Key Performance Indicators (KPIs) and Why They're Important

Going over the figures
•••

PeopleImages.com/Getty Images

Key performance indicators form an important part of the information required to determine (and explain) how a company will progress forward to meet its business and marketing goals. It's important that anyone working in marketing, understand exactly what constitutes a key performance indicator (commonly referred to as KPI).

Basic KPI Definition

A key performance indicator is a quantifiable measure a company uses to determine how well it meets it's operational and strategic goals. This means that different businesses have different KPIs depending on their respective performance criteria or priorities. That said, 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. However, these indicators are important in steering marketing vehicles for management. 

3 Characteristics of KPIs

The three characteristics of KPIs are the following:

  • Quantitative. The KPIs can be presented in the form of numbers.
  • Practical. The KPIs integrate well with present company processes.
  • Actionable. The KPIs can be put into practical application to effect the desired change.

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

Examples of Key Performance Indicators

An organization’s KPI is not the same as its goal. For example, a school may set a goal that all of its students pass a course, but use its failure rate as a KPI to determine its position. And, a business may use the percentage of income it receives from the returning customers as its KPI.

Other examples of KPIs for businesses include:

  • The status of existing customers
  • New customers they acquired
  • Customer attrition
  • Segmenting customers by profitability or demographics
  • Waiting time for customer orders
  • The length of stock-outs

How to Choose KPIs

Businesses should take a number of steps before choosing the best key performance indicators. These steps include:

  • Establishing clearly defined business processes
  • Setting requirements for the business processes
  • Having qualitative and quantitative measurements of results
  • Determining variances and adjusting processes to meet short-term objectives

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

Although industry standards have significance, companies do not necessarily have to choose similar KPIs to those of their competitors. What is more important is knowing how relevant the indicators are to your business or the unit/division you're assessing.

Also, there is no specific number of KPIs a company needs. However, in general, the number usually ranges from four to ten for most businesses—just make sure they are crucial to the success of the business. Remember, nothing is important if everything is important. 

Bottomline

Key performance indicators are important to a business because they help the business focus on common goals and ensure that those goals stay aligned within the organization. This focus helps a business stay on task and work on meaningful projects that help reach objectives faster.