How to Set KPI (Key Performance Indicators) – Step by Step Guide

Key Performance Indicator (or KPI) is a metric that is one of the most important indicators of the current performance level of an individual, department and/or a company in achieving goals. It is used to measure your performance (as an individual, department and/or a company) in achieving key goals.

Note(1): Every KPI is a metric. But not every metric can be used as a KPI. 

Note(2): A KPI is not a goal. However, it needs an accompanying goal in order to be effective. A goal is a specific outcome or result you want to achieve. Whereas KPI is a metric that tells you whether you are on track on achieving your goal.

Follow the steps below to set KPIs:

Step-1: Establish your company’s mission and vision statements. 

A mission statement is a written declaration of the core purpose/cause of your organization. Why it exists? What problem you are trying to solve? The mission is a general statement of how you will achieve your vision.

A vision statement is a written declaration of what an organization would like to achieve in the long term. 

For example, Google’s mission is “to organize the world’s information and make it universally accessible and useful.”.Google’s corporate vision is “to provide access to the world’s information in one click.

 

Step-2: Define your core values (principles) as a business.

Principles (core values) is how your organization should behave on its way to achieving its vision. Your core values support your mission and vision and drive your day to day decision making processes.

Following are examples of core values of a business:

  • Customers obsession
  • Results-oriented
  • Long-term thinking

 

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Step-3: Define your company’s core business goals (objectives)

With your mission, vision and core values in mind and with the help of KPQs (key performance questions) define your company’s core business goals (objectives).

‘Key Performance Question’ or KPQ are those questions which help you in setting up your goals and strategies.

For example, you can ask yourself following KPQs, in order to set up core business goals:

  • Why my business exist?
  • What is the purpose of the business?
  • What are the short term and long term goals of my company?

 

Step-4: Make each core business goal SMARTER by creating well-defined strategies for achieving them.

SMARTER stands for ‘Specific’, ‘Measurable’, ‘Attainable’, ‘Relevant’, ‘Time-bound’, ‘Evaluated’ and ‘Readjusted’

A strategy is a specific method you use to achieve your goals. You can create strategies through ‘Key Performance Questions’. These questions include ‘why’, ‘what’, ‘who’, ‘where’, ‘when’ and ‘how’.

A strategy can be made up of one or several tasks. When these tasks are complete, the strategy is considered to be executed.

Note: Without setting up goals and strategies beforehand, you will have a hard time coming up with KPIs.

 

Step-5: Set up business KPIs for each SMARTER core business objective

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. This KPI is used for measuring the performance of a core business goal.

For example, if one of your core business goals is to acquire more customers then your business KPI can be ‘Customers Growth Rate’.

 

Step-6: For each business KPI set up a clear target that defines what success looks like.

A target is a metric through which you define success and failure in achieving your goals. When you have achieved your target, it is considered a success. When you do not achieve your target, it is considered as failure.

For example, your KPI could be ‘percentage decrease in CPA in the last month‘. Here the KPI does not define what percentage decrease in CPA is considered a success.

For that we need to set up a KPI target like the one below:

10 or more percentage decrease in CPA in the last month.

So KPIs and targets are not one and the same thing.

 

Step-7: Iterate your strategy for each business KPI so that it clearly outlines how you will achieve your business KPI targets.

 

Step-8: Share Core business objectives and corresponding business KPIs and targets across your organization.

The ‘core business objectives’ and their corresponding business KPIs must be shared across your organization so that everyone is aware of what their company is trying to achieve. This will help your employees and departments in setting up goals and KPIs which align with your business KPIs.

Do not mess up at this stage (as many businesses do). In many companies, employees/managers have a hard time understanding how they are adding ‘value’ to the business bottom-line and whether what they are currently doing, is really worth the time and investment.

And this happens because organization core business objectives and business KPIs are not shared across the organization. Everyone in the company must be pushing towards the same organizational goals. This is the only way to ensure maximum productivity and profitability. And this can happen only when the core business objectives and business KPIs are shared across the organization.

 

Step-9: Break down each core business goal into several smaller goals (called ‘External Goals’).

That’s how you create an alignment between your external goals and business goals.

So whenever you achieve one of your external goals, you get one step closer to achieving your corresponding business goal. Use KPQs to identify external goals.

For example, for the business goal ‘Acquire new customers‘, the following can be your external goals:

  • Acquire customers through organic search traffic.
  • Acquire customers through paid search traffic.

For the business goal ‘Retain existing customers‘, the following can be your external goals:

  • Build brand loyalty
  • Increase user engagement

For the business goal ‘Increase website sales‘, the following can be your external goals:

  • Increase the number of transactions
  • Increase user engagement

Similarly, for the business goal ‘Decrease acquisition cost‘, the following can be your external goals:

  • Re-target users
  • Fix website tracking issues

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, your external goal is to increase customer acquisition and decrease customer acquisition costs through ‘Search Engine Optimization’.

 

Step-10: Make each external goal SMARTER by creating well-defined strategies for them.

 

Step-11: Set up External KPIs for each external goal:

External KPI is the KPI set up for measuring the performance of an external goal. External KPIs are set at the department/team/function level and focus on measuring the overall performance of a department/team.

Step-12: For each external KPI set up a clear target that defines what success looks like.

 

Step-13: Iterate your strategy for each external KPI so that it clearly outlines how you will achieve your external KPI targets.

 

Step-14: Share external goals and corresponding external KPIs and targets with your team/department. 

 

Step-15: Break down each external goal into several smaller goals (called ‘Internal Goals’).

That’s how you create an alignment between your external goals and internal goals. So whenever you achieve one of your internal goals, you get one step closer to achieving your corresponding external goal.

Use KPQs to identify internal goals. For example, for the external goal ‘Acquire Customers through organic search traffic‘, the following can be your internal goals:

  • Increase organic search traffic
  • Increase the quality of your email outreach
  • Fix website crawlability and indexing issues.

Internal goals are directly tied to achieving optimization objectives. They may or may not be directly tied to your core business goals.

For example, if you are running an SEO campaign, your internal goal could be to improve 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. 

If you work in SEO then improving the quality of your outreach emails can not be your external goal. That is because improving the quality of email outreach can never really be a core goal of any business (unless that’s all they do).

 

Step-16: Make each internal goal SMARTER by creating well-defined strategies for them.

Step-17: Set up Internal KPIs for each internal goal:

Internal KPI is the KPI set up for measuring the performance of an internal goal. Internal KPIs are set at an individual level and focus on measuring the overall performance of an individual.

Step-18: For each internal KPI set up a clear target that defines what success looks like.

 

Step-19: Iterate your strategy for each internal KPI so that it clearly outlines how you will achieve your internal KPI targets.

 

Step-20: Monitor your KPIs against your targets on a weekly/monthly basis.

 

Step-21: Review and adjust your goals, strategies, KPIs, and targets at regular intervals

Review and adjust your goals, strategies, KPIs, and targets at regular intervals so that they effectively capture any strategic, functional or tactical change in your business.

 

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


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