Different Types of KPIs

‘Key Performance Indicator’ (or KPI) is a metric which is one of the most important indicators of the current performance level of an individual, department and/or a company in achieving goals.

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

  • Example of number KPIs: ‘Days to purchase’, ‘Visits to purchase’, ‘Revenue’ etc
  • Example of ratio KPIs: ‘Conversion rate’, ‘Average order Value’, ‘Task completion rate’ etc

There are two broad categories of KPIs:

  1. High-level KPIs (business KPIs)
  2. Low-level KPIs (external KPIs, internal KPIs)

Business KPIs

A business KPI is a metric that is one of the most important indicators of the current performance level of a business in achieving its core business goals.

The core business goals are the results you want to achieve, improve or maintain as an organization in the short term and in the long run. For example, if one of your core business goals is to acquire more customers then your business KPI can be ‘Customers Growth Rate’.

Business KPIs are set at the organization level and focus on measuring the overall performance of a business. Founders / top management executives should play a key role in setting up and monitoring the business KPIs.

The metric that you choose as a business KPI must highly impact the corresponding core business goal. This is possible only when the metric has the ability to provide recommendation(s) for action which can have a high impact on the business bottom-line.

In other words, your KPI must have the ability to provide recommendation(s) for action which can highly impact the business bottom-line. 

If you are not sure whether or not a metric can be used as a business KPI then correlate it with its corresponding core business objective and then determining the following two things:

#1 Determine whether a linear relationship exists between your chosen KPI and its corresponding core business objective

That is as the value of your KPI increases or decreases there should be corresponding positive or negative impact on the core business objective. For example, if you sell ‘display banner ad space’ on your website and ‘display advertising’ is the main source of revenue for your company then ‘pageviews’ can be used as a business KPI. The more page views you get, the more you can charge for every thousand impressions (CPM) from your advertisers.

#2 Determine the strength of the linear relationship between your chosen KPI and its corresponding core business objective

That is as the value of your KPI increases or decreases there should be a significant positive or negative impact on the core business objective. 

Note: Your core business objectives need to be crystal clear before you can find business KPIs.

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External KPIs

An External KPI is one of the most important indicators of the current performance level of the team /department in achieving external goals. An external KPI is also known as department/function/team specific KPI.

We break down each core business goal into several smaller goals (called ‘External Goals‘).  So when you achieve one of the external goals, you can get one step closer to achieving your corresponding core business goal.

External goals are those core business goals that you can achieve within the area of your responsibility and expertise. External goals are department/function specific.

For example, if you work as an SEO, then you can increase profitability (one of the core business objectives) by decreasing customer acquisition cost through ‘Search Engine Optimization’.

Here decreasing customer acquisition cost is your external goal.

External KPIs are tied to external goals and are used to determine how you or your team/department are performing, in achieving external goals. These are the KPIs we generally report to clients/senior management.

Following are examples of different categories of external KPIs:

  • Sales KPIs
  • Marketing KPIs
  • Financial KPIs
  • Customer Support KPIs etc

External KPIs are set at the department/team/function level and focus on measuring the overall performance of a department/team.

The metric you choose as an External KPI must highly impact the corresponding external goal. This is possible only when your chosen KPI has the ability to provide recommendation(s) for action which can highly impact your external goal.

As the value of your external KPI increases or decreases, there should be a corresponding positive or negative impact on the external goal and this impact should be significant. For example, if one of your external goals is to improve website sales then you can use ‘Average Order Value’ as an external KPI because it can highly impact the website sales.

You can greatly increase website sales at the present conversion rate just by increasing the size of the orders.

Business owners/senior-most management along with department heads must be involved in setting up, approving and monitoring external KPIs.

Internal KPIs

An Internal KPI is one of the most important indicators of the current performance level of an individual in achieving internal goals.

We break down each external goal into several smaller goals (called ‘Internal Goals‘). So when you achieve one of the internal goals, you can get one step closer to achieving your corresponding external goal.

For example, if you work as an SEO, then you can decrease customer acquisition cost (one of your external goals) by improving the quality of your outreach emails. So that you can earn more high-quality backlinks for your website. This, in turn, can increase the organic search traffic on your website and decrease customer acquisition costs. 

Here improving the quality of your outreach emails is your internal goal.

Internal KPIs are tied to internal goals and are used to measure optimization efforts. They may or may not be directly tied to core business objectives. 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.

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

  • Delivery rate
  • Open rate
  • Response rate
  • Conversion rate of outreach
  • 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 only report high business bottom-line impacting KPIs to senior management.

The metric you choose as an Internal KPI must highly impact the corresponding internal goal. This is possible only when your chosen KPI has the ability to provide recommendation(s) for action which can highly impact your internal goal.

As the value of your internal KPI increases or decreases, there should be a corresponding positive or negative impact on the internal goal and this impact should be significant. 

Individuals who directly work on optimization tasks must be involved in setting up and monitoring internal KPIs.

Note(1): Internal KPIs do not need to be business bottom-line impacting.

Note(2): External KPIs can also be used as internal KPIs. There is no hard and fast rule here.

The top-down approach to finding KPIs

Before you can set up internal KPIs, you need to know your external KPIs.

Before you can set up external KPIs, you need to know your business KPIs.

Before you can set up business KPIs, you need to know your core business goals and the strategies to achieve those business goals.

The strategic direction needs to come from top management.

If the captain (aka your CEO) is not sure to which port his ship (aka company) should sail then the sailors (aka employees) can’t help him, no matter how good they are as an individual or team.

 

To learn more about KPIs check out this article: KPI Meaning (What is KPI), Examples & Calculations – Tutorial 


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Himanshu Sharma

Digital Marketing Consultant and Founder of Optimizesmart.com

Himanshu helps business owners and marketing professionals in generating more sales and ROI by fixing their website tracking issues, helping them understand their true customers purchase journey and helping them determine the most effective marketing channels for investment.

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The Digital Analytics Association is a world renowned not-for-profit association which helps organisations overcome the challenges of data acquisition and application.

He is the author of four best-selling books on analytics and conversion optimization:

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