What does a Key Performance Indicator (KPI) stand for?

A key performance indicator, or KPI, is a group of measurable numbers that show how well a business is doing over the long run. KPIs help you determine how well a business is doing in terms of its strategic, financial, and operational goals, especially when comparing them to other companies in the same industry.

How to Read Key Performance Indicators (KPIs)

Similar to key success indicators (KSIs), KPIs differ for each company and industry based on performance standards. For instance, a software business that wants to grow the fastest in its field might use year-over-year (YOY) revenue growth as its leading success indicator. On the other hand, a store chain might think that same-store sales are the best KPI for measuring growth.

Collecting, storing, cleaning, and putting together data is what KPIs are all about. The data could be about money, something else, or any part of the business. The point of KPIs is to quickly share data so that management can make better strategic choices.

Key performance indicators (KPIs) compare the work of a business to a set of goals, targets, or other companies in the same field.

Different types of KPIs

There are four main KPI groups, each with its own traits, time frames, and users.

1. Most of the time, strategic KPIs are the most important. These KPIs might show how well a business is doing but don’t give much more information than a broad picture. Executives most often use strategic KPIs. Return on investment, profit margin, and total company income are all examples of strategic KPIs.
2. When it comes to operational KPIs, time is of the essence. By looking at different processes, groups, or places, these KPIs show how well a business is doing from one month to the next (or even from one day to the next). People in charge of staff often use these practical KPIs to answer questions when they look at strategy KPIs. For example, if a business leader sees that overall sales have decreased, they might look into which product lines are having trouble.
3. Functional KPIs focus on certain parts of a business or job tasks. For instance, the finance department might keep track of how many new partners they add to their accounting software every month, while the marketing department might see how many clicks each email campaign gets. These KPIs can be strategic or practical, but they are most valuable for a specific group of users.
4. Leading or lagging KPIs help you figure out what kind of data you’re looking at and whether it’s pointing to something that will happen or has already happened. One KPI is the number of overtime hours worked, and the other is the profit margin for a primary product. If the business starts to notice that its product quality is worsening, the number of extra hours worked could be a critical KPI. Another option is profit margins, which show how operations went and are considered a delayed sign.

Different kinds of KPIs

Metrics and KPIs for money

Regarding financials, key success measures usually center on sales and profit margins. Net profit is the most reliable way to measure a company’s profit. It shows how much money the company made after paying all its bills, taxes, and interest during a specific time.

Using a company’s financial records, you can get financial data. However, internal management might find it more helpful to look at different numbers that are more relevant to the issues or parts of the business that management wants to look at. For instance, a company might use variable costing to adjust account amounts for internal use only.

Here are some examples of business KPIs:

• You get a liquidity ratio if you divide a company’s current assets by its current liabilities. These KPIs show how well a company will handle its short-term financial obligations based on its current assets.
• KPIs that measure profitability, such as net profit margin, show how well a business makes sales while keeping costs low.
• With a total debt-to-total-assets ratio, for example, you can figure out how healthy a company’s finances will be in the long term by seeing how well it can pay its long-term debt.
• KPIs that measure how fast a company can do a specific job are turnover ratios and product turnover rates. Inventory movement, for instance, shows how quickly a business can move an item from its stock to a sale. Companies try to boost turnover to get more people to spend money quickly so that they can get that money back through sales.

KPIs and Metrics for Customer Experience

Customer-focused KPIs usually focus on how efficiently you work with each customer, how happy they are, and how long they stay as a customer. Customer service teams use these measures to get a better idea of the service that customers have been getting.

Here are some examples of customer-centric metrics:

• Number of new ticket requests: This KPI keeps track of how many different types of customer care requests there are and how many new problems are still open.
• Number of tickets resolved: This KPI tracks how many requests have been filled effectively. One way a business can figure out how well it handles customer requests is to compare the number of requests to the number of answers.
• Average time to resolve an issue: This KPI shows how long it takes to help someone with a problem. For example, companies might divide the average response time into groups for different requests, such as technical issue requests and new account requests.
• Average reaction time: This KPI shows how long it takes for a customer service rep to contact a customer for the first time after the customer has sent in a request. A company may want to reduce the time a customer has to wait for help, even if the first worker doesn’t have the knowledge or skills.
• It’s possible to be the best customer service person if you use any of the above KPIs together. For instance, a company can look at the average reaction time for the whole company and the three best and slowest responders.
• Type of request: This KPI keeps track of the number of different kinds of requests. If a customer says that the company’s website gave them the wrong information, for example, this KPI can help the company figure out the problem they need to fix.
• Customer satisfaction rating: This KPI isn’t obvious, but businesses can do polls or evaluations after interactions with customers to learn more about their experiences.

