Growth in an individual, organization or any process is vital and cannot be overemphasized. As such, the measurement and evaluation of goals, as well as the tools employed in measuring them, are equally very important.
KPI is one of those tools. KPI is simply a measurable value that shows how well a company or organization is achieving its set business objectives.
Generally, KPIs are used to show much success a company has been achieving in terms of reaching its targets. This tool seems to have all you need to grow your business, and we believe you want to know all about it, so what is KPI?
- What is KPI Definition?
- When KPIs Are Useless?
- When a KPI is not linked to any objective?
- When a KPI assesses everything that is easy to assess?
- When you measure almost everything?
- Collecting the same data as others
- Separating KPIs from other data
- Linking KPIs to incentives
- Negligence of senior executives in KPI selection
- Keeping a rigid KPI
- Passiveness towards the KPIs
- KPI Types
- KPI Examples
- Why KPI Is Important?
- Final Word
What is KPI Definition?
KPI refers to a quantifiable measure used to measure the success of an organization, and employees in meeting objectives for performance. Also, it could be said to be a set of quantifiable measures a company uses to gauge its performance over time.
KPIs are tools that measure an organization’s effectiveness and the progress it has recorded towards achieving its goals.
Measuring the level of success of an organization or company might seem to be a challenge, as an organization contains several departments, in charge of several projects which makes evaluation complex.
However, how the company implements KPIs will affect the complexity is reduced as the performances of departments and individuals are tracked independently and corporately. The overall performance of the organization is also measured, giving in detail the level of success of the organization.
Difference Between KPIs, Metrics, and Measures
In the process of evaluation, KPIs, measures, and metrics have played vital and similar roles. Hence, it would not be surprising if they are confused together. However, they are different terms that are needed for the assessment of organizational performances, and the understanding of these terms is essential.
1. Key Performance Indicators (KPIs)
A key performance indicator is a quantifiable value that shows how much an organization is achieving its business objectives. Companies use KPIs to how many of their targets they have reached.
KPIs are effective across organizations, industries, departments, and employees in showing the level of growth of businesses. KPIs are time-bound and are compared or studied in relation to a certain generally accepted standard or past performances.
Organizations can no longer be oblivious of their success. With KPIs in place, they can measure the level of their success, the kind of success, and in relation to what.
Furthermore, they can set goals and establish plans on how to achieve those goals while evaluating those plans as they progress. This way, records are being kept and are easily referred to for consultation and scaling other business plans.
2. KPI Metrics
A metric is a quantifiable measure used to track, evaluate, or monitor the progress of a particular process. The measure in metrics can be derived depending on the peculiarities of your business or your organization.
Metrics are extremely broad as they cover a lot of areas that can be assessed, while key performance indicators think about a specific area that is important and concentrates on it.
This implies that metrics are broader and cover a lot of ground, while KPI is deeper. However, without the metrics to cover a lot of areas, how do you know where to concentrate on or the key areas to evaluate?
In the same vein, there are certain factors that must be fulfilled or achieved for an institution or an organization to fulfill its objectives.
In terms of data, measures are values or numbers that can undergo addition, division, subtraction, and multiplication (basic mathematical operations). The measures or numbers are usually used with dimensions or units which are used to separate different items or categories like products or cities.
For instance, 20 laptops and 30 phones were sold; the number is the measure, while the phones and laptops represent the dimension or the units.
A measure is different from a metric because a measure is specific in terms of its unit, while a metric can be derived based on the organization’s processes.
A measure is different from a KPI and metrics because both the KPI and metrics are acquired from measures. A measure gives quantity and helps to really know how much in the process of assessment or evaluation.
Here is an example to further explain things:
A man runs an automobile company. He knows that it will cost him about $5000 to be able to produce a car. This implies that his cost of production per car (CPPC) is $5000, which is a metric derived basically due to the peculiarity of his business.
We obviously now know the measure or the number behind the metric, which is 5000 (Considering the fact that a lot of measures will have been added or averaged to arrive at that). If the goal of the company is to increase its profit by a certain percentage before the quarter of the year.
The total CPPC of the company in the last quarter will be subtracted from the total selling price of the car to arrive at a profit.
The profit will then be compared to the profit of the previous quarter to determine if that particular key performance indicator KPI has been achieved.
Hence KPIs are usually in content and with respect to certain goals set within a particular time frame.
When KPIs Are Useless?
KPIs in the corporate world are as common as they come. Every organization has goals or objectives, and KPIs seem to be the way to go for almost every organization. However, there are times when they are useless and do not serve their purpose the way it ought to. Some of those instances and situations are:
KPIs cannot work without objectives or targets, because it is what it is supposed to measure in the first place. When KPIs are linked with objectives, this helps in planning strategies.
Money used to gather information as well as time is wasted if the KPI is not aligned with a specific goal. KPIs are only helpful if it contains information vital to your objectives.
