How to Choose Best Suitable KPIs for Your Business
Every organization across the globe works with certain goals or purposes in mind. In order to evaluate the activities that are being performed in pursuit of these goals, businesses need measurable indicators that are known as Key Performance Indicators or KPIs. There are many types of KPIs that differ based on the goals of the business, requirements, and other factors. But they prove effective only if chosen carefully. So how can an organization choose the right KPIs for itself?
In this article, you will learn 1) what KPIs are, 2) the features of KPIs, 3) the importance of KPIs, and 4) how to choose the right KPIs.
WHAT ARE KPIs?
A Key Performance Indicator (KPI), or simply a performance indicator, is a performance measurement tool that helps in the assessment of the success or effectiveness of an act performed by a company. KPIs help to define and then measure the progress made toward a certain goal. KPIs are not only used to evaluate the overall performance of a business but also the separate performances of departments. The indicators that are useful for assessing the progress of the sales department may differ from the indicators used for evaluating the marketing success, and so on.
Businesses need regular evaluation of their activities to identify potential areas of improvement, and this is the reason why performance indicators are linked to performance improvement methods. A KPI can thus also be defined as a group of quantifiable measures used to gauge scope for improvement of an individual, an activity or the business as a whole. Since KPIs are directly linked to the success of the operational and strategic goals of a company, every business must first identify both these goals and then select the KPIs that best reflect these objectives. As an example, if the main goal for a real estate company is to achieve the quickest growth in the industry, then the KPI must be the measure of the yearly growth of revenue.
Categorization of Indicators
Performance indicators are often divided into four main types that fall into two broad categories:
- Result indicators/key result indicators – RIs or KRIs form that group of indicators that demonstrate that several measures are a sum of more than a team’s input. These specific measures help to evaluate the combination of the performance of the teams but cannot be used for solving problems or making improvements. This is so because, in such a case, it may not be possible to find out which team is responsible for the underperformance.
- Performance indicators/key performance indicators – PIs or KPIs are a group of measures which can be associated with a single team or a bunch of teams that work toward a common goal in collaboration with one another. These measures help to identify the team that is responsible for performance or non-performance so that the management can identify the teams that may be underperforming and resolve the problem areas.
FEATURES OF A GOOD KPI
In order for a KPI to be effective, it must have certain characteristic features. Some of these features are listed as follows:
- Relevant and high impact – A good metric is one which has a solid impact and is relevant for your business.
- Understandable / Simple and important (shared) – Every employee working for your business must be able to understand the KPI and why it is important. It must be simple to use and breakable into understandable segments.
- Balanced – The KPI must be balanced in the sense that it must fulfill both short-term and long-term needs for your business.
- Timely – The KPI must be measured in a timely manner, like weekly, daily or monthly
- Non-financial – Another characteristic of a KPI is that it must be not be financial or measured in any kind of currency.
BENEFITS OF KPIs
KPI is a tool that enables businesses to measure their progress as far as moving toward goals and achieving success is concerned. Any business that does not have an idea of its own strengths and weaknesses may not be able to devise plans for further improvement and may not be able to guarantee constant success. The following are some of the points of importance of KPIs.
- Quantifiable results – KPIs are tools that provide you with measurable and quantifiable results. This is why actions can be taken on the results produced through them. This enables you to create corrective strategies for reaching business goals and also improve areas that need polishing.
- Enhancement in performance – KPIs help to identify employees and sectors that are performing well and also those that are performing poorly. They can thus be used by the management to channel resources in such a way that the performance can be enhanced.
- Individual performance incentives – KPIs can also help to improve individual performances of employees since the information offered by them encourages employees to work harder. What happens is that teams or individuals are offered incentives to improve their KPIs, and for this to be done, KPIs have to be quantifiable and clear.
- Boosting sales – Another benefit of KPIs is that they can help boost sales tremendously. Companies that have set objectives for their sales team to achieve often set rewards for those employees who meet their individual goals the fastest. This increases the level of competition between the sales executives and hence helps your business boost overall productivity.
- Increase in efficiency – When your business uses KPIs for assessing growth and success, it often gives your employees measurable goals to achieve. When an employee has a clear idea of what to achieve, he may direct his actions specifically to meet the goals and hence an improvement in the overall efficiency is obtained.
- Better decision-making – KPIs help to reduce the doubt or uncertainty by providing a clear path to move upon. This enables better decision-making throughout the company and leads your business in the right direction.
