What Is KPI and How to Measure It Effectively: Definition, Examples & Templates - Financesonline.com (2024)

Data is what makes the world go ‘round. With the digital age in full swing, information is everywhere, waiting to be mined and analyzed. In fact, just within your company, there’s plenty of data you can use to help improve your operations. All you have to do is know what data to collect, how to collect them, and how to understand them. A good place to start is by measuring KPIs. However, you might be wondering, “What is KPI?”

To help you out, we will be discussing all you need to know about key performance indicators from its definition to the different methods through which you can measure it. Moreover, we have provided some templates that you can use to get started on measuring your KPIs.

The success of your business endeavors relies on how well you understand your capacities. That is to say, the more you know your strengths and weaknesses, the better you will be at planning your operations, addressing issues, and ensuring productivity in the workplace. This is why now more than ever is the time to tap into the stockpiles of data that your company has.

In fact, according to the most recent BARC BI Trend Monitor, companies are increasingly establishing a data-driven culture in their workplaces this 2024. The same study revealed that many businesses are focusing on improving data management, learning more about data discovery, and investing in self-service business intelligence. So, it’s safe to say that remaining competitive in the digital age means understanding data.

The simplest way to start is to measure your KPIs. These will allow you to proactively check the progress of your projects and see efficiencies or inefficiencies in your processes. Thus, these indicators will help you know what changes to make to drive your business forward. Consequently, 70% of executives worldwide say that KPIs greatly affect their decision making.

However, not all companies leverage data to manage their operations. If you’re one of these organizations, we will help you get started by discussing the key performance indicator definition, types, and examples. With this information, you can gain more insight into how you can use KPIs to your advantage.

Of course, aside from learning about what is KPI, it also pays to utilize technologies that will help you promote a more data-driven work culture. We highly suggest that you start by adding a reliable business intelligence software to your arsenal of applications.

What is KPI?

A KPI or key performance indicator is a quantifiable measure of progress toward intended results. It is a detailed specification that lets you track particular objectives. In a way, it serves as a compass that guides companies and organizations by helping them know whether or not they are on the right path towards achieving their long-term goals.

Businesses often use this to evaluate operational performance based on set targets. For example, it can serve as a means to determine the progress of a project or gauge the quality of their output.

An important thing to note here, though, is that KPIs are not to be confused with metrics. Metrics are used to measure certain business activities during particular time periods. Meanwhile, KPIs tackle the evaluation of specific strategic objectives against specific targets. In other words, all KPIs are metrics; however, not all metrics are KPIs.

Why is KPI Important?

KPIs have become crucial in monitoring the success of business operations. However, you might be asking yourself why it’s important in the first place. After all, the proof is in the pudding, right? If you’re turning a profit then you must be doing well.

The only problem with this kind of approach is that you won’t know if you’re on the right track until you’ve either succeeded or failed. On the other hand, if you utilize KPIs, you won’t have to wait to find out. This is because KPIs can:

1. Gives you actionable information on demand
2. Allow you to measure your goals accurately
3. Promote a data-driven work culture
4. Provide you with insights that help reinforce decision making
5. Help you remain consistent in operations even as employees, priorities, and business goals change
6. Make it easy for you to reward staff for doing well. Moreover, it will allow you to gauge if staff members need more training

As you can see from the reasons we’ve cited, KPIs not only measure your overall progress. It gives you detailed insights into every aspect of your operations. That is to say, it lets you gauge if there are things that you can do to make outputs better or processes more efficient as you go.

Types of Key Performance Indicators

There are all sorts of data that you can collect for your business monitoring efforts. In a similar light, there are plenty of KPI types that you can use. After all, different business targets require different measurement approaches.

