 examples of business-related Key Performance Indicators (KPIs) that we might utilize:
Revenue Growth:
This KPI measures the percentage increase in a company's revenue from one period to the next.
Revenue Growth = (Revenue in Current Period - Revenue in Previous Period) / Revenue in Previous Period * 100%
Net Profit Margin:
This is the ratio of net profits to revenues for a company or business segment, showing how much each dollar of revenue becomes profit.
Net Profit Margin = Net Profit / Total Revenue * 100%
Gross Profit Margin:
This KPI measures the total revenue minus the cost of goods sold, divided by the total revenue, expressed as a percentage.
Gross Profit Margin = (Total Revenue - Cost of Goods Sold) / Total Revenue * 100%
Operating Expense Ratio (OER):
This KPI shows what portion of revenue is being spent on operating expenses.
Operating Expense Ratio = Operating Expenses / Net Sales * 100%
Employee Turnover Rate:
This KPI measures the number of employees who leave the company compared to the average number of employees.
Employee Turnover Rate = (Number of Employees who left during the period / Average number of Employees during the period) * 100%
Return on Investment (ROI):
This KPI measures the profitability of investments made in the business.
ROI = (Net Profit / Cost of Investment) * 100%
Customer Acquisition Cost (CAC):
This KPI shows how much it costs to acquire a new customer.
CAC = Total Cost of Sales and Marketing / Number of New Customers Acquired
Customer Retention Rate:
This KPI measures the percentage of customers the company retains over a given period.
Customer Retention Rate = ((E–N)/S)*100%
Where:
- E = number of customers at the end of the period
- N = number of new customers acquired during the period
- S = number of customers at the start of the period
Employee Productivity:
This KPI measures the output of employees per hour worked.
Employee Productivity = Total Output / Total Input
Inventory Turnover:
This KPI measures how many times a company's inventory is sold and replaced over a period.
Inventory Turnover = Cost of Goods Sold / Average Inventory
Days Sales Outstanding (DSO):
This KPI measures the average number of days it takes to collect revenue after a sale has been made.
DSO = (Accounts Receivable / Total Credit Sales) * Number of Days in Period
Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) Margin:
This KPI measures a company's operating performance.
EBITDA Margin = EBITDA / Total Revenue * 100%
Current Ratio: This KPI measures a company's ability to pay its short-term obligations.
Current Ratio = Current Assets / Current Liabilities
Return on Assets (ROA):
This KPI measures how efficiently a company uses its assets to generate profit.
ROA = Net Income / Total Assets * 100%
Average Revenue Per User (ARPU):
This KPI measures the revenue generated per user or unit.
ARPU = Total Revenue / Number of Users
Remember, the choice of KPIs depends entirely on the company's objectives and strategic goals. Therefore, while these are general examples, developing KPIs tailored to our specific business needs is important.
Examples of KPIs in different contexts include:
- Business: Monthly revenue growth rate, customer acquisition cost, customer churn rate.
- Healthcare: Patient satisfaction score, hospital readmission rate, average wait time in the emergency department.
- Education: Student graduation rate, standardized test scores, teacher-student ratio.
- Sports: Points per game, field goal percentage, win-loss record.
- Personal: Steps taken per day, savings rate, number of books read in a month.
FAQs
What is the difference between OKR and KPI?
Objective Key Results (OKR) refers to setting an objective and finding measurable actions that help you achieve the objective. OKRs are goal-setting frameworks that focus on defining a goal and a measurable way of getting there. On the other hand, KPIs are performance measurements that help you track your progress toward achieving a goal. So, an OKR is for setting a goal, while a KPI is for tracking an existing goal.
What is a KPI in business?
In business, a KPI is a numeric, measurable, and consistent value that tracks the business' progress toward an objective over time. A company may use as many KPIs as it finds necessary to measure performance in key areas such as HR, finance, sales, marketing, and manufacturing.
Key Takeaways
- KPIs should align with business goals: Your chosen KPIs should directly relate to your business objectives.
- KPIs should be measurable: Each KPI should be quantifiable and easy to measure over a specific period.
- KPIs should drive action: KPIs aim to highlight improvement areas and guide decision-making.