KPI Meaning (What is a KPI?), Examples & Calculations – Tutorial

What is a 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.

What is a metric?

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

The following are examples of number metrics because they are in the form of numbers:

The following are examples of ratio metrics because they are in the form of ratio:

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

What is the difference between a metric and a KPI?

Every KPI is a metric. But not every metric can be used as a KPI.

KPI is a key metric that has the ability to directly impact the cash flow (revenue, cost) and/or conversions (both macro and micro conversions) in a considerable way.

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 page views you get, the more you can charge for every thousand impressions (CPM) from your advertisers.

Similarly, ‘average order value’ can be used as a KPI because it hugely impacts the website sales. You can greatly increase your website sales at the present conversion rate just by increasing the size of your orders (i.e. the ‘average order value’).

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What is the difference between a KPI and a goal?

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.

For example, if your goal is to decrease acquisition cost then your KPI could be a ”percentage increase in CPA in the last month‘.

Here the KPI does not define the goal itself. It only tells you whether you are on track to decrease your acquisition cost. So don’t try to use KPIs and Goals interchangeably. They are not the one and the same thing.

What is a KPI used for?

KPI is used to measure your performance (as an individual, department and/or a company) in achieving key goals.

Who should use KPIs?

If you are an individual, department and/or a company and you have set up clearly defined goals for yourself then you should use KPIs to measure your performance in achieving your goals.

Who should not use KPIs?

If you do not know your goals as an individual, as a member of your department and/or as a member of your company then you don’t need to use any KPI.

When should I use a KPI?

The best time to use KPI is when you have set up clearly defined goals & strategies and you are now ready to measure your performance in achieving those goals.

What are the attributes of a good KPI?

A good KPI has got the following attributes:

  1. It is available and measurable.
  2. It highly impacts its corresponding goal.
  3. It is relevant to its corresponding goal.
  4. It is instantly useful.
  5. It is available in a timely manner.

#1 Available and measurable

You can use only those metrics as KPIs which are available to you in the first place. For example, if the ‘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 several more months to compute it the second time then it is not a good KPI, as you can not make timely decisions on the basis of such KPI.

What are the different types of KPIs?

There are three broad categories of KPIs:

#1 Business KPI (also known as ‘high level’ KPI) – It is the KPI set up for measuring the performance of a core business goal. Business KPIs are set at the organization level and focus on measuring the overall performance of a business.

#2 External KPI (also known as ‘low level’ KPI) – It 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.

#3 Internal KPIs (also known as ‘low level’ KPI) – It 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.

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

How should an organization use KPIs?

An organization should use KPIs at multiple levels (organizational level, department level, individual level).

How to set KPIs?

Follow the steps below to set KPIs:

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

The mission statement is a written declaration of the core purpose/cause of your organization. Why it exists? What problem you are trying to solve? Your mission should be bigger than yourself and solve a real-life problem for others in a bigger and better way.

Your company does not exist just to make money. Sure your company needs to make money to survive but there needs to be an added mission that serves others and at the same time positively impacts your business bottom-line.

If your company is just driven by business opportunity/money then you won’t go very far in your business.

For example, Google’s mission is “to organize the world’s information and make it universally accessible and useful.” And this has been their mission from the very start. Their mission was never about making more money.

A mission statement does not change over time. A mission statement helps you keep on track. It is like a compass which, when used daily, keeps your organization in the right direction.

Unlike a business goal, a mission is not something that you aim to achieve. A mission is something that drives your day to day actions and decision-making processes in a business.

For example, your business goal could be to generate $100k in additional sales in the next 1 year. But this can not be your mission.

A vision statement is a written declaration of what an organization would like to achieve in the long term. For example, Google’s corporate vision is “to provide access to the world’s information in one click.”

Amazon’s vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.

The difference between mission and vision statements is that the mission is a general statement of how you will achieve your vision.

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. It is like the foundation of your company. Without core values, your company has got no identity, no culture.

Following are examples of core values of a business:

  • Market backward (focus on what the market wants and then deliver it to them).
  • Simplicity (less is more)
  • To the point (no rambling)
  • Focus is everything (do less, better)
  • Customers obsession
  • Results-oriented
  • Long-term thinking
  • Ever evolving, always innovating to become a better version of ourselves.

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

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.

