Why Your Business Needs Key Performance Indicators

If you have a business of any kind, you need to know about Key Performance Indicators (KPIs).

Creating and measuring KPIs is how you track and measure improvements in your business. Like any initiative, you need to have goals and put plans in place to achieve those goals. KPIs will set those goals and measure progress toward those goals.

So let’s look at everything you need to know about KPIs.

What is a KPI?

A KPI is a form of performance measurement that evaluates the success of your business, a particular business product or activity, or even an employee.

The Oxford Dictionary defines a KPI as: “A quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.”

Let’s use an example to help with our discussion of KPIs. Let’s say you own an online shoe company. KPIs will help you determine whether your business is successful and improving, or whether you need to take steps to improve.

Your overall business KPI might be year-over-year profit. You may have KPIs related to specific products, such as growth in sales for a particular line of shoes. Or you may have a KPI focused on customer satisfaction.

Success could be making progress toward a goal, such as a certain percentage increase in profits year over year. It could also mean consistent achievement of a goal, like 5/5 in customer satisfaction surveys each month.

If you have a large organization, there may be KPIs for various parts of the business, like sales, the email marketing branch, etc.

What Makes KPIs Effective?

KPIs need to be related to a specific business outcome that has a performance measure. They aren’t the same as business metrics, which measure different components of business activity at certain points in time.

KPIs represent strategic objectives and then measure performance towards those objectives. KPIs are indeed metrics; not all metrics are KPIs.

To be effective, KPIs need to be “SMART”:

  1. Specific: A KPI should be simple enough to measure and calculate, and to understand and communicate. Don’t have too many KPIs or you’ll be overwhelmed with information.
  2. Measurable: A KPI isn’t always a number, but it still must be measurable.
  3. Actionable: A KPI needs to answer a question that results in an action; or provide direction for decision-making.
  4. Relevant: The measurement needs to have relevance to your business goals.
  5. Timely: Information needs to be gathered in a timely manner to allow for action. If it’s annual profit, it can be gathered annually. But customer satisfaction should be measured more frequently, to take action if problems arise.

Another example for your online shoe store is conversion rate. The goal is to have customers visit your site and make a purchase. So you can use website metrics to track who makes purchases, and divide that by the number of visitors to the site to get a conversion rate.

KPIs can either measure current and future activity, known as drivers, or measure output of past activity, known as outcomes. Year-over-year profit would be a driver, measuring current and future activity. Conversion rate and customer satisfaction would be outcomes, or measures of a past activity.

Why Your Business Needs KPIs

Whatever the size of your business, you need KPIs. That’s because setting goals and measuring performance is your guide to achieving results that matter to the business. They also provide an objective gauge as to the success of the business.

While gut feeling, experience and knowledge can all be important, the objectivity of numbers will tell the full story of the success of the business.

KPIs will also help track change over time, whether that’s improvement or causes for concern. They can also provide a view across several areas of the business.

KPIs inform decisions and ensure that the business objectives are front-of-mind when it comes to decision-making.

In our example, customer satisfaction questions can be related to specific interactions customers have with your business. Ask customers how satisfied they were with the sales process on your website. If the results are consistently low, the structure of your website needs to be improved. This KPI relates to your business objective and informs decision-making. Action can be taken based on the results.

If your organization is large enough to have employees, KPIs can help them understand the goals of the business and what part they play in its success. Employees may even have KPIs for which they are responsible, giving them a purpose and providing them with satisfaction.

How to Create KPIs

KPIs need to be aligned with your business strategy and need to define a clear objective. In other words, they articulate what your business is trying to accomplish, and the most important goals of the business.

It’s also important to assess the current state of the business, to understand where improvement is needed and to measure that improvement.

Here’s an example:

One of your goals as a business is increased sales year-over-year. To achieve that, a high conversion rate is an important measure of effective sales.

So, you establish a KPI to achieve a 30% conversion rate. A measurement is done of current state. If conversion is lower than 30%, changes can be made to the website sales process; you can launch an email marketing campaign; you can do a social media campaign.

Then you can measure conversion rate monthly to monitor changes.

KPIs are not just arbitrary and they aren’t just measured for the sake of measuring. They are aligned with the strategy of the business.

How to Define and Implement KPIs

Determining the right KPIs is not the same for every business, but there are factors to consider when defining them:

  • Choose KPIs that directly align with your business strategy.
  • Choose just a few KPIs to start, to allow for focus on your most important goals.
  • Consider the stage of your business. If you’re just starting out, getting visitors to your site may be the initial goal, before focusing on conversion. If your business is mature, customer retention may be the goal.
  • Make sure the KPI is actually measuring progress to the goals of the business. If the goal is increased sales, simply measuring website visitors won’t show whether that’s being achieved.
  • Ensure the KPI can inform decision-making, or is actionable.

Depending on the size of your organization, your KPIs can be defined with the leadership team, with stakeholders, or with employees. Or, consider getting input before finalizing the KPIs.

Then it’s vital that you evaluate and refine KPIs. They aren’t static and need to be assessed to ensure they’re still relevant to the business. Goals may need to be adjusted, or KPIs may need to be added or deleted.

For instance, if you greatly exceed your target for conversion rate, is it because it was set too low? Or are there other factors that played into the results, like a holiday shopping season.

Adding Orchestrated KPIs (OKPIs)

KPIs support the decision-making of the business in two ways:

  • By providing information to predict results, known as predictive analytics.
  • By recommending future actions or decisions, known as prescriptive analytics.

But this kind of information and decision-making, while valuable, can occur in silos within organizations.

That’s where OKPIs come in.

Orchestrated KPIs form a top layer above the KPIs of each individual facet of the business, bringing a unified look at the entire organization. In this way, results and actions are clarified and understood across the organization. The sales team isn’t separate from the email marketing team and the customer service team.

Using OKPIs, the entire organization understands overall success and not just the success of their own area. KPIs within each area of the business are then defined based on the goals of the entire company.

In our example, year-over-year sales growth would be an OKPI. The email marketing team would have targets for their campaigns. The sales team would set targets for year-over-year improvements in certain shoe lines. The customer service team would have targets for customer satisfaction.

But layered over those KPIs is the OKPI measuring year-over-year sales growth.

Final Thoughts

It’s important for any business to have a clear strategy, with achievable and measurable goals.

KPIs will help you establish goals, and measure performance to achieving those goals. They can also provide a path to performance improvement, inform decisions, and ensure the entire organization understands the goals of the business.

Our guide is the key to helping you understand why you need KPIs and how to implement them.