Key Performance Indicator (KPI): Definition, Examples & Types
What is a KPI?
A KPI stands for a key performance indicator, a measurable and quantifiable metric used to track progress towards a specific goal or objective. KPIs help organizations identify strengths and weaknesses, make data-driven decisions, and optimize performance.
KPIs provide teams with targets to aim for, milestones to gauge progress, and insights to help guide decision-making throughout an organization. By monitoring KPIs, organizations can identify areas of strength and weakness, make data-driven decisions, and take actions to optimize performance.
Example of a KPI
In simple terms, key performance indicators are a goal that you work towards achieving. For the sake of simplicity, let’s look at this example: you own an apple stand, and to be profitable this month, you have to sell 1,000 apples.
So, you set your KPI: sell 1,000 apples this month. Whether that’s 250 apples per week or you sell all 1,000 in the first three days, your KPI is to reach that 1K mark. When it’s the second week of September, and you’ve sold 550 apples, you can look at your KPI and know that you’re on track to achieve your goal.
In businesses, key performance indicators can either be high-level or drill down to a specific department or individual. High-level KPIs typically look at the performance of your business as a whole, like achieving $1M in annual recurring revenue this fiscal year. When you drill down into processes that are specific to departments, teams, or individuals, those are low-level KPIs.
What are the benefits of KPIs?
The benefits of implementing KPIs are vast and well-documented. They include enhancing employee engagement, aligning your team with your organization's mission, and improving accountability.
Aside from performance tracking and control, KPIs can provide your business with the following benefits:
Improves employee engagement
We've already mentioned it, but it's worth noting one more time: KPIs unify employees to work towards a common goal. Employee engagement, a topic that many organizations struggle with, can directly impact your bottom line. But KPIs can help. These indicators, whether individual or organizational, are a helpful mechanism to measure performance, which has a direct tie to employee engagement.
In fact, organizations with an engaged workforce see higher customer engagement, productivity, and 21% higher profitability. On the flip side, disengaged employees cite the same issues: poor communication about strategy between management and individual contributors. KPIs help solve this problem.
Connects your purpose and your culture
Your KPIs should be connected to your organization's mission. “Making money” isn't a mission, and it's not something that employees will connect with on a deeper level, either. Your purpose should encourage employees to show up to work with a renewed sense of excitement every day. There should be a direct link between your mission and your KPIs so that employees feel like their work is purposeful in achieving both.
Remove any ambiguity: ensure your KPIs work towards your end goal and employees clearly understand how and why they're working towards that.
Makes everyone accountable for performance
Traditionally, individual performance management frameworks are about setting objectives, measuring performance, and managing related activities. So why not incorporate KPIs into performance management, too?
Performance KPIs will help employees measure their impact and how their daily activities, arguably the foundation of their role, play into the success of larger organizational goals. KPIs set everyone off in the same direction, making everyone a happy contributor to your success.
What are the different types of KPI?
There are various types of KPI that you can use to measure your organization’s performance. Let’s discuss the ones you should be tracking.
Sales KPIs are used to track the performance of your sales. They can include metrics such as revenue, customer acquisition cost, average purchase value, retention/churn rates, and more.
As implied, Marketing KPIs focus more on assessing the effectiveness of your marketing campaigns. They can include metrics such as website visitors, conversion rate, social media engagement, and more. Insights gathered from Marketing KPIs are usually paired with those gathered from sales.
Financial KPIs focus on financial metrics such as revenue growth, profitability, return on investment (ROI), and cash flow. They provide insights into the financial well-being and stability of your organization.
Operational KPIs measure the efficiency of your operations and operational processes. They can include metrics related to production output, quality control, and inventory management.
Customer-centric KPIs focus on measuring your success in meeting your customer’s needs, expectations, and preferences. Some examples of customer performance indicators include customer retention rate, average customer lifetime value, and customer satisfaction index.
What makes a good KPI?
To drive meaningful insights and support data-driven decision-making, it is important to identify and define the right KPIs. So, what makes a KPI good? Below are some tips.
