In determining how successful a business is and where it needs to improve, there are many tools available. When looking at tools, it is important to find ways to set and measure goals that utilize the SMART criteria: Specific, Measurable, Achievable, Relevant and Time-bound.
Key performance indicators (KPIs) are specific, measurable and often time-focused ways to assess progress. Organizations can use KPIs to understand whether they are achieving their goals or not, or to focus on something they want to improve. KPIs are used to monitor changes over time and can be measured at specific intervals such as monthly, daily or weekly. They may be measured during a specific period of time such as the duration of a marketing campaign or for the entire duration that a company is in business.
KPIs can measure high-level activity such as revenue or measure more specific activities such as the success of a new product. They can be created and utilized in every aspect of a business, and most likely are used in areas of finance and marketing.
Besides figuring out what you are going to measure, it is important to look at how exactly you will be calculating your KPI. Let us review five ways to think about measuring (or counting) your data to create KPIs.
Counts are simple numeric values and are the easiest to calculate. They are useful simply in measuring something that does not need a rate of occurrence or any other context to show change over time. The KPI of count, however, does not work well in instances where more context is needed to more accurately represent performance. For instance, the number of workplace accidents may be a good count KPI, but it may not work well in observing safety across facilities with huge variations in employee numbers.
Percentages elaborate off counts by dividing the number of people or things that exhibit a target characteristic by the total population size. This number is then multiplied by 100, thus the name per (by) cent (one hundred). Some examples are:
- Percentage of employee vacation days used.
- Percentage sales growth by quarter.
- Return on investment.
Percentages work well with cut-and-dry instances such as if a sale occurs or does not, but in measuring things that require a gradient, such as customer satisfaction, they do not work as well.
Not to be confused with counts, sums or totals are continuous variables, meaning they are measured and not counted. This means that sums or totals can take the form of numbers with decimals. For instance, the total time spent on sales calls this week at a company was 48.5 hours. Some other examples are:
- Total company revenue.
- Total cost of retail product inventory.
Also known as the mean, the average is the sum of all the numbers in a dataset divided by the total number of data points. It is a good big-picture way of measuring to what degree an aspect of a business is occurring. Examples:
- Average customer feedback rating.
- Average revenue per sales call.
- Average cost of each product.
Keep in mind that if you have a small number of data points or have outliers that greatly skew the average numbers or overall distribution of your data, then an average may not be accurate and thus not an appropriate type of KPI to use. In this case, it may be better to consider using the median or a different measure to offset bias.
Ratios compare two numbers side by side. Ratios are denoted with two numbers side by side, separated by a colon. This allows the observer to compare the two numbers and their relation. Examples:
- Number of inbound versus outbound sales calls.
- In-store purchases compared to online purchases.
Be sure to only use ratios if it makes sense to compare two numbers. In general, if there is no actionable insight to be gleaned, there is no point in measuring and calculating a KPI.
The next several sections will detail some common examples of KPIs.
A very typical example of a KPI is showing sales growth over time. You can calculate sales growth by measuring the total number of products or services sold or the revenue brought in and comparing it to the same measure in the previous time period. More specific measures of sales growth can be incorporated to offer more granular insight and motivation to sales employees. Sales growth is calculated as a percentage:
Sales growth = 100*(end sales revenue - beginning sales revenue)/(beginning sales revenue)
For instance, a manager at a local retail outlet may want to know sales revenue per day or per employee each week so that they can focus on improving sales techniques or offer sales on specific days of the week. Whereas a director may want to know sales by region in order to analyze which regions need better sales training or to modify regional product mix to keep popular items in stock and reduce the inventory of products with lower sales by volume.
A gross profit margin is a percentage of total sales revenue a company keeps after factoring in any costs for producing goods. This KPI gives a bird’s eye view as to how efficiently a business is operating. The higher the gross profit margin, the more income a business retains from its sales activity.
Gross profit margin = (Revenue - direct cost)/Revenue
Upon seeing efficiency over time, companies can use more specific KPIs to reduce production costs or increase product prices to increase the gross profit margin. For instance, a retail business may want to isolate gross profit margins for each product it has so it can focus on eliminating products with higher costs and lower sales, lowering production costs for specific items or creating eye-catching displays to increase sales for products with higher margins.
As a marketing cornerstone, return on investment (ROI) is a percentage that compares the investment in marketing tactics to how much revenue they created. For instance, a hardware industry marketer invests $5,000 in an online ad campaign to sell more power tools and attributes a $10,000 spike in power tool sales to the campaign. The ROI, in this case, would be 100%. The KPI formula to calculate ROI works by subtracting the revenue from the initial investment and dividing that subtraction by the initial investment (and multiplying by 100 to get a percentage).
Formula: ROI = 100*(revenue gained from investment - cost of investment)/cost of investment
ROI is a powerful tool because it allows businesses to compare different marketing activities to see which ones net the most profit for their companies. It gets businesses thinking about what channels are effective for marketing their business, how to improve marketing efficiency by targeting high-ROI tactics and for establishing the right mix between things like social, email, print ads and so forth.
In terms of key performance indicators for employees, cost per hire is a popular metric. It is calculated by adding together the costs of recruitment, both within and outside of the company. Recruitment includes everything from the costs of advertising, external agency involvement, reviewing candidate resumes and interviews.
Cost per hire = (internal recruitment costs + external recruitment costs)/total number of hires
In compiling the cost per hire, companies can focus on hiring practices that lower costs and time to hire and train employees, such as recruiting internally, hiring in-house recruitment staff and creating training periods of reduced pay for new employees.
When combining multiple KPIs together to analyze business performance, it is important to prioritize KPIs that have the most impact on a business. Measures of revenue and overall profitability are usually defined as the most important as they are the bottom line to any business.
KPIs are a good way to measure performance in every aspect of a business. In seeking to define and reach business goals, they are a cornerstone to assessing growth and creating actionable insight for companies of all sizes.