Imagine having a job in which no clear quarterly goals were established to measure whether your work has been a success or failure. How would you prove you contributed to the business’s mission? What would you have to show for your work beyond day-to-day tasks that never amounted to anything more impactful? This is exactly why KPIs are needed: They drive momentum and keep businesses and their employees accountable for generating progress toward the company’s vision.
Companies often use key performance indicators (KPIs) when analyzing and reviewing the success or failure of their businesses. Simply put, KPIs measure businesses’ most significant goals and objectives against quantifiable data. Doing so provides an overview of an organization’s overall performance and progress.
Research published by Google states, “95% of leading marketers agree that to truly matter, marketing analytics and KPIs must be tied to broader business goals.” To reach its potential, a company should measure indicators related to its core values, such as having a mission of servant leadership or contributing to the greater good of the community. These things aren’t easy to measure, but they’re worth it—considering they lead to lasting motivation and resilience in the face of setbacks.
True leaders know their employees want to be more than a faceless number. Therefore, it’s recommended that they develop performance measures with both their customers and employees in mind to boost motivation, collaboration, and goal achievement. To do so, this article teaches you how to establish KPIs that utilize a balanced, human-first approach.
- KPI stands for “key performance indicator.” They express what a company wants to achieve by when.
- KPIs are used by businesses to measure their performance, specifically related to factors including financial profit, operations, customer satisfaction, and employee well-being.
- Industries that can benefit from KPIs include: financial, retail, manufacturing, travel, shipping, and many other industries.
- Establishing KPIs helps a company determine the sustainability and growth of the business from a glance, allowing room for pivots, adaption, and changes as needed.
- To track KPIs, data needs to be collected, organized, and analyzed regularly.
- A company is only as good as its employees. Therefore, when establishing and administering KPIs, employees should always be a part of the process.
What Is a Key Performance Indicator?
Key performance indicators (KPIs) are measurements used to determine how well a company is doing compared to its goals. They allow a business to gather relevant data and then communicate results in order to make strategic decisions that will benefit the company. While KPIs can be financially focused, such as measuring revenue and net profit, they also focus on how happy customers and employees are. For a company to be successful long-term, KPIs should be well-rounded, taking into account strategic goals, customer growth, and people management.
The Benefits of Developing Strong KPIs
“What gets measured gets done.”Peter drucker
KPIs can be of use for every department within a business, including finances, human resources, marketing, customer service, and operations. They can even be used by individuals to create meaningful goals and gauge progress.
When the business gets off track, KPIs shine a light on possible problems, increasing accountability as teams work together toward their goals. This type of environment also encourages employees to chime in on problems. Employees offer valuable insight into organizations because they’re on the ground working, therefore, they’re more aware of certain obstacles than those in high-level positions.
Below are additional reasons why KPIs are important to establish and track:
- Measures progress: By tracking KPIs, leaders know how healthy their organization is as a whole. A key aspect of following through with goal-setting is staying accountable by comparing where your company currently is to where it wants to be. KPIs also keep a company’s focus on what matters most.
- Ensures financial sustainability: Meeting financial KPIs, such as tracking revenue growth and net profit, is critical for keeping a business afloat. If a company isn’t profitable and can’t afford to pay its employees, grow, and innovate, then it’s impossible to be a success.
- Improves customer experiences and satisfaction: When KPIs are evaluated, it helps companies to know how efficient and effective their services and products are. KPIs allow businesses to reflect on the quality of their offerings, as well as how well they handle customers’ complaints and errors. This allows businesses to better able serve their customers and adapt depending on their feedback.
- Contributes to employee retention and engagement: When a company puts its people first and remains transparent, trust is built when employees are encouraged to contribute regularly. High-level executives working side by side with employees to delegate important tasks and communicate builds a culture of trust. This encourages employees to remain loyal and makes them feel they have ownership in the business.
- Opens lines of communication: KPIs keep a company’s purpose and plan relevant.
How KPIs Differ From Traditional Metrics
All KPIs can be considered metrics, however not every metric qualifies as a KPI.
KPIs are more than simply pieces of raw data. They are quantifiable, outcome-based statements that align with a company’s objectives. In other words, they “measure what matters.” While metrics are usually straightforward numbers, such as sales or monthly website visits, KPIs include a target and a timeframe.
KPIs differ from other types of business metrics in some of the following ways:
- They are targeted measurements, pointing to specific goals by certain dates.
- They are analyzed to help with decision-making.
- They measure more than just numbers; they’re also useful for evaluating how resources, employees, and processes are being used.
- They indicate if progress is being made toward core objectives and by how much.
- They are measured at specific frequencies.
- They help hold team members and teams accountable by comparing results to targets.
