What does KPI mean in business?
In the business world, KPIs are quantifiable measurements that help businesses assess the efficacy of their operations and strategic plans. KPIs are specific to departments, companies and industries. Each metric measures a specific component that contributes to the business’ success, such as sales, the number of hours employees are working, or speed to market.
KPI reports can help companies understand how the business performs overall and which factors contribute to success. For example, if speed to market and sales are both increasing, a business owner may conclude that a quicker speed to market also boosts sales. Some examples of KPIs for various segments include:
- Sales: Measuring profit margins, unit sales and the number of new customers can quantify performance.
- IT: Calculating web processing speeds, the number of clicks per page and the efficacy of cybersecurity protocols can demonstrate IT effectiveness.
- Marketing: Analyzing daily web page views, ad click conversion rates and traffic resulting from media advertisements can indicate whether marketing strategies are persuasive for your target audience.
- Human resources (HR): Employee satisfaction, retention rates, time to hire and cost per hire are some KPIs that illustrate the efficiency of HR processes.
- Customer support: Call times, hold times and the number of phone calls vs. online customer chats are some ways to measure the efficiency of customer support.
Related: How to Grow Your Business
Types of KPIs
In addition to knowing what does KPI stand for, it helps to familiarize yourself with these common types of KPIs:
- Functional unit KPIs, which measure critical operational functions in an area such as IT or finance
- Leading KPIs, which project future outcomes based on available data
- Lagging KPIs, which provide data about events that have already occurred
- Operational KPIs, such as cost per acquisition, transit costs per month or sales by store, which measure short-term performance
- Strategic KPIs, such as market share, revenue and return on investment, which track progress toward big-picture goals
Across these categories, whether a KPI tracks short- or long-term progress, it must connect directly to a specific organizational goal. Balancing lagging and leading KPIs creates a more comprehensive picture.
KPIs vs. metrics: What’s the difference?
Many people use the terms metric and KPI interchangeably. While both phrases refer to data that helps your organization measure progress toward goals, KPI metrics specifically link to the most critical business objectives that drive the growth and success of your business. You could say that KPIs are the most important of the many metrics you rely on during daily operations. Larger organizations may have department-level KPIs in addition to business-level KPIs.
The benefits of KPIs
KPIs track trends over time. They also analyze factors that a business can control, so measurements should be precise to reveal the most useful insights. Three benefits of KPIs are:
- Targeted efficiency analysis
- Focused goals and strategies
- Increased business growth
1. Targeted efficiency analysis
KPIs accurately capture performance metrics for individual departments and processes. Because each business segment is unique, managers must identify and evaluate the most beneficial elements. After establishing metrics, KPIs must be regularly reviewed and adjusted continually to align with business needs.
2. Focused goals and strategies
You can generate effective KPIs from balanced reports of the entire business. A detailed business strategy helps managers develop KPIs that target specific areas such as financial metrics, personnel efforts and customer service response times.
3. Increased business growth
Regular reviews of KPI reports can help you quickly measure the effectiveness of business strategies so you can adjust goals and processes to increase growth.
Questions to ask when developing KPIs
You can use a checklist of a few simple questions to write an effective KPI. Let’s look at an example of how to develop a detailed performance indicator from a general goal, such as “attract more customers.”
- What is the exact outcome you want to achieve? Define a specific objective related to your overarching goal, such as “increase sales by 10% in Q3 of 2020.”
- Why is this outcome important? In this case, more sales results in more profit, which supports the health and growth of the business.
- Who “owns” this KPI? The answer could be an individual, small team or department responsible for delegating responsibilities, tracking task completion and updating stakeholders.
- How will we measure progress? For this example, you would calculate the total desired increase and check in each week to see how far the team has come.
- How will we achieve the outcome? In this section, list the action items to facilitate success with this KPI.
Top KPI tips
Try these tips to use KPIs effectively:
- KPIs must be specific, quantifiable and appropriate for indicating performance over time.
- SMART goals are ideal for developing KPIs. The acronym SMART stands for specific, measurable, achievable, relevant and time-based. Use this framework to write effective KPIs.
- Inevitably, businesses change and objectives evolve over time. If KPIs become irrelevant, you should adjust them.
- A strong IT infrastructure and internal systems that communicate across platforms are needed. KPI systems pull information from across departments and compile it into readable performance charts.
- KPIs should be simple enough to provide value at all levels, enhancing transparency and motivating employees to excel. Provide education about data literacy to create a culture where everyone works toward these common goals and can track their progress.
- Avoid tracking too many KPIs, which can make it difficult to cut through the noise. Instead, focus on just two or three key measures for each department or team.
KPIs are often new projects for managers and businesses, so they commonly have questions. These are the answers to some of the most frequent inquiries.
How can I define a business KPI?
Individual departments use measurements to track specific goals. However, including these metrics may or may not add value to a business-level report. To determine which KPIs you should use, follow these steps:
- Specify your desired outcome and why it’s important to your business.
- Consider which KPIs measure your company’s progress.
- Establish metrics that allow you to see when the business has achieved desired outcomes.
- Determine how often you will review KPIs and progress toward your goal.
What is an example of a KPI?
Some common KPI examples include the number of new customers in a single month, the number of new email addresses gathered from an online campaign or the percentage of conversions among website visitors in a defined period.
What makes a good KPI?
An effective KPI should track a specific, quantifiable element of your business that relates to a defined objective in support of your organizational mission. Often, good KPIs illustrate how an element of performance has changed over time, offering objective evidence of success or emphasizing the need to switch to a new strategy. You can assess the efficacy of KPI metrics by determining whether the data you track actually informs better decisions.