What is a KPI and Why is it SO Important?

(KPI = Key Performance Indicator)

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1. Definition

A KPI (Key Performance Indicator) is a quantifiable measure a business uses to determine how well it meets the set operational and strategic goals.

This means different businesses have different KPIs depending on their respective performance criteria or priorities. At the same time, the indicators usually follow industry-wide standards.

There is a subtle difference between Key Performance Indicators and marketing metrics. An important point to remember is that KPIs are marketing metrics but not all marketing metrics are KPIs. A business must know how to determine which marketing metrics qualify as their key performance indicators. These indicators do not necessarily have to be financial but are important in steering marketing vehicles for management. Without these indicators and the guidance they provide to businesses, it's nearly impossible for them to achieve their full potential.

2. Why do I need KPIs?

Whatever gets measured gets managed! Without factual information you cannot make informed decisions.

It is difficult to know which factors are the most critical unless they are being tracked. If you aren’t looking at something, how can you tell if it improves or deteriorates?

3. Main Benefits

The main benefits of defining good KPIs are:

  • Give your management measurable data that they can use to make informed decisions;

  • KPI’s provide an immediate snapshot of the overall performance of your company;

  • Encourage accountability to prevent making inaccurate decisions about employees during reviews. If you make people accountable for their results that makes them more responsible and participant. As a secondary bonus you prevent the situation when "if everyone thinks anyone else is responsible then no one is truly responsible";

  • Boost your employees' morale through the recognition of their performance. This is extremely important in order to improve company performance and culture. You can also have small victories that make long-term goals become more feasible and realistic without demoralizing your sales team;

  • A good way to compare your business' performance with your competitors. You can do this by comparing your KPIs with your industry's generic KPIs;

4. KPI Characteristics

  • Quantitative: They can be presented in the form of numbers;

  • Practical: They integrate well with present company processes;

  • Directional: They help to determine if a company is getting better;

  • Actionable: They can be put into practice to effect desired change.

A key performance indicator must be based on legitimate data and provide context that echoes business objectives. They must be defined in a way that factors beyond the control of a company cannot interfere with their fulfillment. Another key factor is that they have specific time-frame divided into key checkpoints.

5. How to Choose KPIs

Businesses should take a number of steps before choosing the best Key Performance Indicators, including:

  • Having clearly defined business processes;

  • Setting requirements for the business processes;

  • Having qualitative and quantitative measurements of results;

  • Determining variances and adjusting processes to meet their short-term objectives.

When choosing the right key performance indicators, a company should start by considering the factors management uses in managing the business. Then you must consider and identify whether these factors help in assessing the company’s progress against its stated strategies. Do they also allow those who read the reports to make similar assessments externally?

Although industry standards matter, companies do not necessarily have to choose similar KPIs to their business peers. What is more important is how relevant the indicators are to the business or its unit/division.

6. Common KPIs

KPIs vary from company to company. However there are some KPIs that are common and transverse to most business area:

  • Conversion Rate (closed sales in specific time-frame like 30, 60, 90 or 180 days);

  • Customer Profitability Score (how much profit does each individual customer bring in);

  • Customer Retention Rate (how many customers come back and purchase again). This is also a Loyalty KPI;

  • Customer Acquisition Cost (CAC) (divide your total acquisition costs by the number of new customers in the time frame you’re examining);

  • Net Promoter Score (NPS) (finding out your NPS is one of the best ways to indicate long-term company growth. To determine your NPS score, send out quarterly surveys to your customers to see how likely it is that they’ll recommend your organization to someone they know. Establish a baseline with your first survey and put measures in place that will help those numbers grow quarter to quarter);

  • Number Of Customers (similar to profit, this performance indicator is fairly straightforward. By determining the number of customers you’ve gained and lost, you can further understand whether or not you are meeting your customers’ needs).

There are many more, these are, however, the most common sales-related KPIs. There are internal KPIs, financial KPIs and other area-based KPIs.

7. Conclusion

KPIs help you keep your business measured and therefor manageable. The process of defining KPIs brings your business' goals into focus and generates enough discussion to help you drive your business into the right path.

Too many KPIs can be overwhelming so the challenge is to gather enough pertinent information to make informed decisions but not too much. Many try to measure everything they can, even if they are never going to use that information. That is a fallacy.

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