- Business-aligned: KPIs should be aligned with your overall business strategy and outcomes. For example, let's say your business has a goal to increase monthly recurring revenue (MRR) by 20% by the end of the fiscal year (a high-level KPI). If you’re on the sales team, your KPI might be to increase inbound leads by 50% by the end of Q3 (a low-level KPI). Your performance indicator contributes to the overall business goal because new leads = revenue potential.
- Actionable: KPIs should be actionable. Once you’ve set your KPI, you need to outline the steps you’ll take to reach it and the metrics you’ll measure along the way. What good is a KPI if you have no way to meet it? If your goal is to increase inbound leads, you should have a plan in place to do that—like moving more prospects from the MQL to SQL stage. Actionable steps will set you up for success in reaching your KPIs. It’s also worth noting that KPIs shouldn’t spur additional questions, they should do just the opposite: inspire action.
- Realistic: KPIs should be realistic. Good advice is to start small. Big, lofty KPIs—while they might look good on paper—aren’t doing you or your team any favors if they’re unrealistic from the get-go.
- Measurable: KPIs should be measurable. When you set KPIs, ask yourself: What are you trying to achieve? What is the desired end result? What’s the timeline? Remember to add: How am I going to measure my KPIs? Oftentimes, a BI or analytics tool is a great way to track your progress against your KPIs. This way, you can build a metric (like leads) and easily and quickly see your progress in data visualization (and share it with others on your team or across your organization, too! We love a data-driven team!).
How to set a good KPI
Now that we have the definition of a KPI, let’s take a look at the basics of setting KPIs. While you can take inspiration from industry-recognized KPIs, the ones you set should be unique to your business and your goals.
Let’s take a look at a KPI example of a bad one versus a good one.
Here’s an example of a bad KPI: Make a lot of money this year.
Why is this a bad KPI? To start, it’s incredibly vague. Is “a lot of money” $10K or $1M? There are no definitive actions that you can tie to your KPI if you don’t have a specific amount you’re working towards, there’s no ‘goal post’ (i.e. a defined amount) to know you’ve hit your target, and there’s no metric to attribute to it so you can track your progress.
On the flip side, here’s an example of a good KPI: Increase monthly recurring revenue by $25K this month.
Why is this a good performance indicator? It’s specific in more ways than one: it outlines the dollar amount and the timeframe in which you hope to achieve it. With a detailed KPI like this, you have an associated metric (MRR) that you can track against your progress, and you can hone in on what specific action(s) you’re going to take to achieve your KPI, like going after expansion MRR for existing customers.
It's important to remember that KPIs are a form of communication. When you write a KPI, keep in mind the basic rules of communication: be sure it is succinct, clear, and relevant.
How to define your KPIs
It can be easy to confuse KPIs with business metrics. Key performance indicators, should relate to a specific business outcome with a performance measure.
Let’s look at an example of how to set a KPI. Consider how your business objective is to increase your monthly recurring revenue, so your team sets a sales growth KPI.
Here's how you might define the KPI for that:
|What is your desired outcome?
|Increase revenue by 20% this year.
|Why does this outcome matter?
|The business will become more profitable.
|How are you going to measure progress?
|The increase in monthly revenue is measured in dollars.
|How can you influence the outcome?
|By encouraging expansion MRR for existing customers, by moving MQLs to SQLs, moving opportunities to win, and collaborating between marketing and sales.
|Who is responsible for the business outcome?
|Director of Sales.
|How will you know you’ve achieved your outcome?
|Revenue will increase by 20.
|How often will you review progress toward the outcome?
|On a monthly basis.
What is the best way to measure KPI?
You might be asking yourself: “How do I measure my company KPIs?” Well, the best way to do so is by using the SMART framework.
What is the SMART framework?
SMART refers to the five requirements your KPIs need to be good. It’s an acronym for Specific, Measure, Attainable, Relevant, and Timeframe.
Let's break this down into specific questions you need to answer:
- Is your objective specific? The KPI should have a clear and well-defined focus area. It should directly address a specific aspect of your operations, like sales, customer satisfaction, or website traffic.