- Alignment of goals – It can be difficult for you to keep all the departments and people on the same page as far as moving toward common goals is concerned. But KPIs help to align the goals by dividing complex information into understandable steps.
- Better budgeting – When a business starts using KPIs, it starts setting up reachable goals for itself, which in turn makes way for setting aside a fixed amount of money to be spent in a given time cycle. Thus, KPIs also make way for better budgeting and cutting down on unnecessary costs.
CHOOSING THE RIGHT KPIs FOR YOUR BUSINESS
The main purpose of Key Performance Indicators is to drive the performance of your business. KPIs are capable of letting you bring about instantaneous changes to the segments of the business that may be underperforming and also offer crucial information on sales, marketing, finances and productivity. But this is only possible if you take time to select the right KPIs for your firm. Choosing the proper performance indicators is the first step toward quantifiable improvement, and you must consider several things before you do so for your enterprise. The following are some ways in which you can select the perfect KPIs:
1. Have a clear business goal in mind
Since KPIs help measure progress made toward your business goals, you must have a very clear idea about what you really wish to achieve. Only by setting precise goals for yourself can you define your KPIs. Thus when you set out to define goals for your business, you must focus on hard or solid figures, for example: “Boost sales by 20% in the next 12 months” or “Improve conversion rate by 5% in the next 6 months” and so on. Besides business goals, you must also set clear goals for teams and individuals as well. This helps your employees work harder to achieve the exact figures in a given time period.
2. Select performance indicators that are directly linked to your business goals
You must choose those performance measures that can offer you insight into the progress made by your business in a given period of time. This progress is always relative to a business goal and hence you must make sure your KPIs are aligned with the goals. For example, if your goal is to improve sales by 20% in the next year, then your KPIs must include conversion rate, daily sales and website traffic, etc. On the other hand if your intention is to increase conversion rate by 5% in the next 6 months, then your KPIs must include daily sales, price trends, and retention rate, etc.
In order to choose goal-aligned KPIs, you must ask yourself the following questions:
- What is the purpose of my business?
- What is it that I wish to achieve in the next fiscal year?
- How will I be able to know that I have reached my goals?
- Is my goal merely money-related?
Once you have answered these questions, you will be able to choose the indicators that are of true importance to your business. It is critical to understand that there are plenty of KPIs, but not all may be suitable for your strategic and operational goals.
Depending on the area you would like to improve in your business, here are some ideas for KPIs:
To evaluate your market:
- Conversion rate
- Cost per lead
- Market share
- Footprint in social networking
- Page views
- Bounce rate
- Market growth rate
- Search engine rankings
- Customer engagement level
To understand your customers:
- Customer complaints
- Customer engagement
- Retention rate
- Net promoter score
- Profitability score
- Customer satisfaction index
- Turnover rate
To understand and improve your employee’s performance:
- Churn rate
- Average tenure of employees
- Revenue earned per employee
- Engagement level of employees
- Training ROI
- Satisfaction index of employees
- Salary competitiveness ratio
To improve financial performance:
- Net profit margin
- Net profit
- Revenue growth rate
- Gross profit margin
- Economic value added
- Return on assets
- Return on equity
- Working capital ratio
- Operating expense ratio
- Price-earnings ratio
- Operating profit margin
To measure and improve your operational performance:
- Process waste level
- Project cost variance
- Six sigma level
- Earned value metric
- Time to market
- Quality index
- First contact resolution
- First pass yield
- Equipment effectiveness
- Rework level
3. Select KPIs with mandatory characteristics
When selecting KPIs, make sure that they meet certain mandatory characteristic requirements. A description of the most important ones has been provided below.
KPIs must be measurable.
Key performance Indicators must be measurable and quantifiable. This is the most basic feature that every KPI must have, irrespective of the industry or company in which it is used. If a metric is unable to measure performance or success of an activity or business as a whole, then it doesn’t serve its inherent function and must not be utilized. KPIs must be able to gauge, evaluate and offer solid results.
Consider the business’s growth stage.
Some metrics may prove to be more important than others, depending upon the growth stage in which your business currently is. If your business is a start-up, then you must choose metrics that are associated with business model validation, whereas if it is in its established stages, then you must select metrics like customer lifetime value and cost per acquisition. The following are the three stages of growth with the corresponding metrics for each:
- Pre-Product Market Fit – This is the start-up stage of a business and KPIs that work at this stage include qualitative feedback and customer interviews.
