You’ve done all the legwork and have processes and strategies in place. Now, it’s time to put some Key Performance Indicators (KPIs) in place to determine the effectiveness of these processes, strategies, and goals. But how many indicators are too many, and how do you set these?
You should have two to four KPIs per goal or process as a business. This range is ideal for measuring performance accurately and prioritizing important indicators simultaneously. Every company, industry, and organization will have different ways of operating and different potential KPIs.
To improve something, you need to know where it stands currently. KPIs help you do just that. If you talk to employees and get a sense of how things are going, you will have a subjective indicator. If you genuinely want to see the business improve, you need objective data. KPIs help you quantify your performance and make it easier to assess your progress level.
What is a Key Performance Indicator?
A Key Performance Indicator is a metric that is designed to measure the performance of a specific business goal. They can be tailored to any area of business performance, from sales and marketing success to employee engagement and customer satisfaction levels, and they help companies gauge their performance against set goals and industry standards.
KPIs should focus on measuring your most important indicators. These indicators feed your overall business goals and are most relevant to them. For instance, if your overall objective is increasing customer feedback, your marketing team will look at “engagement” as a metric rather than “following.”
Prioritization is key in metrics because you don’t need a slew of data that will only confuse you. This is why two to four KPIs per goal are sufficient to give you a good idea of how you are performing.
For example, if you are trying to increase sales in your company, you may want to track KPIs such as conversion rates, leads generated per month, or average order value.
Difference between OKRs and KPIs
Objective and Key Results (OKRs) and KPIs are often considered to be the same. However, their overall usage within a business strategy is quite different. OKRs are designed for the company’s bigger vision and are dramatic goals that have to be achieved over time to ensure the success of the bigger objectives.
KPIs are designed to be scalable, whereas OKRs are dramatically aggressive and are designed to push a team’s boundaries and encourage them to do more.
Types of Key Performance Indicators for Businesses
The following are types of key performance indicators (KPIs) commonly used in business: financial, operational, customer-focused, and marketing.
Financial KPIs may include earnings per share (EPS), net income, gross margin, operating expenses as a percentage of revenue, and average inventory turnover.
Operational KPIs may include employee productivity or efficiency ratings, number of service calls handled per hour, warehouse stock accuracy rate, delivery time to customers from purchase orders received by suppliers.
Customer-focused KPIs may include brand loyalty or satisfaction ratings, number of leads generated through sales efforts per week or month, number of website visits from targeted web addresses per month.
Marketing KPIs may include monthly unique visitors to the company’s website or total dollar revenue generated from online ads placed on websites during a specific timeframe.
KPIs come in different types depending on different departments and their goals. Let’s take a look at these in detail:
Quantitative
As the name suggests, these are the most straightforward numbers that can be quantified. These are percentages, ratios, whole numbers, etc. You can get a direct understanding of your performance with these.
Qualitative
These indicators aren’t number-based and rely more on feelings and opinions. This is the kind of data you will receive from surveys and feedback sessions.
Leading
These help identify future performance. These are trends that can help you predict future growth.
Lagging
This is the comparison of an indicator’s current performance with past performance.
Input
Input indicators help companies determine the number of resources they are utilizing to produce the best results for an objective. These indicators can be funding, staff, overtime, etc.
Output
These are direct indicators of how well the business is performing. This includes the number of goods and services produced. Increased or decreased revenue or new and returning customers are also an example of these.
Process
These show how well a particular process is performing.
Practical
You can measure the functionality of a business process using these indicators. These often involve direct observation and feedback gathering.
Directional
These help determine the level of success compared with the competitors.
Actionable
These measure the company’s ability to go through a change or transition.
Financial
This indicator is almost always a priority as it shows the financial stability and growth of the company. This number allows companies to see how well they are doing in the market and revenue-wise.
Outcome
These help determine whether a strategy has achieved its short and long-term goals.
Examples of Business Key Performance Indicators
Let us show you some examples of KPIs that will help strengthen your understanding further.
Operational
These indicators help a business determine the satisfaction levels of its employees. This is important because dissatisfied employees resist changes and processes, costing an organization a lot of time and money.
Customer
Customer indicators help you determine the quality of your relationship with your customers. This is often measured in metrics like the number of returning customers. Surveys can also let you know what percentage of your customers recommend your business to others.
Marketing
Marketing is multifaceted, and so are its KPIs. Let’s take your website for example – monthly web traffic and the number of CTA clicks will be important indicators of its performance. Similarly, conversion rates allow the marketing team to see how well certain campaigns are performing and what changes need to be made to improve these strategies.
Sales
KPIs like lead-to-sales conversion rates and customer lifetime value can help you analyze the sales team’s performance.
Financial
You can get a clear idea of the financial health of your company. Indicators like accounts receivables, inventory turnover rate, net profit margins, and gross profit margins can show your company’s real financial state and help you make strategic decisions.
How to Set KPIs for Your Business
Now that you understand the kind of indicators and how many per goal you should set. It’s time to learn how to lock these down.
An effective KPI should be able to answer the following questions:
- What are we measuring?
- Why does this matter?
- How will we know if we’ve achieved our goal?
- When do we need to achieve this by?
There are a few key things to keep in mind when setting effective KPIs:
- KPIs should be specific and measurable. They should answer the question of how you will know if you’ve achieved your goal.
- KPIs should be relevant to your business goals. Make sure that the KPIs you set align with what you are trying to achieve as an organization.
