What are Key Performance Indicators (KPIs)?

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Definition:

Key performance indicators (KPIs) are a series of benchmarks that companies use to determine how effective they’ve been at meeting their goals.

🤔 Understanding KPIs

When a company’s leadership sets objectives for the firm, they also identify specific key performance indicators (KPIs) that they’ll measure to evaluate their progress. A company might set quantitative goals, such as a particular level of revenue. It also might set qualitative goals, such as employee satisfaction. KPIs are often financial indicators. The KPIs that a company chooses to measure will vary depending on where the company is in its growth and what its goals are. Firms might establish company-wide KPIs or low-level KPIs to measure the success of specific departments, teams, or projects. By continually tracking their KPIs, companies can ensure they’re on the right track and change direction if they find that they’re falling behind.

Example

Suppose an online software company is establishing new goals for its customer service department. The company has gotten complaints about its customer service and wants to turn things around. The company creates a short survey for customers to take after interacting with a customer service representative. The company’s objective is to achieve a particular number of four- and five-star reviews, while keeping their lower reviews to a minimum. In this case, the number of ratings of each star is the KPI the company measures.

Over the next several months, the customer service manager regularly checks in with the results of their customer surveys. By doing this, they can identify whether they’re meeting their customer’s needs. Based on the results, the firm might decide it needs to ramp up its training program or create incentives for representatives who receive good reviews.

Takeaway

Measuring key performance indicators is like updating your budget…

If you find yourself spending too much money every month, you might establish a budget to help you stay on track. Every week, you update your budget to make sure you aren’t spending too much. If you’re going over budget, you know it’s time to cut back. Similarly, the right KPIs help businesses determine if they’re on the right track with meeting their business goals. If they’re falling short, they know it’s time to do something differently.

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Tell me more…

What are key performance indicators (KPIs)?

Key performance indicators (KPIs) are measurements that companies use to determine the progress they’re making toward their strategic goals. A company might identify overall KPIs to measure results such as net profit margin or increase in total revenue from the previous year. A company could also use KPIs to measure the success of a single department, team, or project. For example, an indicator a company might look at is the conversion rate of the latest campaign from the firm’s marketing department.

What are the types of KPIs?

Depending on what kinds of goals you’re setting for your company, there are different types of key performance indicators (KPIs) you might use to measure your results. Let’s talk about some of the different types of KPIs a company might measure.

Qualitative vs. quantitative

One approach to KPIs is to measure either quantitative or qualitative data. Quantitative KPIs measure concrete data. Examples of this type of KPI might include the number of sales per day or the number of customer service calls fielded per hour.

Qualitative KPIs, on the other hand, don’t necessarily measure data but personal traits and perceptions. For example, a qualitative KPI might be the satisfaction a customer has with the customer service department.

Leading vs. lagging

The difference between leading and lagging KPIs is that one is the cause of the result, and one is the effect. For example, suppose you’re measuring the success of a particular marketing campaign. The marketing budget spent on the campaign might be a leading KPI, as it’s likely to impact the outcome directly. The company’s annual revenue might be a lagging KPI for the marketing campaign, as it’s a direct result of it.

Efficiency vs effectiveness

Effectiveness is a KPI that refers to the results that a company is getting. Efficiency is a KPI that measures how quickly or cheaply it’s getting those results. For example, a measure of effectiveness might be how many orders a company gets. A measure of efficiency could be how many of those orders the team can process per day.

Input, process, output, and outcome

Input, process, output, and outcome are four measures of business performance that all build off one another. Suppose you’re measuring the success of a company’s sales department.

You’d start with an input KPI, which is a measure of the resources you’re devoting to a particular project or task. In this case, the input KPI might refer to the number of salespeople.

Next, you’d look at the process KPI. This KPI tracks the activities of those resources. In our example, the process KPI might be how many sales calls the team can make on a particular day.

Next, let’s take a look at the output KPI. This indicator measures the results of your inputs and processes. In the case of our sales department, the output KPI might be the number of sales calls that result in sales.

Finally, the company would measure its outcomes. Outcome KPIs refer to the actual results of a project. In our sales department example, the outcome KPI might be the profits that come as a result of those sales calls.

