What is KPI? A Complete Guide in 2022
When you hear the phrase "key performance indicator," you refer to a quantitative measurement of performance through time for a particular objective. In other words, when you hear this term, you are referring to a "key performance indicator."
Goals and performance indicators (KPIs) serve as targets for teams to strive for, milestones to measure success, and insights to help individuals throughout the business make better decisions.
The concept "key performance indicators" (KPIs) refers to metrics used in many facets of a business, including finance, human resources, marketing, and sales. They enable every business element to go forward at a strategic level. They are widely used in business to track how far you have come in reaching your objectives.
The use of key performance indicators, or KPIs, allows performance to be evaluated on several different strategic levels. For example, a corporation may decide on a single set of key performance indicators (KPIs) to assess its entire business performance.
However, another set of key performance indicators (KPIs) should be used to assess the success of other departments inside the organization, such as sales, marketing, finance, human resources, and operations. Besides humans, projects, campaigns, processes, tools, and even machines can all benefit from using key performance indicators (KPIs).
Chapter 1
KPI vs. Metric
Although key performance indicators and metrics are related, they are not synonymous.
In other words;
- Essential performance indicators, often known as KPIs, are the primary goals that you need to monitor to have the enormous influence possible on the results of your strategic business decisions. KPIs support your plan and assist your staff in concentrating on the most critical tasks. As an example of a key performance measure, "targeted new clients per week" might be used.
- Metrics are used to assess the success of day-to-day company operations that contribute to your key performance indicators (KPIs). Even though they impact your outcomes, they are not the most important measures. "Monthly store visits" or "white paper downloads" are two instances of such activities.
A metric is a unit of measurement that follows a standard (or system). You are utilizing a metric whenever you measure something, whether it is monthly income, sales conversion rate, number of customers, the average age of your consumers, or the number of people on your team with blue eyes, among other things.
A key performance indicator (also known as a KPI) is a sort of metric, but more precisely, it is a statistic deemed essential and may be used to monitor performance.
Examples of Key Performance Indicators vs. Metrics:
As a result, the number of "English guests in your hotel" is a metric, but it does not measure performance and is thus of little significance.
- The average age of your hotel guests may be helpful information, but it does not evaluate performance; hence it is not a key performance indicator (KPI).
- Sales Conversion Rate, on the other hand, is a metric that gauges performance and is significant.
As you can see, key performance indicators (KPIs) are subject to interpretation in contrast to metrics. They take on the characteristics of those who use them, whether they are persons or organizations, and the environment in which they are employed.
As a result, you may notice that some organizations employ completely different key performance indicators (KPIs) than other enterprises. It does not always follow that one is incorrect and the other is correct; they may work in different settings and with different priorities.
A handy way of thinking about it is that metrics represent all of the different measuring methods available. However, key performance indicators (KPIs) are the performance measures you select to focus on to generate results.
Consequently, it is possible that during your career, you may come into touch with hundreds, if not thousands, of different measures. However, if you have correctly designed your KPIs, you should only require a limited, manageable number of KPIs to be used regularly for any given process.
Chapter 2
Why do Key Performance Indicators Matter?
As mentioned before; the use of key performance indicators (KPIs) is highly recommended to assist you and your company in accomplishing your goals. And the pursuit of your objectives is contingent on the consistent and focused delivery of outcomes.
Employees are more engaged when their key performance indicators (KPIs) are met.
💡 Key performance indicators (KPIs) bring employees together to work toward the same goal.
A problem that many firms find difficult to address, employee engagement can directly influence your bottom line. In such situations, KPIs will be helpful. KPIs, whether they be for an individual or an organization, are a useful tool for measuring performance, which has a direct relationship with employee engagement.
In fact, firms with a highly engaged workforce see higher levels of customer engagement, increased productivity, and a 21 percent increase in profits.
Disengaged employees, on the other hand, describe the same concerns as their engaged counterparts: a lack of communication regarding strategy between management and individual contributors. KPIs can assist in resolving this issue.
💡Your key performance indicators (KPIs) connect your purpose with your team culture.
Your key performance indicators (KPIs) should be linked to the objective of your business. "Making money" is not a mission, and it is also not something with which people will identify on a deeper level.
You should make it your goal to motivate other colleagues to approach each new day at work with a revitalized sense of excitement. There should be a clear connection between your mission and your key performance indicators (KPIs) so that employees feel that their job is contributing to the achievement of both.
Remove any uncertainty by ensuring that your key performance indicators (KPIs) contribute to your final objective and that your staff understands how and why they are contributing to it.
Key performance indicators (KPIs) hold everyone accountable for their actions.
