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KPI GUIDE

Table of contents
Table of contents

Introduction about KPI

Key Performance Indicators (KPIs) are among the most widely used metrics in organizations worldwide. They are a crucial component for the long-term development and success of organizations. Despite being a fundamental goal for many organizations, KPIs are often misunderstood and misused.

This guide aims to provide a deeper understanding of what KPIs truly are, how to use them correctly, ways to identify the most suitable KPIs for your organization, and the best methods to leverage KPIs to their fullest potential.

What is KPI?

KPI stands for Key Performance Indicator, It is a type of performance measurement designed to assess the success of an ongoing process or a specific activity.

KPIs are measurable indicators that provide clarity on performance for critical efforts and activities within an organization or a specific team. These encompass all the activities that need to be monitored and measured consistently to maintain your regular operations. For this reason, KPIs are often referred to as “health indicators”.

Getting Started with KPI

Components of KPI

KPI consists of 4 main components:

  1. Metric
  2. Current value
  3. Target value
  4. Title

Metric and KPI

The terms “metric” and “KPI” are often used interchangeably, causing confusion.

  • Metric is a standard (or system) of measurement. Whenever you measure anything, you are using a metric, whether it’s monthly revenue, conversion rate, customer count, average age of customers, or the number of members with brown eyes in your group.
  • KPI is a type of metric, specifically a performance metric considered significant.
    • Therefore, the number of members with brown eyes in your group is a metric but not a performance measure and is not considered significant.
    • The average age of customers may be important information but doesn’t measure operational effectiveness, so it’s not a KPI.
    • Meanwhile, the sales conversion rate is a metric, measures performance, and is highly significant. This could be called a KPI. However, the sales conversion rate might not be a KPI if you work in the Human Resources department.
    • Common metrics for Software as a Service (SaaS) companies are Monthly Recurring Revenue (MRR) and Churn Rate, but these metrics may not be crucial for an e-commerce company.

As you can see, KPIs, unlike metrics, have a degree of subjectivity. They are shaped by the context in which they are used and the individuals or companies employing them. That’s why you might see some companies using KPIs entirely different from others. It doesn’t mean one is right and the other is wrong; it could be that they operate in different contexts with different priorities.

A useful way to think about this is that metrics represent all the measurement options available to you. But KPIs are the performance measures you choose to focus on to drive results.

As a result, in the course of your role, you may work with hundreds or thousands of metrics. However, if you’ve developed your KPIs correctly, you only need to regularly use a small number of manageable KPIs for any given process.

Current Value & Target Value

  • The current value is simply the data recorded during the current period.
  • The target value is the minimum or maximum value you aim to achieve.

Title

The title should include the Metric and Target Value. Following that, you can display the current value, providing all the information someone needs to understand what the KPI is and whether it is performing well or not.

Differentiating KPI Types

There are various types of KPIs, and KPIs for organizations and teams can also be structured in different ways.

Here are four commonly known types of KPIs:

  1. Leading KPIs:
    • Leading KPIs provide almost immediate results. They can help assess trends in the future but often don’t provide a clear picture of long-term impact. Lagging KPIs (see below) offer more specific data to better understand long-term effects.
    • Example: Your company sells software, and one of the Marketing Department’s KPIs is “Number of website visits” —> This is a leading KPI – the number of website visitors can be tracked over a specified period, giving an overview of your website’s situation. However, does it tell you if these visitors are interested in your software? Probably not. This is where lagging KPIs come into play.
  2. Lagging KPIs:
    • Lagging KPIs are metrics that require a period before their impact can be measured accurately. Such KPIs provide more accurate results in understanding the impact of a specific area over time. It’s important to note that lagging KPIs may not be suitable for organizations/teams requiring immediate feedback on their ongoing projects and activities.
    • Returning to the Marketing Department’s KPI example, compared to the number of website visits (leading), tracking the conversion rate of website visits to potential customers (lagging) could be a more insightful indicator of website performance.
  3. Quantitative KPIs:
    • Quantitative KPIs are straightforward and measured by a numerical value, making them very tangible – numbers don’t lie.
    • Examples of purely quantitative KPIs include revenue or profit.
  4. Qualitative KPIs:
    • Qualitative KPIs can be based on opinions, characteristics, and attributes of specific processes or business decisions. They tend to focus more on the question “why?” rather than “how?”
    • Examples:
      • Employee Net Promoter Score (eNPS) measuring employee satisfaction and commitment.
      • Customer Satisfaction Score (CSAT) gauging customer satisfaction.