- Can you measure progress toward your goal? The KPI should be quantifiable using objective data, like percentages.
- Is the goal realistically attainable? The KPI has to be a parameter that you know you can realistically strive for in a given timeframe. Don’t shoot for impossible numbers.
- How relevant is the goal to your organization? The KPI should directly align with your business objectives and reflect an area that is critical to your success.
- What is the timeframe for achieving this goal? Is it for the month, quarter, or year? Setting a timeframe for your KPI can help you do comparisons between periods, which allows you to track your performance and growth.
If you want to expand the SMART framework, you can make it SMARTER by adding evaluate and re-evaluate to your measurement steps. KPIs shouldn't be one-and-done—constantly evaluate them to ensure they are attainable and on track.
What is the difference between a key performance indicator and a metric?
While the terms “KPI” and “business metric” are often used interchangeably, they are distinct concepts. A business metric is a quantifiable measure used to track and assess the status of a specific business process. For example, website traffic is a common business metric.
On the other hand, KPIs are a type of performance measurement that helps you understand how your organization, department, or individual is performing against their strategic goals.
In short, every KPI is a business metric, but not every business metric is a KPI.
The difference between a KPI and a metric is nuanced. It is worth noting, though, that despite their subtle differences, you often need one to have the other. Here’s a side-by-side comparison of a KPI and a metric:
Track towards targets and objectives
Monitor ongoing business performance
Increase MRR by $1M in Q1
Monthly Recurring Revenue
To develop a strategy for writing KPIs, start with the basics: understand what your organizational objectives are, how you plan to achieve them, and who can act on the information. As you iterate and develop, you will gain a better understanding of which business processes can be on a KPI dashboard and who you should share that dashboard with.
What are KPI reports?
Now that you know what a key performance indicator is, you might have also stumbled upon the term “KPI report.” KPI reports, or KPI reporting, is a summary of all key KPIs you have for a project, campaign, or general operations. It’s usually created using interactive dashboards and/or reporting software that users can edit and share.
Ultimately, KPI reports serve as a strategic tracking method, providing a comprehensive view of essential business activities and its performance in each aspect.
What are the benefits of using KPI software?
At some point, you might be asking yourself, “Why do I need software when I can use a spreadsheet?” And while it’s true, spreadsheets have their limitations. They offer limited data visualizations (pie charts, bar charts, etc.), and there is a lot of time and manual effort required to get your report set up.
Spreadsheets require regular, manual maintenance to keep your data up to date, too.
Meanwhile, dashboard and reporting tools automate your data retrieval right from your data source so, right away, there is minimal manual effort. These tools are ideal for creating specialized dashboards, such as executive dashboards for high-level performance monitoring, marketing dashboards for tracking campaign results, social media dashboards for analyzing engagement, and sales dashboards for monitoring sales performance.
In fact, no matter how big or small your organization is, there are a ton of benefits KPI software can give you. Below are the ones you absolutely need to know about.
Has a library of visualization options
Dashboard and reporting tools often have data visualization customization and advanced capabilities, offering a large selection of visualization options. Klipfolio lets you create real-time data visualizations of your KPIs. When you’re tracking your KPIs, you’re likely pulling in data from different data sources, like HubSpot or Google Analytics.
In an analytics tool, you can bring all of that data together in just a few clicks, turn it into stunning data visualizations, and put them on a dashboard. From there, you can segment your data to look at channel types or countries, add dimensions, combine metrics, and share customizable and insightful reports with your team.
Centralizes your data
KPI software provides a structured and organized repository where KPIs can be defined, tracked, and updated. This eliminates the need for manual tracking (like spreadsheets), ensuring that your data will always be accurate, consistent, and accessible.
For example, your sales team can use KPI software to store and track key sales performance metrics such as revenue and conversion rates. All relevant data points and calculations are stored and refreshed in one place, allowing your business to monitor and analyze performance trends over time.