To help you determine what types of indicators to use to get the information you want, we’ve detailed some of the most common types of key performance indicators types used by businesses:

1. Leading. Indicators that help you forecast changes depending on current processes. These are input-oriented so you can expect that while they are easily influenced, measuring them is not always going to be accurate (e.g., number of unique site visitors).
2. Lagging. Indicators that measure the outcome of business processes. However, these are output-oriented so it only provides data on events that you can no longer influence (e.g., total sales).
3. Quantitative. Indicators that are presented numerically (e.g., inventory counts).
4. Qualitative. Indicators that are presented using descriptive characteristics (e.g., employee satisfaction rate).
5. Input. Indicators that measure the different resources used for a particular process (e.g. total funding spent on employee training).
6. Output. Indicators that reflect the outcome of specific process activities (e.g. customer acquisition rate relative to a campaign).
7. Process. Indicators that show the efficiency or productivity of particular processes (e.g.. delivery speed).
8. Directional. Indicators that show whether current processes have a negative or positive impact on your organization (e.g.. client churn rate).

By having a good grasp of these KPI types, you can simplify the process of creating indicators for your business. Moreover, you can have a better shot at ensuring accuracy in your monitoring efforts.

What Are Examples of KPIs?

Once you’ve narrowed down the types of KPIs you’ll be needing for your business processes, you can move on to specifying your indicators. To help you get an idea of where to start, we have listed some KPI examples for different processes below.

KPI for sales

1. Sales Target. A KPI that compares your current sales wins to past performance to help you set future targets for your team.
2. Quote to Close Ratio. This indicator measures the number of quotes your team sent to customers against the number of customers that made a purchase.
3. Sales Per Representative. This KPI for sales measures how many deals each of your representatives are closing so you can gauge the productivity or determine the strengths and weaknesses of your employees.

KPI for marketing

1. Social Media Engagement. A KPI for marketing that tracks how your social media followers interact with your content. This can sometimes be measured by the number of likes, retweets, or shares that your posts and other social media content are getting.
2. Landing Page Conversion Rate. This measures the number of leads who visit your landing pages against the number of leads who converted through the landing page.
3. Click-Through Rate. An indicator that counts how many potential customers are clicking your emails, advertisem*nts, and other online content to learn about what your business has to offer.

KPI for Employees

1. Employee Satisfaction Index. This is KPI lets you gauge how happy or unhappy your employees are about company processes and policies.
2. Employee Productivity Rate. This is one of the most common key performance indicators for employees. It determines workforce efficiency by measuring the total input vs the total output of your employees.
3. Attrition Rate. This indicator measures how many employees leave a company against the average number of employees during a specific period of time.

KPI for Customer Support

1. Resolution Rate. This measures the number of tickets assigned to your team versus how many tickets they resolve. Among the many customer support KPIs, this is perhaps the best at helping you monitor productivity and efficiency.
2. Average First Response Time. A KPI that focuses on the amount of time it takes a representative to respond to a customer request.
3. Number of Ticket Backlog. This indicator lets you track the number of unresolved customer requests during a set period of time.

Of course, the key performance indicator examples we’ve cited here are only a few of the many indicators you can set for the different processes you have. If you’d like to find out more, you can check out our list of business intelligence KPIs.

How Do You Measure KPI?

Knowing the different types and examples of indicators is only the first step to fostering data-driven processes. That is to say, KPIs won’t collect and analyze themselves. So, to help you put it to use, we will now tackle how to measure KPI.

Firstly, you will have to specify what aspects of your operations you want to monitor. After that, you can zero in on the possible indicators that will help you measure them. Lastly, you should pick a method through which these should be measured. Below, we’ve detailed some of the methods you can choose from.

1. Counts

Counts are the most basic method of tracking your key performance indicators. It lets you perform simple monitoring of factors that can be measured with whole numbers. So, it might not be the best option if you want to measure the frequency of an event or trends relating to an event. For example, you can use this to count incidents of data breaches in your workplace but it won’t be able to help you monitor how many times it happens over a period of time.

2. Totals

In a similar vein as counts, totals allow you to perform basic KPI tracking. However, unlike counts, these are continuous variables. That is to say, it can measure all sorts of sums, including data with decimals. A good example here would be your company’s total annual revenue.

