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What is a key performance indicator (KPI)?

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A KPI is a numeric measure of performance for any activity that’s important to your business.

Sometimes known as a ‘performance measure,’ the term KPI is often used interchangeably with ‘metric.’ The only real difference between the two is the word ‘key.’ KPIs are important metrics that you really care about, but a metric is any number that you track. For example, a KPI would be something like New Customers This Month, whereas a metric would be something less crucial like Number of Blog Visitors.

It’s also worth noting that a KPI doesn’t have to be financial, as is sometimes assumed. It could, for example, reflect customer experience, product performance, or operational efficiency.

And what about the difference between a KPI and a goal? Well, a goal (or objective) is the destination: the thing you want to achieve. A KPI tells you how close you are to that destination.

How KPIs interact with goals and objectives How KPIs interact with goals and objectives

How are KPIs used and what are the main benefits?

You can use KPIs to measure progress on high-level strategic goals like revenue. You can also have team-specific KPIs. For example, Customer Support might want to monitor Customer Satisfaction (CSAT), and Response Time. Marketing might care about Retention Time, or Cost Per Acquisition. And Product might care about Daily Active Users, or Conversion Rate from trial to paying customer.

Whatever you use KPIs for, the main purpose is to help you make better decisions, and improve your business’ performance. They do this by:

Clarifying success

Goals can be broad and open to interpretation — ‘Build a world-class team’ is a classic example. And if there isn’t a clear definition of success, it’s tempting to tweak it post-results.

With KPIs, you define success from the start and decide exactly how you’ll measure it. This way of working is far more rigorous and sets the standard for an evidence-based culture.

Focusing everyone

Sharing KPIs with the wider company makes it clear what you’re all striving for. It cuts through the noise and focuses attention on the things you really care about. And if the strategy changes, KPIs help to steer everyone in the new direction.

Tracking progress

Once you’ve set KPIs, you can track progress throughout a project. This lets you see when things are working or not working and adapt. For example, you might launch a marketing campaign, notice a drop in Conversion Rate, and realize there’s a usability problem. Because you spotted it early, you can fix the problem faster.

Motivating teams

KPIs can draw out teams’ intrinsic motivation by giving them something meaningful to strive for, and showing their progress.

The different types of KPIs

Academic definitions divide KPIs into subtypes. We don’t find these particularly useful as they don’t help you with the important part: setting good KPIs. But, if you hear the words thrown around, here’s what they generally mean:

  • Lagging KPIs show how you’ve performed over time. They’re great for showing progress and for keeping everyone focused. But you can only see your effect on them after the fact, so they don’t help you make decisions day-to-day
  • Leading KPIs show you what’s happening right now and can help to indicate future results. Customer Signups would be an example as you could see the number changing in real time
  • Strategic KPIs measure your progress towards core objectives like Monthly Active Users (MAU). They don’t tend to be changed as frequently or checked daily as they’re significant but not fast-moving
  • Operational KPIs measure day-to-day things that need urgent attention, like Number of Open Support Tickets. They show your progress in real time and are changed fairly regularly depending on current priorities
  • Tangible KPIs are concrete things that are easy to observe and measure. For example, Number Of Customers or Volume of Sales
  • Intangible KPIs are slightly more abstract things that are harder to observe and measure, like Net Promoter Score (NPS) and Customer Satisfaction (CSAT)

How do KPIs fit in with other goal-setting frameworks?

KPIs are sometimes seen as the rival to other goal-setting systems like OKRs, Management By Objectives (MBO), and the Balanced Scorecard (BSC). Actually, KPIs fit in well with most other systems.

Take one of the most common frameworks: OKRs. You set the Objective (the high-level intent or “destination.”) Then you have a Key Result (KR) to measure your progress towards that destination. This is generally a number, in which case it’s a KPI. The only time a KR isn’t a KPI is when it’s simply to ship or complete something.

KPIs can also fit in alongside your OKRs. This is useful if you want to keep an eye on things that aren’t OKRs. For example, the focus might be to increase the number of customers, but you still might want to monitor things like Retention and Average Sales Price. Having these as separate KPIs means you can react to problems and avoid unintended consequences.

How KPIs fit in with OKRsHow KPIs fit in with OKRs

In summary

It’s easy to get lost in the different definitions and terminology, but here’s all you really need to know about KPIs:

  • They’re numeric measures of performance for any activity that’s important to your business
  • They can be used to measure anything that matters, not just financial aspects
  • They work with, or alongside, existing goal-setting frameworks

Extra reading

Once you’re onto the stage of choosing meaningful KPIs we recommend these books:

  • Practical Performance Measurement by Stacey Barr. This is the ultimate guide to all-things KPI, along with her blog Measure Up
  • KPI Checklists by Bernie Smith. When you’re actually creating or improving KPIS, this practical step-by-step guide is extremely helpful

You might also want to look at our KPI examples for inspiration.

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