Some companies choose to use objectives and key results (OKRs) instead of KPIs. For example, Google famously uses OKRs by having their employees write out their objectives and measurable deliverables as a team, which can then be tracked. Unlike KPIs, teams set OKRs. These goals must be challenging yet realistically achievable.
Other organizations that use OKRs include Facebook, Spotify, LinkedIn, Twitter, and Amazon. More tech companies are turning toward OKRs because, in theory, they lead to more employee engagement, thus, better innovation.
Categories and Types of KPIs
KPIs are generally split into these main categories:
- Strategic: These look at the “big picture” and create a snapshot of a company’s position. Strategic KPIs are most useful for senior executives and shareholders. They can include measurements such as net profit margin and gross revenue.
- Operational: These track progress month-over-month or year-over-year. Different geographical locations might also be taken into account. These KPIs are utilized mostly by managers and high-level staff. Examples include product sales and yearly revenue growth in certain stores.
- Functional: These focus on the responsibilities of specific teams and departments, such as sales, marketing, and customer acquisition. Examples include e-mail sign-ups and website traffic.
- Lagging and leading: These KPIs look for patterns to predict what’s coming in the future. Examples include tracking manufacturing quality, customer complaints, and employees who have quit, which can all indicate problems in the company.
What Do KPIs Measure?
It’s possible for a company to create dozens of different KPIs, depending on the specific type of business. KPIs typically measure:
- Finances: These focus on how much money a company is gaining or losing. Measurements can include net profit, debt, and turnover of inventory to sales.
- Operations: Operational KPIs focus on a company’s use of products, resources, and processes. Within this category, inputs and outputs are taken into account. Inputs include costs and investments that the company absorbs to deliver its products and services (supplies, storage facilities, and paying employees). Outputs include the number and quality of the products being offered (the amount, value, and uniqueness). Processes include the steps taken to produce the company’s offerings (hiring, training, manufacturing, and shipping).
- Customer satisfaction and retention: These categories address how well customers are being served and how likely they are to remain loyal and refer others. Examples include resolution times for complaints, new sales or sign-ups, customer praise, and both positive and negative feedback.
- Employee well-being and engagement: These focus on people management and human behavior, such as the percentage of employees meeting their targets, their feedback on the company’s culture and performance, and their ability to innovate or execute strategies.
KPI Examples to Measure
Common KPI examples include those related to:
- Quarterly gross profit margins
- Yearly operating profit margins
- Weekly regional sales
- Annual client retention rate
- Yearly revenue growth
- Monthly web traffic
- Yearly return on ad investments
- Quarterly email sign-ups
- Yearly conversion rates
- Monthly open rates
- Average conversion times
- Monthly sales volume by location
- Yearly growth of customer brand awareness
- Average complaint resolution times
- Most active agents per quarter
- Total and open support tickets per quarter
KPI Example #1: Buy one ice cream store and make 1,000 sales in the first month. Your target is 1,000 sales in one month. Halfway through the month, you measure your progress and see that you’re only 25% there. This indicates you’re falling behind, so you do more marketing. By the end of the month, you’ve sold more than 1,000 ice creams and have reached your goal.
KPI Example #2: Reach 20,000 people through your online blog within the next year. Your target is to have at least 20,000 people read your blog posts within the next 365 days. By the end of the first quarter, you’re meeting your goal, since you already have 10,000 visitors. By the end of the year, you’ve surpassed your goal and have measured 50,000 website visitors.
How to Develop KPIs
There’s no specific formula for determining key performance indicators. Since no two businesses have the same goals, objectives, and data, there isn’t a way to standardize the processes of building KPIs.
That being said, the most effective KPIs follow the SMART goals formula (specific, measurable, achievable, relevant, and time-sensitive).
How many KPIs should a company have? On Strategy says, “Great strategic plans have 5–7 clear key performance indicators that keep the pulse on how you’re performing against your plan.”
To work to your benefit, each KPI should include these components:
- A measure to track: What is it exactly that you want to achieve? What will you need to measure to ensure you’re meeting your goal? For example, are you working on adding customers to your database, signing up new vendors, or creating new products? Be clear about the exact measurement you plan to keep track of.
- A target: What is your goal/number that you’re trying to hit? What is the date that you intend to hit the target by? Be as precise as possible. List targets for each specific measurement, such as new product sales, customer acquisitions, or yearly net profit.
- One or more sources of data: Where does the data come from? How will you measure it and keep track of changes? For example, are you tracking email sign-ups or in-store sales using certain types of software?
- Predetermined frequency: How often will you record and analyze data? Once per quarter, once per month, or more frequently?