3. Ratios

Ratios are used to compare and contrast two sets of data. Therefore, it allows companies to pinpoint differences in outcomes, check returns on investment, or measure other pairs of data side by side. For example, you can take a look at the number of leads that you generate versus the number of leads you can convert in a particular period of time. In a similar light, this can help you compare in-store purchases against online purchases to know where your products are selling better.

4. Averages

Counts and totals let you get the sum of particular data. Averages, on the other hand, allow you to pinpoint a central value in a particular set of data. Consequently, it lets you see the bigger picture in your data. This can help you if you are looking to check for frequency of occurrences, set profit targets, or create revenue projections. For instance, if you use cycle time as a KPI for your supply chain processes, you can determine the time you spend manufacturing a product.

5. Percentages

Lastly, we have percentages. These allow you to divide a particular set of data depending on varying factors. As a result, it is great for understanding how many of your total sales calls ended in conversion, how many of your current employees are satisfied with their job, and similar data.

How Do You Create a KPI?

We’ve said it over and over again—KPIs are great tools for improving your business. However, as the old adage goes, “too much of anything is bad”. In other words, keeping track of too many KPIs might actually do more harm than good to your processes.

According to Mukul Deoras, the chief marketing officer of Colgate-Palmolive, the biggest challenge today is sifting through meaningless KPIs and focusing on the few that will yield the most crucial insights. So, to prevent you from overwhelming yourself with data, here is a step-by-step guide to creating KPIs that are relevant to your processes:

1. Define your goals and objectives. Ask yourself, where do you want your business to be in ten years. What long-term goals do you want to work on? Moreover, what measures will bring you closer to your goals?
2. Specify your plan of action Note down the output that you need to produce and map out the processes that you will have to implement to achieve your goals.
3. Set up your KPIs accordingly. Determine what factors will be able to monitor whether your outputs and processes are helping you fulfill your goals and objectives.

So, for example, your long-term goal is to grow your startup. Then, one objective here would be to reinforce marketing strategies to boost your customer base. To help you measure the success of your campaigns, a good KPI to consider would be the customer acquisition growth rate.

Setting Up KPI Reports

Now that you have created and measured your KPIs, the only thing left to do is to set up your KPI reports. These should contain the indicators you are measuring and their respective statuses. In other words, these serve as the summaries of your monitoring efforts.

A standard KPI template would include the following information:

1. Description. This should give context to the KPIs you are measuring. So, it must explain what objective the indicator is tracking.
2. Report Owner. This should specify who is gathering the data to ensure accountability.
3. Measure Formula. Define what methodology you used. This makes it easier to understand how the data in the report was yielded. Moreover, it allows other employees to recreate the process for similar indicators.
4. Data Summary. Lastly, the report should contain a summary of the KPIs you gathered.

Of course, this is only a bare-bones structure of a KPI report. So, it is ideal for those who are beginning to track their KPIs. However, as you collect more data and track more complex indicators, you might need to add more information to your reports such as RAG statuses, charted data, trend graphs, and the like.

You can create these templates manually on spreadsheets and perform your calculations there. On the other hand, if you want to save time, you can also leverage SaaS products to create them. To get you started, be sure to look at this list of best BI tools for KPI dashboard creation.

Improving Your Business Using KPIs

In a world where knowledge is power and data is currency, it is important for businesses to know how to harness information. However, you must remember that data is only as good as the questions you ask. So, you should do your best to focus on learning what is KPI, which ones to monitor, and how to measure them properly.

As a good rule of thumb, you should create KPIs aligned with your long-term business goals. Moreover, you should only measure indicators that are most crucial to your operations. This way, you don’t overwhelm yourself with too much data and lose focus on what you want to achieve.

In addition, you should consider investing in business intelligence platforms or data analytics tools to reinforce your monitoring efforts.

To help you further maximize your use of KPIs, we highly recommend you take a look at our compilation of business intelligence statistics. This should give you a better idea of how other companies are measuring their KPIs and utilizing data to promote business growth.