Why are KPIs important and how to measure them
If you’ve been in the business of business for a while, you’re probably already familiar with the rather popular acronym: KPI, also known as KPIs. After all, it’s one of those terms people often throw in conversations. But despite its widespread use, few people really understand what they are, let alone how to measure them.
On that note, this article will cover the basics of KPIs, starting with a definition.
What are the key performance indicators?
Experts and dictionaries have different definitions of the term KPI. But, ultimately, KPIs are any measurable value that shows how well an organization is doing on a particular operation or goal. Basically it’s a way to measure progress toward a goal, which can range from increasing traffic or reduce IT costs.
Now you might be wondering if then it is possible to call KPIs as metrics? Well, no, because despite how some people use them interchangeably, they are not the same.
Difference between KPIs and metrics
If you look up metrics in a dictionary, you’ll find that it refers to a value that measures something. It can have a very similar meaning with KPIs, but in business these two are different. To clarify further, a metric is anything that measures something, but KPIs are metrics that specifically assess a value that represents progress toward a goal.
Suppose you have a sample sales report or model. Upon closer inspection, you will find that there are several metrics in the sales report. Here are some examples:
- Total income
- Customer Lifetime Value (CLV)
- Net Promoter Score (NPS)
- Cost per prospect
- Return on investment
- Opportunity to win ratio (1)
These KPIs may be of value to your business, but does total revenue tell you anything about the progress of your sales efforts? No it doesn’t, which is why it shouldn’t be called a KPI.
A KPI would be a metric that represents substantial information about your progress on a goal. An example of a sales KPI would be the number of new customers over a period of one week. It shows how well your sales are doing and measures your progress on a specific goal, which is customer acquisition.
But you have to remember that not all KPIs fall under the same category. Rather, there are different types of KPIs, each with different characteristics and use.
Different types of KPIs
Most people associate KPIs with a numeric value, but specific KPIs don’t necessarily imply a number. In fact, KPIs can fall into several categories.
That said, here’s an overview of the different types of KPIs:
The quantitative type is the most commonly used KPI in this list. As the name suggests, this is a numeric value, which can be a decimal, a whole number, or a whole number.
Examples: time spent per call, number of new customers, cost per new customer, etc.
Unlike the previous type, a qualitative KPI measures a value but does not use a number to do so. Rather, it is a characteristic of a transaction or a business objective.
Examples: Customer experience, employee satisfaction, etc.
Key KPIs are metrics that show what could happen. They aren’t always accurate, but it gives you a rough estimate of how much value you can get on a specific metric. Their main goal is to predict the ups and downs of a particular goal.
Examples: number of webinar participants, number of products sold, etc.
Lagging KPIs are the exact opposite of major KPIs in that they represent a value taken from the past. This type of KPI allows you to take action to improve that specific metric.
Examples: total turnover, cost per product produced, etc.
Input indicators are those that quantify the resources required to accomplish a particular task. People often use it to allocate funds or personnel for a business operation.
Examples: Cost to create a product, personnel needed for a marketing campaign, etc.
An output indicator tracks the result of an activity. It can be useful in assessing whether an operation is successful or unsuccessful, and it can be quantitative or qualitative.
Examples: Products manufactured, customers obtained from a marketing campaign, etc.
Note that a specific KPI can belong to more than one category. For example, you can think of cost per customer as both a quantitative indicator and an entry indicator. It is a numeric value and represents the resources required to accomplish a task.
This can complicate matters, but choosing the right type of KPI for the business function is a critical step in the process. Remember that you are more likely to miss out on opportunities if you only focus on one type rather than others. If you just focus on numbers, for example, you might miss out on anecdotal comments, and the same goes for other types of KPIs.
Now you might be asking yourself “Why would you want to track these types of data in the first place?” “
The importance of KPIs for a business
KPIs can be a given, but it can be quite difficult or even expensive to measure a particular KPI. In addition, it takes time to train your employees in the use of KPIs. As such, not all business owners track these types of data.
However, KPIs are of tremendous importance to a business and can be beneficial in many ways. Here are a few examples of these benefits:
- It allows you to find a role model that can help you with your goals
- You can make adjustments to your plans
- An increase in KPIs can boost employee morale
- You can monitor the health of the business
- KPIs can help you establish business goals
- You can manage your finances more efficiently
How to define or propose KPIs?
One of the most popular tactics when it comes to KPIs is SMART criteria. It consists of five goals that you should follow when creating KPIs. These objectives include the following:
Rather than creating a KPI to measure the overall health of the business, such as total revenue, it is much more crucial to be precise when defining and measuring KPIs.
Note that not all KPIs are easy to measure. Some may require an advanced tool, which can get expensive. The easier it is to measure, the better the KPI.
When you attach a goal to a KPI, you need to make sure that it is achievable. For example, rather than going for a 2% customer churn rate, it might be better to settle for a more realistic number, like 7.5%. By doing so, you can easily achieve this goal without exhausting your employees or exhausting your funds due to its utter impossibility.
Because of the promised benefits of defining and measuring KPIs, many business owners tend to define KPIs without giving much thought to how they will affect the business.
As a result, they often define KPIs that are unrelated and unnecessary to their original purpose. If you want to create the perfect KPIs, make sure they are genuinely relevant.
This criterion answers the question “When will you reach the objective of your KPIs?” If it takes too long, you could say it’s not the perfect KPI.
In addition to these five, some experts add two other criteria, namely Explicable and Relative. Explicable means that your employees can easily understand the KPI; Relative refers to the correctness of the KPI’s format (e.g., percentage, integer, etc.) relative to its function.
Once your KPIs are ready and defined, all you have to do is follow them constantly. Unfortunately, it can also be difficult, but it shouldn’t be impossible.
How to monitor and measure your KPIs?
It can be a bit tricky, but it’s entirely possible to track and measure your KPIs for business purposes without too much hassle, especially with the right strategy.
If you are running a small business, it should be possible to track and measure KPIs manually by reviewing the reports yourself. But, as you can imagine, it can take a while. If you don’t have a lot of time for manual work, it may be better to use a tool to help you with this business process. Hope this will make things easier for you and your employees.
Ideally, you need analysis and reporting software. These tools collect data and present it in the form of a graph or table to make it easier to examine and analyze the data. Google Analytics is the perfect example of such tools, but there are many others that may better suit your goals. Nevertheless, a tool would most certainly help to measure KPIs.
Despite its ubiquity in the business world, only a few people have a deep understanding of KPIs, while the rest have just a general idea. Unfortunately, if you want to take your business strategy to the next level, KPIs will be an essential part of your plan. Therefore, a guide like this should be of great help, especially if you are not exactly the most knowledgeable on this subject.
- “8 Sales and Marketing KPIs to Follow”, Source: https://www.formstack.com/resources/blog-sales-marketing-kpis-to-track
- “Why you should use qualitative and quantitative KPIs to grow your business (+ examples)”, Source: https://www.brightgauge.com/blog/quick-guide-to-11-types-of-kpis
- âWhy are KPIs important? The importance of KPIs and how to choose them. “, Source: https://www.rhythmsystems.com/blog/5-reasons-why-you-need-kpis-infographic
- “THE IMPORTANCE OF CONFIGURING INTELLIGENT KPIS”, Source: https://www.trindent.com/importance-setting-smart-kpis
- “Key performance indicators (KPI)”, Source: https://corporatefinanceinstitute.com/resources/knowledge/finance/key-performance-indicators-kpis/