What Are KPIs

KPI stands for key performance indicator, a quantifiable measure of performance over time for a specific objective.

What Is a Key Performance Indicator (KPI)?

Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company’s strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.

KEY TAKEAWAYS

• Key performance indicators (KPIs) measure a company’s success vs. a set of targets, objectives, or industry peers.
• KPIs can be financial, including net profit (or the bottom line, gross profit margin), revenues minus certain expenses, or the current ratio (liquidity and cash availability).
• Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention.
• Process-focused KPIs aim to measure and monitor operational performance across the organization.
• Businesses generally measure and track KPIs through analytics software and reporting tools.

Understanding Key Performance Indicators (KPIs)

Also referred to as key success indicators (KSIs), KPIs vary between companies and between industries, depending on performance criteria. For example, a software company striving to attain the fastest growth in its industry may consider year-over-year (YOY) revenue growth as its chief performance indicator. Conversely, a retail chain might place more value on same-store sales as the best KPI metric for gauging growth.

At the heart of KPIs lie data collection, storage, cleaning, and synthesizing. The information may be financial or nonfinancial and may relate to any department across the company. The goal of KPIs is to communicate results succinctly to allow management to make more informed strategic decisions.

Key performance indicators (KPIs) gauge a company’s output against a set of targets, objectives, or industry peers.

Process Performance Metrics and KPI

Process metrics aim to measure and monitor operational performance across the organization. These KPIs analyze how tasks are performed and whether there are process, quality, or performance issues. These types of metrics are most useful for companies with repetitive processes, such as manufacturing firms or companies in cyclical industries.

Examples of process performance metrics include:

• Production efficiency: This KPI is often measured as the production time for each stage divided by the total processing time. A company may strive to spend only 2% of its time soliciting raw materials; if it discovers it takes 5% of the total process, then the company may strive for solicitation improvements.
• Total cycle time: This KPI is the total amount of time needed to complete a process from start to finish. This may be converted to average cycle time if management wishes to analyze a process over a period of time.
• Throughput: This KPI is the number of units produced divided by the production time per unit, measuring how fast the manufacturing process is.
• Error rate: This KPI is the total number of errors divided by the total number of units produced. A company striving to reduce waste can better understand the number of items that are failing quality control testing.
• Quality rate: This KPI focuses on the positive items produced instead of the negative. By dividing the successful units completed by the total number of units produced, this percentage informs management of its success rate in meeting quality standards.

Marketing KPIs

Marketing KPIs attempt to gain a better understanding of how effective marketing and promotional campaigns have been. These metrics often measure conversation rates on how often prospective customers perform certain actions in response to a given marketing medium. Examples of marketing KPIs include:

• Website traffic: This KPI tracks the number of people who visit certain pages of a company’s website. Management can use this KPI to better understand whether online traffic is being pushed down potential sales channels and if customers are not being funneled appropriately.
• Social media traffic: This KPI tracks the views, follows, likes, retweets, shares, engagement, and other measurable interactions between customers and the company’s social media profiles.
• Conversion rate on call-to-action content: This KPI centers around focused promotional programs that ask customers to perform certain actions. For example, a specific campaign may encourage customers to act before a certain sale date ends. A company can divide the number of successful engagements by the total number of content distributions to understand what percent of customers answered the call to action.
• Blog articles published per month: This KPI simply counts the number of blog posts a company publishes in a given month.
• Click-through rates: This KPI measures the number of specific clicks that are performed on email distributions. For example, certain programs may track how many customers opened an email distribution, clicked on a link, and followed through with a sale.

IT KPIs

A company may desire operational excellence; in this case, it may want to track how its internal technology (IT) department is operating. These KPIs may encourage a better understanding of employee satisfaction or whether the IT department is being adequately staffed. Examples of IT KPIs include:

• Total system downtime: This KPI measures the amount of time that various systems must be taken offline for system updates or repairs. While systems are down, customers may be unable to place orders or employees are unable to perform certain duties (i.e., when the accounting information system is down).
• Number of tickets/resolutions: This KPI is similar to customer service KPIs. However, these tickets and resolutions relate to internal staff requests such as hardware or software needs, network problems, or other internal technology problems.
• Number of developed features: This KPI measures internal product development by quantifying the number of product changes.
• Count of critical bugs: This KPI counts the number of critical problems within systems or programs. A company will need to have its own internal standards for what constitutes a minor vs. major bug.
• Back-up frequency: This KPI counts how often critical data is duplicated and stored in a safe location. In accordance with record retention requirements, management may set different targets for different bits of information.

