What are Key Performance Indicators (KPI)?

Every business has a different standard of success. To align the organization with its objectives,  make your goals visible, measurable, and actionable by defining KPIs and KPI targets. Below, we discuss KPIs and how to make them work for your business. 

What is a key performance indicator?

KPI stands for “key performance indicator”. It is a quantifiable measurement that tracks progress toward a specific business objective over a set period of time. KPIs help businesses set goals (targets), monitor their achievement (milestones), and identify areas for improvement.

To benchmark progress, you set KPI targets. Organizations typically base their targets on one or more of the following:

• Competitor performance
• Past performance
• Pre-determined benchmarks 

KPIs provide targets to aim for, milestones to gauge progress, and insights to help guide data-driven decision-making. By monitoring KPIs, organizations can identify areas of strength and weakness and take actions to optimize performance.

What is the difference between a KPI and a business metric?

Business metrics are the units of measurement used in KPIs. All KPIs use business metrics, but not all business metrics become KPIs. You can designate a metric as a KPI if it is relevant to the organization's goals or the goals of its functions, processes, locations, and segments.

An example of a sales KPI would be the percentage of new inbound leads. You might use lower-level business metrics to measure the activities that contribute or are related to gaining leads, such as the number of unique visitors, views per page, or dwell time.

Types of KPIs

You can categorize a KPI within one or more of five types. A KPI’s type provides a general idea of its organizational purpose, time frame, and level within the business. 

Strategic 

Strategic KPIs are monitored at the executive level to measure the organization’s overall health. They track progress along organizational goals. Examples of strategic KPIs include total company revenue, market share, and profit margin. 

Operational 

In contrast to strategic KPIs, which evaluate the organization as a whole, operational KPIs measure the performance of specific organizational processes, locations, and segments. A key characteristic of the operational KPI is a focus on shorter timeframes, such as monthly or daily targets.

Operational KPIs typically serve larger-scale strategic KPIs. For example, if a company wanted to increase revenue growth, lower-level managers might analyze sales by region to determine which areas they can leverage or improve. 

Functional

Functional KPIs track progress across specific organizational functions, like finance, sales, marketing, or human resources. Finance teams would likely monitor KPIs like return on investment and profit margin, while HR would focus on employee satisfaction and retention.

You can classify functional KPIs as either strategic or operational. If a certain organizational function plays a crucial role in business strategy, you would draw your KPIs from that function. Revenue growth, for example, is a popular strategic KPI tied to financial functions.

Meanwhile, if a function contributes to short-term department goals, you can classify it as an operational KPI. Sales KPIs like monthly sales growth and product performance make for effective functional KPIs.

Lagging and leading KPIs

Another way to classify KPIs is by describing whether they measure the past or forecast the future. Lagging KPIs reflect past performance. You are meant to use this data to set realistic organizational objectives.

An example of a lagging KPI is monthly recurring revenue. You can use past performance or the performance of other companies to set a benchmark for future monthly recurring revenue targets.

In contrast with lagging KPIs, lagging KPIs aim to predict future performance. This data reflects how you will achieve your strategic objectives. Progress along a leading KPI correlates to success in achieving a lagging KPI.

For example, if you want to increase your monthly lead conversions, you would likely track daily page visits, unique visitors, and session duration. 

Benefits of KPIs

KPIs play a crucial role in business success. They align the team on a shared idea of progress to promote action and create accountability. 

Clarifies organizational progress

Without KPI targets, you would struggle to determine whether or not your organization is moving forward. KPI targets define a standard and measurement for organizational performance.

For example, an end-of-year revenue of $1,000,000 is meaningless without context. However, if you set a KPI target, such as a predetermined revenue or revenue growth goal, you can clarify what the number represents for your company.

An end-of-year revenue of $1,000,000 this year compared to an end-of-year revenue of $800,000 shows growth. However, an end-of-year revenue of $1,000,000 compared to a target revenue of $1,500,000 implies a miscalculation in projections or a mishandling of sales strategies. 

Guides strategic business decision-making

Adding visibility to the organization’s successes and failures within a defined objective makes it easier to identify what actions to take next.

For example, if you track revenue growth across two sales teams that implement different strategies, results will show which strategy was more effective. You can then apply that strategy to other sales channels. 

Aligns organization on a shared idea of success

KPI targets ensure that the entire team understands the organization’s definition of success. They push every organization member to move in the same direction rather than following varied, self-defined progress indicators. 

