It’s the end of the month, and you’re preparing to update your team and your manager on the status of your project. You know it’s going well, but you have to show them. How do you share the project’s successes, and any concerns you have, in a quantifiable way?
The answer is key performance indicators (KPIs). KPIs measure specific aspects of performance, enabling you to monitor and share progress in a clear, objective way.
If you’re just getting started with tracking KPIs, don’t worry. In this quick guide, you’ll learn all the basics of key performance indicators, including what they are and how they fit into broader goal-setting frameworks, as well as specific types and examples.
What are key performance indicators?
A key performance indicator is a numeric measure of performance for any activity that’s important to your business.
Think of a goal or objective as a destination: the thing you want to achieve. A KPI helps you track progress toward that destination. KPIs are more granular and specific than goals and are easier to track on a daily or monthly basis.
Each department or team within a business will have different KPIs relevant to them, ranging from high-level, company-wide indicators to marketing KPIs for individual ad campaigns.
The difference between KPIs and metrics
You may hear the terms “key performance indicator” and “metric” used interchangeably. The only real difference between the two is the word “key.” KPIs are essential metrics that you really care about, while a metric is any number that you track.
Which metrics you define as KPIs will depend on your business priorities. For example, say one of your company’s goals is 20% month-over-month growth. A KPI for this goal would be something like “new customers this month,” whereas a metric would be something less crucial like “number of blog visitors.”
How to use key performance indicators
Whether you tie KPIs to broad strategic goals or team-specific objectives, their primary purpose is to help you make better decisions and improve your business’s performance. KPIs can inform your company operations in a number of different ways, depending on which ones you choose and how you share them with your team.
Track changes over time
Continuous tracking of KPIs lets you see whether things are not working and then make adjustments as needed. Monitoring key performance indicators over time will also help illustrate the effects of any changes or new campaigns.
Say you run an ecommerce website, and one of your key performance indicators is shopping cart abandonment rate. You notice a steep rise in cart abandonment after redoing your online checkout.
This tells you right away that the new process may have a usability issue that’s causing customers to give up before completing checkout. Because you spotted the problem early, you can fix it faster.
Keep team members focused
KPIs are, by definition, your most important metrics. By defining specific KPIs, you show your team what to focus on.
Sharing key performance indicators with your team helps cut through the noise of all the data you’re collecting every day. For example, if your marketing team knows that click-through rate is a higher priority than ad impressions, they can design and optimize online advertising campaigns accordingly.
If the company changes strategies, managers should set updated KPIs that tie in with new goals and objectives. This will help team members determine how to adjust their current methods to meet the new performance standards.
Goals can be broad and open to interpretation. Take the example above of “become the market leader in X.” How do you show executives that the company is masking progress toward this objective or identify that you’ve successfully achieved it?
The specific, measurable nature of key performance indicators allows you to clarify your successes by clearly showing how you know you are making progress toward your goals. In our example, the KPI “sign-ups” helped illustrate the company’s growth towards becoming a market leader.
When setting KPIs, you define what success will look like and how you will measure it. When it’s time to share progress, you have the relevant data to back up your claims.
Types and examples of key performance indicators
Keep in mind that key performance indicators will look different for each department. For example, customer support teams might want to track customer satisfaction (CSAT) and first response time. Marketing teams might care about cost per acquisition or ad click-through rate.
There are dozens, if not hundreds, of individual KPIs to choose from. Speaking more broadly, however, there are four commonly cited categories: lagging, leading, strategic, and operational.
There can be overlap between the categories. For example, number of sales leads is a leading KPI, but it could also be an operational KPI. However, a lagging KPI cannot also be a leading KPI. Operational and strategic KPIs are mutually exclusive as well.
1. Lagging KPIs
A lagging KPI is a metric where you have to wait a long time to see results after implementing a change. This might be because business processes cause a delay, such as the lag between an initial sales pitch and a conversion if you have a free trial period.
Lagging KPIs are useful for tracking long-term progress and identifying trends. In many cases, such as with content marketing KPIs like organic traffic or if you have highly variable data, you need to wait weeks or months (if not longer) to see changes in lagging KPIs.