Sales KPIs

The ultimate goal of a company is to generate revenue through sales. Though revenue is often measured through financial KPIs, sales KPIs take a more granular approach by leveraging nonfinancial data to better understand the sales process. Examples of sales KPIs include:

• Customer lifetime value (CLV): This KPI represents the total amount of money that a customer is expected to spend on your products over the entire business relationship.
• Customer acquisition cost (CAC): This KPI represents the total sales and marketing cost required to land a new customer. By comparing CAC to CLV, businesses can measure the effectiveness of their customer acquisition efforts.
• Average dollar value for new contracts: This KPI measures the average size of new agreements. A company may have a desired threshold for landing larger or smaller customers.
• Average conversion time: This KPI measures the amount of time from first contacting a prospective client to securing a signed contract to perform business.
• Number of engaged leads: This KPI counts how many potential leads have been contacted or met with. This metric can be further divided into mediums such as visits, emails, phone calls, or other contacts with customers.

Management may tie bonuses to KPIs. For salespeople, their commission rate may depend on whether they meet expected conversion rates or engage in an appropriate number of leads.

Human Resource and Staffing KPIs

Companies may also find it beneficial to analyze KPIs specific to their employees. Ranging from turnover to retention to satisfaction, a company may have a wealth of information already available about its staff. Examples of human resource or staffing KPIs include:

• Absenteeism rate: This KPI is a count of how many dates per year or specific period employees are calling in sick or missing shifts. This KPI may be a leading indicator for disengaged or unhappy employees.
• Number of overtime hours worked: This KPI tracks the amount of overtime hours worked to gauge whether employees are potentially facing burnout or if staffing levels are appropriate.
• Employee satisfaction: This KPI often requires a company-wide survey to gauge how employees are feeling about various aspects of the company. To get the best value from this KPI, companies should consider hosting the same survey every year to track changes from one year to the next regarding the exact same questions.
• Employee turnover rate: This KPI measures how often and quickly employees are leaving their positions. Companies can further break down this KPI across departments or teams to determine why some positions may be leaving faster than others.
• Number of applicants: This KPI keeps count of how many applications are submitted to open job positions. This KPI helps assess whether job listings are adequately reaching a wide-enough audience to capture interest and lure strong candidates.

Examples of KPIs

Let’s take a look at electric vehicle maker Tesla (TSLA) for a few examples of KPIs in real life. These numbers are from its fourth quarter (Q4) 2021 earnings release.

Vehicle Production

During the quarter, Tesla produced a record 305,840 vehicles and delivered 308,650 vehicles.1 Production is a big deal for the company because it has consistently been criticized for being bad at ramping up. Increased manufacturing scale means more market share and profits for Tesla.

Automotive Gross Margin

For the quarter, Tesla’s automotive gross margin expanded to 30.6%.2 Gross margin is one of the best measures of profitability for Tesla because it isolates its vehicle production costs. Tesla managed to expand its gross margin in Q4 even as sales of lower-priced models outpaced its higher-margin models.1

Free Cash Flow

Tesla’s free cash flow clocked in at $2.8 billion during the quarter. That represented a vast improvement from the $1.9 billion free cash flow in the prior year.2 Tesla’s level of free cash flow production suggested that the company was reaching a scale of profitability without the help of regulatory credits.3

KPI Levels

Companies can use KPIs across three broad levels:

First, company-wide KPIs focus on the overall business health and performance. These types of KPIs are useful for informing management of how things are going. However, they are often not granular enough to make decisions. Company-wide KPIs often kick off conversations on why certain departments are performing well or poorly.

At this point, companies often begin digging into department-level KPIs. These are more specific than company-wide KPIs. Department-level KPIs are often more informative as to why specific outcomes are occurring. Many of the examples mentioned above are department-level KPIs, as they focus on a very niche aspect of a company.

If a company chooses to dig even deeper, it may engage with project-level or subdepartment-level KPIs. These KPIs are often specifically requested by management as they may require very specific data sets that may not be readily available. For example, management may want to ask very specific questions to a control group about a potential product rollout.

When preparing KPI reports, start by showing the highest level of data (i.e., company-wide revenue). Next, be prepared to show lower levels of data (i.e., revenue by department, then revenue by department and product).

