What is a KPI? Definition, Best-Practices, and Examples (2024)

You have heard about KPI, right? The key performance index tool that organizations use to measure how effective they are in achieving their business goals.

There is no doubt that KPI is a common performance-related term in the business world. Almost every large company in the business world uses them.

The standard protocol in a well-structured company is for different departments in the company to have their own unique KPIs based on specific goals and objectives. HR departments, sales teams, marketing departments, and finance departments need KPIs.

As a small business owner, you are probably wondering what the fuss about KPIs is?

If you are looking to understand what a KPI is and how to use it in your daily business, then you stumbled on the right article.

After reading this article, you will have more than enough information about KPI to start implementing KPI best-practices in your small business.

Let’s start with the basics.

Key Performance Indicator: A Short Definition

KPI is an acronym for Key Performance Indicator. A Key Performance Indicator (KPI) is a measurable or analytical tool used by businesses to track how companies or/and individual departments are effectively meeting up with the outlined business objectives.

What are the various dictionaries saying about KPI? How do they define it? Let’s check them out.

“A KPI is a performance metric for a specific business activity.” “Key performance indicators (KPIs) provide managers with advanced warning signals that there may be problems ahead.” – Online Cambridge English Dictionary.

“Key Performance Indicator: A way of measuring the effectiveness of an organization and its progress towards goals.” – Online MacMillian English Dictionary.

“A measure of achievement that can be attributed to an individual, team, or department. KPIs should be constructed using the SMART principles of objective-setting, and are normally developed as part of a performance management system.” – Oxford Reference.

There are two forms of KPIs: the high-level KPIs and the low-level KPIs. The high-level KPIs deal with the overall business performance, while low-level KPIs measure the performances of the several units that make up the business or company.

No KPI form is more important than the other. Companies use both to get a clearer and more accurate picture of their overall performance.

Major Types of KPIs

There are different types of KPIs available, numbering as many as eighteen or more. However, not all KPIs are relevant for every business or industry.

Before selecting a KPI type to use to evaluate the performance of your business, find out if it is relevant to your industry or department. An organization can use different KPIs to track the performance of different departments.

Some of the major types of KPIs include:

1. Marketing KPIs

Marketing KPIs refer to the various measurable metrics used by marketing teams to analyze their performance in light of the set objectives.

This KPI type covers digital marketing metrics, SEO marketing metrics, social media marketing metrics, and email marketing metrics. With marketing KPI in place, sales and marketing teams can effectively reach their set objectives.

When setting up a marketing KPI, ensure it has all the top metrics needed to track your marketing goals. These metrics include funnel conversion rates, brand awareness, customer engagement, customer acquisition cost (CAC), return on marketing investment, and customer retention.

2. Sales KPIs

Sales KPIs refer to the various metrics that sales teams use to evaluate their sales campaign performances. In every organization, the sales teams are the most important force behind the success or failure of the organization.

They are directly responsible for selling the organization’s productions and services and generating revenue. Little wonder the sales teams’ performances are measured by their sales numbers.

Thanks to Sales KPIs, organizations can measure every aspect of their sales team’s performance. Sales KPIs provide more customization than what is attainable with many sales funnel tools.

There are a lot of top-rated sales metrics used to evaluate the performance of sales teams. They include monthly sales growth, average profit margin, sales per rep, sales target, sales by contact method, retention and churn rates, customer lifetime value, and more.

3. Email Marketing KPIs

Email Marketing KPIs refer to the various metrics used by marketing teams to evaluate their email marketing campaigns.

Email newsletters remain one of the top avenues for businesses to nurture their leads, promote their products, and generate revenue. There are several email newsletter software that helps businesses create, automate and analyze their email marketing campaigns.

Tracking email marketing campaigns will help businesses improve their email marketing results.

There are key email marketing metrics every business should use to evaluate their email marketing campaigns. They include open rate, click-through rate, forward, unsubscribes, and engagement scores.

4. eCommerce KPIs

The eCommerce industry is one of the fastest-growing industries in the world. According to Statista, retail eCommerce sales will reach $6.5 trillion in 2023.

eCommerce platforms such as Shopify and BigCommerce help small businesses track their eCommerce performance.

Businesses with online stores need to use the right eCommerce KPIs and metrics to track their overall performance. They include shopping cart conversion rate, sessions, and abandonment, coupon conversion, revenue per visitor, cost per order, revenue for new visitors, returning customers, unique online buyers, and more.

What Makes a KPI Effective?

Many organizations are doing KPIs wrongly. The Key Performance Index (KPI), contrary to what many business owners believe, is not a standardized formula for improving the performance of their businesses.