Examples of lagging KPIs:
- Customer churn rate: Looks back over a certain period to see how many customers you lost during that time. If you’re trying to improve your customer onboarding process, churn rate is a lagging KPI because it takes time to see the effect of your changes.
- Percent returning customers: The percentage of your customers who have purchased from you more than once. This is a lagging KPI that helps measure the success of ongoing customer retention efforts.
It takes time to see how business changes impact lagging KPIs, so they are more helpful for evaluating the effectiveness of a project than for a team tracking the immediate impact of their work.
2. Leading KPIs
Leading KPIs are used to look at immediate results. They give you an earlier indication of performance than a lagging KPI. However, while leading KPIs can help predict future trends, they do not offer as accurate a picture of long-term effects as lagging KPIs.
For example, a leading KPI for sales might be the number of leads in the sales pipeline. An increase in leads can help predict growth further down the sales funnel, although you will not know how much growth actually occurred until you look at lagging KPIs like the increase in number of customers over the quarter.
Examples of leading KPIs:
- Free trial sign-ups: Number of people signing up for a free trial of your product. You can track this in real time, and growth in this KPI could indicate future growth in numbers of paying customers.
- Burn rate: The rate at which your company is spending money. This helps predict how long your current cash balance will last and indicates if you need to cut costs or increase fundraising and sales efforts.
You don’t always need to track leading KPIs on an ongoing basis, and they can change frequently to match the current projects you’re working on. For example, the number of attendees at a marketing event is a one-time leading KPI that indicates potential future customer growth.
3. Strategic KPIs
Strategic KPIs measure long-term progress toward core objectives and are typically tracked on a monthly or even yearly basis. You don’t need to check these KPIs daily as they tend not to change rapidly. It is important to monitor them over time to see how your company is progressing toward its core goals.
Examples of strategic KPIs:
- Monthly active users: Tracks how many people are actively using your product each month.
- Revenue growth rate: Measure month-over-month increases in revenue.
You won’t need new strategic KPIs very often unless your company changes its long-term goals dramatically.
4. Operational KPIs
Operational KPIs report day-to-day changes that need urgent attention. They show your progress in real time, and your team might switch them fairly regularly to keep pace with their current priorities. For example, your customer support team might focus on call tracking metrics one day, but on social media or website chat metrics the next, depending on which source is bringing in the most tickets.
Examples of operational KPIs:
- Current ticket volume: Adds up the number of outstanding customer support tickets your team has right now.
- Current accounts payable: The total outstanding bills your company currently owes.
Operational KPIs can change quickly, and it’s best to check them often. Add them to your team dashboard so everyone can monitor them in real time and see shifts as they occur.
Within each of these four categories, you can have tangible and intangible KPIs. Tangible KPIs are easy to quantify, such as average order value or gross profit margin. Intangible KPIsaim to quantify data that is typically qualitative, like customer sentiment. Intangible KPIs include Net Promoter Score and CSAT.
Looking for more examples of key performance indicators? Check out our list of 90+ KPI examples to keep your company on track.
Fit KPIs in with your other goal-setting frameworks
KPIs are sometimes seen as the rival to other goal-setting systems, like objectives and key results (OKRs), management by objectives (MBO), and the balanced scorecard (BSC). In reality, KPIs fit in well with most other systems.
Each of these management systems uses specific, measurable indicators to track progress toward goals. In many cases, these indicators are KPIs.
Take one of the most common frameworks: OKRs. You set an objective, and then you have a key result (KR) to measure your progress toward that destination. Key results are often numeric, in which case they are KPIs. The only time a KR isn’t a KPI is when it is an action or a task to be completed, like “ship package” or “launch website.”
No matter which goal framework you’re using, key performance indicators help make sure that your objectives don’t get stuck as an abstract idea. By identifying KPIs, you are not just setting goals – you are also establishing a clear plan to track progress.
Interested in learning more about key performance indicators? Check out these resources:
- How to set meaningful and effective KPIs
- Practical Performance Measurement by Stacey Barr, along with her blog Measure Up
- 12 ecommerce KPIs you should be tracking (+ tips from ecom experts)
- 13 important sales metrics and when to use them
Originally published on 14th October 2019, updated on 11th November 2020