Supports real-time monitoring
KPI software enables real-time performance monitoring. It retrieves data from various sources, updates metric values automatically, and presents them in shared dashboards for easy access. This provides instant visibility into performance trends, allowing for timely decision-making and response to changing circumstances.
KPI software can also generate automated alerts and notifications based on predefined rules or thresholds. This way, teams are promptly informed when their KPIs deviate from expected targets, enabling them to take immediate action and address any pressing concerns.
Easy to scale
KPI software offers scalability, allowing organizations to accommodate growing data volumes and expanding performance measurement needs. It’s designed to handle large volumes of data and accommodate growing companies.
For example, you may start off by just tracking basic sales and revenue. But over time, you may find that metrics such as customer retention rates, average order value, and inventory turnover can give you a more accurate reading into the performance of your company. As you collect and analyze more data, your KPI software can scale accordingly.
Integrates with existing sources
KPI software can leverage data from multiple sources. In retail, for example, you have data sources such as point of sales data, loyalty card data, and market data. KPI software integrates with all these systems/data to generate comprehensive insights and maximize the value of your KPIs.
How to create a KPI Dashboard
Creating a KPI dashboard involves a systematic approach to ensure its effectiveness in monitoring and analyzing critical metrics.
- Define the objective of your dashboard: Is it to share insights with people who find raw data challenging to read? To convince management to take action?
- Identify who the dashboard will be for: Is it stakeholders? Marketing? Knowing what exactly your dashboard will be used for helps determine what KPIs you’ll be using, how you’ll be presenting them when it will be monitored, and more.
- Select the right KPIs: Focus on a concise set of metrics that provide a clear and meaningful picture of your organization's progress. You don’t need all of them to make a comprehensive report.
- Choose the proper visuals: What visuals will help you effectively convey the information you have with a glance? Some examples include charts, graphs, gauges, and tables.
- Design your layout: Organize the KPIs in a logical manner, considering factors such as hierarchy, grouping, and visual flow. Keep the design clean, uncluttered, and easy to navigate.
- Gather feedback: Before sharing your KPI dashboard with the rest of your team, test its usability and functionality with a small group of users. Make the necessary adjustments based on user insights to improve the overall user experience.
Knowing what exactly your dashboard will be used for helps determine what KPIs you will be using, how you will be presenting them, when it will be monitored, and more. Remember to regularly maintain and update your dashboard as well to ensure real-time or near-real-time monitoring.
What are the best KPIs to use?
We've said it a lot throughout this article: your key performance indicators should directly tie into your organizational goals and mission. This alignment ensures that everyone in the organization is working towards the same objectives.
For example, if your strategic goal is to improve customer service, a potential KPI might be to "Reduce customer complaint resolution time by 30% over the next 6 months." If you fail to meet this requirement, you need to know why it happened and take corrective action as soon as possible.
However, we also understand that defining the best KPIs to start with can be a challenge. To start your journey into performance tracking, we’ll list down some of the basic KPIs you should be tracking across different business functions, such as sales, finance, and marketing.
Get started creating your KPI dashboard with the following metrics:
Best Executive KPIs
Net Profit Margin shows net profit as a percentage of total revenue. To calculate the Net Profit Margin, divide your net profit (after deducting all expenses) by the total revenue.
The Debt to Equity Ratio measures how your organization is funding its growth and how effectively you are using shareholder investments. For example, if a company has a debt of $1 million and a shareholders' equity of $500,000, the Debt to Equity Ratio would be 2. This means that the company has twice as much debt as equity.
This KPI tells you if the theoretical lifetime revenue you get from a customer is higher or lower than the sales and marketing costs needed to acquire that customer. It is calculated by dividing the Lifetime Value (LTV) of a customer by the Cost of Acquisition (CAC).
CAC Payback Period
CAC Payback Period is the time it takes for a company to earn back its customer acquisition costs. A shorter payback period indicates a quicker return on investment.
Best Marketing KPIs
Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer. It is calculated by dividing the costs associated with acquiring customers, such as marketing, by the number of new customers acquired within a specific timeframe.
