What are key performance indicators (KPIs)?

Every business defines success differently. KPIs make those definitions visible, measurable, and actionable — so your entire organization can move in the same direction.

What is a key performance indicator?

A key performance indicator (KPI) is a quantifiable measurement that tracks progress toward a specific business objective over a set period of time.

KPIs help businesses set goals (targets), monitor achievement (milestones), and identify areas for improvement. To benchmark progress, you set KPI targets. Organizations typically base their targets on one or more of the following:

• Competitor performance: What similar organizations achieve in the same period
• Past performance: Your own historical results as a baseline
• Pre-determined benchmarks: Industry standards or internally agreed thresholds

KPIs provide targets to aim for, milestones to gauge progress, and insights to guide data-driven decision-making. By monitoring KPIs, organizations can identify areas of strength and weakness and take action to improve performance.

What is the difference between a KPI and a business metric?

Business metrics are the units of measurement used in KPIs. All KPIs use business metrics, but not all business metrics become KPIs. You can designate a metric as a KPI if it is relevant to the organization's goals — or the goals of its functions, processes, locations, and segments.

A sales KPI example: percentage of new inbound leads. You might use lower-level business metrics to measure activities that contribute to gaining those leads, such as unique visitors, page views, or dwell time.

Types of KPIs

You can categorize a KPI within one or more of five types. A KPI's type provides a general idea of its organizational purpose, time frame, and level within the business.

Strategic

Strategic KPIs are monitored at the executive level to measure the organization's overall health. They track progress along organizational goals. Examples include total company revenue, market share, and profit margin.

Operational

Operational KPIs measure the performance of specific organizational processes, locations, and segments. A key characteristic is a focus on shorter timeframes, such as monthly or daily targets.

Operational KPIs typically serve larger-scale strategic KPIs. For example, if a company wanted to increase revenue growth, lower-level managers might analyze sales by region to determine which areas to improve.

Functional

Functional KPIs track progress across specific organizational functions, like finance, sales, marketing, or human resources. Finance teams would likely monitor KPIs like return on investment and profit margin, while HR would focus on employee satisfaction and retention.

You can classify functional KPIs as either strategic or operational. Revenue growth, for example, is a popular strategic KPI tied to financial functions. Monthly sales growth and product performance, on the other hand, make effective operational KPIs.

Lagging and leading KPIs

Another way to classify KPIs is by whether they measure the past or forecast the future.

Lagging KPIs reflect past performance. You use this data to set realistic organizational objectives. An example is monthly recurring revenue — you can use past performance or industry benchmarks to set future targets.

Leading KPIs aim to predict future performance. Progress along a leading KPI correlates to success in achieving a lagging KPI. For example, if you want to increase monthly lead conversions, you would track daily page visits, unique visitors, and session duration as leading indicators.

Benefits of KPIs

KPIs play a crucial role in business success. They align the team on a shared idea of progress, promote action, and create accountability.

Clarifies organizational progress

Without KPI targets, you would struggle to determine whether your organization is moving forward. KPI targets define a standard and measurement for organizational performance.

For example, an end-of-year revenue of $1,000,000 is meaningless without context. Set a target, and that number tells a story. Compared to $800,000 last year, it shows growth. Compared to a $1,500,000 target, it signals a gap in projections or sales execution.

Guides strategic business decision-making

Adding visibility to the organization's successes and failures within a defined objective makes it easier to identify what actions to take next. For example, if you track revenue growth across two sales teams using different strategies, results will show which approach was more effective — and where to apply it next.

Aligns the organization on a shared idea of success

KPI targets ensure the entire team understands the organization's definition of success. They push every member to move in the same direction rather than following varied, self-defined progress indicators. Without sales targets, for instance, your sales team might produce results far below what the business requires.

Creates team accountability

KPIs give teams a benchmark for tracking their own performance. A sales team, for example, can use the company's revenue growth target to create individual sales targets for each member — making expectations clear at every level.

Characteristics of an effective KPI

Not every KPI drives results. Effectiveness hinges on the following characteristics:

Business-aligned

A KPI and its target should align with your business objectives. Increases in specific metrics don't always contribute to business growth. Aiming for more leads, for example, won't benefit a company that lacks the resources to support new customers.

Relevant

Each KPI should be relevant to the function or team that owns it. KPIs like search engine rankings and customer acquisition cost belong with the marketing team — they have the context to act on that data.

Simple

Your KPIs serve as a shared progress marker for the entire organization. They must be easy to measure and understand. "Increase revenue by 20% this year" has a clear goal and target. Team members can determine how to create tasks and projects that impact it.

Measurable

Avoid vague KPIs. "Improve customer relations" lacks an assigned metric. "Increase customer satisfaction" can be measured with surveys, net promoter scores, or customer effort scores.

While most KPIs are quantitative, some — like customer satisfaction and employee engagement — can be qualitative. Measured through surveys or feedback tools, qualitative KPIs can drive more accurate business strategies by surfacing clear, actionable sentiments.

