Key Performance Indicators (KPIs) and Why They're Important
Key performance indicators (commonly referred to as KPIs) 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. KPIs help organizations understand if the company is headed in the right direction—and if not, where it needs to divert its attention. No matter what it measures, the goal of a KPI is to improve the health of an organization. It's important that anyone working in marketing understand exactly what constitutes a KPI.
Basic KPI Definition
A key performance indicator is a quantifiable measure a company uses to determine how well it's meeting it's operational and strategic goals. This means that different businesses have different KPIs depending on their individual performance criteria or priorities. That said, the indicators usually follow industry-wide standards.
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 existing 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 must provide context that echoes business objectives. The KPIs must also be defined in a way that external factors, beyond the control of a company, cannot interfere with them. Another key issue is that KPIs should have a specific time-frame that is divided into key checkpoints for accuracy.
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 particular course. However, instead of using the student's passing grade record to chart the goal, the school uses the failure rate of the students as a KPI to determine its position. Another example is a business that chooses to use the percentage of income it receives from its returning customers as its KPI.
Other examples of KPIs used by businesses include:
- The status of existing customers
- The number of new customers acquired
- Customer attrition
- Segmenting customers by profitability or demographics
- The amount of waiting time for delivery of customer orders
- The length of time for 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 key performance indicators, a company should start by considering the factors the management team uses in managing the organization. Next, you need to consider and identify whether these factors help in assessing the company’s progress against its stated strategies. Finally, you need to make sure that the KPIs selected are clear enough so that they're understood by those who read the reports. this allows the people inside and outside the company to make similar assessments.
Although industry standards have significance, companies do not necessarily have to choose KPIs similar 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. Whatever number you decide upon, just make sure the KPIs are crucial to the success of your business. Remember, if everything is important, then nothing is important; so be selective.
KPIs Versus Metrics
There is a subtle difference between key performance indicators and marketing metrics. An important point to remember is that all KPIs are marketing metrics but not all marketing metrics are KPIs. Before doing anything else, a business must first determine which marketing metrics qualify as their key performance indicators. While indicators do not necessarily have to be financial, whatever indicators are selected, these indicators play an important role in steering the various marketing vehicles for management.
A good way to look at it is, a metric is a measurement but a KPI adds context. For example, a metric can be the number of customers, number of sales, or total revenue. Metrics are important, but until you start making comparisons they are simply numbers. Typically, a metric is a combination of two or more measurements. Metrics can help with financial forecasting and benchmarking and designative a value of good or bad—but metrics stop there.
Metrics morph into KPIs when you put them in the context of a particular organization or industry. A KPI adds substance and weight to the detail. This is why ratios and percentages are considered good KPIs—they show in a broader context whether a company is doing well, or not doing well, and where.