The Lead Conversion Rate is the percentage of visitors who come to your website and are captured as leads. The lead conversion rate provides insights into the effectiveness of your sales and marketing efforts in converting leads into paying customers.
A Marketing Qualified Lead (MQL) is a universal metric used by marketing teams to measure the quality of leads they generate and pass to sales. Marketing teams often have different set targets for MQLs.
The Return On Marketing Investment (ROMI) metric measures how much revenue a marketing campaign is generating compared to the cost of running that campaign. It’s computed by first subtracting the amount spent on marketing from the revenue generated by marketing efforts. Then, divide this result by the marketing investment and multiply by 100 (to get a percentage).
Best Sales KPIs
Lead to Win Rate
Lead To Win Rate is the percentage of Leads who entered the sales funnel and are now "Closed Won" customers. The process is more lengthy, but it is commonly computed by dividing the number of leads converted into wins by the total number of leads generated.
A Lead is an individual who has shown an interest in your product or service. They don’t have to be people who buy your offerings.
MRR Growth Rate
Monthly Recurring Revenue (MRR) Growth Rate is the velocity at which MRR is being added to the business, expressed as a percentage. MRR is determined by comparing the Net MRR of the current period with the Net MRR of the previous period.
Average Selling Price
Average Selling Price (ASP) is the average price a given product is sold for. To calculate the ASP, simply divide the total revenue earned from selling the product by the total number of units sold.
For example, let's say your company earns a total revenue of $100,000 from selling 1,000 units of a product. By dividing the total revenue by the total number of units sold, the ASP would be $100.
Best Finance KPIs
Gross Margin is a profitability ratio that measures Gross Profit as a percentage of total revenue. It is calculated by subtracting the cost of producing goods or services from the revenue generated by selling them.
Net Burn, often referred to as Burn Rate, is the amount a company is losing per month as they burn through its cash reserves. There are two common ways to calculate net Burn. The first involves subtracting the Gross Margin from the Operating Expenses. The second method compares the starting and ending cash balances over a specific period. Both methods provide valuable insights into your cash flow and financial health. This way, you'll know if your business is spending more cash than it is generating and if it can sustain its current spending levels.
Net profit is the value that remains after all expenses are subtracted from the company’s total income. It’s computed by subtracting all expenses from your gross income.
Revenue is all income you’ve earned through all channels—be it sales or subscriptions. This KPI lets you know how much your business is earning.
Frequently Asked Questions
What are the five main KPIs?
If we’re talking about the commonly used KPIs, they have to be:
- Profit Margin/Sales and/or Annual Sales Growth
- Client/Customer Retention Rate
- Lead Conversion Rate
- Customer Acquisition Cost
- Customer Satisfaction
However, remember that different organizations have different objectives. Choose the indicators that you think will best track your company’s growth. KPIs serve as quantifiable metrics that reflect the critical areas of your business and provide a clear view of its progress and success. By tracking your performance indicators, you can lay the groundwork for effective management and gain valuable insights into your organization's progress towards its goals.
What does KPI stand for in sales?
Key performance indicators (KPIs) are measurable and quantifiable metrics used to evaluate and assess the performance of your company or organization’s activities. It’s commonly used in sales and marketing to track revenue generation, customer acquisition, conversion rates, and more.
By tracking and analyzing sales KPIs, you can closely monitor your progress towards your targets, pinpoint areas for enhancement, and make informed, data-driven decisions to optimize sales performance.
What is the difference between a dashboard and a KPI?
Sometimes we see the words “dashboard” and “KPI” used interchangeably—which is simply untrue. A dashboard is a visual representation of data that provides a consolidated view of various metrics and other relevant information in a single interface. It offers a comprehensive overview of an organization's performance across different areas and enables businesses to monitor trends, patterns, and insights at a glance.
While a dashboard may include KPIs, it often encompasses a broader range of metrics and data points—not just key performance indicators! Dashboards typically present data through charts, graphs, tables, and other visual elements, allowing users to quickly assess performance and make data-driven decisions. Dashboards are usually set up using a KPI software or reporting tool.