KPI: All You Need to Know and What It Stands For

In whatever field you’re planning to work, study or even just lose weight, you must learn more about KPI and how to use it.

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Key Performance Indicators: What Are They?

KPI, short for Key Performance Indicator, is a method operated by organisations to evaluate performance. It can be used to tackle any business’s weaknesses and thus increasing its efficiency.

KPI demonstrates how effective your work is and what steps you should be following to reach your goal.

Through it, you can measure new monthly leads. Such measurement can also allow you to judge the performance of your team, where higher values indicate more attractions.

In short, a key performance indicator can be defined as the rate of potential customers actually becoming customers.

Also, it can be calculated through dividing the leads converted to sales (actual customers) by total leads, and then multiplying it by 100 to get a percentage.

There are varieties in the KPIs; high-level and low-level KPIs. Low-level indicators can be used to track different fields in a business. Meanwhile, high-level indicators are used to measure the general performance of the whole business.

Key performance indicators differ according to the criteria you’re using them in as well.

For example, the KPI used in retail field will not be the same as that used in marketing since KPIs are precise in what they measure.

Also, KPI can only measure what had already happened. Dealing with the futuristic data becomes a prediction. Sometimes this is based on the performance indicators used beforehand but still not called a KPI.

However, if used unwisely, KPIs may cause a great loss and potential harm in your field of work.

Hence, there are ways to reasonably choose your KPI since not all KPIs will be relevant to your business.

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How to Apply a Successful KPI?

  1. Know Your Objective

Determining the goals and pointing out the problems are the most important steps in any plan. You doesn’t just casually  start a company; a goal and a list of obstacles is needed to begin with.

Goals aren’t just an option but a definitive need for any area you want to succeed in. You might think that it isn’t really that important, but drawing the mental image for the future you want for your work can drive ambition.

Setting a goal also increases focus on a target without aimlessly deviating for an unknown reason. This can save you a lot of time in the long run.

So, let’s say you want to increase the fund your project is receiving. That is a common goal. Focusing on that target is very important. Furthermore, switching to another goal afterward you achieve this is really important to consider as well. A short term plan and a long term plan.

Remember: as your business develops so does its targets.

Now that you know what you want, you go to the next step which is known as CSF.

  1. Critical Success Factors (CSF)

Critical success factors are vital elements for any project. They are the objectives that set your plan in motion redefined in one or two sentences during a specific time period.

A misleading, widely known concept is that CSF doesn’t really differ than KPI so it doesn’t have to be done. This is incorrect.

CSF can be defined as the “what/when” of your target, while the KPI is the “how”.

So if you’re planning on collecting a fund for your project, this is what a CSF for that goal may look like.

Collect 75% of the fund by the end of the month.

By knowing the critical success factors in your business, it’ll be easier to identify whether the key performance indicator you’re using is fruitful or not.

  1. Continual Review on KPI Used

It is important to review your performance indicators quite often. The reason being that sometimes when the objectives change – you also need to change your KPI as well.

So, whether you do it weekly or monthly it’s up to you, but make sure you do.

  1. Share Your KPI 

Getting another opinion on your plan should be something to consider to test the effectiveness of your indicator. Sometimes we overlook small details and this can really affect the work process if it’s not identified.

So, whether it’s an investor you know that works in your field or just a faraway relative, it’s important to take the advice from someone out of the picture.

Also, allowing adjustments and having a flexible KPI might be useful in some fields, as concrete KPIs are sometimes ineffective.

  1. Apply It SMART-ly

Most successful performance indicators are following the SMART analysis. This is a helpful criteria for setting targets and goals. It’s an acronym for specific, measurable, achievable, relevant and time oriented goal.

A specific objective translates in the inclusion of a certain idea, as if it’s very general or unrelated to the subject you’ve decided to work on it might harm it.

So, shrinking down the things you want to do might be a helpful way to get focused.

As for the measurable factor, which is the one mostly involved with key performance indicators, it means you can easily calculate the gains and losses out of it.

This way, it will help you to gain insight on the aspects that need a bit more strengthening and work.

Also, the achievable aspect is very important from the practical way of life, and knowing whether your idea is applicable enough to work on or to just find an alternative for.

Many people lose so much just because they haven’t thought of this point before delving right into their ideas.

For relevance and time orientation, it’s also very important to track them down, noticing if you’re going out of the line or taking too much time in just one thing.

There are so many beneficial aspects from the SMART analysis, hence why it’s used for determining what key performance indicator one must follow.

How to Choose a KPI?

Choosing your KPIs can be sometimes challenging especially when you are trying to measure intangible aspects such as customer satisfaction.

