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

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Key performance indicators form an important part of the information required to determine and explain how a company progresses towards its business and marketing goals. However, many people are confused about what exactly constitutes a key performance indicator or KPI.

Basic KPI Definition

A key performance indicator is a quantifiable measure a company 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.

Characteristics of KPIs

  • 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.

Examples of Key Performance Indicators

An organization’s KPI is not the same as its goal. For example, a school may aim that all its students pass a course, but use its failure rate as a KPI to determine its position. On the other hand, 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, 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.

There is not a specific number of KPIs a company needs. In general, the number may be anywhere from four to ten for many types of businesses, and they must be crucial to the success of the business. Remember: Nothing is important if everything is important. Companies should also review their objectives and strategies regularly and make necessary adjustments on their key performance indicators.

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