Key Performance Indicators (KPIs) with Examples – Beginner’s guide

Introduction to Key Performance Indicators – ‘KPI’

‘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.

Before you can identify KPIs, you must know your goals as an employee, as a department and as a company. Your goals must align with your company’s core business objectives and you must know how to achieve them (i.e. strategy). Only then you will be in a position to find KPIs which align with your business KPIs.

For example, for an individual like SEO, the goal may be, to increase the organic search traffic of his website. But at the organisation level, his goal is most likely to increase customers acquisition and decrease customers acquisition cost through Search Engine Optimization.

Similarly, for a department like ‘Customer Support’, their goal may be to solve all customers enquiries within 12 hours. But at the organization level, their goal is is most likely to improve customers satisfaction and retention.

Whether you are an individual or a department, your goals must align with your company’s core business objectives. Everyone in the company must be pushing towards the same organization goals. This is the only way to ensure maximum productivity and profitability.

Thus there can be two broad categories of goals for each employee or department:

#1 Internal Goals

#2 External Goals (High level goals)

Internal Goals

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

For example, if you are running a SEO campaign, your internal goal may be to improve the quality of your outreach emails so that you can earn more highly quality backlinks for your website. Which in turn can increase the organic search traffic on your website.

External Goals (High Level Goals)

External goals are directly tied to achieving core business objectives.

So if you work as a SEO then improving the quality of your outreach emails can not be your high level goal (or external goal). This is because improving the quality of email outreach can never really be a core objective of any business.

Increasing customers acquisition and decreasing customers acquisition cost can be core objectives of a business. So as a SEO, your high level goal is most likely to increase customers acquisition and decrease customers acquisition cost through ‘Search Engine Optimization’.

Similarly, if you manage PPC campaigns then your high level goal is most likely to increase customers acquisition and decrease customers acquisition cost through ‘Paid Search Optimization’.

Thus external goals are those core business objectives which you can achieve within the area of your responsibility and expertise.

Alignment between internal and external goals

Each employee/team/department need to have both internal and external goals and there needs to be an alignment between their internal and external goals. Only then they will be in a position to achieve their core business objectives within the area of their responsibility and expertise and that too in the most efficient manner.

Let us look at the internal and external goals of our SEO guy.

Internal goal – improve the quality of outreach emails

External goal –  increase customers acquisition and decrease customers acquisition cost through ‘Search Engine Optimization.

Now once the SEO improved the quality of his outreach emails, he can earn more highly quality backlinks for his website. Which in turn can increase the organic search traffic of his website and which in turn can increase customers acquisition and decrease customers acquisition cost through ‘Search Engine Optimization.

Thus there is a clear alignment between the SEO’s internal and external goals. Our SEO guy knows exactly how his day to day work activities impact the business bottomline. Unfortunately this is not the case with many companies where employees/managers have hard time understanding how they are adding ‘value’ to the business bottomline and whether what they are currently doing, is really worth the time and investment.

By aligning/re-aligning your internal and external goals on a daily/weekly basis, you and your team can stay focused and productive and achieve the organizational goals (core business objectives) in the most effective manner.

The core business objectives

The core business objectives are the results you want to achieve, improve or maintain as an organization both in the short term and in the long run. Founders / top management executives should play a key role in setting up and monitoring their core business objectives.

Your core business objectives can be:

  1. Support and maintain company’s core values.
  2. Increase/maintain market share
  3. Increase profitability
  4. Improve brand retention
  5. Provide excellent customers service etc.

The core business objectives can vary from industry to industry and from business to business. Thus there are no predefined set of core business objectives which should be adopted/copied.

Following are the most common, core business objectives for an ecommerce business:

#1 Increase customers acquisitions (acquire more customers)

#2 Improve customers retention (retain customers)

#3 Increase sales

#4 Decrease acquisition cost (decrease the cost of acquiring customers).

The top down approach

Before you can set up KPIs for yourself and your team, you need to have well defined KPIs for your business (the Business KPIs).

But you can set up business KPIs only when your core business objectives are crystal clear i.e. you know exactly what do you want to achieve as an organization. Why your business exist? What it is purpose?

The direction comes from the top. If the captain is not sure to which port his ship should sail then the sailors can’t help him, no matter how good they are as an individual or team.

So you need to first get your business KPIs in place.

The key performance questions (KPQs)

The ‘key performance questions’ (or KPQs) are the business questions which help you in setting up goals, strategies and KPIs.

For example, if one of your core business objectives is to increase customers acquisition, then your KPQs can be:

  • How can we increase customers acquisition?
  • Can we acquire two times more customers than the last year? Is that realistically possible?
  • If it is possible then what do we need to change/adopt in order to achieve this goal?
  • Why doubling the rate of acquiring customers is important to the business? How this would impact sales and profitability?
  • Who would be responsible for increasing customers acquisition?
  • How the success would look like?
  • What should be the time frame for achieving this goal?

Your ‘key performance questions must help you in setting up SMART goals.

