Key performance indicator definition
/What is a Key Performance Indicator?
A key performance indicator (KPI) is a core metric used by a business to monitor its progress toward achieving key goals and financial outcomes. KPIs will vary by industry, due to differences in their operational and financial structures. Among the more common KPIs related to finances are a firm's gross margin, net profit, current ratio, and debt to equity ratio. KPIs related to operations are more varied. For example, a warehouse could measure fulfillment days, while a retail store could measure period-to-period changes in sales, a website could measure page views, a human resources department could track gender diversity, a call center could measure employee turnover, and a hospital could track emergency room wait times.
Different functions of a business may have different KPIs. For example, the sales manager may be most concerned with changes in the sales backlog, while the production manager focuses on the customer order fulfillment rate, and the customer service manager deals with the number of customer complaints settled on the first contact, as well as the number of customers who hang up while on hold. Further, the marketing manager may monitor the acquisition cost of each incremental customer gained.
A business analytics software package may be used to collect the information from around a business that is needed to calculate its KPIs, and presents up-to-date results to management through a dashboard that is available on their computers.
Categories of Key Performance Indicators
There are three main categories into which most key performance indicators are slotted. They are as follows:
Strategic indicators. These are high-level indicators of the overall performance of a business, such as changes in same-store sales, changes in the overall gross margin percentage, and the return on investment for an entire business. It is usually necessary to drill down further to arrive at any actionable measures.
Operational indicators. These are focused on specific activities or cost objects within a business, such as the performance of a specific product, product line, or sales region. The results are sufficiently focused to be used for actionable decisions.
Functional indicators. These are used to measure specific functional areas, such as billings, receiving, or shipping. They are especially useful, because they are usually focused on areas for which just one person is responsible - making it easier to enact changes.
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What are the Best Key Performance Indicators?
KPIs will vary by company, and will depend on its strategic positioning, liquidity, and profitability. That being said, it is quite likely that you will want to use the following core group of key performance indicators:
Customer retention rate. This is the proportion of existing customers who continue to do business with you. This is an essential metric when the cost to acquire new customers is quite high, or there are just very few new customers available.
Customer acquisition cost. This is the total marketing and selling cost incurred to acquire each customer, on average. When this cost is very high, it becomes more important to ensure that you retain the customers you already have.
Leads to win rate. This is the percentage of customer orders actually obtained, versus the number of sales leads entering the top of the sales funnel. Improving this rate can greatly increase your sales.
Profit margin percentage. This is the amount of profits generated as a percentage of your net sales, and is the primary measure of the efficiency of your operations.
How to Use Key Performance Indicators
KPIs are closely monitored by a management team, which should take action if a KPI is not in line with expectations. Over time, the goals of a business may change, so that management decides to replace its KPIs with new ones. If so, the performance monitoring systems of the business should be adjusted to refocus employee attention on the new KPIs.