KPIs are generally not needed by outsiders; they are just internal metrics that management uses to judge how well a company is doing.

Metrics and KPIs for Process Performance

Process metrics aim to track and measure how healthy operations are running across the whole company. These KPIs look at how jobs are done and find problems with method, quality, or performance. These measures work best for businesses that do the same thing over and over, like manufacturing firms or businesses in fields that go through cycles.

Here are some examples of process efficiency metrics:

• A common way to measure this KPI is to divide the time it takes to make each stage by the time it takes to make everything all together. A company might try to spend only 2% of its time looking for raw materials. If it turns out that it takes 5% of the whole process, it might look for ways to make the process of looking for materials better.
• Total cycle time: This KPI shows how long it takes to finish a process from beginning to end. There is a way for managers to look at a process over time by changing this to average cycle time.
• Throughput is a key performance indicator that shows how fast the manufacturing process is by dividing the number of units made by the time it takes to make each unit.
• You get the error rate when you divide the number of mistakes made by the total number of units made. Companies that want to cut down on waste can learn more about how many things fail quality control tests.
• Quality rate: This KPI looks at the good things that are made instead of the wrong things. This percentage tells management how well the company meets quality standards by dividing the number of suitable units by the total number of units created.

KPIs for marketing

Marketing KPIs try to give us a better idea of how well our advertising and marketing efforts have worked. These metrics often track the number of conversations about how often potential customers do certain things in response to a marketing channel. Here are some examples of business KPIs:

• This KPI tracks how many people visit different pages on a business’s website. This KPI can help management determine if online traffic is being directed away from possible sales channels and if customers are not being sent in the right direction.
• This KPI is all about keeping track of the views, follows, likes, retweets, shares, involvement, and other measurable interactions that customers have with the company’s social media pages.
• Conversion rate on call-to-action content: This KPI is about targeted advertising campaigns asking customers to do certain things. For instance, a campaign might tell people to act before a specific sale date stops. If a business wants to know what percentage of customers responded to an offer, it can divide the number of successful engagements by the total number of content releases.
• Blog posts made monthly: This KPI keeps track of how many blog posts a business makes each month.
• Rates of click-throughs: This KPI counts the number of individual clicks on email mailings. For instance, some programs may track how many customers opened an email, clicked on a link, and bought something.

KPIs for IT

In this case, a business might want to monitor how its internal technology (IT) department runs to achieve operational success. With these KPIs, you might better understand how happy your employees are or whether the IT department has enough staff. Here are some examples of IT KPIs:

• This key performance indicator (KPI) tracks how long different systems must be offline for maintenance or changes. When systems are down, like when the accounting information system is down, users might not be able to place orders, or workers might not be able to do their jobs.
• Number of tickets or problems solved: This KPI is like KPIs for customer care. To be clear, these tickets and decisions are for requests from internal staff about hardware or program needs, network issues, or other technology issues that only affect internal staff.
• The number of created features is a key performance indicator (KPI) that measures the development of internal products by counting the number of product changes.
• Count of critical bugs: This KPI tracks how many significant bugs are in systems or programs. Each company will need to set its own rules for minor and giant bugs.
• Back-up frequency: This KPI keeps track of how often essential data is copied and kept somewhere safe. Because of rules about keeping records, management may set different goals for various types of information.

KPIs for sales

A business’s primary goal is to make money by selling things. People usually use financial KPIs to measure income, but sales KPIs are more detailed because they use non-financial data to learn more about the sales process. Here are some examples of sales KPIs:

• Customer lifetime value (CLV): This KPI shows how much money a customer will likely spend on your goods throughout your business relationship.
• Customer acquisition cost (CAC): This KPI shows how much it costs to buy and sell something new to a customer. When companies compare CAC to CLV, they can see how well their efforts to get new customers are working.
• Average dollar value of new contracts: This KPI finds out how big new contracts are on average. A business may have a goal level for getting bigger or smaller people.
• Average conversion time: This KPI measures how long it takes from the first touch with a potential client to getting a signed business deal.
• Number of interested leads: This KPI tracks how many possible leads have been reached or met. You can further break this measure down into different types of contacts with customers, like meetings, emails, phone calls, and more.