SMART Goals

SMART stands for ‘Specific’, ‘Measurable’, ‘Attainable’, ‘Relevant’ and ‘Time bound’.

Specific’ – Your goal need to be clear and specific. It should target to achieve a specific outcome.

Measurable’ – Your goal need to be measurable. You should be able to measure the progress or regress towards your goal.

For example, ‘Customers happiness’ can not be your goal unless you have a mechanism in place through which you can quantify and differentiate between different human emotions (happiness, frustration etc).

Attainable’ – Your goal need to be realistic. You should be able to achieve your goal within the area of your responsibility and expertise. At the organization level, an ‘attainable’ goal should be based on SWOT (‘strength’, ‘weaknesses’, ‘opportunities’ and ‘threat’) analysis.

‘Relevant’ – Your goal must help you in achieving the desired outcome(s). For example an ‘internal goal’ is relevant when it aligns with its corresponding ‘external goal’. Similarly, an ‘external goal’ is relevant when it aligns with one of the core business objectives.

‘Time bound’ – Your goal must have a deadline attached to it. Without deadlines no goal in unachievable. You can achieve it next week, next month or next year. There is no urgency. ‘Time bound’ goals bring urgency and help you in staying focused and motivated.

Example of SMART goal – increase organic search traffic of the website by 100% in the next 6 months.

Strategies

Strategies are specific methods you use to achieve your SMART goals. The ‘key performance questions’ can help you in coming with effective strategies. These questions include ‘why’, ‘what’, ‘who’, ‘where’, ‘when’ and ‘how’.

‘Why’ denotes objective and reasoning of your strategy. What you are trying to achieve? What should be the outcome?

‘What’ denotes what is involved in implementing your strategy. Creating and implementing any strategy requires time, cost, people, subject matter expertise and other resources.

‘Who’ is involved in implementing your strategy. These people can be you, your colleagues, boss, clients etc.

Where’ denotes the ‘direction’ in which your strategy should move so that you can get highest possible return on your investment. Your strategy should move in the direction where it helps you in achieving your goals in the most efficient manner. Thus ‘where’ can also denote ‘efficiency’.

When’ denotes ‘situation’, ‘date and time’, ‘assumptions’, ‘risks’, ‘barriers’, ‘deadlines’, ‘opportunities’ etc. A strategy also need to be time bound in order to be cost effective. Without deadlines there is no urgency.

How’ denotes the ‘process’ you will use to execute your strategy. This includes coming up with certain set of tasks. When these tasks are complete, the strategy is considered to be executed. Thus a strategy can be made up of one or several tasks.

Without setting up goals and strategies beforehand, you will have hard time coming up with KPIs which align with your internal / external goals and core business objectives.

Types of KPIs

There are two broad categories of KPIs:

#1 Business KPIs

#2 Department/Function Specific KPIs

Department/Function Specific KPIs can be further classified into internal and external KPIs

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

Business KPI framework

A business KPI framework helps in setting up business KPIs. Following is the example of a business KPI framework for an ecommerce website:

Business owners/senior most management along with department heads must be involved in setting up and approving a business KPI framework. This framework is the strategic roadmap for your business and provide the big picture and the direction in which your company should move to get the highest possible return on investment.

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. Remember the ‘top down approach’. The direction and clarity comes from the top.

Note: Acquisition is also known as ‘conversion’ or  ‘customer’. So cost per acquisition (CPA) can be the ‘cost per conversion’ or the average cost of acquiring a customer.

How to find a good business KPI

The metric you choose as a business KPI must highly impact the corresponding core business objective. 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 bottomline. In other words, your KPI must have the ability to provide recommendation(s) for action which can highly impact the business bottomline.

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 following two things:

#1 Determine whether a linear relationship exist between your chosen KPI and its corresponding core business objective i.e. as the value of your KPI increases or decreases there is 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 you then  ‘pageviews’ can be used as a business KPI. The more pageviews you get, the more you can charge for every thousand impressions (CPM) from your advertisers.

#2 Determine the strength of linear relationship between your chosen KPI and its corresponding core business objective i.e. as the value of your KPI increases or decreases there should be significant positive or negative impact on the core business objective.

Department / Function Specific KPI Framework

A department/function specific KPI framework helps in setting up internal and external KPIs for each department/function. Following is the example of a KPI framework for ‘Search Engine Optimization’ of an ecommerce website:

Following are examples of department/function specific KPIs:

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

Introduction to Internal KPIs

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.

Internal KPIs do not 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 highly business bottomline impacting KPIs to senior management.

Related Article: How to become Champion in Data Reporting

How to find a good Internal KPI

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 corresponding positive or negative impact on the internal goal and this impact should be significant. For example if one of your internal goal is to improve the quality of your outreach emails, you can then choose ‘Response rate’ as an internal KPI.  

Introduction to External KPIs

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

How to find a good External KPI

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 corresponding positive or negative impact on the external goal and this impact should be significant.