- KPIs should be time bound, so that you can track and measure progress over time.
- Make sure that your KPIs are achievable. It is important to set realistic goals in order for them to be useful motivationally speaking.
Here is a short step-by-step guide to help you:
Step 1 – Have Clear Business Goals Defined
The first step in determining what indicators to choose – you need to know what objectives they’ll measure. Your company should have a set of strategic goals it wants to achieve and then have indicators that measure its success rate. Some examples of goals are:
- Increasing revenue growth
- Increasing brand awareness
- Increase customer engagement
- Increasing production
Having clear business objectives will help you set the right KPIs.
Step 2 – Determine What Success Looks Like
Once you know what objectives you want to achieve, you need to determine what success looks like for each of these objectives. For instance, if increasing revenue is a goal, you need to increase the number of leads your business gets. Leads can be a good KPI here. Having this in mind beforehand will help you determine the indicators easily.
When defining your indicators – it is important not to copy other organizations. Instead, understand that your organization is unique, and success will have a unique definition for you.
Step 3 – Determine What Stage Your Company Is At
When you choose metrics, you must keep your company’s growth stage in mind. Metrics for startups will be quite different as compared to a full-blown enterprise. Younger companies focus on data that helps them validate their business model and make necessary changes. At the same time, enterprise-level organizations focus on metrics like customer acquisition and revenue growth, etc.
Step 4 – Identify Both Leading and Lagging Indicators
In order to achieve success, you need to keep an eye on both leading and lagging indicators. The main difference between the two is how well you did and how well you can do based on the former.
Leading indicators are projections that help you speculate the metrics you have the potential to achieve. Lagging indicators measure what has already happened. This includes the sales number from last month, returning customers from last month, etc.
Organizations most favorably measure lagging indicators, but the thing is – how much can you measure what has already happened? This is why leading indicators are equally or even more useful.
Growth is the main goal for every business, and if you can identify leading indicators to help you achieve this goal, you will be in a much better position.
Step 5 – Develop Measurement Metrics
Be clear about each indicator and what metric represents its measurement. Every KPI will have a quantifiable metric that you can measure to see progress. For example, if customer acquisition is the KPI, then the measurable metric can be website form fill-ups or the calls received.
Step 6 – Write Down Your KPIs
This one is quite obvious but often neglected, and that is what leads to all the confusion surrounding KPI reporting in organizations. Your KPIs not only need to be written, but they also need to be shared with all the relevant employees and managers in the organization.
The more visibility they have into these indicators, the harder they’ll work to deliver them and achieve their goals.
Step 7 – Decide KPI Reporting Frequency
Each indicator will need to have a timeframe in place for reporting. For example, KPIs can be measured and reviewed weekly, monthly, quarterly, bi-yearly, yearly, etc. Whatever timelines you choose, make sure you do regular reporting to maintain data consistency and see accurate patterns.
Step 8 – Update as Necessary
The work doesn’t end when you set KPIs and start measuring them, you have to review them regularly and update them as the company grows and the circumstances change. As the organization grows, so will your indicators, so it’s important to keep track of these changes and adjust your metrics accordingly.
Benefits of Business KPIs
A business that has no real data related to its strengths and weaknesses cannot improve or thrive in the market. Here are some obvious benefits of having KPIs for your business:
Performance Enhancement
Success indicators let you know which teams and departments are performing well and which aren’t. This helps management redirect their efforts where necessary to enhance employee and process performance.
Numeric Results
KPIs give you results in the form of quantifiable numbers. These numbers guide your strategy and help you make decisions and amendments that drive you towards success. Numbers are much easier to handle as compared to qualitative data, which can be subjective.
Boosting Revenue and Sales
KPIs give you a clear idea of which sales team member is doing better than others. Most companies set commissions and benefits for employees that outperform others. This increases competition and allows the team to achieve greater revenue targets.
Boosting Individual Performance
A good reward and recognition system is based on indicators. Clear KPIs allow teams to achieve their goals better and faster. Numbers keep employees motivated.
Improve Efficiency
When employees have a clear idea of what needs to be achieved, they have no confusion. This means they can direct their efforts towards tasks that help them achieve their KPIs in time.
Data-Driven Decision-Making
KPIs give you a clear path to work on and also results that help you make decisions. You can take this data and convince employees or stakeholders at every level.
Intelligent Budgeting
When you set KPIs for a set time period, it is easier to control the amount of money spent on delivering them. This ensures there is no wastage of capital and the business budget is better.
Goal Alignment
KPIs help break bigger objectives into small and achievable milestones. This helps all departments within an organization stay on track and know what needs to be achieved. When departments are able to work in harmony, better results are achieved.
Frequently Asked Questions
What does a good KPI look like?
A good one should be simple, straightforward, and easy to measure. It should help you make decisions rather than confuse you into asking more questions.
How many KPIs should you have?
As mentioned above – two to four KPIs per goal is more than enough. Some goals may even need only one KPI. Too many indicators can skew your data and confuse you, which is detrimental to decision-making.
Why does a KPI fail?
KPIs fail because they are too hard to measure. You need quantifiable data that can drive growth and decision-making. Without this, they are of no use.
Final Thoughts
KPIs are essential to measuring a company’s progress, growth and identify areas of improvement. However, it’s better to prioritize metrics for each goal instead of measuring every potential metric out there.
Prioritized indicators give you enough data to measure progress and not get confused. Please take a look at our guide above for creating sound KPIs.