When a KPI assesses everything that is easy to assess?
Most times, people are not sure whether an attribute can be measured or whether it should be measured, and as such, people find it easy to measure everything as long as it is easy to measure.
When you measure almost everything?
With the importance of KPIs and their effect on the growth of companies and organizations, most folks are tempted to gather a lot of information, and source a lot of data in a bid to capture everything, thereby wasting a lot of time and resources.
Most people are of the school of thought that believes the more information, the better. In this case, too much information might mean the same thing as little information.
Collecting the same data as others
Collecting the same data as everyone else is clearly wrong and for obvious reasons. KPIs are primarily linked to specific objectives for it to be developed.
So, if an individual looks at someone else’s KPI instead of taking into consideration the peculiarities of the organization, the information needed as well as the right targets to build a suitable KPI, this will render the KPI useless.
For instance, a popular KPI is earning a lot of reviews in journals and popular business magazines. It will be wrong to use such KPIs just because of their successes.
Separating KPIs from other data
Information is everywhere in business, and there is no shortage of data. Ranging from customer satisfaction, sales, financial projection, expenditure, market reports, and the list goes on and on.
However, the mistake that most people make is that they mix up their KPI with other information. The reason for this is that most times, business strategies are constantly in a race against time, and as such, they don’t have the luxury of wading through pages.
Linking KPIs to incentives
Mixing KPIs with incentives is an unhealthy practice in corporate organizations because of the consequences it brings.
The motive is to be able to evaluate yourself and your employees. (Know where you are and where you want to be).
This affects the organization in a lot of ways as workers or employees do not really care about the objectives or targets but the incentives (bonus) attached to them.
This might lead to a change in behavior or even the alteration of data or measures in order to have access to those incentives.
Negligence of senior executives in KPI selection
Most senior executives are concerned with strategies; driven by numbers, they see the big picture formulate strategies, and leave younger executives to deal with the selections of KPIs.
By doing this, they will feel like outsiders in their own firms due to their passive involvement in the process. In the end, they do not make use of the KPIs because they do not come from them.
There must be a clear relationship between the strategy and the questions they intend to answer.
Keeping a rigid KPI
KPIs are supposed to be limited within a particular time frame.
For most, once the KPI is designed, and the target of the KPIs is selected, they are used consistently over time without making the necessary adjustment which has become imperative due to the change in variables.
Questions must be asked of the selected KPIs if they can still be relied upon or if it is still relevant in measuring the growth of that organization at that particular time.
Without the appropriate answers, KPIs can just be possessed for that sake alone. The KPI must be constantly reviewed to bring about new strategies, which will lead to better performance, which is the sole purpose of the KPI.
Passiveness towards the KPIs
It does not matter how grand a plan is if it is not executed; it is as good as nothing. In the same vein, no matter how calculated, well-aligned, and objective your KPI is, if it is not utilized, it is null.
A plan is, after all, as great as its use. KPIs help to make informed decisions and deduce facts that will ultimately lead to the success of your organization by increasing your overall performance.
If the factors discussed are adhered to and remedied where necessary, the KPI will be effective.
There are various types of KPIs that can be used for businesses with respect to their use and the peculiarity of the business. The following are different types of KPIs:
- Quantitative indicators are expressed with numbers.
- Qualitative indicators are expressed in the content.
- Leading indicators can show the result of a program before it is concluded.
- Lagging indicators reveal the success or failure of the process after its completion
- Input indicators reveal the number of resources invested in the process before the end.
- Process indicators represent efficiency and how well the whole process is managed.
- The output indicator shows the output or result of the entire process.
- Practical indicators are indicators that relate to the existing companies.
- Financial indicators are indicators, especially for comparing performance and operatives.
- Idleness indicators are used to calculate how long a machine is not working.
- Coincident indicators are used if they change the same way as the direction of an entire process.
Knowing full well that KPIs are supposed to measure something, the outcome of the evaluation process is appraised in several ways:
A KPI might answer the question it poses for assessment in a binary way or in a polar way. This implies that the answer is either ”yes” or ”no”.
This way, the answer is absolute. It is either the target or objective is reached or not.
This measure is when a KPI is taken in relation or with respect to a past KPI or a standard one.
KPIs are also classified with respect to the different levels it is used for. For instance, a High-level KPI handles the entire performance of a business, while a lower-level KPI handles a specific department.
KPIs are dependent primarily on their use; however; however, with each classification, there are various examples to each of them.
The Examples of sales KPIs
· Number of new contracts signed per period –First, a period of time will be established to determine the time frame and the number of new clients within that period will be determined.
· Amount of resources spent on sales follow-up –Resources spent on sales follow-up.