Achievable

Setting unrealistic goals increases the risk of failure and burnout. Use past data to analyze your team's capacity with available resources. To increase monthly sales, check past targets and increase them by a reasonable margin. If you can provide additional support, you can aim higher.

Timely

Effective KPIs are bound within appropriate timeframes. Tracking too infrequently makes it difficult to identify trends. Tracking too frequently wastes time and resources when there are few meaningful changes between reports.

Visible

Ensuring everyone in the organization has access to KPI results increases accountability across teams. It also shows each member whether their efforts are bearing fruit, allowing better strategy and execution.

Visibility helps both strategic and operational KPIs. Operational KPIs add clarity to specific business endeavors. Strategic KPIs help teams see whether collective efforts are working — profit-related KPIs, for instance, can reveal whether the organization is consuming too many resources or whether revenue-generating activities are effective.

How to define a KPI

Defining a KPI requires incorporating the above characteristics while ensuring systems are in place to track progress. The table below outlines the process.

Identify the desired outcome

Define the strategic objective your KPI will measure. Start by identifying what your business currently needs, then set a timeframe so the team has a reference for mapping out their strategy.

Leading metrics are tracked more frequently because changes within small timeframes help map out trends. Lagging metrics are tracked less regularly because significant changes take longer to appear. If you want to expand your business, revenue growth is a natural KPI — it shows whether your product or service is attracting and retaining customers.

Establish the outcome's relevance to the business

Identify how meeting your KPI goals contributes to the well-being and growth of your business. Growing revenue, for example, increases profitability. Excess revenue can fund additional revenue-generating activities or investments that streamline operations.

Set a unit of measurement

If the KPI is quantifiable, identify the unit of measurement that aligns with your goal. A revenue growth KPI is simply measured in dollars.

If your KPI is qualitative, identify an effective method of data collection. For employee engagement, ask questions about common motivators — management, work-life balance, pay, and benefits.

Determine how to influence the outcome

Identify the actions that can bring your KPI to its target. Operational KPIs are typically attached to specific day-to-day operations. Strategic KPIs require you to identify which organizational functions can add impact. Increasing revenue growth, for example, might involve raising sales targets, running lead conversion campaigns, or tightening the handoff between marketing and sales.

Assign a KPI owner

Assign a KPI owner who can build business strategies from regular progress monitoring. Operational KPIs typically fall under managers heading specific business endeavors; strategic KPIs belong to executives. The best owner for a revenue growth KPI is the Sales Lead — that individual has the most valuable insights for generating revenue.

Determine KPI review frequency

Whether your KPI is leading or lagging, regular review is essential. Leading KPIs require frequent review to map patterns and trends. Tracking lagging KPIs semi-regularly helps check progress within the designated timeframe.

If you aim to increase revenue by year-end, tracking monthly gives your strategy room to adapt. You can test different approaches each month and compare performance to determine what works.

KPI examples

Different departments track different KPIs to gauge progress. Below are some of the most common KPI examples per business function.

Marketing KPI examples

Return on marketing investment (ROMI)

ROMI compares marketing campaign costs against subsequently generated revenue to calculate the effectiveness of your marketing campaigns. Analyzing ROMI shows which marketing activities work, allowing for efficient resource allocation.

Click-through rate

The click-through rate compares total ad or page viewers against the total number of clicks for a designated link. It helps measure the effectiveness of ad or content campaigns in capturing attention.

Lead conversion rate

The lead conversion rate measures the number of leads that become paying customers. This could be website visits against the number of visitors who completed a desired action, such as a purchase or newsletter sign-up.

Average time on page

This KPI tracks the average time a visitor spends on your website. Measuring average time on page helps you determine your website's effectiveness and the likelihood of converting visitors to customers.

Social media reach

Social media reach tracks the number of viewers per post. Higher reach increases opportunities for engagement and conversion.

Net promoter score (NPS)

The net promoter score asks customers to rate their likelihood of recommending the organization's product or service. It helps gauge the potential for gaining new leads.

Website traffic by source

Website traffic by source tracks where your visitors come from. It helps you determine which channels to engage to attract more leads.

Sales and retail KPI examples

Revenue

Revenue is one of the most common KPIs for sales. It refers to the income gained from selling goods and services.

Sales growth rate

The sales growth rate tracks how much your sales increase over a specific timeframe. Understanding sales growth rates helps you set realistic revenue or sales targets.

Average sales cycle length

The average sales cycle length tracks how long leads transition from initial contact to final sale. Tracking this KPI helps forecast cash flow and identify potential areas for improvement in sales processes.

Sales pipeline value

Sales pipeline value estimates the total value the organization can earn from leads and opportunities currently in the pipeline. Because this KPI helps predict future earnings, you can use it for more accurate resource allocation.

Customer retention rate

The customer retention rate tracks the number of existing customers who continue purchasing your products and services. It can help predict revenue or sales growth.

Customer satisfaction score (CSAT)

The CSAT uses surveys and other feedback tools to determine how satisfied a customer is with a product, service, or company. It helps predict future customer retention.

