What Are Key Performance Indicators (KPIs)?
Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company's strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.
- Key performance indicators (KPIs) measure a company's success versus a set of targets, objectives, or industry peers.
- KPIs can be financial, including net profit (or the bottom line, gross profit margin), revenues minus certain expenses, or the current ratio (liquidity and cash availability).
- Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention.
- Process-focused KPIs aim to measure and monitor operational performance across the organization.
- Generally speaking, businesses measure and track KPIs through business analytics software and reporting tools.
Key Performance Indicators (KPI)
Understanding Key Performance Indicators (KPIs)
Also referred to as key success indicators (KSIs), KPIs vary between companies and between industries, depending on performance criteria. For example, a software company striving to attain the fastest growth in its industry may consider year-over-year (YOY) revenue growth as its chief performance indicator. Contrarily, a retail chain might place more value on same-store sales, as the best KPI metric in which to gauge its growth.
At the heart of KPIs lies data collection, storage, cleaning, and synthesizing. The information may be financial or non-financial and may relate to any department across the company. The goal of KPIs is to communicate results succinctly to allow management to make more informed strategic decisions.
Key performance indicators (KPI) gauge a company's output against a set of targets, objectives, or industry peers.
Categories of KPIs
Most KPIs fall into four different categories with each category having its own characteristics, timeframe, and users.
Strategic KPIs are usually the most high-level. These types of KPIs may indicate how a company is doing, although it doesn't provide much information beyond a very high-level snapshot. Executives are most likely to use strategic KPIs, and examples of strategic KPIs include return on investment, profit margin, and total company revenue.
Operational KPIs are focused on a much tighter timeframe. These KPIs measure how a company is doing month-over-month (or even day-over-day) by analyzing different processes, segments, or geographical locations. These operational KPIs are often used by managing staff and are often used to analyze questions that are derived from analyzing strategic KPIs. For example, if an executive notices company-wide revenue has decreased, they may inquire as to which product lines are struggling.
Functional KPIs hone in on specific departments or functions within a company. For example, the finance department may keep track of how many new vendors they register within their accounting information system each month, while the marketing department measures how much clicks each e-mail distribution received. These types of KPIs may be strategic or operational but provide greatest value to one specific set of users.
Leading/Lagging KPIs describe the nature of the data being analyzed and whether it is signaling something to come or signaling that something has already occurred. Consider two different KPIs: the number of overtime hours worked and the profit margin for a flagship product. The number of overtime hours worked may be a leading KPI should the company begin to notice poorer manufacturing quality. Alternatively, profit margins are a result of operations and are considered a lagging indicator.
Types of KPIs
Key performance indicators tied to the financials typically focus on revenue and profit margins. Net profit, the most tried and true of profit-based measurements, represents the amount of revenue that remains, as profit for a given period, after accounting for all of the company's expenses, taxes, and interest payments for the same period.
Financial metrics may be drawn from a company's financial statements. However, internal management may find it more useful to analyze different numbers that are more specific to analyzing the problems or aspects of the company management wants to analyze. For example, a company may leverage variable costing to recalculate certain account balances for internal analysis only. Examples of financial KPIs include:
- Liquidity Ratios (i.e. current ratio which divides current assets by current liabilities): These types of KPIs measure how well a company will management short-term debt obligations based on the short-term assets it has on hand.
- Profitability Ratios (i.e net profit margin): These types of KPIs measure how well a company is performing in generating sales while keeping expenses low.
- Solvency Ratios (i.e. total debt to total assets ratio): These types of KPIs measure the long-term financial health of a company by measuring how well a company will be able to pay long-term debt.
- Turnover Ratios (i.e. inventory turnover): These types of KPIs measure how quickly a company is able to perform a certain task. For example, inventory turnover measure how quickly a company can convert an item from inventory to a sale. Companies strive to increase turnover of activity to generate faster churn of spending cash to later recover that cash through revenue.
Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention. These metrics are used by customer service teams to better understand the service that customers have been receiving. Examples of customer-centric metrics include:
- Number of New Ticket Requests: This KPI counts customer service requests measures how many new and open issues customer are having.
- Number of Resolved Tickets: This KPI counts the number of requests that have been successfully taken care of. By comparing the number of requests to the number of resolutions, a company can assess its success rate in getting through customer requests.
- Average Resolution Time: This KPI is the average amount of time needed to help a customer with an issue. Companies may choose to segment average resolution time across different requests (i.e. technical issue requests vs. new account requests).