· Net sales or percentage growth
· Average conversion time
The Examples of financial KPIs
· Growth in revenue
· Net Profit margin
· Gross profit margin
· Operational cash flow
· Current account receivables
· Inventory turnover
Examples of Customer KPIs
· Number of customers retained
· Percentage of market share
· Net promoter score
· Average Ticket/ Support Resolution
Examples of Operational KPIs
· Order Fulfillment time
· Time to Market
· Employee Satisfaction rating
· Employee Churn rate
Examples of marketing KPIs
· Monthly website traffic
· Number of Qualified leads
· Conversion Rate for a call-up to content
· Keywords in the top 10 search engines result
· Blog articles published this month
· E-books published this month
Why KPI Is Important?
Evaluation is an important process when it comes to anything at all. When you evaluate, you know where you stand in respect to where you want to be, hence this proves to be an invaluable tool in every process.
However, KPI goes into the evaluation of an organization in further detail, examining its peculiarities, which lead to the formulation of strategies that help achieve set objectives.
What then makes KPI so important
1. Targets can be evaluated
This is one of the most significant reasons why KPIs are used. Considering the fact that KPIs are no actually company goals, they are used to measure company goals, and as such, they help to know how close or how far behind an organization is from achieving its set goal.
For instance, the goal of a production company is to increase production by 50%; the KPI helps measure how close it is to that percentage increase and helps you make informed decisions to achieve that target.
2. Induces a learning environment
Learning is brought about by the passage of information, which brings about the behavioral change needed to fulfill certain objectives.
The KPI serves as a source of information to the workers or employees in the firm. During the process of research and gathering data, they are educated and become more informed about the state of the organization.
Furthermore, this affords them practical experiences as they can see what they have discovered for themselves.
This gives results in insightful conversation and the rubbing of minds together, which is a form of communication that births great ideas and strategies while educating the entire team.
3. Increases corporate accountability
KPI help to be able to account or be held responsible for the performance or progress of the organization. This way, assumptions are not made, and merits or demerits are meted out based on accurate data.
There is adequate proof of an employee’s good or bad performance to help in making the right decisions.
Similarly, a KPI points out the inaccuracy of certain data, this way holding both employee and employer to account.
4. Motivate the team
There is nothing better than a united front. Or what better way can a company move forward if not together. One of the easiest ways to bring out the best in teams is to have a goal in sight.
When targets are met, team members are motivated, and overall performance increases as well as job satisfaction. Further, KPI helps to keep track of an individual’s progress within the organization.
5. Easy access to information
Information can be priceless, depending on how timely it is. In a competitive market, KPI gives information necessary to make timely changes needed to keep the organization ahead.
KPIs are powerful tools used to assess the development of a company by providing them with information necessary to help them make the right decisions and come up with strategies needed for the growth of the organization.
Where can I find KPIs and performance measures for my industries?
Business journals and magazines can be used as models for consultation. However, it is important to design your own KPI owing to your business peculiarities.
How can I use KPI and performance measures to assess performance?
The KPI is compared to or measured against a standard or the previous result and, as such, the deductions drawn from the result to assess the entire operation.
What makes a good KPI?
A good KPI must have a measure, a target, a clear data source, and a consistent reporting time frame.
What Is A Smart KPI Definition?
SMART is an acronym that shows the characteristics of a particular term.
Where S = Specific
The following characteristics underline everything KPI is supposed to possess.
A KPI measures a specific objective that is attainable, and useful to the organization while understanding the peculiarities of the organization within a specific time frame.
What Are The Top Marketing KPIs?
With the advent of online market space, there are new dynamics to market space as technology now affects the marketing KPIs leading to new strategies. Here are the common ones used in recent times:
· Ad click-through ratio (CTR)
· Average response rates of the campaign
· Brand consideration
· Brand awareness percentage
· Brand credibility
· Brand strength
· Column of inches of media coverage
· Consumer awareness
· Cost per lead
· Cost per converted lead
· Cost per mile
· Delivery of materials
· Effective reach
· Leads generated
· Gross rating point
· Marketing budget awareness brand ratio
· Marketing budget ratio
· Number of client visits
· Number of product focus groups conducted
· Return on Investment (ROI)
· Response Rate
· Staying within budget
· Target rating point
· Transaction value of a brand
· Website hits
· Website leads generated.
The list is a long one, but I hope these ones will do.
What is the most important KPI for sales?
1. Employee Satisfaction
Sales can be difficult at times. This is because it requires persistence; feedback is important to assess sales managers and motivate them when needed.
2. Sales Volume by Location
When the volumes of sales are compared across the board in certain regions, disparities are observed and corrected.
3. Competitor pricing
It is important to know the prices of your competitors’ products to keep a competitive edge and to stay relevant in the market.
4. Meeting Acceptance rates
The meeting acceptance rate is vital in showing how willing they are to make new customers.
The number of prospective customers is averaged by the number of responses received. This indicates the priority given to your products.