Business KPIs: the essential guide
Do you know a boat without oars, adrift, moving at the mercy of the sea current? What are its chances of reaching its destination in port without reporting any damage? Now think about your startup: If you don’t monitor your performance, based on precise business KPIs, your business will end up like that boat. Tim Westergren (the co-founder of Pandora Media) explains it well, after all:
“without clear and measurable KPIs, a startup is like a boat without oars, destined to be pushed by the market current rather than driven by its own actions.”
But, exactly what are these business KPIs? And why are they so important for a startup (or company in general)? More importantly, how is it possible to define the correct KPIs? All these questions (and more) we are about to answer in the next few lines. The first step is to clarify the definition of KPIs, starting with the meaning of this English acronym.
What are business KPIs?
The meaning of KPI is “key performance indicators“. In practical terms, these are indices that, when monitored on a regular basis (every week, every month or every 3 months, depending on specific needs), describe the performance of certain crucial areas of the business, clarify business objectives and illustrate the best strategies for achieving them.
You have to be very careful to choose your startup’s KPIs carefully because not all indicators are the same and, more importantly, are able to prove really useful.
Difference between high-level KPIs and departmental KPIs
As just pointed out, there are different types of KPIs, and one of the most common classifications distinguishes between high-level KPIs and departmental KPIs.
The former are higher-order Key Performance Indicators because they allow the company’s performance to be analyzed at the general level. Departmental KPIs, on the other hand, make it possible to assess the performance of the individual departments that make up the company.
KPIs vs metrics: what is the difference?
It is time now to clarify a further distinction, namely that between KPIs and metrics. You should know that while it is true (and it is) that all KPIs are metrics, it is certainly not possible to say the opposite: not all metrics, in fact, represent key performance indicators.
To be considered as such, KPIs must be (among other things) relevant and functional for the purpose of making more informed strategic decisions. Not only that, Key Performance Indicators must also be significant, i.e., capable of showing whether or not the company is progressing properly toward achieving its goals.
The importance of KPIs in the corporate world
As you may have realized by now, KPIs play a fundamental role in business processes. Their function is twofold, but to understand this better, it is necessary now to introduce another distinction within the universe of KPIs, which can also be subdivided into consunct KPIs and predictive KPIs.
The former, also called lagging indicators, are used to measure performance over a past period of time and, therefore, to evaluate a business process that has already been completed. The latter, also called predictive indicators, on the other hand, are intended to provide some useful indications of the company’s expected performance in the future.
How KPIs influence business decisions
KPIs are used to measure the progress made by your startup or a specific compartment of it on the way to achieving the goals you have set for yourself. Thanks to them, you can analyze data over a period of time that has already passed and, therefore, verify the soundness of the strategic decisions you have made, but also predict future trends and, based on this, study new future strategies.
The usefulness of Key Performance Indicators
In addition to verifying past performance and anticipating future trends, KPIs also have an additional function: they also serve as a stimulus to employees’ work. Precisely in this regard, we have a very important tip for you: remember to communicate the KPIs you have identified to all your employees, defining them clearly and then also explaining how they will be measured.
One of the best ways to communicate KPIs is to use what is known as the “KPI dashboard“: this is a graphical representation reminiscent of the dashboard found inside automobiles and shows in a practical and intuitive way what the key performance indicators are, which areas are successful and which, on the other hand, require action.
In order for the potential usefulness of KPIs to translate into actual benefit, it is necessary for the indicators identified to be concrete and achievable, and it is essential to constantly monitor and update them over time.
How to define the correct business KPIs
To properly define business KPIs, you need to know some precise strategies that serve to clarify both what kind of data you need and what requirements KPIs must necessarily meet to prove useful.
The measurability of KPIs
To identify valid performance indicators, you must first assess their measurability: only by measuring them can you analyze with accuracy and certainty any progress your startup has made. In addition to measuring the indicators, however, you must also be able to relate and compare the different KPIs with each other. This way, in fact, you can gain insight and make better strategic decisions.
The importance of clear and achievable goals
You will remember that business goals must be attainable, so that they can also function as an incentive for employees. Not only that, goals must also be certain. By certain goals we mean goals that are functional in determining clear and valid KPIs.
Essential questions to ask when choosing KPIs
To define KPIs, you may also decide to automate the processes of choosing and measuring indexes by using specific software. Otherwise, you can start with a set of basic questions that will help you choose the best KPIs for your startup. Here are some of them:
- Does the indicator allow for monitoring? More importantly, is it really important to monitor it?
- Is KPI relevant right now and will it continue to be relevant in the future?
- What outcome do you expect? And in what time frame?
- Who will be responsible for the outcome to be achieved?
- Can the indicator you have chosen be easily understood (including by your employees and external contractors)?
Practical examples of business KPIs
Now that you know what business KPIs are and how to define them, you just need to know some practical examples of key performance indicators.
Examples of KPIs for the sales department
Below, you can discover a list of examples of sales KPIs:
- number of new contracts signed within a given period;
- economic value of new contracts;
- number of qualified leads generated from the sales funnel;
- hours devoted to sales;
- average time to conversion from lead to customer;
- rate of up-selling and cross-selling;
- number of net sales.
Examples of financial and operational KPIs
Financial and operational KPIs, for example, include:
- profit margin;
- operating cash flow;
- gross operating margin;
- time to Market;
- order fulfillment time;
- evaluation of employee satisfaction;
- employee dropout rate.
KPIs in marketing and customer care
Particularly important for strategic purposes are KPIs in marketing (and customer care), so much so that they deserve an ad hoc in-depth study. Here are some of the main KPIs in marketing and customer care:
- website traffic;
- number of qualified leads from marketing;
- conversion rate per Call to Action (CTA);
- search engine positioning;
- number of articles/ebooks published;
- repeat sales;
- rate of complaints per number of customers.
How KPIs can transform your business
You are about to conclude your journey of discovery of business KPIs. To return to the initial metaphor, now is the time to take back the helm of your “boat” and proceed full speed toward the safe harbor, that is, toward choosing the best KPIs for your startup.
Let a few things guide you: monitoring which areas of your startup are working and which, on the other hand, need action to improve performance is critical, and Key Performance Indicators provide you with a snapshot of the business in the midst of its action. Not only that, they also help you identify new strategies for the future. More specifically, KPIs are there to help you track the performance of your business processes and the progress you’ve made toward achieving your goals, but also to find useful data to define your future performance.
Remember that KPIs must be relevant, meaningful, ongoing and, most importantly, measurable. Only by setting goals that are equally measurable, as well as clear and realistic, can you identify the best key performance indicators for your startup.
Don’t forget to communicate business KPIs to your employees, monitor them regularly (you can choose to do this weekly, monthly, or every 3 months, depending on your startup’s needs), and update them where necessary (your chosen indicators may be relevant today, but it may not remain so in the future).