For instance, if you don’t set sales targets, your sales team might produce much lower results than your organization requires. 

Creates team accountability

KPIs give teams a benchmark for tracking their own performance. Knowing the organization’s standard helps them define benchmarks for the smaller goals that contribute to organizational objectives. A sales team, for example, can use the company’s revenue growth target to create sales targets for each member. 

Characteristics of an effective KPI

It’s crucial to ensure that your KPI can effectively guide business strategy. Effectiveness hinges on the following characteristics:

Business-aligned

A KPI and its target should be aligned with your business objectives. This ensures that your goals help the business rather than hurt them.

Increases in specific metrics don’t always contribute to business growth. For example, it is common for businesses to aim for increases in lead acquisition, but achieving this goal won’t make sense for a company that lacks the resources to support new customers. 

Relevant

Similarly, each KPI should be relevant to the function or team that owns it. KPIs like search engine rankings and customer acquisition cost should be assigned to the marketing team since they will better understand how to ideate tasks that impact progress. 

Simple

Your KPIs serve as a shared progress marker for the entire organization. For these markers to become effective, they must be easy to measure and understand. Members of your teams should easily understand how to influence the KPI to meet the target.

For example, “increase revenue by 20% this year” has a clear goal and target. Your team members will have an easier time determining how to create tasks and projects to impact the KPI, plus understanding how to relate the results to business goals.

Measurable

Avoid generalized questions when generating KPIs. A KPI called “improve customer relations” is vague because you lack an assigned metric for improvement. However, a KPI like “increase customer satisfaction” can be measured with surveys, net promoter scores, or customer effort scores.

While most KPIs are quantitative, some, such as customer satisfaction and employee engagement, can be qualitative. They can be measured using surveys or other feedback collection methods.

Qualitative KPIs, when used effectively, can drive more accurate business strategies, as they provide clear and actionable sentiments. Gathering customer feedback through surveys, for example, can help you gauge what customers feel about the product and what draws them to buy. 

Achievable

Setting unrealistic goals increases the chances of failure and burnout. Use past data to analyze your team's capacity with their available resources.

For example, to increase monthly sales, check past targets and increase them by a slight margin. If you can provide additional support, you can aim higher.

Timely

Effective KPIs are bound within optimized timeframes. Tracking KPIs too infrequently might make it difficult for you to identify trends.

For example, tracking lead conversions per year might not give you an accurate picture of your campaigns' effectiveness.

Meanwhile, tracking too frequently might waste time and resources, especially when there are few changes per report.

Visible

Ensuring that everyone in the organization has access to your KPI results increases accountability across teams. It also shows each member whether their efforts bear fruit, allowing them to strategize better and execute further actions.

Visibility helps both strategic and operational KPIs. Operational KPIs add clarity to the progress of specific business endeavors.

Meanwhile, strategic KPIs help teams see whether collective endeavors work. Profit-related KPIs, for instance, can reveal whether the organization is consuming too many resources or if revenue-generating activities are effective. 

How to define a KPI

Defining a KPI requires incorporating the above characteristics while ensuring systems are in place to track progress. The table below and subsequent discussion outline the process of defining a KPI.

Identify the desired outcome

What is your desired outcome? Define the strategic objective your KPI will measure. Start by identifying what your business currently needs. You may also set targets for business performance or growth.

Set a timeframe for your goal so the team has a reference for mapping out their strategy. This typically depends on how often you intend to track the KPI. Leading metrics are tracked more frequently because changes within small timeframes help map out trends.

Meanwhile, lagging metrics are tracked less regularly because it takes longer for significant changes to occur.

For example, if you want to expand your business, revenue growth is a good KPI for tracking progress. Naturally, revenue growth shows that your product or service attracts and retains customers. 

Establish the outcome’s relevance to business 

Why does this outcome matter? Identify how meeting your KPI goals contributes to the well-being and growth of your business. Growing revenue, for example, will increase your business’s profitability.

You can use excess revenue to fund additional revenue-generating activities or invest in upgrades that streamline operations. 

Set unit of measurement

How will you measure progress? If the KPI is quantifiable, this step is straightforward: simply identify the unit of measurement that aligns with your KPI. A revenue growth KPI would simply be measured in dollars. 