Your core business goals can be:

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

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

  1. Acquire more customers (i.e. Increase customers acquisitions)
  2. Retain existing customers (i.e. Improve customer satisfaction).
  3. Increase sales
  4. Decrease the cost of acquiring customers (i.e. decrease acquisition cost)

You can find your company’s core business goals through ‘Key Performance Questions’ (also known as KPQs).

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

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

  • How can we increase customer acquisition?
  • Can we acquire two times more customers than last year? Is that realistically possible?
  • If it is possible then what do we need to change/adopt in order to achieve this goal?

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 I am trying to achieve as an organization?
  • What are my company’s mission and vision?
  • What are the short term and long term goals of my company?
  • What are the core values of my company?

Note: KPQs are the building blocks of goals, strategies, and KPIs.

Founders / top management executives should play a key role in setting up and monitoring their core business goals. 

If you are an external consultant/agency then you determine core business goals with the help of the people who actually run the business and not from the website or Google Analytics reports. Consequently, you need to interview your client

Note(2)The core business objectives can vary from industry to industry and from business to business. Thus there are no standard set of core business objectives which should be adopted/copied.

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

Your core business goals must be SMARTER (i.e SMARTER core business goals). Your ‘key performance questions must help you in setting up SMARTER business goals.

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

Specific

Your goal needs to be clear and specific. It should target a very specific outcome. The more specific your goal, the higher is your probability of achieving it. For example, ‘generating more’ sales is not a specific goal. Generating 10k extra per month is a specific goal.

You must be able to quantify your goal. You must be able to measure it. Otherwise, it is not a goal but just some obscure direction.

‘Measurable’

Your goal needs to be measurable. You should be able to measure the results and progress of each goal. You would need to establish criteria for measuring results and progress towards the attainment of each 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 is considered to be achievable if you can achieve it in the short term. And by short term, I mean within a year. However sooner the better. Long term goals are not achievable unless we have accomplished corresponding short term goals. That’s why it is critical to breaking down your long term goals into several smaller short term goals.

That’s how you create an alignment between your short term goals and long term goals. So that ever time you achieve a short term goal, you come one step closer to achieving your long term goal. So when we talk about a goal that is attainable, we refer only to the short term goals. Without short term goals in place, your long term goal is not a goal but just some obscure direction, wishful thinking.

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).

‘Time-bound’

Your goal must have a deadline (target date) attached to it. Without deadlines no goal is unachievable. You can achieve it next week, next month or next year. There is no urgency. Set an exact date when you plan to achieve your goals.

Work on your goals backward

So if your 5 years goal is to generate 1 million dollars in sales then what should be your 1-year goal?

If your 1-year goal is to generate $200k in sales then what should be your quarterly goal?

If your quarterly goal is to generate $50k in sales then what should be your monthly goal?

If your monthly goal is to generate $16,667 in sales then what should be your weekly goal?

If your weekly goal is to generate $4167 in sales then what should be your daily goal?

Then start working on achieving your daily goals.

Shorter the time frame, the more likely you are to achieve your desired goal. The longer the time frame, the less likely you are to achieve your desired goal. ‘Time-bound’ goals bring urgency and help you in staying focused and motivated.

‘Evaluated’

Evaluate where you are with achieving your goals. You need to regularly evaluate your goals. Things change, circumstances change, market change over time and you may need to adjust your goals accordingly. If you fail to adjust your goals, they may become irrelevant over time.

‘Readjusted’

If one approach is not working then you may need a different approach to achieve your goals.

Example of SMARTER business goal – increase website sales by 100% in the next 6 months by improving organic search traffic through SEO.

 

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

Why?

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

What?

‘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?

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

Where?

‘Where’ denotes the ‘direction’ in which your strategy should move so that you can get the 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?

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

How?

‘How’ denotes the ‘process’ you will use to execute your strategy. This includes coming up with a 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.

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 the KPI set up for measuring the performance of a core business goal. 

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. 

For example, if one of your core business goals is to acquire more customers then your business KPI can be ‘Customers Growth Rate’ (a measure of the percentage increase in customers between two time periods.)

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.

Founders / top management executives should play a key role in setting up and monitoring the business KPIs.

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

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

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

A KPI is not a target. However, it needs the accompanying target in order to be effective.

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. Whereas KPI is a metric that tells you whether you are on track on achieving your goal.

