Key performance indicators are the measures of performance that are most relevant to the goals and objectives of a business. They are the metrics that are most important for tracking the growth and evaluating a business.
The most important thing to keep in mind about KPIs is that they will differ from company to company, they are subjective and based on the unique goals of each individual business. The term KPI also tends to be used interchangeably with metrics, but it should be established that though all KPIs are metrics, all metrics are not KPIs
Importance of KPIs
- Measuring Targets and Progress - KPIs will help the company assess how well they are doing of the targets and goals they have set for themselves and how far they are from reaching them. For example, if the company has set a goal of reaching X amount of revenue per month they can use gross profit margin as a KPI to track it.
- Track Company Health - Companies can use KPIs to track the overall health and monitor vital aspects of the business such as human resources, customer satisfaction, business processes, etc. While these may not be directly related to business profits, sales, or revenue they play an important role in the proper functioning of the company.
- Facilitate Learning - Companies can use the information and data collected from KPIs to stimulate discussions about efficiency, the effectiveness of the goals and measures used to evaluate it, and other discussions that foster learning and growth of all the personnel involved.
- Establish Trends - The data collected for measuring KPIs and the data from KPIs that have been tracked over a period of time can be used to establish trends within the company. This can be used to gain insights into what areas of the business need help and what needs to be changed.
Types of KPIs
The three main types of KPIs are
- Financial - These KPIs are concerned with tracking factors like profits, costs, sales, etc. Example - Gross profit margin, net profit margin.
- Customer - These include metrics like net promoter score, customer retention rate, customer lifetime value, and customer acquisition cost.
- People - These are concerned with tracking information related to employees and people within the company. For example - employee turnover rate and employee satisfaction, salary competitiveness ratio.