Strategic vs. operational

Strategic and operational KPIs look at the big-picture and small-picture of a company’s progress, respectively. The two go hand-in-hand. The progress of the operational KPIs makes or breaks your strategic KPIs. For example, a strategic KPI might be your company’s profit margin. An operational KPI that you’d measure to get there could be the cost of goods sold, meaning how much it costs to make each product you put out. The less it costs you to make something, the higher your profit margins on that item, assuming you sell it for the same price.

What are the most important KPIs?

The most important key performance indicators (KPIs) for your business are those which measure your progress toward meeting your goals. The most important KPIs will be different for every company.

Presumably, the most important KPIs for any company will be those that measure the overall growth of the company. But those aren’t the only ones to look at. Another way to approach KPIs is to look at those which measure how successful your company is at moving new customers through your sales funnel. A few examples might include:

  • What percent of website visitors become leads
  • What percent of leads become sales
  • What percent of customers become repeat customers

What is the difference between KPIs and metrics?

Key performance indicators (KPIs) and metrics both refer to data that a business might track. Metrics can measure any piece of data within a company, such as the number of sales, the number of employees, or the total annual expenses. As long as you can measure it, it’s a metric. KPIs, on the other hand, measure data as a means to determine if the company is meeting or making progress on its goals.

Often KPIs are made up of several individual key metrics. For example, suppose one of your business objectives for the year was to increase profit margins from last year’s. To successfully measure whether your business has achieved this, you’d have to look at the following metrics:

  • Last year’s profit
  • Last year’s expenses
  • This year’s profit
  • This year’s expenses

There are lots of metrics that companies could measure. But like in our profit margin example, only those that directly relate to a company’s objectives are taken into account when measuring KPIs.

What makes a KPI effective?

There are a few characteristics that any key performance indicator (KPI) should have to be a useful measure of progress. First, the indicators you use should be relevant to the goals you’ve set. If your goal is to increase the conversion rate of your sales team, only measure indicators that directly relate to that goal. If your goal is to increase your sales conversions, the transportation costs to deliver a product aren’t relevant.

Next, make sure the indicators that you’re measuring compare change over a certain timeframe. Rather than just measuring revenue, compare the revenue for a particular quarter to the revenue of the same quarter from the previous year. Otherwise, you’re measuring your KPI with no context behind it.

Next, a good KPI is one that is measurable. Suppose your goal is to increase the quality of your customer support. Customer service isn’t an inherently data-driven goal. Instead, you could implement a customer-satisfaction survey that individuals take after speaking with a customer service representative. That way, you have numerical results to measure and compare.

Finally, make sure you’ve used both leading and lagging KPIs to measure your progress. Lagging indicators often measure the numbers that companies care most about such as revenue and profit. But measuring the leading indicators can help create some context for those results. It’s easy to say that your company didn’t meet its goal because sales went down. But if you measure the right leading indicators, you might see that the reduction in sales was a direct result of the fact that you cut the budget of your sales department.

How do you use KPIs?

To use key performance indicators (KPIs) successfully in your business, you’ll have to follow a few steps.

First, make sure you have clear objectives for your business. If you don’t know where you’re hoping to end up, it’s impossible to measure whether you’ve arrived. A practical goal should be measurable. Don’t say you want to grow your company — Say you want to grow your company by a particular percent.

Next, make sure that the KPIs you choose to measure are directly related to the goal you’ve set for your company. It might be tempting to measure all sorts of KPIs for your business, but they’re only useful if they measure the success of your goal.

Once your KPI is set, it’s time to measure. Depending on your KPI, you can track your results on a daily, weekly, monthly, quarterly, or annual basis.

Finally, make sure you know what your KPIs are telling you. More importantly, adapt your business process based on the performance measurements you’re seeing. This step is why it’s critical to use both leading and lagging KPIs. A lagging KPI can tell you that something needs to change. A leading KPI can tell you what specifically needs to change.

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New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

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© 2022 Robinhood. All rights reserved.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC (member SIPC), is a registered broker dealer. Robinhood Securities, LLC (member SIPC), provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

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© 2022 Robinhood. All rights reserved.