      Such metrics can be quantified for measurement purposes, but they rely entirely on qualitative assessments.

Identifying Crucial KPIs

Organizations and teams often fall into the temptation of applying industry-famous metrics without determining whether these metrics are genuinely important for their specific context. While these metrics serve as good references, they might not provide the information needed to reflect the health of your organization or the performance of your team.

One way to identify truly crucial KPIs is for you and your team to ask filtering questions like:

  • Question 1: Do you believe that the entire organization and/or specific areas within the organization are healthy? Why or why not?
    • If not, which KPIs could be used to nurture health back?
    • If yes, what metrics have informed you that everything is okay?
    • Write down all these metrics. At this point, you might have too many KPIs. Don’t shy away from tough choices about what is important and what is not.
    • In the next filtering round, ask yourself:
  • Question 2: Does this truly reflect our most critical business operations? Or is this a metric that we need to review regularly?
    • Go through each metric and filter.

Sometimes the desire to track too many metrics results from focusing too much on details – eliminate that noise. Here are some examples to illustrate this:

  • A company’s HR department is tracking Employee Net Promoter Score (eNPS) for each individual department, but they could simplify by monitoring eNPS for the entire company. Once the company’s eNPS drops below the desired target, they can zoom in to see if it’s an issue in a specific department or if the issue exists organization-wide.
  • A SaaS business should include Monthly Recurring Revenue (MRR) in the company’s KPIs.
    • Break MRR down into a specific product for the Sales department and Churn MRR for the Customer Success department.
    • The Customer Success department may track metrics like Expansion MRR, Contraction MRR, and Churn Rate individually, but they could also consider looking at Churn Rate, which combines all three metrics.

Now that you’ve learned how to identify the most fitting KPIs for you and your organization/team, make sure you’re leveraging your KPI dashboard to maximize performance.

Maximizing KPI Utilization

Consider KPIs as a communication tool; hence, they need to be concise, clear, and transparent so that teams and individuals can take calculated actions to maintain the health of the business. Here are some tips to maximize your KPIs:

Determine “Current Value”

There are various ways to calculate the current value, and each approach has its own pros and cons. We’ll highlight the differences so you can use the best formula for your specific situation.

  1. X Consecutive Days vs. Fixed Time Frame
    • If you focus on X consecutive days, your current value may change daily.
    • If you focus on a fixed time frame, such as monthly or annually, your current value only changes once after that time frame completes.

    Do you need daily feedback on your KPIs? Do you want immediate notification of changes?

    • If the answer is “Yes,” X consecutive days might be a better choice.
    • Conversely, if you don’t want to be bothered too frequently and prefer checking your KPIs once a week or once a month, using a fixed time frame may be better.
  2. Numeric vs. Percentage Figures
    • For certain KPIs like sales targets (e.g., Achieving $5 million in contracts), it’s clear that you want to see the exact number.
    • For other KPIs, such as conversion rates from website visits to potential customers, it’s clear that you want to see a percentage.
    • However, for some KPIs, this isn’t clear. Imagine you need to ensure your Sales team is giving enough presentations to potential customers. In that case, you might need to track:
      • Total number of presentations/meetings scheduled.
      • Conversion rate % for each presentation.
      • Or you might look at the % of remaining time your Sales team has?
    • Each option will have its own advantages and disadvantages, so it’s crucial to decide on the specific goal you want this KPI to achieve and then verify whether your current settings accurately reflect that.
  3. Long vs. Short Time Frame Setting
    • The longer the time frame, the more accurate your number is likely to be. For example, your company’s Net Promoter Score (NPS) over the last 3 months will be more accurate than calculating NPS on a daily basis.
    • However, a longer time frame will turn your current data into a Lagging KPI, meaning you and your team won’t catch up with what’s happening in the near term. Similarly to the above example, you’d see the NPS trend immediately by tracking daily, but it would take longer before you notice that with a 3-month NPS.

