What Is A Key Performance Indicator? Importance And Types

Updated 8 September 2023

Companies use specific indicators known as key performance indicators (KPIs) to assess their work performances regularly and determine business success. KPIs help the company's decision-makers plan future business strategies to advance its interests. By understanding how a KPI works, you can learn how to use it as a quantifiable measurement to assess the company's performance and check if you are meeting your goals. In this article, we discover what a key performance indicator is, its business importance, its effectiveness, the different KPI types, how to make a SMART KPI, creation tips and some FAQs.

What Is A Key Performance Indicator?

A key performance indicator (KPI) is a measurement used to determine the value of business activity or performance. The measured value may be a financial one, such as the company's profit or liquidity, or a marketing or sales one, such as the number of website visitors or repeat customers the company gets. KPIs are useful for evaluating whether a company's operations are successful and if it is meeting its business objectives. They enable performance comparisons with industry competitors and guide companies in making strategic decisions to improve their business efficiency and profits.

Why Are Key Performance Indicators Important In Business?

Key performance indicators are important in business for the following reasons:

They help businesses to identify their overarching goals and measure their success in different areas.
They enable the company management to base their business decisions on the company's main goals.
They allow employees to understand how their work performances contribute to a larger goal and the company's overall success.
They may assist the company in fostering a work environment conducive to employees' ongoing learning and personal growth.

What Makes A KPI Effective?

A KPI is effective when it can help a company bring about beneficial internal and external business changes. The following features can make a KPI effective:

It is simple: You can measure the KPI easily, track the progress of company-wide goals and make practical business decisions that enable the company to bring about the desired outcome.
It is relevant: To increase the chances of a successful outcome, it is essential that the KPI you measure is relevant to the business' strategy and one that can help you make specific business decisions.
It is supportive: The company can benefit from KPIs that focus on and support its overall strategy and align well with its business goals.
It is actionable: KPIs can be effective if they have realistic goals that employees can understand and reach realistically within the deadline.
It is measurable: An effective KPI would focus on specific goals and provide accurate measurements of the quality and quantity of activities or performances.

What Are The Types Of KPIs?

Some of the different types of KPIs that you can find across various business sectors include the following:

Financial KPIs

Financial KPIs measure the financial performance and financial results of a company. They enable the company to get detailed information about sales, cash flow, profit and expenses. With this information, the company management can make appropriate decisions to achieve its financial goals. The examples of financial KPIs include net profit, current ratio, cost, cost of goods and sales by region.

Customer-based KPIs

Customer-based KPIs are metrics that use customer input data to measure how satisfied or loyal customers are with a brand's goods and services. They can monitor how many customers a company gains or loses, whether customers are likely to recommend the brand and the cost of acquiring new customers. Some customer-based KPI examples are customer satisfaction, customer retention, number of customers, net promoter score and customer acquisition score.

People-based KPIs

People-based KPIs measure data a company obtains through surveys and feedback from its employees. The KPIs can determine the employees' satisfaction with their jobs, salaries, opportunities for advancement, and the overall work culture. With this information, the employer can better understand what their employees want, and they can make appropriate changes or introduce policies to improve their morale and the work environment.

Employees satisfied with their jobs and the company are generally more diligent and conscientious about completing their work effectively. They are also less likely to leave the company to pursue other opportunities. Retaining high-performing employees can benefit the company. Examples of people-based KPIs include employee turnover rate, employee satisfaction and response to open positions.

Process-based KPIs

Process-based KPIs measure the efficiency of a company's business processes. These KPIs help the company assess its productivity levels in various areas and determine which sections are less streamlined. They can then decide on and make the necessary improvements or changes in those specific areas to enable the business processes to perform better. That can guarantee increased customer satisfaction with the brand since efficient work processes can lead to better quality products and quicker responses to customer service requests. Some examples of process-based KPIs are product defects, efficiency and customer support requests.

Ways To Make A SMART KPI

By applying the SMART (Specific, Measurable, Attainable, Relevant and Time-based) criteria to KPIs, the organisation can derive more benefits from them. You can create a SMART KPI by following these tips:

Know the business' goals: When you understand the exact objectives of the company, it can enable you to identify the right key performance indicators for achieving them.
Ensure the KPIs are specific and strategic: It is necessary for the KPI to express specific values that identify the business goals towards which you want employees to work.
Select KPIs that are actionable: Along with measuring performances and activities, you want KPIs that can enable you to analyse them and derive actionable insights to make better short-term and long-term business decisions.
Communicate KPI relevance to company personnel: When they understand what the KPIs measure and why the measurement is relevant to business success, they may be more willing to accept them for monitoring their performances.
Evaluate the KPIs regularly: You can maintain the relevance and effectiveness of KPIs by tracking their progress and evaluating them every week or every month and making any necessary changes.

Tips For Creating KPIs

The following tips may enable you to create effective KPIs for business success:

Track KPIs: Use KPI software tools to automate KPI tracking in real-time and enable users to understand trends with well-presented data visualisations.
Gather information to enhance business success: Choose key performance indicators that allow you to gather information about activities or performances that you can improve for future business success.
Use customer information to understand KPIs: Gather customer experience information by talking directly with customers and use that information to understand the KPIs you have collected.
Mention business targets: Discuss business targets with company employees to get a better idea of what the business needs in different areas and make the necessary adjustments in KPIs.
Use metrics to achieve goals: Align the performance metrics you are monitoring with the business objectives and take specific actions to achieve the goals.
Segment KPIs: Segment your KPIs so that you can monitor the right trends and pay attention to the underlying data.
Focus areas of improvement: Avoid vanity metrics such as the number of followers the company has on social media and concentrate instead on factors you can improve, such as social engagement and conversions.

FAQs About KPIs

Here are some of the most frequently asked questions that relate to tracking and creating KPIs for a business:

Are KPIs the same as metrics?

All key performance indicators are metrics, but all metrics are not key performance indicators. KPIs measure performances or activities to show how effective you are in achieving the business' objectives. Metrics are quantifiable measures that track raw data to assess the process or the progress towards the business' objectives. For the company, you may benefit from specific metrics that provide relevant information for improving the business' strategy and furthering the business' goals.

What is the best way to communicate business KPIs?

The best way to communicate business KPIs is to provide detailed information and context. You can let employees know how you plan on tracking the metrics and explain the exact purpose of the KPIs. When they understand how key performance indicators can monitor work progress and help everyone stay on track with their work, this may motivate them towards achieving shared goals to benefit the business.

Are certain KPIs more important than others?

A common perception is that financial KPIs are likely to be more important than all others, but it is a matter of perspective. The importance of KPIs depends on how relevant, valuable and insightful they are for attaining the company's goals and objectives. Your objectives could be to retain employees, provide increased customer satisfaction or obtain business funding. It would be necessary to have relevant KPIs to monitor the activities that can help with these goals. The KPI you choose is more important than others for the business.

What Is A Key Performance Indicator? Importance And Types