How to Create a KPI Report

With companies seemingly collecting more data every day, it can become overwhelming to sort through the information and determine what KPIs are most useful and impactful for decision making. When beginning the process of pulling together KPI dashboards or reports, consider the following steps:

1. Discuss goals and intentions with business partners. KPIs are only as useful as the users make them. Before pulling together any KPI reports, understand what you or your business partner are attempting to achieve.
2. Draft SMART KPI requirements. KPIs should have restrictions and be tied to SMART (specific, measurable, attainable, realistic, and time-bound) metrics. Vague, hard-to-ascertain, and unrealistic KPIs serve little to no value. Instead, focus on what information you have that is available and meeting the SMART acronym requirements.
3. Be adaptable. As you pull together KPI reports, be prepared for new business problems to appear and for further attention to be given to other areas. As business and customer needs change, KPIs should also adapt with certain numbers, metrics, and goals changing in line with operational evolutions.
4. Avoid overwhelming users. It may be tempting to overload report users with as many KPIs as you can fit on a report. At a certain point, KPIs start to become difficult to comprehend, and it may become more difficult to determine which metrics are important to focus on.

Advantages of KPIs

A company may wish to analyze KPIs for several reasons. KPIs help inform management of specific problems; the data-driven approach provides quantifiable information useful in strategic planning and ensuring operational excellence.

KPIs help hold employees accountable. Instead of relying on feelings or emotions, KPIs are statistically supported and cannot discriminate across employees. When used appropriately, KPIs may help encourage employees as they realize their numbers are being closely monitored.

KPIs are also the bridge that connects actual business operations and goals. A company may set targets, but without the ability to track progress toward those goals, there is little to no purpose in those plans. Instead, KPIs allow companies to set objectives, then monitor progress toward those objectives.

Limitations of KPIs

There are some downsides to consider when working with KPIs. There may be a long time frame required for KPIs to provide meaningful data. For example, a company may need to collect annual data from employees for years to better understand trends in satisfaction rates over long periods of time.

KPIs require constant monitoring and close follow-up to be useful. A KPI report that is prepared but never analyzed serves no purpose. In addition, KPIs that are not continuously monitored for accuracy and reasonableness do not encourage beneficial decision making.

KPIs open up the possibility for managers to “game” KPIs. Instead of focusing on actually improving processes or results, managers may feel incentivized to focus on improving KPIs tied to performance bonuses. In addition, quality may decrease if managers are hyper-focused on productivity KPIs, and employees may feel pushed too hard to meet specific KPI measurements that may simply not be reasonable.

Pros

• Informs management of how a company is performing in countless ways
• Helps hold employees accountable for their actions (or lack of)
• Can motivate employees who feel positively challenged to meet targets
• Allows a company to set goals and measure progress toward those objectives

Cons

• Results in potential time commitment to consistently gather data over long periods of time
• Requires ongoing monitoring for accuracy and reasonableness in data
• May encourage managers to focus on KPIs instead of broader strategies
• May discourage employees if KPI targets are unreasonable

What does KPI mean?

KPI is an abbreviation for key performance indicator, data that has been collected, analyzed, and summarized to help decision making. KPIs may be a single calculation or value that summarizes a period of activity, such as “450 sales in the month of October.” By themselves, KPIs do not add any value to a company. However, a company can use this information to make more informed decisions about business operations and strategies.

What is an example of a KPI?

One of the most basic examples of a KPI is revenue per client (RPC). For example, if you generate $100,000 in revenue annually and have 100 clients, then your RPC is $1,000. A company can use this KPI to track its RPC over time.

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

KPIs vary from business to business, and some KPIs are more suitable for certain companies compared to others. In general, five of the most commonly used KPIs are:

1. Revenue growth
2. Revenue per client
3. Profit margin
4. Client retention rate
5. Customer satisfaction

Similar understanding of KPI profitability is ROI.

How do you measure KPIs?

It depends on the actual KPI being measured. Generally speaking, businesses measure and track KPIs through business analytics software and reporting tools. This includes everything from the collection of data via reliable sources, the safe storage of information, the cleaning of data to standardize its format for analysis, and the actual number crunching. Finally, KPIs are often reported using visualization or reporting software.

What makes a KPI good?

A good KPI provides objective and clear information on progress toward an end goal. It tracks and measures factors such as efficiency, quality, timeliness, and performance while providing a way to measure performance over time. The ultimate goal of a KPI is to help management make more informed decisions.

The Bottom Line

KPIs offer an effective way to measure and track a company’s performance on a variety of different metrics. By understanding exactly what KPIs are and how to implement them properly, managers are better able to optimize the business for long-term success.

SPONSORED

Strategies to Help Minimize Investment Taxes

A strategic approach to investing can help you maximize your retirement income while minimizing your investment taxes. With no commissions and no financial incentives, Vanguard Personal Advisor Services® can develop a goal-driven plan to help you do just that. You’ll also have access to personal service at a low cost. Learn more about how you can access personal financial advice and start the conversation.