Therefore, you and your team should jointly determine and agree on the “Evaluation Cycle” for each KPI to most accurately represent the business/department situation.

Consensus on Target Values

Now that you know how to calculate the current value best for your metrics, it’s time to decide what you want that current value to become – your target value.

The target value indicates what constitutes good performance. Without it, the KPI cannot become a useful performance indicator because you won’t know what good performance looks like.

Less Than or Greater Than

The target value is the minimum or maximum value you want that metric to achieve. So, you have two options for your target value:

Here are some examples:

  • Greater Than or Equal to (≥)
    • Transactions ≥ $10 million
    • eNPS ≥ 30
    • Gross profit margin ≥ 70%
  • Less Than or Equal to (≤)
    • Monthly gross profit margin ≤ 2%
    • Annual employee turnover rate ≤ 10%
    • Invoices canceled ≤ 25,000€

Ensuring Understanding of KPIs

Ensuring that everyone understands KPIs is essential to maintaining their health. If no one understands a KPI, they may not know how to nurture it. To ensure everyone understands KPIs, you need to provide appropriate context and make sure it doesn’t have too many interpretations.

For each KPI, answer the following questions and store these answers with the KPI so that everyone in your organization can easily find them:

Why is this KPI applied? This question forces you to think thoroughly about the KPI you’re creating for your team or company. It helps listeners place the KPI in a specific context, which is particularly valuable in larger teams and organizations where you don’t have the opportunity to talk directly to everyone.

How is the current value calculated? No matter how you calculate the current value, it’s crucial that everyone viewing the metrics understands how that number is calculated. So, share your formula.

Explain how you achieve the target value Each KPI must have a target value, and people need to understand why that is the target value. Does it rely on a benchmark?

Regularly Review KPIs

There is only one way to ensure that you are working according to the right KPIs, and that is to review them regularly. We encourage you and your team to review all KPIs at the beginning of each quarter, at the same time as closing out the previous quarter’s OKRs and drafting new OKRs.

Sometimes, we may realize that there are KPIs that have never been looked into, which may be a sign that the KPI is not truly important. Other times, we may realize that a KPI does not influence our behavior, which could be a sign that it is not set correctly.

Regularly reviewing KPIs is crucial because what may be a fitting KPI for your team or organization in one year does not automatically mean it will be suitable for the next year.

KPIs and OKRs: Formula for Success

KPIs are often confused with Objectives and Key Results (OKRs). In reality, KPIs and OKRs are entirely different goals that complement each other naturally in creating favorable conditions for the execution of an organization’s strategy. OKRs can also be used to improve unhealthy KPIs.

How can they combined?

As you know, KPIs measure the success, output, quantity, or quality of a process or activity.

On the other hand, OKRs provide the missing link between ambition and reality. They help you break down the current state and lead you into new, often unexplored territories. If you have a big dream—a lofty, inspirational Goal for your company, you need OKRs to get you there.

Imagine your organization as a car, and you’re driving that car to a destination (your ultimate Goal). In that analogy:

  • Your KPIs are what you’ll find on the car dashboard: Fuel gauge, Engine temperature gauge, Current speed, etc. These are things you’ll need to keep an eye on continuously.
  • Conversely, OKRs are like your roadmap. They guide you to your destination. OKRs are temporary; they will change over time. Once you’ve passed a milestone to get to your destination, you’ll focus on the next milestone.

Similarly, a organization needs both KPIs and OKRs. If you only look at KPIs, you won’t know how you’re progressing toward your destination. If you only look at OKRs, you won’t see how you’re running out of fuel.

Can OKRs become KPIs (and vice versa)?

The answer is: “OKRs can become KPIs, and KPIs can be established through OKRs.” This is one of the reasons why many organizations choose to track both KPIs and OKRs together.

