What Is a KPI? Definition, Examples, and How To Measure

You don’t start a business to fail. Every organization, regardless of size or industry, needs a way to measure its success. While it’s fairly straightforward to look at your profit as a measure of financial success, a more effective strategy requires continuous feedback. Many businesses may leverage return on investment (ROI) to understand outcomes, but that analysis is incomplete without utilizing key performance indicators (KPIs).

If ROI is the what, KPIs are the why and how. A key performance indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. They’re essentially the vital signs of your organization, serving as a framework to evaluate your business strategy. Let’s take a closer look at KPIs.

What Is a Key Performance Indicator?

A KPI is a strategic navigational tool that supports your everyday operations. Each KPI is a critical measure tied to your business’s strategic goals. They monitor performance areas that you’ve identified as essential for the survival and growth of your business.

For example, a goal might be to “achieve market leadership in customer retention.” So, you need a corresponding KPI. In this case, customer churn rate fits because if it changes, it will directly affect the company’s ability to achieve that market leadership. A higher churn rate means less retention, and vice versa.

To properly evaluate a KPI, you need to set a benchmark number that signifies success. To do this, you can use leading and lagging indicators. Leading indicators predict future outcomes, while lagging indicators measure past results. Leading indicators are actionable and focus on driving success, such as tracking the number of churned customers or abandoned carts. Lagging indicators provide retrospective data on whether or not your goals were achieved. You need both to set an effective KPI.

What’s the Difference Between KPIs and Metrics?

KPIs are often confused with metrics, and the terms are frequently used interchangeably. There are some crucial distinctions, however. While metrics focus on operational health and are designed to inform you of current trends, KPIs are indicators that guide action and measure success towards your strategic goals.

All KPIs are metrics, but not all metrics are KPIs. For instance, every number on a car’s dashboard is a metric, but the “Check Engine” light is a KPI because it indicates a necessary course of action (taking your car to a mechanic).

How to Select Effective KPIs

Effective KPIs should be structured to meet certain criteria. Many organizations tie KPIs to the SMART goal framework. That means that KPIs should be:

• Specific: It is clear exactly what is being measured.
• Measurable: It is quantifiable and trackable with existing, reliable data.
• Achievable: It’s realistic to track and achieve.
• Relevant: It’s crucial to the organization’s overall goals.
• Time-Bound: It is tracked over specific, defined intervals (daily, weekly, quarterly).

Before you work on a KPI, you have to ask a key question: “If this number changes significantly, does it affect the company’s survival, competitive position, or primary strategic goal?” You really might not have very many such measures, and that’s okay. KPIs are key indicators, and having too many can lead to KPI overload. Successful companies focus on the Rule of Few, choosing 5-7 core KPIs for the entire organization. Individual departments may add on a few additional ones specific to their projects and goals.

Examples of KPIs

To give you a better idea of what KPIs look like, here are some common examples used across business departments.

Financial KPIs

These KPIs can gauge the economic health and efficiency of the business:

• Net profit margin: Measures the percentage of revenue remaining after all operating expenses, interest, taxes, and preferred stock dividends have been deducted.
• Return on investment (ROI): The classic metric for evaluating the efficiency of a single investment.
• Operating cash flow: Measures the cash generated by a company’s normal business operations.
• Customer acquisition cost (CAC): The total marketing and sales cost required to acquire one new customer.

Each can give you a better idea of your company’s financial health.

Sales KPIs

These measure the effectiveness and efficiency of the sales process:

• Sales pipeline coverage: The ratio of qualified pipeline value to the sales goal, indicating future revenue security.
• Average deal size: The mean revenue generated per closed deal.
• Conversion rate: The percentage of prospects who successfully move from one stage of the sales pipeline to the next, or who make a purchase.

These indicators can help you make any necessary changes with your sales strategy.

Marketing KPIs

These measure the efficacy of campaigns and customer engagement efforts:

• Customer Lifetime Value (CLV): The total revenue a company can reasonably expect to earn from a single customer over the entire time they remain a client.
• Lead-to-customer ratio: The efficiency with which marketing efforts generate leads that sales can convert into paying customers.

You can leverage marketing KPIs to improve campaigns and reduce customer acquisition costs.

Customer Service KPIs

These measure how well the business is retaining and serving its clients:

• Customer churn rate: The percentage of customers who cease doing business with the company over a specific time period.
• First contact resolution (FCR): The percentage of customer issues resolved entirely during the first interaction with a support agent.
• Net Promoter Score (NPS): A measure of customer loyalty and willingness to recommend the company to others.

Improving your customer service KPIs can lead to benefits in other parts of your business, too.