- Average Response Time: This KPI is the average amount of time needed for a customer service agent to first connect with a customer after the customer has submit a request. Though the initial agent may not have the knowledge or expertise to provide a solution, a company may value decreasing the time a customer is waiting for any help.
- Top Customer Service Agent: This KPI is a combination of any metric above cross-referenced by customer service representatives. For example, in addition to analyzing company-wide average response time, a company can analyze who the three fastest responders are and who the three slowest responders are.
- Type of Request: This KPI is a count of the different types of requests. This KPI can help a company better understand the problems a customer may have (i.e. the company's website gave incorrect or inaccurate direction) that need to be resolved by the company.
- Customer Satisfaction Rating: This KPI is a vague measurement, though companies may perform surveys or post-interaction questionnaires to gather additional information on the customer's experience.
KPIs are usually not externally required; they are simply internal measurements used by management to evaluate a company's performance.
Process Performance Metrics
Process metrics aim to measure and monitor operational performance across the organization. These KPIs analyze how tasks are performed and whether there are process, quality, or performance issues. These types of metrics are most useful for companies with repetitive processes such as manufacturing firms or companies in cyclical industries. Examples of process performance metrics include:
- Production Efficiency: This KPI is often measured as the production time for each stage divided by the total processing time. A company may strive to spend only 2% of its time soliciting raw materials; if it discovers it takes 5% of the total process, the company may strive for solicitation improvements.
- Total Cycle Time: This KPI is the total amount of time needed to complete a process from start to finish. This may be converted to average cycle time if management wishes to analyze a process over a period of time.
- Throughput: This KPI is the number of units produced divided by the production time per unit. This is the average amount of items produced in a given amount of time and how fast the manufacturing process is.
- Error Rate: This KPI is the total number of errors divided by the total number of units produced. A company striving to reduce waste can better understand the quantity of items that are failing quality control testing.
- Quality Rate: This KPI focuses on the positive items produced instead of the negative. By dividing the successful units completed by the total number of units produced, this percentage informs management a KPI of its success rate in meeting quality standards.
Marketing KPIs attempt to get a better understanding of how effective marketing and promotional campaigns have been. These metrics often measure conversation rates on how often prospective customers perform certain actions in response to a given marketing medium. Examples of marketing KPIs include:
- Website Traffic: This KPI tracks the number of people who visit certain pages of a company's website. Management can use this KPI to better understand whether online traffic is being pushed down potential sales channels or if customers are not being funneled appropriately.
- Social Media Traffic: This KPI similarly tracks the views, follows, likes, retweets, shares, or other measurable interactions between customers and the company's social media profiles.
- Conversation Rate on Call-To-Action Content: This KPI centers around focused promotional programs that ask customers to perform certain actions. For example, a specific campaign may encourage customers to act before a certain sale date ends. A company can divide the number of successful engagements by the total number of content distributions to understand what percent of customers answered the call to action.
- Blog Articles Published Per Month: This KPI simply counts the number of blog posts a company publishes in a given month.
- Clickthrough Rates: This KPI measures the number of specific clicks that are performed on e-mail distributions. For example, certain programs may track how many customers opened an e-mail distribution, clicked on a link, and followed through with a sale.
A company may desire operational excellence; in this case, it may want to track how its internal technology department is operating. These KPIs may encourage better understanding of employee satisfaction or whether the IT department is being adequately staffed. Examples of IT KPIs include:
- Total System Downtime: This KPI measure the amount of time various systems must be taken offline for system updates or repairs. While systems are down, customers may be unable to place orders or employees are unable to perform certain duties (i.e. when the accounting information system is down).
- Number of Tickets/Resolutions: This KPI is similar to the customer service KPIs. However, these tickets and resolutions relate to internal staff requests such as hardware or software needs, network problems, or other internal technology problems.
- Number of Developed Features: This KPI measures internal product development by quantifying the number of product changes.
- Count of Critical Bugs: This KPI counts the number of critical problems within systems or programs. A company will need to have its own internal standards for what constitutes a minor vs. major bug.
- Back-up Frequency: This KPI counts how often critical data is duplicated and stored in a safe location. In accordance with record retention requirements, management may set different targets for different bits of information.
The ultimate goal of a company is to generate revenue through sales. Though revenue is often measured through financial KPIs, sales KPIs take a more granular approach by leveraging non-financial data to better understand the sales process. Examples of sales KPIs include:
- Customer Lifetime Value (CLV): This KPI represents the total amount of money that a customer is expected to spend on your products over the entire business relationship.