There are a lot of nuances that every organization has to take into consideration about their values before structuring their unique KPIs.

Blindly adopting a KPI because it is working for an organization may end up being counterproductive, even if it is an industry-recognized KPI. Every business and organization has its unique structure. For a KPI to work, it must be a suitable fit for that business’ needs.

One aspect that tends to get overlooked in the KPI discussion is the idea of KPI being a communication tool. On its own, KPI cannot boost performance, it needs to be backed by valuable actions.

What KPI does is to communicate the performance of your business or aspects of it to its readers. Because KPI is a communication tool, it has to stick to the basic rules and best-practices of communication for it to be effective.

One of such best-practices is that it must be clearly expressed in a form that the user can easily understand. Also, the information the KPI produces must be relevant to the needs of your business.

When developing KPIs for your organization or individual departments in your business, consider the following best-practices:

• Identify and make clear the objectives of the organization or the department to your teams.
• Set up a plan on how to achieve your objectives.
• Define the roles that different departments or individuals will play in actualizing the set objectives.

This process may involve some back-and-forth meetings with your team, but it is well worth it. During the process, it will become evident the KPIs your business need and what part of your business or process needs such attention.

In summary, effective communication is what makes a KPI effective.

How to Define a KPI

We briefly defined KPI at the surface level as:

“A measurable or analytical tool used by businesses to track how companies or/and individual departments are effectively meeting up with the outlined business objectives.”

Now, it is time for the more practical test. How do businesses define what key performance indicators are the best fit for them? Defining the suitable KPIs can be a tricky task.

Many businesses bundle the whole idea of KPIs by putting it in the same bracket as business metrics. You will be shocked to know how many businesses do not differentiate KPIs from business metrics.

At its core, KPI refers to all the “key” metrics that are relevant to the organization’s result. While KPIs can be grouped as business metrics, organizations need to differentiate both terms to get the best results.

KPIs are super-targeted metrics that help businesses measure their performance in light of their set business objectives. Business metrics refer to all the possible statistics, criteria, and measurements about the business (important or unimportant).

Once you understand that KPI’s sole function is strictly related to the business objectives, defining it will be a lot easier. Here are some key questions that will help you define the appropriate KPI for any industry or business type.

• What is the desired result?
• Why do you want to achieve it?
• What can you use to measure or track your progress or journey?
• Who are the key players that can influence the result?
• Who is in charge of the project?
• What is the expected timeframe for its completion?
• How will you know when you reach your objective?
• What are your plans for reviewing the progress made towards achieving the desired result?

Let’s take an example that clearly shows how to define a KPI to meet your desired result. This example is the eCommerce Growth KPI.

• The desired result is to increase revenue from our eCommerce store by 25%
• Reaching this goal will help our business make a profit
• We will track and measure our progress by using monthly earning targets
• Our eCommerce sales and marketing teams are responsible for this goal
• Our online sales manager is in charge of the project
• We expect to reach our milestone by December 21, 2021
• When our eCommerce sales revenue for the year reaches $350,000
• We will review progress monthly.

Best Tips for Managing Your Business Using KPIs

Key Performance Indicators (KPIs) are super-specific signals that reveal the performance of your business. It tells you if it is performing, overperforming or underperforming.

KPIs are an important evaluation tool to track business performance. Although it is critical for you to track your business performance for optimal results, doing it wrongly can harm your business.

A round-hole KPI in a square-hole business will cost the business valuable time and money. It will also cause the business to make a series of bad decisions based on misleading data. If you do not properly optimize your KPI, even if it is the right fit, it can lead to the same disastrous outcomes.

KPIs are not metrics you set and forget about it. You need to monitor it regularly to get the most out of it for your business.

In a data-driven world, businesses that use KPIs have the advantage of arriving at more informed business decisions than those who don't. Here are some of the best tips for managing your business using KPIs.

1. Select KPIs that Match Your Key Business Objectives

Key Performance Indicators should match your business goals and objectives. Picking KPIs that align with your business objectives will move you a step forward towards its actualization.

Selecting the right KPIs can be a difficult task. Some businesses' complex structure allows for confusion in the selection process.

Some companies have several key objectives, worsened by their use of short, medium, and long-term goals. Companies have different approaches to measuring performance, making it hard to use a one-size-fits-all approach.

Here are some tips that will help you select the right KPIs even amid organizational complexities.

#1 Use Different KPIs for Different Department or Managerial Needs

In an organization, individuals have their separate roles and objectives. For example, the executive class focuses more on medium to long-term objectives. The management class focuses on short to mid-term objectives. The rest of the workforce focuses on short-term objectives.