Individual performance management frameworks have traditionally been concerned with the definition of objectives, the measurement of performance, and the administration of the activities associated with those objectives. So why not add key performance indicators (KPIs) into performance management as well
Employees will be able to quantify their influence and how their everyday activities, which are arguably the cornerstone of their work, contribute to the achievement of bigger organizational objectives through the use of key performance indicators (KPIs). KPIs have everyone moving in the same direction, resulting in a more satisfied workforce that is a happier contributor to your success.
Chapter 3
Different Types of KPIs
KPIs metrics in the financial sector; Customer/client-centric KPIs; Process performance metrics
KPIs metrics in the financial sector
Revenue and profit margins are usually the target of key performance indicators that are tied to the financials. Although net profit is the most popular of all profit-based measurements, it is also one of the most challenging to calculate.
This shows the revenue sum that remains as profit for a given time frame after taking into account all of the firm’s expenses, taxes, and interest payments during the selected time frame.
Net profit, which is calculated as a monetary figure, must be transformed into a percentage of sales (referred to as "net profit margin") in order to be utilized in comparative analysis.
Suppose the standard net profit margin for a certain industry is 50%. A new business in that market knows that it must strive to match or exceed that ratio if it wants to stay competitively viable in the long run.
Similarly, the gross profit margin, which evaluates revenues after deducting expenses directly related to the manufacture of goods for sale, is another commonly used profit-based key performance indicator.
The "current ratio," a financial key performance indicator (KPI) that focuses on liquidity, is calculated by dividing a firm's current assets by the number of current loans due to the company.
A financially stable company's cash on hand should generally be enough to pay its financial commitments for the next 12 months.
However, because different industries rely on varying amounts of debt financing, a company's current ratio should only be compared to that of other businesses in the same industry in order to determine how its cash flow compares to that of its competitors.
Customer/client-centric KPIs
Customer-centric KPIs are generally focused on per-customer efficiency, client happiness, and customer retention.
Client lifetime value (CLV) is the projected amount of money a customer will spend on your goods over the course of their entire business relationship with you.
Customer acquisition cost (CAC) stands for the total amount of money spent on sales and marketing to acquire a new client. Organizations can assess the efficiency of their client acquisition efforts through comparisons between CAC and CLV(customer lifetime value).
Process performance metrics
They are a set of metrics that measure how well a process performs.
Process metrics are intended to be used to assess and monitor operational performance throughout a company's whole enterprise.
Businesses may calculate what percentage of their goods are faulty by dividing the number of defective goods made by the total number of goods produced, for example. Naturally, the goal would be to bring this figure as close to zero as possible.
The total amount of time needed to finish a certain procedure is referred to as throughput time. For example, the throughput of a drive-through restaurant can be used to determine how long it takes to serve an average client, from the moment they place their order to the time they drive away with their food in their hands.
Chapter 4
KPI Examples
Financial metric example and Customer metric example
Financial metric example
- Profit: The importance of profit cannot be overstated, but it is nonetheless necessary to mention because it is one of the most crucial performance measures available. Also, don't forget to look at both the gross and net profit margins in order to gain a better understanding of how good your firm is at creating significant returns.
- Cost: Evaluate the cost-effectiveness of your options and determine the most effective ways to minimize and manage your costs.
- LOB Revenue Vs. Target: The comparison between the current profit with the revenue you forecasted. Understanding the differences between these two statistics, and charting and analyzing them, will assist you in determining how your department is functioning.
- Cost Of Goods Sold: The entire amount that your company spent for costs that are directly connected to the selling of items is referred to as the cost of goods sold (COGS for short).
- Day Sales Outstanding (DSO): The Day Sales Outstanding is calculated by dividing your accounts receivable by the number of total credit sales (DSO). Multiply that amount by the number of days that have transpired since the start of the time period under consideration. Congratulations, you have just figured out what your DSO number is! When it comes to collecting accounts receivable, the lower the amount, the better your firm is doing. Run this formula once a month, once a quarter, or once a year to see how much you have improved.
Customer metric example
- Customer Lifetime Value (CLV): The only (or perhaps the best) strategy to improve your customer acquisition is not to reduce costs as much as possible. The Client Lifetime Value (CLV) metric allows you to evaluate the value your firm derives from a long-term customer relationship. This performance indicator can be used to narrow down which channels are the most effective at bringing in the most customers for the lowest possible price.
- Customer Acquisition Cost (CAC): The Customer Acquisition Cost (CAC) is determined by dividing your overall acquisition expenditures by the number of new customers gained during the time period in question. Voila! This is the CAC that you were looking for. One of the most essential metrics in e-commerce is the cost efficiency of your marketing efforts, which is considered to be one of the most important metrics in the industry.