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 (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.

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

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 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’.

Similarly, if you manage PPC campaigns then your external goal is to increase customer acquisition and decrease customer acquisition costs through ‘Paid Search Optimization’. 

Whatever you choose as an external goal, make sure that it is always directly tied to achieving the company’s core business goals.

You can find your external goals through ‘Key Performance Questions’. 

For example, if one of your core business goals is to increase customers acquisition, then your KPQs for setting up an external goal for SEO can be:

  • How can we increase customer acquisition?
  • Can we acquire two times more customers than 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 from organic search?
  • Who would be responsible for increasing customer acquisition through SEO?
  • What does success look like?
  • What should be the time frame for achieving this goal?

Your external goal must be SMARTER (i.e SMARTER external goals). 

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

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

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.

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.

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. Whenever we talk about KPIs in general, we are referring to external KPIs. 

Following are examples of different categories of external KPIs:

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

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.

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.

The external goals and their corresponding external KPIs must be shared across your team/department so that everyone is aware of what their team/department is trying to achieve. This will help the individuals within your team/department in setting up goals and KPIs which align with external KPIs.

Everyone in the team/department must be pushing towards the same team/department goals. This is the only way to ensure maximum productivity and profitability. And this can happen only when the external goals and their corresponding KPIs are shared across the 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.

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.

The internal goals are the goals that 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).

You can find your internal goals through ‘Key Performance Questions’.

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

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

Your internal goal must be SMARTER (i.e SMARTER internal goal). Your ‘key performance questions must help you in setting up SMARTER internal goals.

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

The internal KPI is the KPI set up for measuring the performance of an internal goal. An Internal KPI is one of the most important indicators of the current performance level of an individual in achieving internal goals. 

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.

Related Article: How to become Champion in Data Reporting

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. 

For example, if one of your internal goals is to improve the quality of your outreach emails, you can then choose ‘response rate’ as an internal KPI.

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.

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

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 so that they effectively capture any strategic, functional or tactical change in your business.

 

Remember the top-down approach

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.

Similarly, before you can set up internal goals, you need to know your external goals. Before you can set up external goals, you need to know your core business goals. Before you can set up core business goals, you need to have mission and vision statements + well-defined core values in place.

The strategic direction needs to come from top management.

Alignment between external and internal goals is the key

Each employee/team/department needs to have both external and internal goals and there needs to be an alignment between their goals.

Only then they will be in a position to achieve the 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 an SEO guy.

External goalIncrease customer acquisition and decrease customer acquisition cost through ‘Search Engine Optimization.

Internal goal Improve the quality of outreach emails

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

Thus there is a clear alignment between the SEO’s external and internal goals. Our SEO guy knows exactly how his day to day work activities impact the business bottom-line.

Unfortunately, this is not the case with many companies where 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.

By aligning/re-aligning your external and internal 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.

But all of this can happen only when you share: Core business objectives, Business KPIs, External goals and External KPIs across your organization. So this type of sharing and openness is very important.

Examples of good KPIs

#1 Gross Profit

It is the profit after production and manufacturing costs.

Gross Profit = Sales – Direct Cost.

A direct cost can be something like the cost of manufacturing a product

#2 Gross Profit Margin

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

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

Higher the gross profit margin, the 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 – 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 costs in control.

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

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

#5 Net Profit

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

Net Profit = Sales – 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 a profit.

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

A low profit-margin indicates a higher risk that a decline in sales will erase the profit and result in a net loss.

#7 Sales Growth Rate

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

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

#8 Total Economic Value

It is the total value added by your product/service/campaigns to the business bottom-line.

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

The ‘total economic value’ also takes 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

<h2″>#10 Return on Ad Spend (ROAS)
It is used to evaluate the efficiency of investment in an ad campaign.

ROAS = (Sales from investment – cost of investment)/cost of investment

ROAS is different from ROI in the sense that it takes only ad cost into account. Whereas ROI takes total cost into account.

#11 Net Promoter Score

It tells how likely it is that your customers will recommend your business to a friend or colleague.

More information about Net Promoter Score.

Net promoter score = % of promoters – % of detractors

#12 Customer Lifetime Value

It is the projected revenue (repeat business) a customer will generate 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 lifespan in months/years)

Average customer lifespan means how long he/she remains your customer.

