What is a Key Performance Indicator?
KPI stands for Key Performance Indicator. It can measure the performance of the whole company or one of its business activities. KPIs are also used to evaluate employees’ performance.
KPIs are quantifiable measures: “200 repeat customers”, “30 minutes in-store” or “15% net profit margin”.
KPIs are a lot easier to calculate if you have your books in order. If you need any help with these, check out our accounting services.
KPIs express your subjective performance expectations in a way that has no second reading. Without KPIs in place, you tell an employee, “Work better, and I will give you a raise.” With KPIs “better” becomes “Make 15 sales per month for 4 months straight, and you get a raise.” The employee now has a perfect understanding of what is expected of them.
Types of Key Performance Indicators
You can measure your performance and set future goals based on that. To be more precise, you measure either quality or quantity of something.
A quantity-oriented KPI gives you an insight into how much of something happens over a period of time.
I need to sell at least 5 books a day.
Quality-oriented KPI shows how much positive feedback you get over a period of time.
You want 50% of your monthly customers to rate your shop 10/10.
As you can see, both quality and quantity are measured numerically.
What KPIs are important for my business?
Businesses generate lots of data. You need to learn what pieces of it are relevant to you to understand how your business is doing. Relevant parameters are your KPIs. Focusing on the wrong parameters gives you an inaccurate picture of your company’s performance. If you count the number of client meetings your sales managers have instead of the number of deals they close, they will spend all the time in the meetings without selling much.
KPIs are influenced by many factors: the specifics of goods and services, the season, sometimes even the TV news. If your company sells holiday decorations, then your sales skyrocket when holidays approach and stay low for the rest of the year. So your sales KPIs cannot be the same for June and December. If you sell pork, news about swine flu bring your sales down for a period of time.
An online store sets KPI for ads as they bring new customers, while a funeral parlour might pay more attention to direct sales because their ads are not something people ordinarily like to see.
It makes sense to have different KPIs at different stages of your company’s development. For a newborn startup looking to raise money, KPI is the amount of cash you secured in investment. For an established business, it is revenues and sales.
What is considered important often depends on the department collecting the data. Both goals and ways of achieving them are different across different divisions of a single company. KPIs set for PR is not the same for the people working in sales.
Imagine you are the CEO of a fashion house specializing in luxury fur coats. You understand that this product has specific features. The furs are in demand mostly in cold months and are affordable only to a small group of customers, and they are willing to pay lots of money only if they are sure every coat is unique. So instead of focusing on the number of coats made or monthly sales, you set KPIs for ads in luxury fashion magazines, contacts with influencers, and customer experience. This way your goods will be noticed by the target audience who will come to your store and bring you revenues.
The management’s responsibility comes down to correctly defining, setting and integrating KPIs assigned to different departments to make the company run smoothly. It is also important to make KPIs sensible and understandable for employees because otherwise, they won’t be achievable.
Kyle is the owner of a funeral parlour. His business is associated with a very sensitive topic and Kyle has to be delicate when attracting customers. He wants to earn more, so he puts KPIs on ads which promote the low prices and the quick automated service.
But Kyle’s customers don’t want a McDonald’s kind of funerals. They want a custom burial for their loved ones. They expect personalized service and are willing to pay for it. So when they see Kyle’s “low price” ads or come to his parlour managed like a fast-food restaurant, they feel disrespected and leave. The wrong management decision has made the KPIs Kyle set unachievable by nature.
How do I identify relevant KPIs?
Start with deciding how you want your business to improve. Being everywhere like Apple is not going to cut it. Ambition is great but your goal has to be less complex and more achievable. An example of a goal that KPIs are helpful in achieving is increasing revenue that comes from the website.
Next, look at your data and decide what metrics help you set a relevant KPI. From the website, you get a ton of numbers. Let’s focus on those that are easy to interpret:
- Daily visitors;
- Number of visits per purchase;
- Time spent on the website.
Now crack the code of these numbers. Determine how one metric affects another and what is the most efficient way to improve them. The number of daily visitors can be increased by well-placed targeted advertising. But what good is it doing to you if they are not buying?
Bad visits-per-purchase ratios can be caused (aside from the bad product) by the bad UI experience. Maybe you hid the checkout box too well. Maybe ads pop up left and right like whack-a-moles. Either way, the problem can be solved.
Tell website development guys that you want customers to find the product they want and go from adding it to cart to actually purchasing as fast as possible. Define the time it should take the customer to buy, give the number to the team and here you go — a KPI.
Not every business sells products online, so let here is more universal instruction:
- Establish an achievable goal.
- Find metrics that are relevant to that goal.
- By the power invested in you by maths, link them together.
Examples of KPI
Here are some examples to help you understand what companies typically look at:
- If the company is in a seed or a pre-seed stage, main KPI is the number of potential investors spoken to or the amount of funding secured.
- If the company is engaged in retail, the important metric for it is client satisfaction index. An easy to track metric helping to measure client satisfaction with the product is the number of repeat customers. To see how well your sales department works, look at the average cheque sum.
- Net profit is one of the most known KPIs. It represents the amount of revenue that remains after you discount all of the company’s expenses for a certain period (such as salaries, taxes, rent, interest payments, etc).
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