KPI, which stands for Key Performance Indicator, is an acronym you’ve almost certainly heard bandied about by people working in or studying management. But if you’ve never had a specific reason to investigate what KPIs are, it’s likely you’re unfamiliar with the meaning of the term.
If you hope to have a career in management, consulting, or any other position of leadership in business, you would be well served by learning about KPIs. Maybe that term seems self-explanatory to you. Even so, we can assure you that using KPIs effectively is not as simple as it seems. Nor is it so complex that it’s beyond the skills of any manager. In this article we’ll help you understand what, exactly, KPIs are, and how to use them effectively.
KPI Metrics: Which to Include
Okay, so first off, beyond the literal meaning of the acronym, what is KPI? The real KPI meaning refers to purposefully chosen metrics that management uses to define and evaluate operational success. Think about it. You’re leading a team charged with a certain set of shared objectives. But how do you know, exactly, whether or not you’re on the path toward achieving those objectives? You use key performance indicators to help assess your performance. This helps determine what stands between you and accomplishing your goal.
Working with KPIs isn’t always obvious at first glance, even if you know what KPI stands for. The truth is, there’s almost no limit to the amount of information you can assess when you analyze a situation. The real key to working with KPI metrics is to be smart about the most appropriate, useful, and powerful metrics to focus on as you monitor a business.
There are a few criteria that effective KPIs have in common. A good KPI should be clearly defined and quantifiable. Further, it should be essential to the goal you’re trying to achieve and should define what success means for the project or business. Finally, it should be effectively communicated to all relevant stakeholders to keep the various parties on the same page.
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Every project will have its own unique best KPIs, and there’s no one-size-fits-all form of KPI report. But there are some common types of KPIs you can adapt to suit your needs in many situations. There are certain common KPIs for marketing contexts, sales contexts, financial contexts, and virtually every other dimension of a business’s operations. Determining which elements of your business require the most focus within a particular task will go a long way toward helping you decide on the right KPIs.
Let’s take a look at a few common KPI examples.
This is the most common financial metric and defines some of the most important objectives for most every organization. Until or unless our economic system fundamentally changes, virtually every organization will have to keep profit front-of-mind. Sometimes determining profit for the sake of a KPI is obvious, but other times you might drill down more. For instance, you can measure profit-per-unit-produced, or else profit relative to previous performance, or profit relative to prevailing economic conditions. Be careful to define which type of profit you’re tracking – in most contexts, operating profit will be the metric to track.
Customer Acquisition Cost
In most organizations, this will fall under the category of customer KPIs. Customer acquisition cost refers to how much money a company has to spend in order to bring in a new customer. This is an especially relevant metric for subscription-based business models, in which the company’s profits & solvency are directly tied to the growing or shrinking customer base, and the profits derived from each customer are narrowly defined.
Complaint tickets. One simple way of measuring the success of a company’s quality control & customer service is to measure the number of formal complaint tickets initiated by customers. You might set a simple maximum as a target and use that as your KPI, or else you might evaluate on some proportional basis, such as complaints-per-units-sold.
This simple KPI is critical for online businesses. If you notice fewer people navigating to your site, you should expect revenue to fall.
If you are experiencing a revenue decline, you might be inclined to assume you need to do more marketing to get more people considering your products. But maybe the issue is that people aren’t deciding to buy once they are on your website? A KPI report needs to include KPI examples that measure different things and help you analyze your business from different angles.
OKR vs KPI: What’s the Difference?
Some people misunderstand the concepts of OKR vs KPI, mistakenly believing they’re interchangeable. While they are related, they are different. OKR refers to Objectives & Key Results. This refers to the strategic framework by which a team or organization will define its goals. KPI refers to the specific evaluation tactic of using pre-chosen quantified metrics to achieve the goals previously defined by the OKR. The difference is subtle, but meaningful.
In other words, a business must start with OKR, and establish KPI metrics to monitor and help achieve its OKR.
Every organization will produce its own unique KPIs. However, we can provide a simplified KPI template that almost any organization should be able to use to define what its KPIs will be.
- Determine overarching strategic goals. What is the purpose of an organization, of a team within an organization, of a project undertaken by a team?
- Define what success will mean. Too often teams proceed with a hazy impulse forward but no real definition of success. Defining the goal can help you envision and manifest it.
- Pick your metrics. What are the most relevant things you can reliably measure to determine whether you’re getting closer to or farther from your objective?
- Choose your best KPIs. Within the metrics you’ve emphasized as most relevant to your objectives, what exact measurements will mean you’ve been successful? And what numbers will you need to hit along the way to know whether you’re keeping up with the plan?
Here is an example of how a KPI template might look, from Someka.net.
It’s one thing for a business to fail because it has an inferior product, or because it neglects its responsibilities to the public. Those results are inevitable in any public marketplace. But what shouldn’t happen–what benefits no one–is when a business fails despite offering a superior product/service. When this happens, it’s often because management failed to clearly define what success would mean, and so was unable to steer its operations toward it.
If you want to give your business the best chance of succeeding, use KPI metrics to monitor performance. Key Performance Indicators are a navigation device – an astrolabe – without which any business risks getting lost at sea.
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