Companies may link awards to key performance indicators (KPIs). For sellers, their fee rate may depend on how many leads they get and how many leads turn into sales.

KPIs for Human Resources and Staffing

It might also be helpful for businesses to look at KPIs that are specific to their workers. A business may already have a lot of information about its employees, ranging from how many leave to how happy they are with their jobs. Here are some examples of KPIs for human resources or staffing:

• Absenteeism rate: This KPI keeps track of how many times a year or during a specific period workers call in sick or don’t show up for work. This KPI could be a sign that workers aren’t interested in their work or are unhappy.
• Increase in extra hours worked: This KPI keeps track of the increase in overtime hours to see if workers are at risk of burnout or if staffing levels are correct.
• For this KPI, employee happiness, it’s common to need a company-wide poll to determine how workers feel about different parts of the business. Companies should consider doing the same poll every year to see how things change when they ask the same questions. This will help them get the most out of this KPI.
• Employee loss rate: This KPI shows how often and quickly workers leave their jobs. One more way for companies to figure out why some jobs are closing faster than others is to break this KPI down even further by department or team.
• How many people apply for jobs? This KPI tracks how many people apply for open jobs. This KPI helps figure out if job postings are reaching enough people to get people interested and attract suitable candidates.

Some examples of KPIs

Let’s look at Tesla (TSLA), a company that makes electric cars, to see how KPIs work in real life. These numbers come from its earnings report for the fourth quarter (Q4) of 2021.

Production of Vehicles

Tesla made a record 305,840 cars and shipped 308,650 cars during the quarter. People have always said bad things about the company’s ability to ramp up, so production is significant. Tesla will get a more significant market share and make more money if they can make more cars.

Gross Margin for Automobiles

Tesla’s car gross margin grew to 30.6% during the quarter.2 Gross margin is one of the best ways to see how profitable Tesla is because it separates the costs of making vehicles. In Q4, Tesla increased its profit margin even though sales of its cheaper models were higher than those of its more expensive models.

Cash Flow Without Spending

During the quarter, Tesla had $2.8 billion in free cash flow. The free cash flow was a lot better than the $1.9 billion it was the previous year. Based on Tesla’s free cash flow production, it looked like the company was making enough money to stop needing government loans.

Levels of KPIs

KPIs are helpful for businesses in three main ways:

First, company-wide KPIs look at the health and success of the whole business. You can use these KPIs to let management know how things are going. It’s just that they aren’t always detailed enough to make choices. People in the company often discuss why some areas are doing well or badly after setting KPIs for the whole company.

Companies often start to look into KPIs at the departmental level at this point. These KPIs are more detailed than KPIs for the whole company. KPIs at the departmental level often tell us more about why specific results are happening. There are a lot of examples above of KPIs specific to departments and a tiny part of a company.

A company can use KPIs at the project or sub-department level to go even further. Management often asks for these KPIs, especially because they need particular data sets that might not be easy to find. For instance, management might want to ask a control group particular questions about a possible introduction of a product.

When making KPI reports, start with the most critical data, like the total income for the whole company. Next, prepare to show smaller amounts of data, like revenue by department, then by department and product.

How to Put Together a Key Performance Indicator (KPI) Report

It can be hard to sort through all the data companies seem to collect daily and figure out which KPIs are the most valuable and essential for making decisions. Here are some things to think about before you start putting together KPI screens or reports:

1. Talk about your plans and goals with your business partners. KPIs are only helpful if people use them in the right way. Know what you and your business partner want to achieve before you start putting together KPI reports.
2. Write down the SMART KPI standards. Set limits on KPIs and connect them to SMART measures that are clear, measurable, attainable, practical, and have due dates. Vague, hard-to-figure-out, or unrealistic KPIs aren’t very useful. Instead, you should focus on the information you already have and ensure you meet the SMART name standards.
3. Don’t be rigid. As you put together KPI reports, prepare for new business issues and other areas to get more attention. KPIs should change with the times to keep up with changes in operations and customer and company needs. This means that specific numbers, measures, and goals should also change.
4. Do not confuse people. If you can, you might want to put as many KPIs as possible on a report and make it too hard for people to read. At some point, KPIs may become hard to understand, and it may become more challenging to figure out which numbers are the most important to pay attention to.

