KPIs: What are they, how do you select one, and 5 important kpis.

What is a KPI?

A Key Performance Indicator (KPI) embodies a strategic objective and measures performance against a goal. KPIs are applied to Business Intelligence (BI) to gauge trends, provide a metric, and assess tactical courses of action.

It is common to divide KPIs into two types: outcomes and drivers. Outcome KPIs measure the output of past activity and driver KPIs measure activity in its current and future state. Remember not all metrics are KPIs, so it’s important to think clearly about what metrics really drive your business.

It can be difficult to distinguish outcomes from drivers. As Neal Williams, founder of Corda and currently head of its professional services, says, “One man’s measure is another man’s value driver. An outcome KPI in one dashboard could be a driver KPI in another”. Don’t get too hung up on KPI classification, but certainly keep the conceptual differences in mind when possible.

5 Characteristics of effective KPIs

Delivering high-impact KPIs is crucial to an organization’s performance and growth. Here are six characteristics of successful KPIs:

1. Simple

KPIs should be both simple to understand and to measure. Employees must able to know what the KPI is measuring and how it is being calculated. KPIs are also made simple when they are sparse. Focusing on a small number of KPIs enables employees to understand at a deep level what behaviors the KPI is driving and modify the KPI to deliver better results.

2. Cascading

Effective KPIs cascade from strategic dashboards to tactical and operational dashboards. This means that KPIs should trickle down from the overall strategic goals of the organization to the daily operations of the employees that are affecting the KPIs. When KPIs share a link from the C-level to the entry level, they support unified goals and actions.

3. Measurable

KPIs must be measurable for employees to analyze their performance. A KPI doesn’t have to be quantitative to be measurable. For example a qualitative KPI such as  “how satisfied are our customers with this product” can be measured through customer feedback surveys. However, quantifiable metrics should be used for decision making processes as data backed, strategic decisions have a higher probability of success.

4. Actionable

Business analytics expert Jay Liebowitz says that an effective KPI is one that “prompts decisions, not additional questions”. When employees clearly understand what they need to do to influence a KPI, they can manage to do it.

5. Timely

The results of KPIs should be reported frequently enough so that employees can make timely decisions but not too frequently so that they are overwhelmed with data. Organizations should consider how urgent, sensitive, accurate, and costly measuring the KPI is before deciding how often to report on it. Additionally they should ensure that the results of a report are being acted on in a timely fashion.

6. Visible

Making KPIs visible across an organization communicates to employees how their work is affecting the organization’s overall goals. It will incentivize them to work harder and be more productive. Employee satisfaction increases when they feel they make a meaningful contribution to the company. This also lowers employee turnover.

5 Important KPIs

There are countless key performance indicators used by businesses for strategic decisions. Which kpi you use depends on your industry and what you are trying to measure. We discussed characteristics of a good kpi and then constructed a list of 5 kpis that are essential to almost all industries. It should be noted that there are different categories of kpis: marketing kpis, financial metrics, customer metrics, people metrics, performance metrics, and other business metrics. The five we listed are from multiple categories of metrics.

1. Revenue growth – For all organizations that are for profit, revenue growth is one of the most essential kpis. Revenue growth shows the change in sales between period x and period y. Generally, companies report revenue growth annually but any time frame can be used. Revenue growth is calculated with the following equation: (Revenue Year X – Revenue Year Y)/ Revenue Year. Revenue growth is a good indicator of a companies health as it shows the companies ability to sell their goods or services. Consistently stagnant or decrease in revenue growth is a red flag and reveals flaws in sales and marketing strategies.

2. Gross Profit Margin – Gross profit margin measures a company’s profitability. All companies earn revenue, but revenue doesn’t account for costs. To find the gross profit margin, you need to find gross profit first. Gross profit tells us how much money the company has left over after subtracting the costs to produce goods or services (labor, overhead, material costs, etc).

Gross Profit Formula: Gross Profit = Revenue – Cost of Goods Sold (COGS).

Gross profit margin is a percentage that shows us the percent of the profit in regards to revenue. It’s a useful business metric to assess a companies performance. High gross profit margins indicate that a company is efficient with it’s resources. It generally means they have more cash to invest in other forms of capital. Gross profit margins are where executives tend to focus a significant amount of attention on. Higher gross profit margins allow for CEOs and other officers to set more ambitious business goals, higher budgets, and increase their cash flow.

Gross Profit Margin Formula: Gross Profit Margin = Gross Profit/Revenue.

3. Conversion Rate – Conversion rate is one of the most common kpi examples.

Conversion rate Formula: Conversion Rate = # of conversion/total # of visitors to a page.

A conversion rate, in simple terms, tracks if people perform the action you want them to on your web page. Using Google Analytics, you can track the website traffic and conversions on your page. A conversion can be anything you want to track. For e-commerce websites, they look for sales conversions while for lead gen companies, they look for leads collected. Conversion rates also measure marketing campaigns success. Digital marketers will post content on various social media channels and monitor conversion rates to see how they perform.

4. Customer Retention or Churn Rate- Customer retention and churn are high level kpis that measure the amount of customers your company retains or lose over a given period of time. Retaining customers is a measurement of customer satisfaction. In theory, if you retain your customers, they are satisfied with the goods or services you are providing them. Customer retention is crucial for businesses because existing customers are more likely to use your other goods and services and they cost less to market to.

Check out these stats reported by Crazy Egg

“For one thing, you’ll spend five times less money on customer retention.

Additionally, at best, your probability of selling to an existing customer is at least 40 percent more likely than converting someone who has never bought from you before.

Existing customers also spend 31 percent more than new leads, and when you release a new product, your loyal customers are 50 percent more likely to give it a shot.”

The numbers speak for themselves. This is why customer retention and churn rates are popular business metrics that executives and leadership use frequently. The number of customers retained matters significantly more than the number of customers gained. The customer retention rate directly impacts other metrics such as Gross Profit Margin, Customer Lifetime Value, and Revenue.

Customer Retention Rate Formula:

Customer Retention Rate = (Existing Customers – New Customers )/ Starting # of Customers

5. Bounce Rate: Bounce Rate tracks a customers journey through your website. A customer bounces when they only view one page of your website. Bounce Rate is the stickiness of your website. Ideally, you want all website traffic to land on a landing page and continue their journey through your site to your conversion page. Bounce rate is a performance measurement usually used by digital marketers and seo specialists to adjust their content marketing strategies. The better the content, the stickier the page and the more likely the user is to make a conversion.

Why Implement KPIs?

Key performance indicators play a vital role in business as they provide decision makers with business metrics that they can use to make strategic decisions. Implementing kpis helps focus and refine business processes, business objectives, and strategic goals. All companies should use kpis to track and measure their success. In today’s data driven age, it is essential to use kpis since the provide data driven observations. However, a powerful kpi is meaningless unless its objective, status, and outcome are reported on. Selecting the right kpis for your business from growing as kpis play a key role in decision making. Using the wrong metric sets business goals in the wrong direction, squandering resources and time. Using a Business Intelligence or data analytics tool will help the implementation and tracking of kpis. Check out Better Buys BI Software reviews for more information on BI.

 

About the Author: Jillian D’Arcy is a Sales Associate for Beekeeper Data. Beekeeper Data lets organizations quickly and easily send beautiful reports to customers, partners, executives and more.

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