- Customer Satisfaction & Retention: This seems simple: please the client, and they will remain to be your client. Many companies, on the other hand, believe that this is more for the benefit of shareholders than it is for the benefit of the customers themselves. Customer satisfaction ratings and the proportion of customers who return to complete another purchase are two performance measures that may be used to assess CSR.
- Net Promoter Score (NPS): NPS is a metric for customer satisfaction measurement. Finding out your net promoter score (NPS) is one of the most reliable techniques to predict long-term company growth. Send out quarterly surveys to your consumers to assess how likely they are to suggest your firm to someone they know. This will give you the Net Promoter Score (NPS). After collecting data for your first survey, create metrics that will allow those figures to expand from month to month as the survey continues.
- Number Of Customers: This performance metric is similar to profit in that it is quite basic. By calculating the number of new and lost consumers, you can acquire a better understanding of whether or not you are serving the needs of your customers.
Chapter 5
How to Report on KPIs
A KPI dashboard is the quickest and most convenient way to report on your key performance indicators. A key performance indicator (KPI) dashboard provides you with a quick snapshot of your company's performance in near real-time.
A key performance indicator dashboard, also known as a key performance indicator report, depicts how your present performance compares to your goals. KPI reports are traditionally completed on a quarterly basis; however, with a KPI dashboard, you can simply report on your performance at-a-glance, at any time of day or night.
To construct a key performance indicator (KPI) report, follow these general steps:
- Make an overview or an introduction to your work.
- Clearly establish the key performance indicators (KPIs).
- Present your key performance indicators (KPIs) using relevant graphs, charts, and tables.
- Finalize the report's content and then distribute it.
Chapter 6
KPI Mistakes
Here are some frequent pitfalls to avoid while establishing or using key performance indicators.
1. Using ineffective proxy measures:
When we are not able to measure the thing we want to measure, we measure another KPI that we believe is close enough — this is called a proxy measurement. This is frequently the situation when we want to track a lagging indication but are unable to do so due to technical constraints, in which case we utilize a leading indicator instead.
We should exercise caution when using proxy measures because many of them are, in reality, ineffective proxy measures. An increase in new leads doesn’t have to be the same as an increase in new sales.
It is not always the case that an increase in social media followers translates into a rise in positive brand sentiment. While a reduction in the average resolution time for customer calls is desirable, it does not always translate into increased customer satisfaction. As a result, we must employ proxy servers with caution.
2. Actions are being measured, not results:
KPIs must be used to control performance rather than activity. Frequently, you will see people writing their key performance indicators (KPIs) in the following way:
However, this does mean that you will need to monitor on a regular basis to ensure that these activities are contributing to high performance, which will require some type of qualitative review.
3. Invisible key performance indicators:
What is the worst KPI? It's the one that no one seems to notice.
KPIs should motivate people to take action. It is possible to argue that the level of visibility you provide for a KPI is equally significant as the KPI itself. A key performance indicator (KPI) should be as visible as feasible for as long as possible.
Ideally, they should be shown on a key performance indicator (KPI) dashboard-mounted on your office wall. Alternatively, if you work from home, they should be shared automatically and on a regular basis with the rest of your team.
You should also note that a key performance indicator (KPI) is a type of communication. By establishing a key performance indicator, you are emphasizing what is significant (and what is less important).
A clear understanding of key performance indicators (KPIs) can assist teams in focusing their efforts, prioritizing more effectively, and creating possibilities for spontaneous new ideas.
4. Forgetting to conduct a review:
You should schedule regular meetings to assess your key performance indicators (KPIs). If your present technique is not producing the results you would anticipate, you should reconsider your approach and try something new.
Once again, key performance indicators (KPIs) should spur action. If you just assess your key performance indicators (KPIs) at the beginning and end of a project, you will have missed multiple opportunities for review during which you could have fine-tuned or altered your strategy.
5. Weasel words:
Weasel words are words that suffocate the words around them by sucking out their life force. Terms such as "efficient", "optimize", "capacity", "streamline" or "best practice" are examples of these types of terms. They're bothersome in general, but when it comes to goal-setting, they're downright dangerous.
Weasel words may make objectives seem more significant or larger than they are, but they aren't quantifiable. Try to avoid using slang or jargon while defining goals, and call attention to it when others do.
Instead, utilize the SMART ASSES framework to develop goals that can be quantified, and then use key performance indicators (KPIs) to track progress toward those goals.
