Running a successful business doesn’t rely on how good your product or service is. Instead, it comes down to how well you are able to set goals as well as to measure and optimize processes to achieve the wanted results.
After all, if you can’t measure something, you can’t improve it either.
That’s why metrics are important, and in the modern business world, that’s where KPIs come in.
KPI stands for Key Performance Indicators, and it’s a universally acknowledged way of measuring the success of a business.
Bernard Marr, the author of Big Data, defines KPIs as “... a way of measuring how well we as individuals or how well entire companies or business units are performing. A KPI should help us to understand how well a company, business unit or individual is performing compared to their goals and objectives.”
In that sense, anything you can measure is a metric - the amount of time a visitor spends on your website or the revenue your site makes for the company.
That can also be the bounce rate for a specific website page (that one page that made visitors leave your website). Or the number of times a certain word appears on said page.
You can also measure your employees’ productivity at work and home via specialized remote employee monitoring tools.
There are a multitude of these metrics, so it’s a challenge to find those best suited to your business.
Yes, it’s important to gather data, but how to do that without ending up buried in information you have no way of interpreting and using for making strategic decisions?
You need to create a precise set of goals you want to achieve and ways to measure the progress. That way, they will act as a compass guiding all company efforts in a set direction.
What Makes a Metric a KPI
You can measure all sorts of things, but just because you can, that doesn’t mean you should.
Some numbers just don’t add any value when making business decisions. Therefore, before you start tracking anything and everything, you should think about what you need the information for.
- What don’t we know about our business efforts?
- What decisions will be triggered if we start measuring something?
- What do we do if the numbers are too low or too high?
If you can’t answer these questions, then you probably don’t need to track particular metrics or aren’t ready to do so.
All KPIs are metrics, but not all metrics can be Key Performance Indicators.
In order for a metric to qualify as a KPI, it needs to fulfill these 3 conditions.
It needs to be KEY for decision making.
If you sell products, then the number and value of sales are relevant metrics for your company. You can also track the number of visitors on your website, but unless they are also buyers, they don’t really do anything for you, so you have no use of the metric.
It needs to measure PERFORMANCE.
Knowing how many times a certain word appears on the website page you are monitoring tells you nothing about how your business is doing. However, being informed that you’ve had a $2000-worth sale last week does, but that doesn’t necessarily make it a relevant KPI.
It needs to be an INDICATOR of a future trend.
Last week’s number of sales tells you nothing about the future, so that’s not really a KPI. A metric that is also able to give you a warning about changing course in due time is, however, KPI material.
That is why KPIs are more valuable than other metrics you might decide to track.
How to Create KPIs
One example of how you can successfully define KPIs is by following the SMART method.
Specific: Formulate a KPI so it’s as specific as possible. The more clearly defined a metric is the easier it will be to track and know when you’ve reached it.
Measurable: Make the KPI quantifiably measurable - set it to be the number of sales leads gathered, pairs of shoes made, hours spent monitoring employee computer use.
Achievable: The number you want to track also needs to be achievable. An unrealistic goal will demotivate your employees while setting the bar too low will probably end up being pointless to measure.
Relevant: If it’s in no way connected to what you ultimately want to achieve, why bother measuring a KPI? Keep it relevant to your goals.
Timely: You can set your KPIs to have any time constraint you want as long as it serves your goals. Ultimately, it’s important to set some sort of deadline for each or you risk it never actually being achieved.
By following these guidelines for formulating KPIs, the end result should be a specific, quantifiable metric that is relevant to your business goals and achievable in the set time frame.
What Types of KPIs Are Most Tracked
There are four types of Key Performance Indicators that businesses usually track in order to get a complete picture of how they are doing.
Financial success is the ultimate goal of all businesses. Keeping a close eye on this means you’re making sure you’re sailing the boat in the right direction.
Whether you are worried about the ROI of your latest ad spending spree, or the performance of your profit margins, tracking financial KPIs is a good way to ensure meeting company’s financial goals.
Having a comprehensive marketing strategy is crucial for company success.
Marketing KPIs like social networking footprint, cost per lead, conversion rate, etc. are designed to give a clear picture of how your marketing dollars are spent and whether they are bringing you closer to actual sales at the rate you need.
Since satisfied customers are the backbone of a successful business, knowing what makes them tick can lead to more sales.
Tracking KPIs focused on customer relationships will provide information about customer satisfaction levels and customer retention rates. Organize a customer satisfaction survey every year to keep up with their views on your services and products. Additionally, make an effort to interview the leaving customers and get their feedback since it can help you improve your current operations.
When it comes to operational expenses, locating, screening, hiring, and training new employees can cost a lot, so it only makes sense to track their performance and productivity in the office once they are part of your team.
Tracking things like engagement levels and average revenue per employee can be done by means of employee monitoring software and can tell you how your employees’ performance influences the overall success of the company.
Best KPI Practices for Boosting Business Potential
Once you start measuring your KPIs, prompt action based on the gathered data is necessary for the uninterrupted company growth. Here are some of the ways you can use the data you get.
Use tools and software to measure.
Don’t be afraid to implement adequate technology that can help you measure KPIs in your company in the easiest and most effective way. Drowning in data is a thing of the past now that there are tools and software that can put all the information in context and make it easily digestible.
Make progress visible.
Celebrate the small wins just like you do the big ones. If a new way of doing things is showing positive results, sharing them with the team will provide better motivation and push people toward achieving bigger goals as well.
If it works, do more of it.
If some areas of your business are performing better than others, there is no reason to make any drastic changes there. If anything, you should find a way to boost the strategies they have implemented and spill them over to other sections of the company that need it.
Continuously monitoring company, team, and individual KPIs has become necessary for business advancement nowadays.
However, having too many or poorly defined KPIs is worse than having none at all.
Not only does it take focus away from actions that result in business growth, but it can also steer the company to failure in the long run.
Remember that once-set KPIs are not and shouldn’t be forever. They serve as the means for communicating the company mission and grabbing employee attention. Therefore, as your business goals grow and change, so must your KPIs be regularly revised and modified accordingly.
This article was originally written on June 7th, 2016 by Gina Ora. It was updated on June 9th, 2020 by Aleksandra Djordjevic.