Understanding Key Performance Indicators (KPIs) – Complete Guide


What I am going to do next is, explain KPIs to you in a way that is
instantly useful and I am planning to make you a KPI Champion in just 10 minutes ;)

What is a KPI?

KPI stands for ‘Key performance Indicator’.

It is a metric which is used to determine how you are performing against your business objectives.  

A metric can be a number or a ratio. So we can have ‘number metrics’ and we can have ‘ratio metrics’.

For example: Visits, Pageviews, Revenue etc are number metrics because they are in the form of numbers.

Bounce rate, Conversion rate, Average order value etc are ratio metrics because they are in the form of ratios.

Since KPI is also a metric, we can have KPIs in the form of numbers and ratios. So we can have ‘number KPIs’ and we can have ‘ratio KPIs’.

For example: Days to purchase, visits to purchase, Revenue etc are number KPIs.

Conversion rate, Average order Value, Task completion rate etc are ratio KPIs.

 

Difference between a Metric and KPI

A metric graduates to KPI.

However in order to make this happen the metric must hugely impact the business bottomline.  This is possible only when the metric has the ability to provide recommendation(s) for action which can a huge impact on the business bottomline. So

Your KPI must have the ability to provide recommendation(s) for action which can hugely impact the business bottomline.

For example, ‘Average Order Value’ can be used as a KPI because it hugely impacts the business bottomline. You can greatly increase sales at the present conversion rate just by increasing the size of the orders.

Revenue per click, Revenue per visit, Revenue per acquisition, Cost per acquisition, Task completion rate etc. are other examples of metrics which can be used as KPIs.

 

How to find a good KPI?

1. Before you start the process of finding KPIs, you must acquire a very good understanding of your business and its objectives.

2. Then you need to translate your business objectives into measurable goals.

3. Once you have determined your goals, you will select KPIs for each of these goals.

You will use these KPIs to measure the performance of each goal.

Goals are specific strategies you used to achieve your business objectives.

Your business objective can be something like ‘increase sales’. Your goal could be something like ‘increase sales by 5% in the next 3 months by increasing the average order value from x to 2x’.

Any metric which has the ability to directly impact the cash flow (revenue, cost) and/or conversions (both macro and micro conversions) in a big way can be a good KPI.

For example if you sell display banner ad space on your website and display advertising is the main source of revenue for you then  ‘pageviews’ can be used as a KPI.  The more pageviews you get, the more you can charge for every thousand impressions (CPM) from your advertisers.

If you are not sure whether or not a metric can be used as a KPI, then try to correlate it with revenue, cost and/or conversions over a period of time (3 or more months).

You need to prove that there is a linear relationship between your chosen KPI and revenue, cost and/or conversions

i.e. as the value of your KPI increases or decrease there is a corresponding increase or decrease in revenue, cost and/or conversions.

 

Can you use ‘number of twitter followers’ as a KPI?

The answer is ‘NO’, not unless you can correlate number of twitter followers with revenue, cost and/or conversions i.e. as the number of twitter followers increases or decreases there is a corresponding increase or decrease in revenue, cost and/or conversions.

prove-correlation

Even if somehow you are able to correlate the number of twitter followers with revenue, cost and/or conversions you still need to prove that the correlation has huge impact on the business bottomline.

Just because a metric impacts the business bottomline, does not automatically make it a good KPI.

 

Can you use ‘number of facebook fans as a KPI?

The answer is ‘NO’, not unless you can correlate number of facebook fans with revenue, cost and/or conversions

i.e. as the number of facebook fan increases or decreases there is a corresponding increase or decrease in revenue, cost and/or conversions.

 prove-correlation2

Even if somehow you are able to correlate the number of facebook fans with revenue, cost and/or conversions you still need to prove that the number of facebook fans has huge impact on the business bottomline.

Just because a metric impacts the business bottomline, does not automatically make it a good KPI.

 

Can you use ‘Phone Calls as a KPI?

The answer is ‘yes’ provided majority of your revenue comes through Phone calls.