- Customer Acquisition Cost (CAC): This KPI represents the total sales and marketing cost required to land a new customer. By comparing CAC to CLV, businesses can measure the effectiveness of their customer acquisition efforts.
- Average Dollar Value for New Contracts: This KPI measures the average size of new agreements. A company may have a desired threshold for landing larger or smaller customers.
- Average Conversion Time: This KPI measures the amount of time from first contacting a prospecting client to securing a signed contract to perform business.
- Number of Engaged Leads: This KPI counts how many potential leads have been contacted or met with. This metric can be further divided into mediums such as visits, e-mails, phone calls, or other contact to customers.
Management may tie bonuses to KPIs. For salespeople, their commission rate may depend on whether they meet expected conversion rates or engage in an appropriate amount of leads.
Companies may also find it beneficial to analyze KPIs specific to its employees. Ranging from turnover to retention to satisfaction, a company may have a wealth of information already available on its staff. Examples of human resource or staffing KPIs include:
- Absenteeism Rate: This KPI is a count of how many dates per year or specific period employees are calling in sick or missing shifts. This KPI may be a leading indicator for disengaged or unhappy employees.
- Number of Overtime Hours Worked: This KPI tracks the amount of overtime hours worked to gauge whether employees are potentially facing burnout or if staffing levels or appropriate.
- Employee Satisfaction: This KPI often requires a company-wide survey to gauge how employees are feeling about various aspects of the company. To get the best value from this KPI, companies should consider hosting the same survey every year to track changes from one year to the next regarding the exact same questions.
- Employee Turnover Rate: This KPI measures how often and quickly employees are leaving positions. Companies can further break this KPI across departments or teams to determine why some positions may be leaving faster than others.
- Number of Applicants: This KPI keeps count of how many applications are submit to open job positions. This KPI helps assess whether job listings are adequately reaching a wide enough audience to capture interest and lure strong candidates.
Examples of KPIs
Let's take a look at electric vehicle-maker Tesla (TSLA) for a few examples of KPIs in real life. These numbers are all from their Q4 2021 earnings release.
During the quarter, Tesla produced a record 305,840 vehicles and delivered 308,650 vehicles. Production is a big deal for the company because it has consistently been criticized for being bad at ramping up. Increased manufacturing scale means more market share and profits for Tesla.
Automotive Gross Margin
For the quarter, Tesla's automotive gross margin expanded to 30.6%. Gross margin is one of the best measures of profitability for Tesla because it isolates its vehicle production costs. Tesla managed to expand its gross margin in Q4 even as sales of lower-priced models outpaced its higher-margin models.
Free Cash Flow
Tesla's free cash flow clocked in at $2.8 billion during the quarter. That represents a vast improvement from the $1.9 billion free cash flow in the year-ago period. Tesla's current level of free cash flow production suggests that the company is reaching a scale of profitability without the help of regulatory credits.
Companies can use KPIs across three broad levels. First, company-wide KPIs focus on the overall business health and performance. These type of KPIs are useful for informing management of how things are going. However, they are often not granular enough to make decisions. Company-wide KPIs often kick-off conversations on why certain departments are performing well or poorly.
At this point, companies often begin digging into department-level KPIs. Department-level KPIs are more specific than company-wide KPIs. These types of KPIs are often more informative as to why specific outcomes are occurring. Many of the examples mentioned above are department-level KPIs as they focus on a very niche aspect of a company.
If a company chooses to dig even deeper, they may engage with project-level or sub-department-level KPIs. These KPIs are often specifically requested by management as they may require very specific data sets that may not be readily available. For example, management may want to ask very specific questions to a control group about a potential product rollout.
When preparing KPI reports, be prepared to "drill down". Begin by showing the highest level of data (i.e. company-wide revenue), but be prepared to show lower levels of data (i.e. revenue by department, then revenue by department and product).
Developing KPI Reports
With companies seemingly collecting more data every day, it can become overwhelming sorting through the information and determining what KPIs are most useful and impactful for decision-making. When beginning the process of pulling together KPI dashboards or reports, consider the following steps.
Step 1: Discuss goals and intention with business partners. KPIs are only as useful as the users make them to be. Before pulling together any KPI reports, understand what you or your business partner are attempting to achieve.