If your KPI is qualitative, identify an effective method of data collection and craft questions that will help you collect relevant sentiments. Say your goal in gauging employee engagement is understanding what keeps employees engaged, learn to ask questions about common motivators, such as management, work-life balance, and pay and benefits. 

Determine how to influence the outcome

How can you influence the outcome? Identify the actions that can bring your KPI to its target. It’s easy to do this with operational KPIs — they are typically attached to specific day-to-day operations. However, with strategic KPIs, you need to identify the organizational functions that can add impact.

How to increase revenue growth, for example, isn’t clear-cut. You can increase sales targets, but you can also get more specific and attract potential customers through lead conversion campaigns. 

Assign KPI owner

Who is responsible for the business outcome? Assign a KPI owner who can effectively build business strategies from regular progress monitoring. Operational KPIs typically fall under the responsibility of managers heading specific business endeavors, while strategic KPIs are the responsibility of executives.

The best KPI owner for a revenue growth KPI is the Sales Lead. This individual will have the most valuable insights for generating revenue. 

Determine KPI review frequency

How often will you review progress toward the outcome? Whether your KPI is leading or lagging, you must review your performance. Leading KPIs require regular review because they are tracked to map out patterns and trends. Tracking lagging KPIs semi-regularly also helps to check progress within the designated timeframe.

If you aim to increase revenue by the end of the year, tracking monthly will help guide your strategy. You can try different strategies per month and compare monthly performance to determine what works. 

KPI examples

Different departments track different KPIs to gauge progress. Below, we’ve listed a few of the most common KPI examples per business function. 

Marketing KPI examples

Return on marketing investment (ROMI)

ROMI compares marketing campaign costs against subsequently generated revenue to calculate the effectiveness of your marketing campaigns. Analyzing ROMI shows which marketing activities work, allowing for efficient marketing resource allocation. 

Click-through rate

The click-through rate compares total ad or page viewers against the total number of clicks for a designated link. It helps measure the effectiveness of ad or content campaigns in capturing attention. 

Lead conversion rate

The lead conversion rate measures the number of leads that become paying customers.  For example, this could be website visits against the number of visitors who executed a desired action, such as a purchase or newsletter sign-up. It gauges the effectiveness of your marketing efforts. 

Average time on page

This KPI tracks the average time a visitor spends on your website. Measuring average time on page helps you determine your website's effectiveness and the likelihood of converting visitors to customers. 

Social media reach

Social media reach tracks the number of viewers per social media post. Higher reach increases opportunities for engagement and conversion. 

Net promoter score (NPS)

The net promoter score asks customers to rate their likelihood of recommending the organization’s product or service. It helps gauge the potential for gaining new leads. 

Website traffic by source

Website traffic by source tracks where your visitors come from. It helps you determine which channels to engage to attract more leads. 

Sales and retail KPI examples

Revenue

Revenue is one of the most common KPIs for sales. It refers to the income gained from selling goods and services. 

Sales Growth Rate

The sales growth rate tracks how much your sales increase over a specific timeframe. Understanding sales growth rates helps you set realistic revenue or sales targets. 

Average sales cycle length

The average sales cycle length tracks how long leads transition from initial contact to final sale. Tracking average sales cycle length helps forecast cash flow and identify potential areas for improvement in sales processes. 

Sales pipeline value

Your sales value estimates the total value the organization can earn from leads and opportunities in the sales pipeline. Because this KPI helps you predict how much you’ll earn in the future, you can use it for more accurate resource allocation. 

Customer retention rate

The customer retention rate tracks the number of existing customers who continue purchasing your products and services. It can help predict revenue or sales growth. 

Customer satisfaction score (CSAT)

The CSAT uses surveys and other feedback collection tools to determine how happy a customer is with a product, service, or company. It helps predict future customer retention. 

Operations KPI examples

Return on investment (ROI)

ROI measures profit against the cost of a particular investment. It helps you determine the success of an investment. 

Overall equipment effectiveness (OEE)

OEE uses your machinery's availability, performance, and quality metrics to measure effectiveness and efficiency. It can help you determine where to allocate resources for upgrades or fixes. 

Capacity utilization

Capacity utilization measures the extent to which you maximize your full production potential. Tracking capacity utilization shows how much you can increase production without incurring additional costs. 

Labor productivity

The labor productivity KPI tracks the output produced per hour of labor. It helps you determine whether labor processes need refinement to improve efficiency. 

