- Key performance indicators (KPIs) are the core metrics a business uses to track its progress.
- Harness KPIs by aligning them with your company’s strengths and weaknesses and position in the marketplace.
- Managers need to understand how to collect and analyze KPI data.
- This article is for small business owners interested in using KPIs within their organizations.
Imagine your business journey is a road trip. Along the way, you have goals you’d like to meet and milestones you’d like to reach. Those details define your endeavor, ensuring you don’t forget why you started and where you hope to end up. Key performance indicators, also known as KPIs, are how businesses track their progress on that journey. Setting and measuring KPIs let business owners know how their organization is performing – where the company has fallen short, where it has excelled, and what needs to change.
What are KPIs?
Every business should have objectives that are specific to its brand, and executive decisions should focus on improving performance in these areas. These objectives are KPIs, and they guide your business in the right direction. KPIs add purpose to your company and help you check off those pit stops along your road trip.
An example of a KPI would be a goal to increase your profit margin for your line of biodegradable paper towels by 20% in the fourth quarter. With that objective, business activities for the next few months should relate to whatever it takes to accomplish that KPI. After the quarter ends, you would assess whether you achieved the KPI. Your success or lack thereof should inform the next KPI you set.
Why are KPIs important?
Every business needs money to survive, but revenue is generally not considered a KPI. KPIs are other data points that show whether a company is growing financially and if it is otherwise on the right track. Picking the right KPIs and tracking them properly can add value to a business in numerous ways.
Establish company focus.
Even small businesses have numerous functions, not all of which are aligned with each other or even the company’s financial performance. But when an organization focuses on the right KPIs, everyone on the team can quickly grasp how the business is doing and how their work contributes to company performance. When you set KPIs, the business’s objectives become clear to everyone.
Assess business health.
A well-thought-out set of KPIs helps leaders understand the health of an organization and where it needs to improve. Take app companies, for example. Two common KPIs for these businesses are user growth and daily active users. By tracking these two related but distinct metrics, executives can better understand what’s going right and what’s not. Based on that assessment, leaders can make informed decisions on how to improve the business.
Gain employee insights.
Teams can set their own KPIs to meet in addition to company-wide targets. That way, KPIs help managers keep workers accountable to their particular department and across an organization. Setting individual KPIs also gives team members goals to strive toward and lets them know where they should center their efforts. Monitoring their progress will let you know who is performing well and which KPIs need to be adjusted. KPIs can even boost morale if you reward those who reach their agreed-upon goals.
Did you know?: KPIs can be an important part of tracking employee performance and creating a performance management plan.
How do you set KPIs?
Each department in a business, whether it’s marketing or finance, is likely to have different KPIs. When determining what those KPIs should be, set relative indicators that will help you focus on what matters most to you and your brand. For instance, a KPI for your marketing efforts might be “number of conferences attended in X months,” while a KPI for your financial efforts might be “percentage of revenue increase in X years.”
KPIs also vary depending on the industry. A PR agency might measure media mentions, while a consultancy might measure customer acquisition. However, no two companies – even those in the same field – should have the exact same KPIs. It’s crucial to outline your values as a business in order to have a unique vision to measure against and to ensure you are measuring the right aspects of the company.
To determine the right KPIs for your organization, ask basic questions about your brand: What do you add to your industry? What do you offer customers that your competitors don’t? What are your monetary goals, and how can you achieve them?
You may want to start by determining some SMART (specific, measurable, assignable, realistic and time-based) objectives. Then determine the best KPIs to evaluate if you’re reaching them. [Read related article: How to Set Achievable Business Goals.]
“To set your own KPIs, you need to know both how your strategy creates value and what that value is,” said Kyle J. Brost, CEO of Spark Insight Partners. “Once you’ve defined … the unique or key activities you will perform, you can start setting your own KPIs by making those activities measurable, and then measuring them.”
Make sure your business model and your employees reflect your KPIs. Every person involved in your brand should have the same overall objectives, so only hire those who share your vision – and then measure them, too. Creating a clear company vision statement can help with this process.
Tip: Almost all businesses use some form of email marketing. Here are the email marketing KPIs to consider for tracking the success of your campaigns.
How do you measure KPIs?
To get the most out of KPIs, businesses need to measure them in line with their goals.
Kent Lewis, president and founder of digital marketing firm Anvil Media, said one of his clients evaluates his business with just one metric: customer satisfaction. “He’s found that checking in regularly with his clients leads to correcting small issues before they become major problems,” Lewis said. “His happy clients drive his business through improved retention, account growth and referrals to new business.”
Customer satisfaction is, in fact, a defining factor of success. If you want to meet your KPIs, you need to please consumers. To gauge customer satisfaction for his own business, Lewis analyzes Anvil’s net promoter score, which measures how likely customers are to recommend a company to others.
“Twice a year, Anvil sends a brief survey to its clients to evaluate the quality of their experience,” he said. “The process helps us identify strengths and weaknesses and improve the customer journey.”
Another simple yet meaningful way to measure your success is by regularly reviewing data that relate to your KPIs, especially financial statistics.
“Determinants of this KPI can be your growth in revenues, profits and the shareholder value,” said Ketan Kapoor, co-founder of Mettl, an online tool for assessing job applicants. “If these metrics show an upward trend, consider that your employees are running a good show.”
If not, however, you’ll want to make a change. When something isn’t working for your company, it will fall short of your KPIs, and you’ll know to adapt accordingly. KPIs can also contribute to a performance self-assessment, helping team members objectively evaluate their progress.
Effective KPIs are central to running successful businesses
Successful businesses have leaders who understand where the organization is and where it needs to go. KPIs function as ways for companies to set and measure goals quickly so everyone stays on the same path. How a business determines its KPIs and how it measures them is often a good indication of its prospects. The results may inspire you to take measures like upgrading your business technology stack or implementing performance-based pay. Keep in mind that this should be an evolving process. Regularly reassess your KPIs so you can make adjustments as necessary and stay on track.
Sammi Caramela contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.