Key Performance Indicator (KPI)

Joran Hofman
April 4, 2021

What is a Key Performance Indicator?

A key performance indicator is a metric used to check how effectively a company or business is achieving business objectives.

Some businesses and companies use KPIs at different levels to weigh success in terms of achieving goals. Higher-level KPIs can be targeted at the company’s overall performance; on the other hand, low-level KPIs can focus on more specific processes such as marketing, human resources, sales, support, and others.

Why is KPIs Important?

One of the reasons why KPIs are important is that they serve to monitor the company’s good health. They allow you to measure what you want to modify to generate an improvement.

They are used to measure progress over time, tracking key performance indicators such as gross margin, revenue, number of employees, number of locations, etc. Goals can be created at the beginning of each year or quarter, and through KPIs, progress towards these goals can be measured.

Another reason for the importance of KPIs is that they serve to make adjustments and stay on course. Apart from the results, it is also necessary to have leading indicators that allow knowing when there is a risk of not reaching those results before it is too late.

They serve to solve problems or take advantage of opportunities. You can use a composition of KPIs in a dashboard to have the right information at hand to solve problems or take advantage of opportunities.

Patterns can be studied over time. By evaluating the same KPIs over the same periods, you can begin to identify patterns or patterns in the numbers. These patterns or guidelines can help a business in many ways. Perhaps you can predict when the time with fewer sales will be and use that time to make a system-level improvement or train the employees.

What are the  Types of Key Performance Indicators?

Every business, company, or project needs certain KPIs. According to the type of company and the area of ​​activity, there is a set of specific measurements that make it easier to obtain certain competitive advantages:

Financial metrics.

  • Benefit: although it is evident, it is important not to lose sight of it since it is one of the most important performance indicators. Gross and net profit margin analysis should be performed to understand better the organization's success in creating high returns.
  • Cost: It is a must to measure performance and discover the best ways to minimize and manage costs.
  • The cost of the items being sold: When you count the production costs of a product sold by the company, you can get a better picture of what the product profit margin and the actual profit margin should look like. This information is very useful in determining how to outsell your competitors.
  • Daily sales pending (DSO): accounts receivable are taken and divided by the total number of credit sales. This number is multiplied by the number of days in the period you are analyzing to find the DSO number. The lower this number, the better the organization will perform when collecting outstanding accounts. You can use this formula every month, quarter, or year to track and see improvements.
  • Sales by zone: By analyzing the zones that meet the sales targets, better recommendations can be obtained for the underperforming regions.

Customer metrics.

  • Lifetime Customer Value (CLV): This metric helps to study the value an organization gains from maintaining a long-term relationship with a customer. This performance indicator can be used to narrow down which avenues help you get the best customers at the best price.
  • Cost of customer acquisition (CAC): the total costs of acquiring customers are divided by the number of new customers in the period studied, and the CAC is obtained. This is very important in e-commerce because it helps when evaluating the profitability of marketing campaigns.
  • Customer satisfaction and retention: Various performance indicators can be used to measure CSR, including customer satisfaction scores and the percentage of customers who make a purchase again.
  • Net Promoter Score (NPS): knowing the NPS is a way to indicate a company’s growth in the long term. To know the NPS score, surveys can be sent from time to time to customers to determine how likely they are to recommend the organization to someone they know. You can create a baseline with the first survey and activate methods that help those numbers increase from quarter to quarter.
  • The number of customers: Similar to earnings, this performance indicator is very simple. By knowing the number of customers won and lost, you can better understand whether customer needs are being met.

Process metrics.

  • Customer support ballots: studying the number of new tickets, the number of tickets resolved, and the time spent on the resolution will help set up and create a better customer service department in the company.
  • Percentage of product defects: the number of defective units is taken and divided by the total number of units created in the period being studied, and the percentage of products with defects will be obtained. Obviously, the fewer the numbers, the better for the company.

People metrics.

  • Employee turnover rate (ETR): to calculate the ETR, the number of employees who have left the company, is taken and divided by the average number of employees. If you get a high ETR, you should study your workplace culture, job packages, and work environment.
  • Job vacancy response rate: When you have a high percentage of qualified applicants looking for job vacancies, it is a sign that you are doing a good job maximizing exposure to the right job applicants.
  • Employee satisfaction: Measuring employee satisfaction using surveys and other metrics is very important to a department and organization, as happy employees work harder.

Key Performance Indicator Best Practices.

  • Define indicators that can be measured.

To define the indicators well, it is necessary that they can be easily measured. That is, quantitative and not qualitative indicators must be chosen. As an example, instead of setting a goal to improve sales, you should set an indicator about the sales conversion rate.

  • Don't complicate key performance indicators.

These should be simple so that all team members can understand them. When you complicate a KPI, you run the risk of not being able to obtain useful information. When the team members do not understand an indicator they can become demotivated, which negatively affects the company’s entire performance.

  • Define indicators adjusted to the reality and current situation of the company.

All indicators do not work in all businesses. Some indicators are better adapted to one type of business, but that does not fulfill any function in other activity areas. Creating indicators just for creating them will generate interference in the performance of workers and collaborators, which will have a bad influence on the company’s final results.

  • Analyze and evaluate the KPIs from time to time.

A KPI must be studied frequently since only through constant monitoring can it be understood if it is going in the right direction or not. Indicators that can be easily and frequently measured should be chosen, whenever possible, to be able to make decisions in real-time based on reliable and up-to-date information.

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