What is a Key Performance Indicator (KPI)?
What is a KPI?
A KPI is short 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, a KPI is 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.
What is the definition of a key performance indicator (KPI)?
The definition of a KPI, or a key performance indicator, is “a measurable value used to evaluate how successful a person or organization is at reaching a target.”
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 makes a good KPI?
A good KPI is realistic, straightforward, and easy to measure. Here are a few tips to keep in mind for setting good KPIs.
- KPIs should be aligned with the overall business strategy and outcomes. The overarching business strategy should be what informs your KPIs. 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 KPI contributes to the overall business goal because new leads = revenue potential.
- 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.
- 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 favours if they’re unrealistic from the get-go.
- 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!)
What’s the difference between a KPI and a metric?
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:
Attribute | KPI | Metric |
Timeframe | Specific deadline | Ongoing |
Purpose | Track towards targets and objectives | Monitor ongoing business performance |
Example | Increase MRR by $1M in Q1 | Monthly Recurring Revenue |
How to set KPIs for your team and company
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 KPIs you set should be unique to your business and your goals.
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: succinct, clear, and relevant information is the most effective.
Let’s take a look at a KPI example of a bad one versus a good one.
Here’s 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 KPI? 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.
KPIs Vs Business Metrics: Understanding The Difference
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, a KPI is a type of performance measurement that helps you understand how your organization, department, or individual is performing against their strategic goals. Every KPI is a business metric, but not every business metric is a KPI.
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.
How to define KPIs
It can be easy to confuse KPIs with business metrics. KPIs, or 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:
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:
| Question | Answer |
|---|---|
| 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. |
Using the SMART framework to define company KPIs
You might be asking yourself: “How do I measure my company KPIs?” One way to measure the performance of your KPIs is by using the SMART framework.
What is the SMART framework?
Specific, Measure, Attainable, Relevant, Timeframe = SMART.
Let's break down the SMART acronym:
- Is your objective specific?
- Can you measure progress toward your goal?
- Is the goal realistically attainable?
- How relevant is the goal to your organization?
- What is the timeframe for achieving this goal?
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—you should constantly evaluate your KPIs to ensure they are attainable and on track.
How to use KPIs with dashboard and reporting software
You might be asking yourself, “Why do I need KPI software when I can use a spreadsheet?”
And while it’s true, spreadsheets have their limitations. Let’s take a look at the options for writing KPI dashboards or reports and how different types of dashboards can help enhance your data visualization and analysis.
- Spreadsheets are a great place to start if you’re new to KPI reporting. Spreadsheets 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. The plus side of spreadsheets is that they are accessible to everyone.
- Dashboard and reporting tools automate your data retrieval right from your data source, so right away, there is a 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. Dashboard and reporting tools often have data visualization customization and advanced capabilities, offering a large selection of visualization options. Lastly, while the dashboard and reporting tools take some time to set up at the start, the end result is that you and your team can buy back so much time because everything is automated.
- BI and analytics software adds an additional layer of data capabilities on top of the dashboard and reporting tools, often allowing for advanced analysis that meets the needs of sophisticated data and reporting teams.
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.
What are the benefits of using KPI software?
KPIs serve as a guidepost to help you and your organization reach your goals. And the pursuit of your goals depends on focused and consistent delivery of results. When you track your KPIs using a dashboard and reporting tool, there are numerous benefits, including:
KPIs engage employees
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. KPIs, 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.
KPIs connect 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.
KPIs make 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.
Linking KPIs to Business Strategy
Your KPIs should be directly linked to your strategic goals. 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."
Benefits of KPIs: Case Studies and Evidence
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. Here, we'll delve into a few case studies demonstrating how businesses have reaped the benefits of effectively implementing KPIs.
What are the best KPIs?
We've said it a lot throughout this article: your KPIs should directly tie into your organizational goals and mission. Get started creating your KPI dashboard with these metrics.
Best Executive KPIs
Net Profit Margin
Net Profit Margin shows net profit as a percentage of total revenue.
Debt to Equity Ratio
The Debt to Equity Ratio measures how your organization is funding its growth and how effectively you are using shareholder investments.
Lifetime Value to Cost of Acquisition Ratio
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.
CAC Payback Period
CAC Payback Period is the time it takes for a company to earn back its customer acquisition costs.
Best Marketing KPIs
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer.
Lead Conversion Rate
The Lead Conversion Rate is the percentage of visitors who come to your website and are captured as leads.
Marketing Qualified Leads
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.
Return on Marketing Investment
The Return On Marketing Investment (ROMI) metric measures how much revenue a marketing campaign is generating compared to the cost of running that campaign.
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.
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.
Average Selling Price
Average Selling Price (ASP) is the average price a given product is sold for.
Best Finance KPIs
Gross Margin
Gross Margin is a profitability ratio that measures Gross Profit as a percentage of total revenue.
Net Burn
Net Burn, often referred to as Burn Rate, is the amount a company is losing per month as they burn through their cash reserves.
Net Profit
Net profit is the value that remains after all expenses are subtracted from the company’s total income.
Revenue
Revenue is defined as the income generated through a business’ primary operations.