8 Tips to set the best Key Performance Indicators
Cecily Giancaterino
May 22, 2023
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16 min read
Sales
If you’ve spent any amount of time in business meetings, you’ve undoubtedly heard the acronym KPI. You might hear, “Our KPIs look good this quarter,” or “A look at the KPI dashboard shows we’re on track.” So, what is a KPI?
KPI stands for “Key Performance Indicators,” and they are the real-time measurements used by company management to ensure that business goals are being met. Think of KPIs as a scorecard for businesses.
Some common KPIs include profit margin (the percentage of revenue that exceeds costs) and conversion rate (the percentage of users who take a desired action, like clicking on an ad).
These KPI examples are fairly straightforward, as they can be derived from simple mathematical calculations. Some KPIs are more complex and require a bit of statistical analysis to arrive at. This includes marketing KPIs like customer acquisition cost and customer lifetime value. Other KPIs are non-numerical, like product reviews and customer satisfaction surveys.
No matter how you use KPIs at your company, they are necessary in today’s business world. Measuring your progress toward your goals should be done often, and KPIs offer a way to do just that quickly and easily.
So the big question is: How do you set the best Key Performance Indicators for your business? This blog post will dive into the process of defining the KPIs that will have the most impact and give you the crucial information you need to stay on top of your goals.
Key Takeaways:
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Key Performance Indicators (KPIs) are Vital: Setting the right KPIs is essential for measuring progress and success. KPIs provide valuable insights into business performance, help track goals, and facilitate data-driven decision-making.
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Align KPIs with Business Objectives: KPIs should directly align with the specific objectives and goals of the business. By selecting KPIs that are relevant and meaningful, businesses can focus on measuring what matters most and driving strategic outcomes.
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Select a Mix of Leading and Lagging Indicators: A balanced mix of leading and lagging indicators provides a comprehensive view of performance. Leading indicators offer insights into future trends, while lagging indicators analyze past performance. Both are necessary for a well-rounded evaluation.
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Make KPIs Specific and Measurable: KPIs should be specific, measurable, and quantifiable to track progress effectively. Clear and precise KPIs enable accurate measurement, comparison, and evaluation of performance over time.
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Ensure KPIs Are Attainable and Realistic: KPIs should be challenging yet attainable. Setting unrealistic goals can demotivate employees and lead to frustration. Strive for ambitious targets while considering the resources and capabilities of the business.
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Regularly Review and Adjust KPIs: KPIs should not be set in stone. Regularly review and assess the relevance and effectiveness of KPIs. Adjustments may be necessary based on changing business conditions, market dynamics, or strategic shifts.
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Use Technology and Automation: Leverage technology and automation tools to streamline KPI tracking and reporting. Software solutions, such as CRM systems or analytics platforms, can simplify data collection, analysis, and visualization.
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Communicate and Cascade KPIs Throughout the Organization: Effective communication is vital for KPI success. Ensure that KPIs are clearly communicated to all stakeholders, and create a culture of accountability and alignment to drive performance improvement across the organization.
What are KPIs used for?
Businesses use KPIs to determine where they’re at with certain goals. KPIs help team members work towards predetermined goals and identify any issues that may get in the way.
KPIs are used to track the progress of daily business operations, projects, marketing campaigns, and overall business strategy.
Why are KPIs important?
KPIs are essential tools for businesses for the information they provide and how they provide that information.
As businesses have undertaken digital transformation efforts in the last couple of decades, the amount of data generated has grown exponentially. Whereas you used to consider computer data in terms of megabytes and gigabytes, it’s now common to think of terabytes.
Remember that a terabyte is roughly equivalent to one trillion bytes––and your company probably has hundreds of terabytes of information floating around. KPIs help you process that mountain of data without suffering from information overload.
Simply put, KPIs provide a quick and efficient way to see how your business is operating. They turn abstract ideas into easily-understood information that helps you make decisions. For these reasons alone, KPIs are among the most important tools in any employee’s toolbox.
How to choose the right KPIs
Before you can set the KPIs that will have the most value for your company, it helps to take a step back and understand the role that they should play. A good KPI will perform a few functions and aid the decision-making process.
Before you can figure out exactly which KPIs to track, you first need to understand the objective of setting them. Consider relevant objectives or goals you want to achieve that can help your business improve. Ensure that these objectives are specific and important for your brand's success instead of being vague and not well thought out.
Identifying key goals you want to achieve through setting KPIs forms the basis of the whole process. If not done right, you will end up wasting time, effort, and money.
