What is a KPI?
A key performance indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs to evaluate success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes across departments like sales, marketing, HR, or support.
Definition of a Key Performance Indicator (KPI)
KPI, or a key performance indicator, are measurable values used to evaluate how successful a person or organization is at reaching a target. You can have high-level KPIs that look at the performance of your business, or KPIs that drill down into processes at the individual or departmental level, too.
A quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.
A set of quantifiable measurements used to gauge a company's overall long-term performance.
A way of measuring the effectiveness of an organization and its progress towards achieving its goals.
Basics of using KPIs
Now that we’ve defined a KPI, let’s take a look at the basics of using a KPI.
Have you ever adopted an industry-recognized KPI, only to find it doesn't work for your business? It's important to remember that KPIs are a form of communication. Meaning that they abide by the same result and best-practices as any other form of communication: succinct, clear, and relevant information is most effective.
To develop a strategy for formulating 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.
Let's look at each stage of formulating a KPI in a little more detail:
How to define a KPI
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.
Let's say your objective is to increase your monthly recurring revenue—your sales growth KPI. Here's how you might define the KPI:
|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, 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 collaboration 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 towards the outcome?||On a monthly basis.|
How to write a KPI
It's important that KPIs are customized to your business situation and developed to help you achieve your goals. Follow these steps to write clear, measurable KPIs.
Write a clear objective for your KPI
Your KPI should be connected with a key business objective. Without aligning your KPI to a business objective, you're working towards a goal with no impact for your organization. A KPI needs to be more than an arbitrary number, too. KPIs should express the strategic objectives of your organization. Most importantly, KPIs should tell the story of your company.
Share your KPI with stakeholders
Remember when we said that KPIs are a form of communication? KPIs need context in order to be effective. You have to explain what you're measuring and why you're measuring it. Share your KPIs with employees and stakeholders so they are aware of the direction of your organization. Withholding that information creates misalignment among teams. Listen for feedback and questions so you can identify and refine how you communicate your goals and KPIs.
Review your KPIs on a consistent basis
It's essential that you review your KPIs on a consistent basis. Review your KPIs from two perspectives: your progress against the KPI and your progress to determine the effectiveness of the KPI. If you're not making any progress, the objective of your KPI may have missed the mark and it's time to iterate.
Create actionable KPIs
Follow these 5 steps to create actionable KPIs.
- Review business objectives: Remember, KPIs aren't static! Your KPIs should evolve as your business objectives evolve.
- Analyze your current performance: Are you setting achievable targets? Analyzing your performance is essential to understand your areas of success and areas of improvement. Look at your historical performance data, too, to set a baseline for what you've accomplished in the past using a platform like PowerMetrics.
- Set short and long term KPI targets: Set your long-term goals (whether it's quarterly or yearly) and then work backwards to identify the milestones (or short-term targets) that you need to reach along the way. This way you can continually reassess and change course as you work towards your bigger targets.
- Review targets with your team: Teamwork makes the dream work! It's an old adage, but it still remains true. It's important that everyone remains in-the-know so you're all working towards the same end goal.
- Review progress and readjust: Make it a habit to check in on your status. KPIs aren't set-it-and-forget-it. Regularly check-in against your performance and relevance of your KPIs. And once you make it habit, it'll get easier every time.
How to measure a KPI
One way to measure the performance of your KPIs is using the SMART framework. What is the SMART framework?
Let's break down the acronym:
- Is your objective specific?
- Can you measure progress towards your goal?
- Is the goal realistically attainable?
- How relevant is the goal to your organization?
- What is the timeframe for achieving this goal?
Specific, Measure, Attainable, Relevant, Timeframe = SMART.
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 report on KPIs
The easiest way to report on your KPIs is with a KPI dashboard. A KPI dashboard provides you with an at-a-glance view of your business performance in near real-time. A KPI dashboard, also known as a KPI report, visualizes how your current performance stacks up against your objectives. Traditionally, a KPI report is done on a quarterly basis, but with a KPI dashboard, you can easily report on your performance at-a-glance, any time!
How to use KPI software
KPI software doesn't have to be intimidating. In fact, in a lightweight BI tool like PowerMetrics, it's actually pretty simple.
With PowerMetrics, or other similar tools, you can create real-time visualizations of your KPIs. You may be asking yourself, “Why do I need KPI software when I can just use a spreadsheet?”
In a lightweight BI tool, you can connect to your data sources in a few clicks and bring your most important KPIs onto a dashboard. From there, you can segment, add dimensions, and combine metrics for a customizable and insightful report for you and your team.
Why are KPIs important?
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
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 employee's 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 the 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 best KPIs?
We've said it a lot throughout this article: your KPIs should directly tie in to your organizational goals and mission. Get started building 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 their 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.
A Lead is an individual who has shown an interest in your product or service.
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 is a profitability ratio that measures Gross Profit as a percentage of total revenue.
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 is the value that remains after all expenses are subtracted from the company’s total income.
Revenue is defined as the income generated through a business’ primary operations.