What is a Key Performance Indicator (KPI)?
What is a KPI? It’s commonly agreed that KPIs, which stand for Key Performance Indicators, are a really powerful tool to aid business growth. However, to use them effectively it’s also important to really understand what a KPI is and isn’t. Let’s start with our definition: “A KPI is a metric which indicates how a business or team is performing against its goals. They are given context in terms of a target or benchmark which relates back to a business’s objectives and goals.”
Many experts on business strategy and analytics offer their own definitions for KPIs. For example:
“A key performance indicator (KPI) is a metric that helps you understand how you are doing against your objectives.”
“In simple terms a KPI is a way of measuring how well we as individuals or how well entire companies or business units are performing. KPI is short for Key Performance Indicator. A KPI should help us understand how well a company, business unit or individual is performing compared to their strategic goals and objectives.”
What unites these experts in their definitions of KPIs? They both say it a is a metric, and they agree that metric should relate back to your business goals and objectives. So, if a metric does not directly influence your achievement of business goals, then it is not a KPI, it is simply a metric.
Why are KPIs important?
A KPI ultimately provides focus for a business or team. Through having them you can unite a team towards achieving a common objective which will help the business succeed.
They also allow a business or team to track performance against their overall objectives. This means that if things aren’t going well you can quickly take corrective action. Similarly, by tracking KPIs you also easily spot any opportunities to seize which will accelerate your trajectory towards hitting goals.
What defines the KPIs that matter to a business?
At a high-level, your business goals and strategy will define the KPIs for your business. However, the KPIs that are important to a business will mostly vary based on two factors. Firstly, your business model will impact the KPIs that matter to you. For example an e-commerce website such as Amazon will really care about the average basket value of purchases on their website because increasing it accelerates growth. However, a news website such as the Huffington Post won’t be interested in this because they don’t have shopping baskets. They’ll be more interested in average number of pages a user looks at. This is because the more pages a user looks at the more adverts they can show, which is what will drive revenue growth for them
Secondly, your stage of business growth will impact what KPIs are important to you. For example, in a business which is just starting, something like Customer Lifetime Value (CLV) is meaningless because there is little customer lifetime to put a value on. However, for a long established business growing the lifetime value of each customer can be vital lever for growth and consequently an important KPI.
If you want help getting started with deciding what KPIs matter to your business, then we recommend reading our article on how to choose your business KPIs.
What different types of KPIs exist in a business?
There are three major types of KPI within a business. Firstly, overall business KPIs. These are the KPIs that the whole business is working towards. They will be broad and will be metrics which everyone in the business can identify with and understand. For example in a Software as a Service business like Geckoboard these are things such as grow Monthly Recurring Revenue (MRR) by a certain percentage each month. This is what the overall success of the business relies on.
The second type are departmental / team KPIs. Whilst the whole business needs KPIs that enable them to focus on a common goal, each department or team within a business also requires KPIs that unite them around a goal. The important thing is that these departmental or team indicators feed into the overall business reaching their KPIs. For example, in Geckoboard where our focus is on growing MRR every month each department might have KPIs which are relevant to their work and help drive revenue, such as:
- Sales - Having more demos is what drives more customers and ultimately more revenue through sales. So their KPI could be to grow demos by a certain amount each month as a team.
- Marketing - Having more potential customers trialling the product each month will also drive more customers and ultimately revenue. As such, their KPIs would be about growing trial sign-ups each month.
- Customer Success - Our Customer Success team are responsible for delighting our customers. Ensuring customers don’t leave makes sure revenue continues to grow, so their KPI would be to reduce churn rate by a certain amount each month.
- Product & Engineering - Whilst for other departments it’s easy to define KPIs, by nature of the work that Product and Engineering do being more distant from revenue generation, it’s a little more challenging. However, if you break it down there are KPIs that are relevant. To support reduction of Churn, keeping our application working will ensure customers are happy, so application uptime targets could be one KPI. Also, delivering new relevant features and customers using those features successfully will help drive revenue growth. As such, target numbers of customers using features and completing tasks using those features might be other KPIs.
The third type are Individual KPIs. These are KPIs for individuals within a business, and are often tied to individual performance appraisals. However, there is a school of thinking that tying individual KPIs to performance appraisals is counterproductive. An argument which performance measurement specialist Stacey Barr summarises well here. In summary the arguments against are that it encourages employees to fudge figures distorting the reality and also encourages competition as opposed to collaboration. However, this can be overcome, according to Stacey, by detaching KPIs and performance appraisals. Also, instead of choosing measures to judge how people have performed against each other come performance appraisal time, help people choose KPIs based on the results they collaborate to produce, and use those measures as ongoing and regular feedback in between performance appraisals to adjust and improve how those results are produced.
Either way, many businesses see individual KPIs as important to building an effective business. To give you an example of how this might look, I’ll continue the example from Geckoboard above and focus on the marketing team and how their individual KPIs might look:
- Content Marketing Manager - What will drive more trials (the overall goal of the marketing team) is to get more visits to the website. For a Content Marketing Manager their responsibility is to produce content which drive visits such as blog posts, ebooks, podcasts and other resources. Their KPIs would be focused on producing a certain amount content each month, which delivers a certain amount of visits to drive the required number of trials.
- Product Marketing Manager - The product marketing manager’s job is to effectively communicate the benefits of the product and launch new features. Their KPIs might be focused on delivering a certain number of visits to announcements about new product launches. Also, given writing website messaging which persuades people to take a trial is one of their core areas they might have a KPI to improve the conversion rate from website visit to trial by a certain amount.
- PR Manager - A PR manager is responsible for generating mentions in the press of Geckoboard and monthly targets on this would be one metric. However, as part of that, their goal is really to raise awareness of Geckoboard. So other individual KPIs may include a target in terms of direct visits to Geckoboard’s website or brand related searches for Geckoboard.
The other type of metric to be aware of when defining KPIs are Supporting Metrics. These are not KPIs, but they can compliment your KPIs nicely. Ultimately, Supporting Metrics define if you’re hitting KPIs in an effective way. They are a way of playing devil’s advocate with you KPI achievements, but aren’t KPIs themselves. You want to keep an eye on them but don’t want to obsess over improving them. The Indicator in KPI suggests that KPIs are not a perfect metric, it indicates performance but doesn’t provide a perfect picture.
For example, if like Geckoboard your KPI was to improve MRR as a business and you achieved your growth targets, then you might want to check your supporting metrics such as the Cost of Acquiring Customers (CAC). If MRR has gone up but your CAC has increased significantly then whilst you’re growing it may be that you’re growing in an unsustainable way. Supporting Metrics ensure that you’re achieving your KPIs in a way which isn’t having a negative impact on your business. This article from Bernard Marr explain nicely the potential downside of KPIs, which shows why Supporting Metrics are important.
How many KPIs should you have?
It’s important not to have too many KPIs as this dilutes focus for your business on the actions that are going to drive success. Ben Yoskovitz, author of Lean Analytics, even endorses focusing on the one KPI that matters in our video interview. Having one KPI that’s important for the whole business to work towards can unite everyone to have the same focus. However, there’s likely to be other departmental and individual KPIs which influence that one KPI that matters for the whole business. Also, supporting metrics are worth keeping an eye on to ensure you’re achieving your KPIs in a sensible way, which is sustainable for the business. Just ensure that there aren’t so many KPIs that the Key in KPI is redundant and focus dilutes.