Choosing one-size-fits-all KPIs that have general implications for all groups is not the most effective approach. Instead, use unique KPIs that match the objectives and focus of the group. Every group (executive, management, and workforce) should have different KPIs.

#2 KPIs Should be Linked to Business Success

The most effective KPIs are the ones that combine your business success with your customer success. A good example is the Customer Referral Rate. This KPI shows you how your team members are performing, and how your customers are responding to your products.

The Customer Referral Rate is one of those evergreen KPIs that cut across the three levels of workers in the organization: executive, managers, and workers.

At the worker level, it speaks about the effectiveness of their marketing campaigns. At the manager level, it speaks of their effectiveness in converting referrals into paying and dedicated consumers. At the highest peak (the executive), it speaks of the ability to meet set objectives.

#3 Avoid Using Irrelevant KPIs

If a KPI does not relate to your business objectives, no matter how fancy and data-driven it is, avoid giving it a central focus. Every business objective is unique, which explains why there are so many types of KPIs available.

Select only meaningful and relevant KPIs that can take you to your destination, your business objectives.

2. Select KPIs That Are Within Reach

Many business owners choose KPIs for their business out of preference rather than necessity. If you choose a KPI for your business that is not the perfect fit, the KPI is as good as useless.

Avoid picking KPIs that your business does not have the data needed to operate. Stay off KPIs where the cost of operation is costlier than what your budget permits.

Choosing the right KPIs for your business ultimately comes down to two variables: cost and benefit. Here are some questions you can use to ensure you pick KPIs that are within reach.

• What data do I need to use for the KPI?
• What are the processes and tools I need to use?
• How often do I need to add data to the KPI?
• What platforms or systems do I use to share the KPI with relevant stakeholders?
• What is the overall cost of the KPI?
• What are its potential returns?

3. Limit The Number of KPIs Used

There is no standard limit of KPIs for any business or industry. However, no business can realistically integrate all the available forms of KPIs into its systems.

Apart from its cost, it will distract you from concentrating on the data you truly need to measure your business performance.

Evaluate your business objectives and the processes it needs to achieve them. Consider all the KPIs you have in mind to use, and remove the ones that do not add much value.

Keep your KPIs to a number that your business can handle. By restricting it to a few super-relevant choices, you improve your business chances of success instantly.

Here are the reasons why limiting your KPIs is the hack you need to better manage your business.

• It forces you to narrow down KPIs to a shortlist that includes only key metrics for accurately measuring your business performance.
• Fewer KPIs mean more time and energy to review performance results.
• It saves you the cost required for monitoring and optimizing a wealth of KPIs.

4. Review Your KPIs

Avoid the trap of getting too familiar with a set of KPIs and putting them on autopilot for a long time. Your business is not static and can outgrow the need for a particular KPI overtime.

Spend time to evaluate your KPIs to find out if they remain the best solutions available for your business.

If your business experienced growth, organizational or structural changes recently, a KPI review is required.

Here are some questions you can use to review your KPIs.

• Is the reason why you picked this KPI still relevant today?
• Has your business outgrown the KPI?
• Can you adjust the KPI for better results?

How to Use KPIs as Part of Your Performance Management Appraisals

There are lots of similarities in the function of KPIs and performance management appraisals. KPI refers to the key performance metrics used by businesses to evaluate their performance.

Performance management appraisals are the process by which relevant stakeholders in an organization work together to review the business objectives of an organization.

It is the continuous process of accessing the progress made, communicating, and training workers to ensure that the business objectives are met.

KPI is a type of performance management indicator that is relevant for businesses. When preparing your performance management appraisals, you can use KPIs. Here is how to do it.

1. Align Your Business Strategy

Businesses or startups today lookout for that single metric that they can use to evaluate their performances. This fascination with a single metric solution requires businesses to thoroughly understand what the business is about, and how to use it for performance appraisals.

For many businesses, sales is that single metric solution they rely on to evaluate their business performance. In many cases, sales are the key performance indicators that everyone by default wants to use.

The challenge is not about sales being the single most important metric for businesses. Rather, it is about the challenge of quantifying the outcome.

How do you drive sales? Take time out to figure out the answer, and ensure it aligns with your overall business strategy.

2. Cover Your Tracks

As a business owner, you are familiar with the concept of having to choose between two items of equal value. Now and then, you face these painful choices. Why can’t you just have both?

With KPIs and performance management appraisals, you can navigate these scenarios by using an established framework.

The Balanced Scorecard (BSC) is the framework that helps you navigate such tight situations. It does this by breaking down your business into key smaller parts for effective monitoring.