- Product Market Fit – This is the stage between start-up and established businesses; the KPIs that work here include renewals, monthly recurring revenue and customer satisfaction.
- Expansion – This is the stage where a business has already become well-established. At this stage, the KPIs that work are lifetime value, cost per acquisition and average order size.
Consider the industry your business is in and the most appropriate industry practices for KPIs.
It is important to know that KPIs differ from company to company and also from industry to industry. Therefore, it is important to consider the industry your business is in while selecting KPIs. The following are some of the suitable KPIs for different industries:
- B2B – Total cost savings, on-time delivery, quality of services/products, availability of inventory and compliance with contract, etc.
- SaaS – Churn, lifetime value, monthly recurring revenue and cost per acquisition, etc.
- Retail – Stock turnover, average customer spend, customer satisfaction, sales per square foot and capital expenditure, etc.
- E-Commerce – Average order value, days and visits to purchase, share or search, conversion rate, visitor loyalty, average order value and task completion rate, etc.
- Social Media – Referral traffic, growth of followers, link click through, volume of publishing and shares, etc.
- Content marketing – Unique visits, bounce rate, click patterns, page views and mobile readership, etc.
- Online media – Unique visitors, time on site, share ratio and page views, etc.
Consider workforce as a KPI.
If you run a service-based business, then you must consider your workers as a KPI as well. For businesses such as yours, the labor is the biggest area of expense. If you consider it as a performance indicator; you can manage the costs of staff better, thereby boosting overall performance. Thus in order to make crucial decisions, you must create useful labor data and reports in a timely manner. The reports must consist of aspects like realization rate, utilization, and gross profit margin.
Identify the target audience and then consider its point of view.
It is very important for you to identify who your target audience is so that you can base your KPIs accordingly. Once you know who you are targeting, you can consider the customer’s point of view and then choose those metrics that can measure their customer experience and satisfaction levels.
4. Consider the consequences of choosing particular KPIs for your business
It is very important to follow a systematic approach when choosing KPIs. Avoid selecting KPIs without considering the consequences that they can produce. For example, a certain KPI may help you measure the performance of a particular activity but it could indirectly be affecting other aspects of performance and hence must be avoided. A well-planned and researched approach must be followed when shortlisting the performance indicators.
5. Keep the list of KPIs concise (avoid unnecessary metrics)
Your list of KPIs must be kept short and effective. Having too many metrics can make evaluation of actions complex and may confuse your employees. Measure only that data which really matters to your organization and can help you make improvements. Remember that it may take time to narrow down your list of indicators but it will prove worthwhile. The optimal number of KPIs that you must have is about 5–9. Anything more than this will make you lose focus on the important variables. Thus, eliminate unnecessary metrics.
6. Understand and determine leading and lagging performance indicators
Another step to choosing your KPIs is to know and understand the differences between leading and lagging indicators.
Lagging indicators — these are indicators which measure the overall performance of the business and are backward-focused or trailing in nature. This means that they help to evaluate performance information which has already been captured. Everything you wish to monitor will have lagging indicators, such as number of sick days, returns on investments and even the number of bags moved in a single day, etc.
Leading indicators — these indicators are considered as business drivers since they point to the direction in which things are moving. They change quickly and come before an upcoming trend. For every business, identification of leading indicators is important as far as the strategic plans are concerned. They must be chosen carefully and should be unique to your business environment.
7. Avoid getting caught up in the number game
The total number of likes, the number of page visitors, the percentage of increase in signups and other such numbers can really capture you in a net and make it difficult for you to see the larger picture. Your focus must always be on the quality and not the quantity since the most important parts of businesses are often not measurable. It is easy to get caught up in the number game of KPIs but you need to move forward from vanity metrics and concentrate on what really matters. Ask yourself if a slight increase in the ‘Likes’ on your Facebook page would really affect your success.
8. Know where your money is going
Another point that can help you in selecting the right KPIs for your business is to consider exactly where your money is going. It is a good idea to determine the areas where you are spending your money and then find out if these areas are linked to the goals of your business. Also, see if a KPI can be associated with these goals. The basic idea behind knowing the direction of the flow of money is to be able to choose only those KPIs which can keep a check on your expenses.