Key performance indicators (KPIs) are data that measure how effectively a business is progressing towards a strategic business objective. These measurements can reveal how well teams or the business as a whole are performing over a specific time period.
The late Peter Drucker—father of modern management—once said that “[i]f you can’t measure it, you can’t improve it.” This principle is actualized through KPIs.
Let’s take a deep dive into KPIs and answer some of the following questions:
- What is a KPI?
- What are examples of KPIs?
- How do you create KPIs?
- Do small businesses need KPIs?
What Does KPI Stand For?
The term KPI stands for key performance indicator. Over the last decade, the term has gained a lot of buzz as tech and other innovative businesses develop management and goal-setting strategies based on these important data points.
KPI simply means a metric that measures performance, or one used to evaluate a specific activity in pursuit of a larger goal. For example, if you’re trying a new diet (activity) to become healthier (goal), you could use weight (lbs) as a KPI. If you’ve lost 3 pounds after a week, the KPI of weight would indicate that the new diet is helping you toward your larger goal of becoming healthier.
In the business world, KPIs evaluate an action tied to some strategic organizational goal. By measuring a KPI metric before starting a project and then again at the end of the project, the change in that KPI metric—positive or negative—will reveal how well that person or team performed at that task and how valuable that task was toward the larger goal.
For example, if your business goal is to keep your high-performing employees from leaving, you may decide to implement weekly happy hours for 6 months to improve employee satisfaction.
You could use the KPI of employee attendance at those happy hours throughout the 6 months to measure the activity. If there’s a positive trend in attendees and you’re seeing fewer high-performing staff leaving, then you could feel confident that the activity is working and helping you toward your larger goal.
What Are KPI Examples?
At this point, we have an idea of what KPIs are, but let’s actually see them in action. Below are a few KPIs based on the business areas in which they may be most helpful—and keep in mind that this is just the tip of the iceberg. There are thousands of KPIs across the entire business ecosystem, and many can be used to measure different objectives.
Sales KPI Examples
- Cold calls: How many accounts did you call on?
- Leads: How many new prospects were acquired?
- Sales calls: How many prospects were moved to a sales call?
- Total new customers: How many new customers were brought on?
- Revenue: How much sales revenue was generated?
Customer Service KPI Examples
- Customer retention rate: What is your client turnover?
- Net promoter score (NPS): How likely are your customers to refer your business?
- Average response time: How long does it take your team to respond to clients?
- Customer lifetime value (CLV): How much do customers spend with your company over their full life?
Production KPI Examples
- Capacity utilization: Is your production line at full capacity?
- Overall equipment effectiveness (OEE): Is your equipment working efficiently?
- Defective rate: Are you maintaining quality control?
- Return rate: Are your customers satisfied with your products?
Human Resources KPI Examples
- Employee satisfaction index: What’s the pulse of your company culture?
- Absentee rate: How often are employees missing work?
- Employee turnover: What is your staff attrition rate?
- Diversity rate: How well do your inclusion and diversity practices work?
Advertising KPI Examples
- Cost of customer acquisition (COCA): What are you paying in advertising per sale?
- Clickthrough rate (CTR): How often are leads clicking your ads?
- Return on investment (ROI): How much are you earning per dollar spent in advertising?
- Impressions: How many eyeballs are seeing your ad?
Marketing KPI Examples
- Email open rate: How often are people opening your email marketing?
- Pageviews: How many visitors are landing on the website?
- Organic social media reach: How big is your organic audience on social?
- Event attendance: How many people attended an event hosted by your business?
How to Create KPIs
KPIs are a part of goal-setting, and their purpose is entirely based on a few key factors:
- Relevancy: KPIs must be relevant to the goal—that is, the metric must directly affect the action tied to the goal. Take the diet and health example from before: a KPI of average hours slept for the week would not measure the effectiveness of your diet because sleep is not relevant to the action we are assessing (losing weight), even though it could connect to the larger goal of becoming healthier.
- Measurability: You need to be able to measure your KPIs in order to make any assessment. Determine how you can collect the data needed to measure whatever KPI you choose effectively—and do so before you start to ensure that you have the baseline needed to measure against.
- Specificity: KPIs are tied to goals, and the goals need to be specific. The narrower your goals, the easier it’ll be to assess the performance of an action.
- Time: Create a timeframe to help hold you and your team accountable for the activity. Keep in mind that too short of a timeline may not give you enough of a robust sample size to measure the KPI—and too long of one could skew your results, too.
- Realisticness: Are your goals and initiatives relating to those goals realistic? For example, you can’t expect to double sales in 30 days if you’re only raising your advertising budget by 10%. Don’t set yourself up for failure—take an objective approach to goal-setting and be realistic with your expectations based on what you’re willing to invest into that activity. A KPI is simply an assessment of that activity, but if it doesn’t align with your chosen goal, you’re unlikely to see a positive trend from your measurement.
What’s the Value of KPIs for Small Businesses?
The biggest question for small businesses is whether you truly need to use KPIs. The short answer: you probably already do.
KPIs are just another way to measure the performance of your business, and most business owners are already looking at the metrics they feel are most important. If you’re running an Amazon store, you’re probably looking at your daily sales and measuring that against yesterday, last week, or last year. If you have a bakery, you’re probably keeping an eye on what items are selling and which ones you’re throwing out day after day, and you’re likely adjusting your pastry production based on this information.
Whether or not you call them KPIs or implement a different goal-setting strategy to assess metrics isn’t important. What is important: taking the time to assess your performance and making strategic decisions based on that insight.