Balanced Scorecard has four key parts: the financial perspective, customer relationship perspectives, internal processes perspectives, and education and growth perspectives.

For effective performance management appraisals, all these four key parts must be aligned. They overlap each other. Isolating one from the others will not produce full reporting details.

If there is a slight unbalance in the Balanced Scorecard, for example, one part is affected, it will also impact the others.

3. Activate Your BSC Strategy with OKRs

BSC Strategy is an acronym for Balanced Scorecard (BSC) strategy while OKR is an acronym for Objectives and Key Results.

The BSC strategy is all about developing KPIs, objectives, goals, and actions for each perspective you have as a business. Many businesses use this framework to integrate KPIs as part of their performance management appraisals.

There is a newer but not necessarily a better framework that is gaining popularity among businesses today. It is the OKR framework that became popular because of its use by the internet giant, Google.

OKR is an objective and key result framework that helps businesses define and track their objectives to produce the desired outcome. It is a strategy that serves as a middle ground between the KPI strategy and the BSC framework.

OKRs is a simple framework used by businesses to track their business performance. The tool helps to set objectives, communicate them, and track their implementation simply and clearly so that everyone can focus on the same direction.

When you implement the OKR framework properly for your business, it can boost your business productivity. If you struggle with setting clear work objectives and identifying the desired key results, OKR can help you solve your problems with three framework questions:

• Objectives – Where do I need to go?
• Key Results – How do I know I am getting there?
• Initiatives – What will I do to get there?

What makes OKR attractive for many businesses is its simple framework. It is easily a middle-ground solution that features parts of KPI features and parts of the performance management appraisal features.

OKR is a practical framework for defining, tracking, and measuring business key objectives. It covers what we can quantify (measurable values) and what we cannot measure (aspirations).

4. Use a KPI Dashboard for Your Performance Management Appraisals

A KPI dashboard is a data-driven tool that provides real-time business performance results. Setting up a KPI framework for your organization is ineffective if you do not use a KPI dashboard.

Businesses use KPI dashboards as part of their performance management appraisals. These dashboards provide a comprehensive analysis of the performance of the organization.

A KPI dashboard consists of the following terms:

• Key Risk Indicator (KRI) – for measuring the risk of an activity
• Critical Success Factor (CSF) – for measuring the critical factors needed for an organization to achieve its objectives.
• Performance Metrics – for measuring the organization’s performance

Good KPI Examples

There are tons of KPI examples available for businesses to use in their overall KPI strategy. What determines if a KPI example is ideal for your business or not is primarily your business objectives.

Before selecting a KPI example, define the goals and objectives you want to achieve. Next, determine how best you can measure your progress towards the attainment of your desired results (goals and objectives).

KPIs are designed to show you how much progress you are making towards the attainment of your goals and objectives.

We will divide KPIs into four popular categories that cut across organizations to list the best KPI examples under each category. These categories include sales, financial, project management, and marketing.

Sales KPI

1. Sales Growth

Sales growth is directly related to your business growth. By tracking your sales growth, you are indirectly getting a full picture of your business performance. It involves the tracking of your sales representative’s performances.

2. Sales Target

What are your sales targets? Measuring sales targets should be a priority for every business. It is not just enough to set it, tracking it is equally as important as reaching your sales milestone.

Tracking your sales target is a crucial sales KPI that helps you know if you are on track or not.

3. Customer Lifetime Value (CLV)

This sales KPI helps you identify how much you can expect to earn from each of your customers. It helps you keep track of your core business objectives, which is to make revenue.

Financial KPI

1. Current Ratio

This financial KPI measures the ability of your business to meet up its financial goals within one year.

2. Net Profit Margin

How well is your company performing after subtracting all expenses including operation cost and taxes from your revenue? The net profit margin is one of the top financial KPIs used by businesses and organizations.

3. Working Capital

This financial KPI measures the financial health of your business by tracking all its available assets. It helps businesses identify if they are in positive financial health or a negative one.

The working capacity is simply a function of the value left after subtracting total liabilities from your total assets.

Project Management KPI

1. Cycle Time

This refers to the time needed to accomplish a task or activity. Tracking the cycle time for your projects is one of the best ways to effectively track their performance. Setting up a cycle time KPI is a valuable metric for repeated tasks or projects.

2. Cost Performance Index

This project management KPI measures the efficiency of your project performance. It divides the actual amount of time spent doing the project by the actual budgeted costs.

3. Customer Satisfaction

Measuring customer satisfaction or loyalty will help your business determine if it is performing well or not.

A larger number of customers turning into repeat customers, or simply expressing satisfaction about your services means your business performance is top-notch.

