What is a Key Performance Indicator (KPI)?
A Key Performance Indicator (KPI) is a value to evaluate the performance of a company in achieving goals. Its value is measurable in terms of its effectiveness in showing progress. KPIs can focus on the overall productivity of the business or focus on the operation of departments or teams in the company.
Qualities of Good KPIs
KPIs need to be effective to be considered critical gauges of growth. So, what are the qualities of good KPIs?
- Objective – Data should be non-subjective and non-biased to give an accurate picture of results
- Measurable – The basis of decisions should be on facts instead of feelings and instincts. This certainty is in the form of statistics and data. Numbers do not only show which way the business is performing, whether positive or negative. They also show the magnitude of its performance.
- Comparable – Results should have the ability to be compared over time to understand if the business is indeed moving forward
- Balanced – Leading and lagging indicators are of proper proportions
- Trait Tracking – Indicators should have the ability to study the business’ efficiency, effectiveness, quality, economics, project performance, and personal performance, and resource utilization. Behaviors, compliance, and governance are among those that are necessary to record. Indicators should be timely with the analysis made during the relevant period.
These qualities can be further analyzed in five different categories to keep these indicators relevant and straightforward. The groups aim to induce more decisions than questions.
These are the resources used to produce a particular output. It can involve different attributes, including quantity, cost, and types.
This type of KPI will show the efficiency, quality, and consistency of the production. It can explicitly refer to tools or equipment, or even training or resource usage style.
These define the quantity and quality of the results of production.
Outcomes differ from outputs in their measurement of impact and objectives set by the business.
These usually measure the overall objectives and individual plans of the business. They are significant to the vision of the company.
KPI Examples and Definitions
Different performance indicators exhibit good qualities of measuring performance. However, they may not be relevant or applicable to every function or project. Listed below are some of the essential indicators grouped by the type of measurement.
When reporting to your Board, some measurements that may be useful are various P&L statements such as P&L vs. previous month, P&L vs. forecast, year-over-year data on certain products, headcount summaries, rolling forecasts vs. original projections and cash projections.
Some of the more fundamental KPIs are below:
This measure shows how much the business earns given all inputs and costs not only to have the product made but also all of the company’s expenses. The higher the profit, the better it is for the company. Analysis of gross and net profit margin is integral to see the business’ progress.
Measuring cost can be on its effectiveness, the need for substitutes or alternatives, or the exact amount needed for production or to run operations, if a project.
Line of Business Revenue vs. Target
The goal is the target. It is good to set an objective that is well studied to have a forecast of how the business will do. The Line of Business Revenue is the actual revenue. Comparing the two will give some indication of how near or far off the result was from the goal.
Cost of Goods Sold
Understanding the full cost of production will show the profit margin and the necessary mark-up to get a net positive or stay breakeven.
Day Sales Outstanding (DSOs)
To get the day sales outstanding (DSO) number, multiply the number of days by the total accounts receivable over the number of total credit sales. This indicator measures the collection of accounts receivable. The lower the score, the better.
An organization with a proper sales pipeline and forecast management capability will have any number of metrics, depending on the product or service. For example:
- Monthly lead resourcing
- Opportunities lead by conversion rates
- Closed deals from conversion rates
- Successful deal size
- Win rates
- Average sales cycle period
- Total number of open and possible opportunities
Line of Business Expenses vs. Budget
The budget is the planned expenses, while the LOB Expenses is the actual net costs. Future operations will be better prepared when the business studies the difference between the two.
Customer Lifetime Value
This measure is an indication of the company’s value through a relationship with the customers.
Customer Acquisition Cost
Measuring the total acquisition cost by dividing it by the new customers given a specific period evaluates the marketing campaigns and the effectiveness of the value the company pays.
Customer Satisfaction and Retention
As much as it is crucial to have new customers, it would not be efficient if they don’t stay. Many indicators measure their satisfaction and willingness to buy again. This number can also measure shareholder value.
Net Promoter Score (NPS)
Word of mouth is one of the most effective ways of marketing a business. Customers who are happy with their service will usually tell friends. Surveys that can detail customer satisfaction, willingness to pay prices, willingness to buy again, and if they will recommend the company or the product to their family, friends and business associates can be given to them to know the company’s NPS. “Promoters” are typically those who register 8 or higher on a 10-point scale.
Net Number of New Customers
The net number of new customers added in a given period can indicate the effectiveness of sales, marketing and the viability of the product.
KPIs can be formed for processes, including:
Customer Support Tickets
Customer service can make or break a business. Some problems can take too long in its resolution. And this can be a turn off to some customers. A study on the number of tickets received and the marginal amount since the start of the resolution, the number of resolved tickets, and the time it took for its settlement will measure the strength of the business’ customer support.
Percentage of Product Defects
The number of defective units given the total produced amount is the percentage of product defects. This can measure how effective the company’s processes are or the quality of inputs. It is another measure of productivity, and the numbers are better when they are low.
LOB Efficiency Measure
This measurement concerns the time and quantity of production. It would be beneficial to note down how many products come out for a given period, say a day. Note also, how many hours a day the machines or equipment were up.
Employee satisfaction is vital to the success of a business. With satisfied employees, productivity increases.
Employee Turnover Rate (ETR)
Some employees find better and leave the company. The turnover rate is the number of people who have resigned or left over the average number of employees. High ETRs can be a sign of dissatisfaction.
Percentage of Response to Open Positions
Measuring this percentage is dividing the number of qualified applicants over the total number of applications.
Knowledge Achieved with Training
Additional training and development are factors that drive productivity. A diagnostic test before and after training can measure the effectiveness of further education.
KPIs for Software, SaaS, Platforms
Monthly Recurring Revenue (MRR)
This indicator is the amortized monthly revenue from monthly subscriptions. MRR does not include one-time payments, discounts, or metered changes.
Annual Recurring Revenue (ARR)
The measurement of the ARR is just the MRR multiplied by 12.
Customer Churn Rate
This rate is the percentage of canceled subscriptions over the total number of customers in a given time.
MRR Churn Rate
MRR Churn is the amount of money lost due to cancellations or downgrades in subscriptions. Divide the MRR Churn at the end of a period by the MRR at the start of the period. The number is the rate of MRR loss.
Average Revenue Per Customer (ARPC)
This indicator pertains to the average MRR given the number of customers. Dividing the sum of all customers’ MRR by the number of customers computes the ARPC.
Customer Lifetime Value (LTV)
For software companies, the computation for the LTV is the division of the average revenue per customer by customer churn.
Average Sale Price
This indicator measures sales effectiveness in getting new customers. It is the average MRR of new customers, which is the sum of all new MRR in a period divided by the number of new customers in the same period.
Customer Renewal Rate
It is also known as the Retention Rate, which is the percentage of customers renewing their subscriptions given the total number of customers who are about to finish their current subscription.
Customer Acquisition Cost
The measurement of the estimated cost in marketing the product to get new customers is the sum of all expenses in marketing and sales over the number of new customers.
This indicator is a full analysis to show the evolution of subscriptions in a given time.