Pros of using Key Performance Indicator (KPIs)

There are several reasons a business might want to look at KPIs. KPIs help managers understand specific issues; a data-driven approach gives us measurable data that helps plan strategy and ensure operations run smoothly.

KPIs are a way to hold workers responsible. The KPIs are based on facts and can’t favor one employee over another because they are not based on feelings or emotions. When used correctly, KPIs may motivate workers because they know their performance is closely monitored.

KPIs are also the link between how a business works and its goals. If a company can’t keep track of its progress toward its goals, its plans aren’t beneficial. Instead, KPIs let businesses set goals and then track their progress.

What KPIs Can’t Do

When working with KPIs, there are some terrible things to think about. The time it takes for KPIs to give helpful information may be very long. For instance, a company might need to get information from its workers once a year for many years to understand better how happiness rates change over time.

Keep an eye on KPIs and do regular follow-ups for them to be helpful. Making a KPI report but never looking it over is pointless. Also, KPIs that aren’t constantly checked for correctness and fairness don’t help people make good decisions.

KPIs make it possible for managers to “game” them. For managers, the incentive to improve KPIs linked to performance bonuses may make them focus on those instead of actually improving processes or results. Quality may also go down if managers are too focused on output KPIs, and workers may feel like they have to work too hard to meet KPI targets that aren’t fair.

Pros

• In many ways, it tells managers how well a company is doing.
• It helps workers take responsibility for what they do (or don’t do).
• Can inspire workers who look at challenges in a good way to meet goals
• It lets a business set goals and track its progress toward those goals.

Cons

• This could mean spending a lot of time collecting data over multiple periods.
• It needs constant checking to make sure the information is correct and makes sense.
• Could make managers more focused on KPIs than on bigger plans
• Could make workers quit if KPI goals are too high

What does a Key Performance Indicator (KPI) stand for?

Key performance indicators, or KPIs, are data gathered, studied, and summed up to help people make decisions. One KPI could be a single number or figure that sums up a time of activity, like “450 sales in October.” KPIs don’t add any value to a company by themselves. However, a business can use this information to make smarter choices about how to run its business and what methods to use.

What does a KPI look like?

RPC, or income per client, is one of the most basic KPIs. Your RPC would be $1,000, for instance, if you make $100,000 yearly and have 100 clients. This KPI can help a business keep track of its RPC over time.

What are five of the most common key performance indicators (KPIs?

Different businesses need different KPIs, and some work better for some businesses than others. As a whole, these five KPIs are the most popular ones:

• Growth in sales
• Money made per customer
• Profit level
• Rate of keeping clients
• Customer Happiness

How do you find out what key performance indicators (KPIs are?

It depends on the KPI that is being checked. Most of the time, companies use business analytics software and monitoring tools to measure and keep track of KPIs. As well as getting data from trustworthy sources and storing it safely also includes organizing the data so that it is in a standard format for analysis and doing the math. Lastly, KPIs are often shared using software for showing or writing reports.

What Does a Good KPI Do?

A good KPI tells you clearly and objectively how far you’ve reached your end goal. It keeps track of and counts performance, quality, speed, and efficiency. It also lets you see how performance changes over time. One of the primary purposes of a KPI is to help management make better choices.

In Short

KPIs are an excellent way to track a company’s performance on several metrics. Managers can better set up their businesses for long-term success if they know precisely what KPIs are and how to use them correctly.

Conclusion

• Key performance indicators (KPIs) compare a business’s performance to a set of goals, aims, or other businesses in the same field.
• KPIs can be financial, like net profit (also called “bottom line” or “net income”), sales minus certain costs, or the current ratio (which measures how flexible and cash-flowing a business is).
• Customer-focused KPIs usually focus on how efficiently you work with each customer, how happy they are, and how long they stay as a customer.
• Process-focused KPIs aim to track and measure the organization’s overall business success.
• Most businesses use analytics software and reporting tools to measure and keep track of KPIs.