Marketing KPI

1. Return On Marketing Investment (ROI)

This marketing KPI is one of the most important when tracking the performance of your marketing campaigns. With this KPI, you can track the revenue generated from your campaigns.

2. Incremental Sales

This KPI tracks your sales revenue from your marketing campaigns. It shows you if your campaigns are effective (leading to increased sales revenue) or ineffective (reduced sales revenue).

3. Social Traffic and Conversions

This marketing KPI is valuable for businesses running social media campaigns. With this KPI, you can track the effectiveness of your social media campaigns at meeting your conversion goals.

How to Use KPIs in Your Daily Business

You can use KPIs to monitor, track and evaluate your business daily. For example, if your objective is to sell 100 packs of organic milk in a day, set up KPIs that can track your progress towards your set objective.

The process for setting up KPIs is similar for different organizations and business needs. You first have to set your business objectives and then select the appropriate KPIs to help you attain them.

Using KPIs in your daily business can best be accomplished by using KPI reports and KPI dashboard solutions.

1. KPI Reports

A KPI report is a visual management tool that facilitates the management of the various key performance indicators. Businesses use these KPI reports to track their progress and performance and compare it with their targets.

KPI reports are the visual, mathematical sides of the KPI. They often involve the use of a mixture of graphs, charts, and tables.

These reports help businesses to define or achieve their objectives, identify their strengths and weaknesses.

Any business, whether small to medium businesses or large companies can use KPI reports in their data and routine activities. The enormous amount of data that businesses generate daily can be converted into KPI reports, through which businesses can track their performances.

Not every data that a business generates makes it into the KPI reports. As the name suggests, only key data that are relevant for evaluating the business are tracked.

KPIs make tracking your business performance easy by comparing it directly to your set objectives. With KPI reports, you get a detailed summary of your performance. It allows you to track your progress, holds you accountable, and keeps you on the path to attaining your objectives.

2. KPI Dashboard Solutions

KPI dashboards are a valuable tool for any business executive or manager. These dashboards provide an overview of the business performance. They help business managers identify the areas where their businesses are underperforming, performing, and overperforming.

Decision-making at businesses or organizations becomes clearer and more effective with KPI dashboards. Businesses can make better judgments and track short-term, mid-term, and long-term goals in real-time.

There are a rich array of KIP dashboard solutions in the market. Some offer simple KPI tracking tools for small businesses, while others use advanced business intelligence solutions suitable for large organizations.

Here are four of the best KPI dashboard solutions for businesses.

#1 Scoro

Easy-To-Use KPI Dashboard Solution

Scoro KPI dashboard software is a cloud-based business tracking and monitoring tool for small to medium-sized businesses. The platform allows you to oversee all parts of your business from one central point.

Its dashboards are customizable and user-friendly. If you have an existing software you use to track and monitor your data, you can integrate it with Scoro.

#2 Geckoboard

Best KPI Dashboard Solution with Multiple Integrations

Geckoboard is a KPI dashboard solution that helps businesses collect, track, visualize and share information in real-time. The platform presents a clear overview that is easy to understand for all.

There are over 80 integrations available on the software for businesses to use. You can find custom KPI templates to use on the platform.

#3 Sisense

Best Visually-Appealing KPI Dashboard Solution

Sisense is a KPI dashboard solution that converts complex data into understandable insights. The business intelligence platform uses an interactive online dashboard that provides businesses with multiple visualization templates to choose from.

The software integrates with platforms such as SalesForce, Adwords, and Google Analytics.

#4 Tableau

Best KPI Dashboard Solution for Sales-Driven Data

Tableau is a KPI dashboard solution for data discovery and visualization. The platform supports the use of different data sources such as Salesforce, Oracle, MS Excel, Google Analytics, and MS SQL.

KPIs and Metrics FAQ

Next Step: Become A More Data-Driven Company

Today’s world places more emphasis on data than in any time in human history. With every business aspect now available in quantifiable data, businesses have little choice but to embrace a more-data driven culture.

However, not all business metrics are important for businesses. Only key performance indicators are relevant.

You can become a more data-driven and effective company through the use of KPIs (Key Performance Indicators). While implementing KPIs, only use those that are directly related to your business goals.

Make the KPI process easier with KPI dashboard solutions. Scoro is an easy-to-use KPI dashboard solution for small to medium-sized businesses.

Geckoboard offers real-time KPI statistics with over 80 integrations. Sisense is the best visually-appealing KPI dashboard solution.

Tableau is the best for businesses focusing on sales-driven KPIs.

Use KPIs the right way and watch how easily your company performance increases and your company objectives are met.

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