- Determination of progress (usually measured in percentages): How far have you or your company come toward achieving your goals? State your progress by determining the percentage that you’ve reached, such as fulfilling 50% or 10% of your target.
- Improvements year-over-year: How much have you grown or improved in certain areas since last year, or since your previous measurement? Just like this progress, show this number in percentages. For example, you may have sold 1,000 products in four months (this is your measure and target), which is 25% of your yearly goal (your progress). Analyzing this data may reveal that you’ve changed and improved by 20% since last year.
Focus on the “why” when developing KPIs. Why does your desired outcome matter? KPIs should take into account your company’s purpose, mission, and impact. This ensures you’re pursuing the right goals in the first place. Additionally, when meaningful KPIs are shared with the whole company and clearly explained, it helps employees feel that they are contributing to something bigger than themselves and making a difference.
Tips for Measuring and Reporting on KPIs
It’s recommended that throughout the year, companies have regular conversations, check-ins, and KPI reporting sessions so they can determine how far they’ve come in reaching their goals. This keeps morale high and allows room for adaptation.
Here are tips for measuring and reporting on KPIs:
- Use software systems to stay organized: Most leaders and organizations using KPIs utilize online dashboards or tracking systems that provide insight into the progress and performance of their teams. Tools such as QuickScore help with the process of managing and sharing data, adding context, and visibly checking on the status of goal achievement.
- Be consistent: Create a schedule to stick to in order to measure KPIs regularly. Many companies track KPIs monthly or quarterly, in addition to yearly.
- Revise as needed: KPIs often need to be changed as a business pivots and grows. They should regularly be updated, and new KPIs should then be shared with the entire company.
Businesses can utilize lagging indicators and leading indicators to help with decision-making.
Lagging indicators are based on the past and what’s already happened, which can inform you about what’s likely to come in the future.
Leading indicators predict future success based on lagging indicators.
Together, these two help determine how a company should use its resources, change its strategies, or adjust its goals.
What does KPI mean?
KPI means “key performance indicator.” KPIs are quantifiable measurements of a company or individuals’ performance over a certain period of time. They are always related to specific objectives rather than basic measurements.
What are the main categories of KPIs?
Key performance indicators are typically split into these categories: financial, strategic, operational, and lagging/leading. Each has its own role, such as determining the “big picture” of a company’s objectives, tracking money spent and made, and evaluating processes used to make products and services.
Who uses KPIs within a company?
Ideally, every department should be involved, including finances, HR, marketing, customer relations, manufacturing, and operations.
Should employees help develop KPIs?
Yes, it is always a great idea to invite your team members into the process of developing their KPIs. Research shows most employees feel disconnected from the performance measures set for them and lack an understanding of why and how their work connects to the company’s overall purpose. For instance, Gallup found 53% of people are “not engaged” at work. On top of this, only 44 percent of workers strongly agree they know how their work contributes to meeting their business’s goals. To fight low engagement, make KPIs a more collaborative experience.
How can I craft KPIs with my team?
- Involve the whole company in the KPI process: Measuring KPIs should not feel like a robotic process in which there’s no communication except for when an employee is measured against a target number.
- Involve workers in the process: KPI reporting should be a communicative, collaborative experience that takes workers’ feelings, opinions, and thoughts into consideration.
- Practice employee recognition: Reaching out, recognizing work, and showing appreciation are all ways to keep employees feeling motivated and engaged.
What software is popular for reporting on KPIs?
Many businesses use analytics software and reporting tools to track KPIs and share progress with their employees. Some examples include:
- Arena Calibrate
- Zoho Analytics
- Smarten Augmented Analytics
Where KPIs Fall Short, and How to Fill in the Gap
KPIs can only measure so much, as they often neglect to take into account factors beyond money and output. Leadership expert Simon Sinek says, “Customers will never love a company until the employees love it first.” Evaluating a company’s performance with its employees’ integrity and commitment in mind decreases the number of toxic workers and leaders within the organization, boosting communication, teamwork, and innovation.
Here are tips for incorporating less traditional KPIs into your business plan:
- Rethink what’s being measured: Money is not everything. Track how much of an impact your company is making.
- Ask employees for input and feedback: Developing KPIs along with your employees helps to broaden your perspective. Agreeing upon performance measures with employees is one of the best ways to build a connected, collaborative, effective working environment that is fair and reasonable. Finally, having team members involved in the KPI process increases accountability.
- Focus on good communication: When a company values open communication, honesty, and empathy, problems get solved faster. This type of environment highlights natural leaders and allows companies to train them further, putting them into positions designed to guide others.
Want to learn more about servant leadership and creating a strong work culture? Check out these two articles next: Servant Leadership: The Ultimate Key To A Healthy Business and Here’s How to Build a Great Corporate Culture.
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