Step 2: Draft SMART KPI requirements. KPIs should have restrictions and be tied to specific, measurable, attainable, realistic, time-bound metrics. Vague, difficult to acertain, or unrealistic KPIs serve little-to-no value; instead, focus on what information you have that is available and meeting the SMART acronym requirements.
Step 3: Be adaptable. As you pull together KPI reports, be prepared for new business problems to appear and further attention to be given to other areas. As business and customer needs change, KPIs should also adapt with certain numbers, metrics, and goals changing in line with operational evolutions.
Step 4: Avoid overwhelming users. It may be tempting to overload report users with as many KPIs as you can fit on a report. At a certain point, KPIs start to become difficult to comprehend, and it may become more difficult to determine which metrics are actually more important to focus on.
Advantages of KPIs
A company may wish to analyze KPIs for several reasons. KPIs help inform management of specific problems; it's data-driven approach provides quantifiable information useful in strategic planning and ensuring operational excellence.
KPIs help hold employees accountable. Instead of relying on feelings or emotions, KPIs are statistically supported and can not discriminate across employees. When used appropriately, KPIs may help encourage employees as salespeople may realize their numbers are being closely monitored.
KPIs are also the bridge that connects actual business operations and goals. A company may set targets but without the ability to track progress towards those goals, there is little to no purpose in those plans. Instead, KPIs allows for companies to set objectives, then monitor progress towards those objectives.
Limitations of KPIs
There are some downsides to consider when working with KPIs. There may be a long time frame required for KPIs to provide meaningful data. For example, a company may need to collect annual data from employees for years to better understand trends in satisfaction rates over long periods of time.
KPIs require constant monitoring and close follow-up to be useful. A KPI report that is prepared but never analyzed services no purpose. In addition, KPIs that are not continually monitored for accuracy and reasonableness do not encourage beneficial decision-making.
KPIs open up the possibility for managers to "game" KPIs. Instead of focusing on actually improving processes or results, managers may feel incentivized to focus to only improving KPIs tied to performance bonuses. In addition, quality may decrease if managers are hyper-focused on productivity KPIs, and employees may feel pushed too hard to meet specific KPI measurements that may simply not be reasonable.
Informs management of how a company is performing in countless ways
Helps hold employees accountable for their actions (or lack of)
May motivate employees who feel positively challenged to meet targets
Allows a company to set goals and measure progress towards those objectives
Results in potential time commitment to consistently gather data over long periods of time
Require ongoing monitoring for accuracy and reasonableness in data
May encourage managers to focus on only KPIs instead of broader strategy
May discourage employees if KPI targets are unreasonable
What Does KPI Mean?
KPI is an abbreviation for key performance indicators, data that has been been collected, analyzed, and summarized to help decision-making. KPIs may be a single calculation or value that summarizes a period of activity such as "450 sales in the month of October". By itself, KPIs do not add any value to a company. However, a company can use this information to make more informed decisions about business operations and strategy.
What Is an Example of KPIs?
One of the most basic examples of a KPI is Revenue Per Client (RPC). For example, if you generate $100,000 in revenue annually and you have 100 clients, then your RPC is $1,000. A company can use this KPI to track its RPC over time. For example, a company may notice its RPC has doubled in the past three months. A company may choose to change their company's business approach if it wants minimize the amount of revenue per client or wants to continue minimizing the number of clients it revenue is earned from.
What Are the 5 Key Performance Indicators?
KPIs vary from business to business, and some KPIs will be more suitable for some companies compared to others. In general, five of the most commonly used KPIs include:
- Revenue growth
- Revenue per client
- Profit margin
- Client retention rate
- Customer satisfaction
How Do You Measure KPIs?
It depends on the actual KPI being measured. Generally speaking, businesses measure and track KPIs through business analytics software and reporting tools. This includes everything from the collection of data via reliable sources, the safe storage of information, the cleaning of data to standardize it format for analysis, and the actual number-crunching. Last, KPIs are often reported using visualization or reporting software.
What Makes a KPI Good?
A good KPI provides objective and clear information of progress towards an end goal. It tracks and measures factors such as efficiency, quality, timeliness, and performance while providing a way to measure performance over time. The ultimate goal of a KPI is to help management make more informed decisions.
The Bottom Line
KPIs offer an effective way to measure and track a company’s performance on a variety of different metrics. By understanding exactly what KPIs are and how to implement them properly, managers are better able to optimize the business for long-term success.