You can easily track phone calls through ‘phone calls tracking’ software and then import phone calls data into Google Analytics. Once the data is imported you can tie phone calls to revenue, cost and/or conversions to determine correlation.

Here there is one thing to keep in mind.

A KPI doesn’t need to be a metric available in Google Analytics reports.

You can use metrics from other analytics tools too.

For example ‘Phone call’ metrics is not available in Google Analytics reports by default but this doesn’t mean that we can’t use it as a KPI.

Similarly, ‘Task completion Rate’ metric is not available in Google Analytics reports. However you can calculate ‘Task completion Rate’ through a survey tool like Qualaroo and use it as a KPI.

Task completion rate is the percentage of people who came to your website and answered ‘yes’ to this survey question: “Were you able to complete the task for which you came to the website?”

 

Can you use Clients’ Happiness as a KPI?

The answer is ‘NO’. This is because a KPI is a metric and metric is a number or a ratio. In other words,

metrics is something which can be measured in the first place.  

How you can possibly quantify a human emotion like ‘Happiness’?

 

Types of KPIs

There are two broad categories of KPIs:

  1. Internal KPIs
  2. External KPIs

Internal KPIs

These KPIs are internally used by team members to measure and optimize their marketing campaigns’ performance. They are not always reported to clients/boss/senior management.

Internal KPIs don’t need to be business bottomline impacting either.

For example following KPIs can be used to measure your link building outreach campaigns:

  1. Delivery Rate
  2. Open Rate
  3. Response Rate
  4. Conversion Rate of outreach
  5. ROI of outreach

Often marketers make this terrible mistake of reporting internal KPIs to clients/senior management.

For example ‘Bounce Rate’ is a good Internal KPI for optimizing landing pages. But it is not something which you will report to a CEO. We report only hugely business bottomline impacting KPIs to senior management.

 Related Post: How to become Champion in Data Reporting

 

External KPIs

These are the KPIs we report to clients/senior management and use them to create ‘Web Analytics Measurement Models’ (strategic roadmaps) for businesses.

External KPIs must be hugely business bottomline impacting.

Whenever we talk about KPIs in general, we are referring to external KPIs. Some examples of external KPIs:

  1. Average Order Value
  2. Conversion Rate
  3. Revenue
  4. Revenue per acquisition
  5. Cost per acquisition
  6. Task Completion Rate
  7. Goal conversions

Note: External KPIs can also be used as internal KPIs. There is no hard and fast rule here.

 

Attributes of a Good KPI

A Good KPI has following attributes:

1. Available and Measurable
You can use only those metrics as KPIs which are available to you in the first place. For example if ‘Net Promoter Score’ metric is not available to you then you can’t use it as a KPI.

Similarly if you come up with something which is impossible to measure (like ‘frustration level of customers who abandoned the shopping cart for the 3rd time’) then you can’t use it is as a KPI.

So when you are finding your KPI,

you need to be 100% sure that there is a mechanism/tool available out there to measure and report your KPI in the first place. 

 

2. Hugely business bottomline impacting
If a metric does not greatly impact the business bottomline then it is not a good external KPI.

3. Relevant
If your KPI is hugely business bottomline impacting then it is got to be relevant to your business objectives. Conversely, if your KPI is not relevant to your business objectives then it can’t be business bottomline impacting either.

4. Instantly useful
If your KPI is hugely business bottomline impacting then it is got to be instantly useful i.e. you can quickly take actions on the basis of the insight you get from your KPI.

5. Timely
Your KPI should be available to you in a timely manner so that you can take timely decisions.

For example if you are using a compound metric (a metric which is made up of several other metrics) as a KPI and it takes several months to compute it once and then another several months to compute it second time then it is not a good KPI as you can’t take timely decisions on the basis of such KPI.

 

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Examples of Good KPIs

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There is virtually no limit to the number of good KPIs you can find.

It all depends upon the nature of the business and the industry you work in.

For example if you work in an industry where majority/all of the conversions happen offline via phone calls then you can use ‘Phone Calls’ as your KPI.

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