So, in order to choose your KPI, you must identify your goal and make sure it is reachable in a suitable time period.

You should also denote the change you want to see; for example if you want to increase sales, set a particular percentage increase as well as a time frame.

What you’re trying to reach should be countable through specific procedures; you can count the number of complaints but not the number of satisfied customers nor loyal customers.

All to make sure that all KPIs you’ll be using will serve measuring your goals directly without many trails and errors.

Now there are so many different KPIs you can use in your field of work, and we will demonstrate how every platform might even have its own KPIs in the following examples.

Finance

For financial departments, LOB revenue vs. target is a KPI that compares between your actual revenues and your planned revenues.

When plotted on a graph, it can show whether your organisation is losing profit or gaining. You can calculate it through:

Gross profit = sales – cost of production.

This KPI will show you if decreasing or increasing a product’s cost is necessary.

You can also compare the sales in different regions and tackle underachieving areas through marketing.

Moreover, you can assign your financial KPI through estimating both actual time needed for a certain project and a budgeted one. This can help in increasing the efficiency when everything’s on time.

Also, using an accounting system for your work might help in organising everything for both workers and clients.

Accounts payable turnover can be a useful KPI for your business as well, considering it measures the rate of which you pay to your suppliers. The formula to calculate it in a certain duration of time is:

Total costs of sales ÷ average payable accounts.

Similarly, the accounts receivable turnover shows the rate of the payments you successfully receive from your clients. The formula to calculate it is:

Total sales ÷ average receivable accounts.

Also there’s the Return on Equity KPI measurement (ROE) that estimates your supposed company’s income through its overall worth, which helps in determining the profitability and success of your business, no matter of its current status.

Social Media 

For social media marketing, you can use a number of different KPIs to track your marketing team.

For example, in Facebook you can use the Facebook engagement metric which equals likes + comments + shares + clicks + reach.

The results can be plotted on a graph monthly and monitored. Checking individual posts allows you to understand your customers’ interests.

If a post receives more interactions than another, perhaps its content matches the audiences’ taste.

In a shop, potential customers may be the number of people entering your shop, but for social media, this can be done by the number of accounts visiting your website divided by the number of conversions.

Lead conversion rate can be helpful for both sales and marketing departments too.

Sales

As for sales, you can measure the sell-through rate, which compares between the number of products sold to customers versus the amount sold to a retailer so you can use it to generate trends through:

The number of products sold to a retailer – the number of products sold to customers ÷ number of products manufactured × 100.

Another effective way for performance indicators in sales is to calculate the net promoter score (NPS) of the organisation; that is, the quantity of customers who would recommend you to someone they know and how satisfied they were from their experience with you.

To measure this, you have to send surveys to your customers on a constant basis. Also, try as much as you can to answer to the critics you might get, for it can be a very good method for customer loyalty.

Marketing

There are so many effective key performance indicators you can use in the field of marketing, sometimes as simple as measuring the number of customers per a certain period of time.

A technique which can be helpful if you want to evaluate your marketing team is to measure the Customer Acquisition Cost (CAC) by dividing costs spent on attracting new customers over the number of new customers.

Also one of the very simple ways is to increase the customers’ engagement with your business, allowing your name to be widely known and heard of, especially if you listen to the critics and advice you get from customers.

You can use key performance indicators as well in the marketing field, including marketing and sales qualified leads (MQL) (SQL), lifetime value of customers (LTV), funnel conversion rates, customer’s retention and so many other useful metrics.

There are process metrics too. The percentage of faulty products can be easily measured through dividing the number of these products over the number of total products produced to get a measure.

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To Wrap Up: KPI

  • A KPI is an indicator for the efficiency of your organisation, business or even your baseball team.
  • KPIs differ from one field to another due to their precision and accuracy.
  • Knowing what your objective is helps in choosing the most accurate KPI.
  • Most KPIs are linked with critical success factors to help strengthen it.
  • Constant recheck of the KPI used and developing it is a must.
  • SMART analysis is the method through which one applies KPI. That makes the process specific, measurable, achievable, relevant and time oriented.
  • Identifying goals help in choosing the right KPI.
  • Successful KPIs in finance are: LOB revenue vs target, accounting systems, account payable turnover, account receivable turnover and Return on Equity measurement.
  • Successful KPIs in social media work: Engagement metrics and lead conversion rates.
  • KPIs in sales: Sell-through rate and net promoter score.
  • KPIs in management: Customer acquisition cost, customer’s engagement, marketing and sales qualified leads, lifetime value of customers, funnel conversion and customer’s retention.
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