Key Performance Indicator
KPI (Key Performance Indicator): Definition & Meaning
Whether it is the sales, finance, marketing or IT department of a business, each operational end demands performance tracking. This is key to ensuring success as well as continual improvements.
Key Performance Indicators are a set of metrics that enable businesses to track their performance. Through it, companies can gain insights about where they are outperforming and where there might be room for improvement.
This article explains key performance indicators (KPIs). It further discusses the types of KPIs, its examples, and benefits.
What Is a Key Performance Indicator?
Key performance indicator, generally called KPIs, is a quantifiable value that helps a business or organization track progress toward its goals.
KPIs are used to evaluate the success of a business or project by measuring performance against specific objectives.
Some of the most commonly used KPIs for eCommerce businesses include financial KPIs (e.g., revenue, GMV, profit), operational KPIs (e.g., shipping provider, payment method), consumer behavior KPIs (e.g., average order value, conversion rate), marketing performance KPIs (e.g., SEA, SEO, and website traffic).
The process of setting, measuring and evaluating key performance indicators is a data-driven one. Companies that track KPIs collect data, store it, and clean it before deriving insights from it. The information KPIs yield are used to make strategic decisions for output and growth.
Types of Key Performance Indicators
Most key performance indicators can be grouped into four categories, described below:
- Strategic: These KPIs are used to track organizational goals. They typically take a high-level view and offer a larger picture of a company’s performance. Examples include revenue, return on investment, and profit margin.
- Operational: These KPIs measure efficiency of different operational ends of a business. They focus on routine tasks that nonetheless contribute to overall organizational performance. They are typically tracked and evaluated for shorter time periods – for example, weekly or month-by-month. Examples are metrics related to sales by geographic region, cost per acquisition (CPA), and monthly expense.
- Functional: These KPIs refer to metrics that assess particular functions or departments within an organization, such as IT or marketing. Thus, they are specific to the processes being measured. For example, the IT department may track IT service availability, network performance, and average server downtime. The marketing department may monitor customer acquisition costs and click-through rates (CTRs) on digital campaigns.
- Leading/Lagging: These are indicators that define the nature of the data being collected and evaluated: leading or lagging. Leading KPIs forecast results and outcomes while lagging KPIs evaluate past events. For example, employee training attendance is a leading KPI as it provides insights into the engagement of employees with training programs. On the other hand, project completion time is a lagging KPI as it measures the performance after the project is already finished.
The Benefits of Key Performance Indicators
KPIs do not just enable organizations to track their performance: they also deliver insights which drive positive results. The benefits of KPIs include:
- Performance measurement: With the relevant KPIs, each department of an organization can measure its performance against specified goals. The data is quantifiable and offers information about whether the performance meets, exceeds, or falls short of expectations.
- Accountability: KPIs related to efficiency and productivity promote accountability. Teams as well as individuals can assess their performance against the stated targets. The data-based review is transparent and ensures employees adhere to performance standards.
- Informed decision-making: With KPIs, each end of the business can gather relevant data about their performance. Using it, they can assess the areas that need improvement and devise budgets accordingly. The decisions for future growth, thus, are not only based on approximation but actual data.
- Continual improvement: Through tracking KPIs, organizations can locate areas that demand improvement. They can pivot strategies to improve productivity, optimize systems, and reduce costs on a continual basis, which can lead to long-term growth.
- Customer Satisfaction: Companies that track customer service departments or help desks can ascertain how satisfied their customers are with their products and services. KPIs such as response time and resolution time can provide valuable data to boost customer satisfaction.
Key Performance Indicator (KPI): Key Takeaways
- Key performance indicators, or KPIs, are used to measure and evaluate a company’s performance against defined goals.
- The main categories of KPIs are strategic, operational, functional, and leading/lagging.
- Strategic KPIs take an overall perspective or performance, while operational KPIs drill down and track regular activities.
- Functional KPIs are specific to different departments of a company like sales or IT. Leading/lagging KPIs are indicators to measure future or past progress respectively.
- Tracking KPIs can lead to improved growth and outcomes for all operations of a company.
- KPIs can improve performance and accountability. By providing relevant data, they promote informed decision-making, continuous improvements, and customer satisfaction.