Operations KPI examples

Return on investment (ROI)

ROI measures profit against the cost of a particular investment. It helps you determine the success of an investment.

Overall equipment effectiveness (OEE)

OEE uses your machinery's availability, performance, and quality metrics to measure effectiveness and efficiency. It can help you determine where to allocate resources for upgrades or fixes.

Capacity utilization

Capacity utilization measures the extent to which you maximize your full production potential. Tracking it shows how much you can increase production without incurring additional costs.

Labour productivity

The labour productivity KPI tracks the output produced per hour of labour. It helps you determine whether labour processes need refinement to improve efficiency.

Cost of goods sold (COGS)

COGS refers to the sum of all direct costs involved in producing a sold product. Analyzing what adds to COGS helps you reduce production costs and increase profitability.

Days in inventory

Days in inventory tracks the average number of days an organization holds inventory before it is sold. It helps you track when cash will flow into the business.

Inventory turnover

Inventory turnover measures the rate at which you sell, use, or replace stock. It helps gauge sales performance and inventory management effectiveness.

Human resources KPI examples

Employee engagement index

Keeping employees engaged ensures they are motivated to work and stay with the organization. You can measure employee engagement through surveys or other feedback tools.

Employee satisfaction index

Employee satisfaction increases the likelihood of employees staying with the organization or recommending it to potential hires. Like employee engagement, it is tracked through surveys and feedback, allowing employees to rate their satisfaction across areas like work-life balance, benefits, and management.

Employee turnover rate

Employee turnover rate measures how many employees exit the company within a given timeframe. It is used to track patterns in turnover causes.

Project completion rate

The project completion rate tracks the rate at which tasks and projects are completed. It helps identify bottlenecks or inefficient processes.

Time to hire

Time to hire measures the length of a hiring process from application to offer acceptance. It is used to identify inefficiencies in the hiring process for reduced downtime and increased candidate satisfaction.

Percentage of cost of the workforce

This KPI measures the cost of the workforce — including compensation packages, training, and support — against the total costs the company incurs. It helps HR teams contextualize the cost of adding benefits or automating gaps in the organization.

Quality of hire

The quality of hire counts the number of new hires who received strong ratings in performance reviews. It reveals HR's effectiveness at finding quality candidates.

Project management KPI examples

Number of scope change requests

Number of Scope Change Requests monitors uncontrolled growth in a project's scope. These changes typically exceed available resources and time frames. This KPI helps identify problematic changes and keep projects on track. A related KPI is Percentage of Project Budget Allocated to Scope Changes.

Change requests

This KPI tracks the number of requested changes in a project. Staying on top of change requests helps you add necessary resources, set realistic deadlines, and inform stakeholders — avoiding scope creep.

Risk exposure

This KPI tracks the cost or impact of potential project risks. It helps project managers craft mitigation strategies.

On-time completion rate

This KPI measures total tasks against tasks completed within schedule. Tracking on-time completion rates helps you identify inefficiencies or set timeline goals more realistically.

Team productivity

Team productivity measures output per team member within a set development period. Tracking this data helps project managers build realistic timelines for future endeavors and identify improvements for effective team management.

Stakeholder satisfaction

The stakeholder satisfaction KPI uses surveys to ask clients, investors, team members, and other stakeholders to rate their satisfaction with the project's output. This measures project success and allows project managers to identify which strategies to carry forward.

Project health

The project health metric tracks schedule, budget, scope, and quality to evaluate a project's performance against its defined timeline and goals. It helps project managers identify inefficiencies and communicate progress to stakeholders.

The limitations of KPIs

KPIs are a tool for gauging progress. Unwise use of this tool can hinder your business as much as help it. Below are a few common limitations to keep in mind.

Lack of agility

KPIs represent goals — but goals can change under evolving circumstances. Sticking to KPIs instead of adapting to new realities can set your business back.

For example, you may be focused on acquiring new customers. But if equipment failures force you to scale back operations, your reduced capacity will make it difficult to accommodate the new customers your KPI is designed to attract.

Demotivation

Demotivation most often occurs when organizations set unattainable KPI targets. Employees work without seeing progress, leading to burnout. Reduced motivation then diminishes productivity and work quality.

Misses smaller wins

KPIs can fail to account for smaller wins. Progress that isn't officially measured is still progress — but employees don't receive recognition because it falls outside a KPI. Having systems in place to reward impactful work that doesn't directly move a KPI helps maintain morale and momentum.

Information overload

Stick to the KPIs that align with your organization's needs. Tracking numbers that don't matter wastes resources and labour. Many KPIs also require deeper analysis to become effective. Tracking employee turnover, for example, only tells you how many people leave — the real work is understanding why.

Track your KPIs with Klipfolio

Monitoring KPIs is only valuable when you can see them clearly and share them easily. Klipfolio Klips is customizable KPI dashboard software that connects to 130+ data sources, visualizes progress in real time, and distributes results to your entire team — however they need to see them.

Visit the Klipfolio Business Dashboard page to see what's possible.