Cost of goods sold (COGS)

COGS refers to the sum of all direct costs involved in producing a sold product. Analyzing what adds to COGS helps you reduce production costs and increase profitability. 

Days in inventory

Days in inventory track the average number of days an organization keeps inventory before it is sold. It helps you track when cash will flow into the business. 

Inventory turnover

Inventory turnover measures the rate you sell, use, or replace stock. It helps gauge sales performance and inventory management effectiveness. 

Human resources KPI examples

Employee engagement index

Keeping employees engaged ensures they are motivated to work and stay with the organization. You can measure employee engagement through surveys or other feedback 

Employee satisfaction index

Employee satisfaction increases the likelihood of employees staying with the organization or promoting it to potential hires. Like employee engagement, it is tracked through surveys and feedback, allowing employees to rate their satisfaction in aspects like work-life balance, benefits, and management. 

Employee turnover rate

Employee turnover rate measures how many employees exit the company within a given timeframe. It is used to track any patterns in turnover causes.

Project completion rate

The project completion rate tracks the rate at which tasks and projects are completed. It helps identify bottlenecks or inefficient processes.

Time to hire

Time to hire measures the length of a hiring process from application to offer acceptance. It is used to identify inefficiencies in the hiring process for reduced downtime and increased candidate satisfaction. 

Percentage of cost of the workforce

This KPI measures the cost of the workforce, including compensation packages, training, and support, against the total costs the company incurs. It helps HR teams contextualize the cost of adding benefits or automating gaps in the organization.

Quality of hire

The quality to hire counts the number of new hires who received good ratings in performance reviews. It reveals HR’s effectiveness at finding quality candidates.

Project management KPI examples

Scope creep

Scope creep monitors uncontrolled growth in a project’s scope. Typically, these changes exceed the available resources and time frame. This KPI helps identify problematic changes and keep projects on track.

Change requests

This KPI tracks the number of requested changes in a project. Staying on top of change requests can prepare you to add necessary resources, set realistic deadlines, and inform stakeholders, thus avoiding scope creep.

Risk exposure

This KPI tracks the cost or impact of potential project risks. It helps project managers craft mitigation strategies.

On-time completion rate

This KPI measures total tasks against tasks completed within schedule. Tracking on-time completion rates help you identify inefficiencies or set timeline goals more realistically.

Team productivity

Team productivity measures output per team member within a set development period. Tracking this data helps project managers build realistic timelines for future endeavors and identify necessary improvements for effective team management.

Stakeholder satisfaction

The stakeholder satisfaction KPI uses surveys to ask clients, investors, team members, and other stakeholders to rate their satisfaction with the project's output. This measures project success and allows project managers to identify which strategies to carry forward in future endeavors.

Project health

The project health metric tracks schedule, budget, scope, and quality to evaluate the performance of a project against its defined timeline and goals. It helps project managers identify inefficiencies and communicate progress to stakeholders.

The limitations of KPIs

Ultimately, KPIs are a tool for gauging progress. Unwise use of this tool may hinder your business more than help it. Below are a few common limitations of KPIs.

Lack of agility

KPIs are arbitrary metrics that represent business goals. However, goals can change over time under evolving circumstances. Sticking to KPIs instead of adapting goals to new realities can set your business back.

For example, you want to focus on acquiring new customers. However, your equipment takes a hit, forcing you to scale back on operations. Under reduced capacity, you will struggle to accommodate the new customers your KPI wants to attract.

Demotivation

Demotivation most often occurs when the organization sets unattainable KPI targets. Employees work without seeing progress, leading to burnout. Reduced motivation then diminishes productivity and work quality.

Misses smaller wins

KPIs might also fail to account for smaller wins. Progress not officially measured is still progress, but the employee does not get recognition because it does not fall under a KPI. It’s helpful to have systems in place to reward work that is impactful despite not affecting KPIs.

Information overload

It’s important to stick to the KPIs that align with your organization’s needs. Otherwise, you might waste resources and labor tracking numbers that don’t matter.

Additionally, many KPIs require deeper analysis to become effective. Tracking employee turnover, for example, only tells you how many people leave, but the real work is in understanding why.

Create a customized KPI dashboard with Klipfolio

Track KPIs in real time with Klipfolio’s customizable KPI dashboards. Interactive charts and graphs visualize progress for the KPIs that matter most and gain insights for future business strategies.

Visit the Klipfolio Business Dashboard page for more information.