Examples:

  • An example of how OKRs can become KPIs is as follows:
    • In the last quarter, a company’s Marketing Department applied OKRs to optimize the conversion rate on the website. They ran all kinds of tests to improve their website’s performance and convert more website visitors into leads.
    • OKRs brought significant success. The business increased the initial conversion rate through the tests run by the Marketing Department. However, as the website is the main touchpoint where people learn about their business and also where they can learn about the people behind it, it is essential that the conversion rate is as high as possible.
    • Because the business believes there’s always room for improvement, it was decided that running tests to increase the conversion rate would become standard for the Marketing Department. Thus, the Marketing KPI was created to ensure continuous adjustments and optimization of the conversion rate on the website: KPI “Optimize website conversion rate by an additional 5% each month”, ensuring that running tests to increase the conversion rate would become a regular task.
  • Another example – OKRs can also be used to address unhealthy KPIs:
    • The Marketing Department’s KPI is to track the overall conversion rate on the website. The business sets the goal for this KPI at 7% or higher. That means as long as 7% of website visitors convert into leads, everything is fine, and the Marketing Department doesn’t need to focus further on this.
    • Conversely, if the KPI shows the conversion rate dropping below 7%, the Marketing Department can prioritize addressing the KPI and bringing the overall conversion rate back to the desired level. In other words, Marketing can create OKRs to address the unhealthy KPI and bring it back to a healthy state.

Choose Appropriate KPIs for your Business

1. Define Business Objectives

The first step in selecting suitable Key Performance Indicators (KPIs) is to clearly define your business objectives. What are you trying to achieve? Do you want to increase sales, improve customer satisfaction, or streamline operations? Once you have a clear understanding of your goals, you can choose KPIs that will help you track the progress towards them.

Example:

  • If your goal is to increase sales, potential KPIs could include revenue growth, conversion rates, or average order value.
  • If your goal is to improve customer satisfaction, you might track metrics such as customer loyalty and retention rates.

By defining your business objectives, you can select KPIs that provide the most valuable insights and help you make informed decisions.

2. Consider Industry and Target Audience

Different industries and target audiences may require different KPIs.

Example:

  • A retail company may prioritize sales and customer satisfaction, while a manufacturing company might focus on production efficiency and cost reduction.
  • In the B2B software industry, potential KPIs could include Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), or churn rate.
  • In B2C e-commerce, focus might be on metrics like website traffic, conversion rates, or average order value.

By choosing KPIs specific to your industry and target audience, you can obtain more accurate results.

3. Determine Crucial Metrics

Not all metrics are created equal—some have a more significant impact on business success than others. When selecting KPIs, consider which metrics have the most significant influence on your business and will provide value in reaching your goals.

Example:

  • Small business owners might prioritize metrics such as profit margin, cash flow, and return on investment (ROI).
  • Startups might concentrate on growth metrics like customer acquisition rates, monthly recurring revenue (MRR), or user growth rates.

By identifying the most important metrics for your business, you can prioritize efforts and ensure that you are maximizing your time and resources.

4. Keep It Simple

While tracking numerous KPIs can be tempting, it’s crucial to keep everything simple and focus on a few key metrics. Too many KPIs can be overwhelming, leading to confusion and inaction. Therefore, stick to monitoring a handful of the most crucial metrics that provide the most valuable insights for your business.

For small business owners, choosing 3-5 key metrics aligned with your business goals could include metrics such as revenue growth, customer satisfaction, and profitability.

By concentrating on a select few metrics, you can easily track your progress and identify areas for improvement.

5. Ensure Measurability and Feasibility

A good KPI is one that can be easily measured and tracked over time. It should also be feasible, providing clear guidance on the steps you can take to improve performance.

Example:

  • If tracking revenue growth as a KPI, also monitor metrics like the number of leads, conversion rates, and average order value. Analyzing these metrics can help identify areas for improvement and actions to drive revenue growth.
  • Similarly, if customer satisfaction is a KPI, additional metrics such as response time, resolution rates, and customer feedback can be monitored. Analyzing these metrics can pinpoint areas for improvement and actions to enhance customer satisfaction.

In other words, your business KPIs and team metrics should include both “Result Metrics”—reflecting what the business wants, and “Driver Metrics”—guiding steps/instructions to achieve results.

6. Regularly Update Your KPIs

Business goals and priorities can change over time, so it’s essential to regularly review and update your KPIs. Ensure that the KPIs you are using remain aligned with your current business objectives, providing valuable insights.

By frequently reviewing and updating KPIs, you can ensure that you are monitoring the most critical metrics for your business at any given time.