Before adopting any KPI, make sure it:
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It is easily understood by all who view it
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Measures an essential indicator
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Shows where you’re at in achieving your goals
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Provides a point of reference to compare results
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Can be updated regularly
Another factor to keep in mind is the relevance of KPIs to the company as a whole. As KPIs are formed from data collection practices, some departments are going to have more opportunities to create KPIs.
For example, the social media team will collect a lot of data that could be turned into many different marketing KPIs. But the ones that should be shared should matter to the company as a whole, like the number of new customers that social media efforts have brought in. You could even look at this as an opportunity to merge the social media data with the KPIs provided by the marketing team.
Types of Key Performance Indicators
Key Performance Indicators generally fall into one of two categories: quantitive KPIs and qualitative KPIs. The easy way to remember the difference between the two is that quantitive KPIs use numbers to measure progress, and qualitative KPIs focus on non-numerical data.
Quantitative KPIs
Quantitive KPIs use numbers to measure progress toward a goal. You’ll find that most KPIs fall into this category. Some common examples are the number of leads, qualified leads, customer retention statistics, and return on investment (ROI).
Qualitative KPIs
Qualitative KPIs use non-numerical data to track performance. Customer experience data often falls into this category, such as customer comments left in surveys and product reviews.
However, qualitative KPIs can provide information that helps form quantitive KPIs. The qualitative examples above can form the basis for quantitive data like the number of product page views, abandoned carts, search engine hits, and search engine optimization (SEO) effectiveness.
This process of merging quantitive and qualitative information can help you make adjustments to real-world strategies such as pricing and advertising spend.
Leading indicators vs. lagging indicators
KPIs are often broken down into leading indicators and lagging indicators.
Leading indicators give you an early indication of performance by showing the progress you’re making toward a specific goal. For example, if the goal of your team is to make sales to 10 new customers per month, you’ll need leading indicators that can help you see how you’re doing early in the month.
Lagging indicators are a measurement of things that take a longer time to measure. Customer churn rate is often slow to change, making it a lagging indicator. If you were to measure it early and often, the KPI wouldn’t be as effective as measuring it over a longer period of time.
KPIs vs. metrics
KPIs are sometimes called “metrics,” but that’s a little misleading. While a KPI can be a metric, not every metric is a KPI.
Here’s one simple rule to help you remember the difference: A KPI should be a significant measure of performance.
On the other hand, metrics can be used to measure the smallest action. That’s not to say that metrics aren’t important. Smaller metrics have value for individuals and departments and can help guide them to better performance. But when it comes to KPIs, remember what the “K” stands for. A KPI is a Key Performance Indicator, so make sure that the KPIs you set truly is key to understanding how your company is performing.
Now that you have an understanding of the importance of Key Performance Indicators, here are some tips to help you set the right KPIs for your organization.
How to set Key Performance Indicators
As each company is unique, there are no templates for setting the right KPIs. Use the following eight tips to help you set the KPIs that will guide your business toward meeting its goals
1. Determine the number of KPIs
Once you've determined your specific objectives and are clear about where you are heading, you can decide on how many Key Performance Indicators you want to set. You should have no more than three KPIs for each goal to stay focused and not get pulled in too many directions.
Start with linking your goals to your Key Performance Indicators so that each performance measurement works as a way to reach a certain objective. If a KPI doesn't serve as a means to work your way to a particular goal, then you might want to remove that.
2. Clarify the KPI components
There are four main components to consider when setting your Key Performance Indicators:
3. Use the S.M.A.R.T. criteria
It is important to make sure you have well-defined KPIs set for your business. A well-defined KPI is adequately researched and is targeted toward a specific goal. It should also be compared for performance tracking and well-balanced. Many companies use the S.M.A.R.T. criteria as a way to clarify their KPIs. S.M.A.R.T. stands for Specific, Measurable, Attainable, Relevant, and Time-bound.
4. Set complementary short-term KPIs
A long-term Key Performance Indicator is the primary target for you to reach and is an overall vision of what you want to achieve. Setting complementary short-term KPIs to get that main target is a great way to stay on track and ensure you achieve success.
Take things one step at a time instead of tackling everything together. For instance, let's say you target earning $12,000 in 6 months. You can set short-term KPIs to reach a specific monthly figure to achieve this long-term KPI. Here, if you make $2000 per month, you will be able to get your goal of $12,000 in 6 months.
Short-term Key Performance Indicators are a great way to stay on track and ensure you stay on the right path. By analyzing your progress at every step and keeping an eye on how you are doing, you can quickly improve your performance when needed instead of waiting until it's too late.
