1. What Are KPIs?
KPIs (short for key performance indicators) are metrics that quantitatively measure the performance and progress of activities against goals a company has previously set. KPIs can be established at both the strategic and operational levels of an organization, as well as for specific teams, projects, and individuals. For example, high-level KPIs typically focus on a company's overall performance, while lower-level KPIs focus on a specific department or activity within a company, such as departmental processes, products, and productivity.
A business calculates a KPI using data relevant to the targeted goal — for example, a specific click-through rate on a marketing web ad, or the number of sales achieved per salesperson.
KPIs measure the performance and progress of activities against goals a company has previously set
In addition, depending on its goals and strategy, a company will define various types of KPIs to assess how well a given activity has been completed.
For example, many companies focus on financial performance metrics, such as revenue growth rate and net profit margin. Others focus on customer-related metrics, such as customer satisfaction or churn rate.
Some KPIs measure operations, such as time-to-market and average order fulfillment time, while others focus on employee or talent management metrics, such as employee retention rate and turnover.
2. Types of KPIs
KPIs are divided into two types: lagging indicators and leading indicators.
Lagging indicators reflect past results, measuring the outcome of actions already taken. Monthly recurring revenue and employee turnover are two examples of this type of KPI. Lagging indicators can reveal trends, helping companies assess their progress and inform future decisions.
Leading indicators predict what may happen in the future and give businesses a chance to prepare accordingly. For example, an increase in deal size or headcount can signal upcoming revenue growth.
KPIs can be divided into two types: leading indicators and lagging indicators
3. The Difference Between Metrics and KPIs
Metrics and KPIs are two terms that are often used together, but each has a distinct meaning:
A metric is any quantitative data a company tracks to monitor performance and improvement across the business. Once an organization starts tracking a key metric, it has a baseline against which to compare future figures and see how the performance of different processes or teams has changed over time. As a business grows, it typically starts tracking more metrics, including ones specific to certain initiatives or departments.
KPIs are metrics that are especially important to a business because they measure progress against the company's key objectives. One defining trait of a KPI is that it usually has a predefined target, which isn't true of every metric — a company may track certain metrics for years without any specific target. At least a few KPIs are typically financial metrics, such as revenue growth, profit margin, cash flow, and customer acquisition cost.
The difference between Metrics and KPIs
4. Elements of a Good KPI
Before a business can choose any KPI, it first needs to establish its overall objectives. Only then can a KPI show which aspects and functions of the business need attention. From there, choosing the right KPIs helps an organization assess whether it's on track to achieve its business goals. But what traits should a good KPI have? Consider the following criteria:
4.1 KPIs Are Aligned with Measurable Objectives
A strong KPI reflects a company's strategic goals. Different types of companies have different KPIs — for example, business-to-business (B2B) versus business-to-consumer (B2C) — as well as different business models. For instance, a software company will have different measures of success than an industrial manufacturer.
If the goal is to grow e-commerce revenue by 30%, a company might choose metrics that measure average order value, conversion rate, and cart abandonment rate. KPIs can also be aligned with the goals of different departments, teams, and individuals. If the purchasing department wants to improve inventory management, the most effective KPIs might include inventory turnover rate and perfect order rate.
Different company goals call for different KPIs
4.2 Aligned with the Business's Growth Stage
A good KPI also needs to fit the business's stage of development. For example, metrics for a growing business might focus on customer feedback and validating the business model. KPIs for more established companies might include monthly recurring revenue, customer retention rate, and customer acquisition cost.
KPIs need to be quantifiable and measurable
4.3 KPIs Are Realistic and Quantifiable
A good KPI needs to be measurable and based on clear, trackable goals. It can be expressed as a rate, percentage, or ratio, so that teams can see at a glance where they stand and where they need to go. For example, "reduce customer acquisition cost by 15%" is a measurable goal, but "reduce customer acquisition cost" is far less so. KPIs for this goal might include conversion rate and cost per lead by channel.
4.4 KPIs Are Valuable
Does the KPI focus on what actually matters in moving the business forward, or does it focus on superficial vanity metrics that make a product or business look successful on the surface — such as free app downloads or social media followers? In most cases, the majority of these users won't become paying customers, so the value is limited. A good KPI delivers real value — it points to a trend or informs the next steps to take.
4.5 Choose Achievable KPIs
A good KPI measures goals that are achievable rather than unrealistic. Achievable also means the data needed to calculate the KPI is available, accessible, reliable, and can be presented to stakeholders.
4.6 KPIs Are Actionable
An actionable KPI points to measurable tasks that help a business move toward its goals. Without a target, a KPI is just a measurement, not a guide. KPIs can inform decisions — for example, whether to adjust a sales plan based on how well a product is performing in the market. They also reveal trends that shape future strategy.
6 questions to consider when choosing the right KPIs
5. Frequently Asked Questions About KPIs
How do you choose good KPIs?
Businesses have a huge number of KPIs available to them. What matters is choosing the ones best aligned with strategic objectives. The right combination of KPIs reflects how the business is performing across different areas, helping paint a picture of its overall health. They also help teams and employees stay focused and enable better, data-driven decision-making.
What are the main KPIs?
There are many KPIs to choose from. They can be financial, focusing on net profit margin or the ratio of assets to liabilities. They can be customer-based, monitoring retention or customer satisfaction. They can also shed light on individual products and processes, as well as employees and teams. Common metrics include revenue growth, profit margin, cash flow, and customer acquisition cost.
How does a business set KPIs?
First, a company must define its strategic goals and growth stage before it can choose KPIs. Second, KPIs need to be quantifiable and measurable, and they need to be well-suited to driving business growth as well as surfacing any issues in the company's operating processes. In addition, KPIs must be actionable — meaning they point to measurable tasks that can help the company reach its goals and support the decision-making process.
Overall, KPIs reflect whether a business is achieving its key goals or objectives. Metrics simply track the status of processes that carry varying levels of importance to the company. Understanding what KPIs are and choosing the right ones will help a business track its performance and adopt more effective ways of working.