For example if one of your external goal is to improve website sales then you can use ‘Average Order Value’ as an external KPI because it can highly impacts the website sales. You can greatly increase website sales at the present conversion rate just by increasing the size of the orders.

Attributes of a Good KPI

A Good KPI has got 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 not 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 not use it is as a KPI. 

So when you are finding your KPIs, you need to be 100% sure that there is a mechanism/tool available, to measure and report your KPI in the first place.

#2 Highly impacting

If a metric does not greatly impact its corresponding goal then it is not a good KPI.

#3 Relevant

If your KPI is highly impacting then it is got to be relevant to its corresponding goal.

#4 Instantly useful

If your KPI is highly 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 the second time then it is not a good KPI, as you can not take timely decisions on the basis of such KPI.

Examples of Good KPIs

#1 Gross Profit

It is the profit after production and manufacturing cost.

Gross Profit = Sales Revenue – Direct Cost.

Direct cost can be something like cost of manufacturing a product

#2 Gross Profit Margin

It is used to determine the effectiveness of your business in keeping production cost in control. 

Gross Profit Margin = (Gross Profit/ Revenue) * 100

Higher the gross profit margin, more the money is left over for operating expenses and net profit.

#3 Operating Profit

It is the profit before interest and taxes.

Operating Profit = Sales Revenue – Operating Cost.

Operating cost is the ongoing cost of running a business, product or system. It can include both direct and indirect costs.

#4 Operating profit margin

It is used to determine the effectiveness of your business in keeping operating cost in control.  

Operating Profit Margin = (Operating Profit/ Revenue) * 100

Higher the operating profit margin, more the money is left over for net profit.

#5 Net Profit

Also known as net income, net earnings, bottomline. It is the profit after interest and taxes

Net Profit = Sales Revenue – Total cost (this includes any direct and indirect cost + interest + taxes)

#6 Net Profit Margin

Also known as profit margin, net margin, net profit ratio. .  It is used to determine the effectiveness of your business in converting sales into profit. 

Net Profit Margin = (Net Profit/ Revenue) * 100

Low profit margin indicates higher risk, that a decline in sales will erase the profit and result in net loss.

#7 Revenue Growth Rate

Also known as sales growth rate. It is the measure of the percentage increase in sales between two time periods.

Revenue Growth Rate = (Current month’s Revenue- Last month’s Revenue) / (Last month’s Revenue) * 100

#8 Total Economic Value

It is the total value added by your product/service/campaigns to the business bottomline. 

Total Economic Value = Total Revenue + Total value of the assisting conversions + Total value of the last click conversions

The ‘total economic value’ also take into account the role played by micro conversions and conversions which assisted and completed the sales.

#9 Return on Investment (ROI)

It is used to evaluate the efficiency of your investment or to compare the efficiency of different investments.

ROI= (Gain from investment – cost of investment)/cost of investment

#10 Net Promoter Score

It tells how likely it is that your customers will recommend your business to a friend or colleague. Click here for more details.

Net promoter score = % of promoters – % of detractors

#11 Customer lifetime value

It is the projected revenue (repeat business) a customer will generated during his lifetime. Different types of customers have different lifetime value (LTV). One of the best ways to boost LTV is by improving customer satisfaction.

(Average order value) X (Number of Repeat Transactions) X (Average customer life span in months/years)

Average customer life span means how long he/she remains your customer.

#12 Customer retention rate

It is used to determine how good your company is in retaining customers.

Customer Retention Rate =  [1- (Customers lost in a given time period/total number of customers acquired in the same time period)] * 100

#13 Customer profitability score

This score is used to separate profitable customers from unprofitable customers.

Customer profitability score = Revenue earned through a customer – cost associated with customer’ management/service/retention

#14 Cost per lead

It is the average cost of generating a lead.

Cost per lead = total cost/total leads

#15 Cost Per Acquisition

It is the average cost of acquiring a customer or generating a conversion.

Cost Per Acquisition = Total Cost/ Total acquisitions

#16 Revenue Per Acquisition

It is the average revenue earned through an acquisition.

Revenue Per Acquisition = Total Revenue/Total acquisitions

#17 Per Visit Value

It is the average value of a visit to your website.

Per Visit Value = Total Revenue/Total Visits

#18 Conversion Rate

It is the percentage of visits which results in goal conversions or ecommerce transactions.

Conversion Rate = (Total Goal conversions/ E-commerce transactions/ total visits) *100

#19 Average Order Value

It is the average value of an ecommerce transaction. Through this metric you can measure how effective your upselling and cross selling efforts are and whether you are helping people in finding the product they are looking for.

Average order value = Total Revenue/Total ecommerce transactions

#20 Task Completion Rate

It 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?”

Task completion rate = (number of people said ‘yes’ to the survey question/ Total number of survey responses) *100

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

It all depends upon the nature of the business and the industry you work in and your goals. 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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My name is Himanshu Sharma and I help businesses find and fix their Google Analytics and conversion issues. If you have any questions or comments please contact me.

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