5. Objectives and Key Results (OKRs)
People often confuse Objectives and Key Results with Key Performance Indicators, but they are two different frameworks that can be used with each other in a complementary manner. OKRs is a strategic framework that helps with performance and goal management by measuring the outcome of your endeavor.
To differentiate, KPIs measure your work process and help you stay on track with your goal by measuring performance. On the other hand, your OKRs will allow you to align your brand's priorities and measure the progress toward your end goals over time. This also helps improve your KPIs' performance and encourages you to improve.
6. Clear and straightforward communication of the KPIs
The best way to ensure all relevant parties understand your KPIs is to set straightforward, uncomplicated, and easy to grasp instantly. Communicating your KPIs well will allow everyone to be on the same page and understand their role in moving toward the main goal. This can be done by adding context to your KPIs and making others understand why these are relevant and important for your brand.
Elaborate on why you chose said KPIs over others and how you plan to measure them. Explain your strategy properly and answer any questions the involved people may have, as setting a clear foundation is necessary for a smooth operation later.
Communicating your KPIs clearly adds another advantage: the quicker the employees understand the concept, the more they will be able to add relevant insights and inputs. An open conversation can lead to making your KPIs potentially more efficient.
7. Set sales KPIs
Sales is a number-driven KPI that’s essential to any business. In short, every company needs to monitor its sales activity regularly. Some important sales KPIs include:
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Monthly sales calls or emails per sales team member
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Average purchase value
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Deals won vs. deals lost (the Opportunity to Deal ratio)
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Overall monthly sales growth
8. Review and update your KPIs regularly
As you progress toward reaching your goal, you will have to keep reevaluating your Key Performance Indicators from time to time. Track the progress of long-term and short-term KPIs daily, monthly, or weekly as required and measure performance.
Updating your objectives and KPIs are extremely important to stay relevant, as these are never meant to be static. Update your KPIs and let them evolve and change with your business. By constantly reviewing and readjusting, you will be able to weed out relevant KPI targets that are worth pursuing and ones that are not.
Setting Key Performance Indicators for your business is a great way to achieve success and reach the goals you have set for your company. Without such a framework, it can be challenging to understand whether you are on track and where you need to do better.
Conclusion
No matter which KPIs you choose to measure your company’s performance, you’ll need strong data to base them on. That’s why choosing the right tools to manage your business objectives is critical. FiveCRM has an array of products that cover every aspect of attracting and retaining customers, giving you the data needed for powerful measurement of your team’s performance. To find out how FiveCRM helps you meet your goals, reach out to us today or contact us for a demo.
FAQs
Q: What are Key Performance Indicators (KPIs)?
A: Key Performance Indicators (KPIs) are measurable values that help businesses assess their progress and performance toward specific objectives. KPIs provide insights into critical areas of business operations and serve as benchmarks for success.
Q: Why are KPIs important for businesses?
A: KPIs are essential for businesses because they provide a clear picture of performance and progress. They help track goals, measure success, identify areas for improvement, and enable data-driven decision-making.
Q: How do I choose the right KPIs for my business?
A: To choose the right KPIs, start by aligning them with your business objectives and goals. Consider the specific metrics that are most relevant to your industry, measure what matters most to your business, and ensure that the KPIs are specific, measurable, attainable, realistic, and time-bound (SMART).
Q: What is the difference between leading and lagging indicators?
A: Leading indicators are forward-looking metrics that provide insights into future performance and trends. They help identify potential issues or opportunities before they impact the business. Lagging indicators, on the other hand, analyze past performance and provide a retrospective view.
Q: How often should KPIs be reviewed?
A: KPIs should be reviewed regularly to ensure their relevance and effectiveness. The frequency of review may vary depending on the nature of the business, industry dynamics, and strategic goals. It is recommended to review KPIs at least quarterly or on a monthly basis.
Q: Can technology help with KPI tracking and reporting?
A: Yes, technology can significantly aid in KPI tracking and reporting. Various software solutions, such as CRM systems, business intelligence tools, or analytics platforms, can automate data collection, analysis, and visualization, making KPI management more efficient and effective.
Q: How can I ensure KPIs are effectively communicated throughout the organization?
A: Effective communication is crucial for KPI success. Clearly communicate the chosen KPIs to all relevant stakeholders, ensuring everyone understands the significance and relevance of each metric. Foster a culture of accountability and alignment, where employees understand how their efforts contribute to achieving KPIs.
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