#13 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

#14 Customer Profitability Score

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

Customer profitability score = Revenue earned through a customer – Total cost associated with customer’ acquisition, management, service and retention

#15 Cost Per Lead

It is the average cost of generating a lead.

Cost per lead = total cost/total leads

#16 Cost Per Acquisition

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

Cost Per Acquisition = Total Cost/ Total acquisitions

#17 Revenue Per Acquisition

It is the average revenue earned through an acquisition.

Revenue Per Acquisition = Total Sales / Total acquisitions

#18 Per Visit Value

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

Per Visit Value = Total Sales / Total Visits

#19 Goal Conversion Rate

It is the percentage of visits that result in goal conversions.

Goal Conversion Rate = (Total Goal conversions / total visits) *100

#20 Ecommerce Conversion Rate

It is the percentage of visits that result in ecommerce transactions.

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

#21 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

#22 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

#23 EPS (earnings per share)

EPS stands for earnings per share. It is the indicator of a company’s profitability. Higher the EPS, the more profitable the company is to investors. Since EPS measures the company’s profitability, a negative EPS means the company is not profitable for investors. Earnings per share is quite meaningless if analyzed on its own. Although the higher the number the better for shareholders themselves.

EPS is most useful as a comparison metric. EPS is generally considered to be the single most important variable in determining a share’s price.

Formula to calculate EPS:

Net Earnings / average number of Outstanding Shares

For example,

Company A had earnings of $100 million and 10 million shares outstanding, which equals an EPS of 10 ($100 Million / 10 Million = 10).

Company B had earnings of $100 million and 50 million shares outstanding, which equals an EPS of 2 ($100 Million / 50 Million = 2).

So, Company ‘A’ seems to be more profitable to investors.

Types of EPS

#1 Trailing EPS – previous year’s EPS and the only actual EPS. It is often compared with the current EPS

#2 Current EPS – is the current year’s EPS.

#3 Forward EPS – is a forecast of what the EPS might be in the future.

Note: Most recorded and quoted EPS values are trailing.

#24 Price to Earnings Ratio (P/E)

The Price to Earnings Ratio gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. P/E metric is quite meaningless if analyzed on its own. Although the higher the number the better for shareholders themselves.

P/E is most useful as a comparison metric.

Formula to calculate P/E – Current Stock Price/EPS

For example, a company with a share price of $40 and an EPS of $8 would have a P/E of 5 ($40 / 8 = 5).

Note: Companies that are losing money do not have a P/E ratio.

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.

Introduction to KPI dashboards

A KPI dashboard is used to present your KPI analysis to decision-makers. It is a medium of communicating your insight from KPIs to key stakeholders so that they can make data-informed business and marketing decisions.

Dashboards are used to create ‘changes’ within your company. Therefore it is important for a dashboard to recommend great actions.

There are two types of KPI dashboards:

#1 Tactical (operational) KPI dashboards

#2 Strategic KPI dashboards

Tactical (operational) KPI dashboards

The goal of a tactical KPI dashboard is to help team leaders better understand the performance of their team/department/function.

So we can create tactical dashboards for say SEO team, PPC team, Affiliate marketing team, social media team, etc. A tactical dashboard is used to present the analysis of your external KPIs to decision-makers. 

Such dashboards are created to show aggregated/segmented data and are often created via a web analytics tool like ‘Google Analytics’.  There isn’t a lot of context or explanation of insights etc in such dashboards as the people for which these dashboards are built, already have a great understanding of what they are doing. 

So when a web analyst gives them a tactical dashboard they know exactly how to interpret the data, what conclusions to draw, and what actions to take.  

Following is an example of a tactical KPI dashboard:

Strategic KPI dashboards

The goal of a Strategic KPI dashboard is to help key stakeholders (often top management executives) better understand the performance of their core business objectives. A strategic dashboard is used to present the analysis of business KPIs to key decision-makers. 

Such dashboards are NOT created to show aggregated/segmented data and are NOT usually created via a web analytics tool like ‘Google Analytics’.  There is a lot of context or explanation of insights etc in such dashboards as the people for which these dashboards are built, do not know exactly how to interpret the data and what conclusions to draw.  

Following is an example of a strategic KPI dashboard:

Checklist for designing a strategic KPI dashboard

#1 Segment your KPIs before you present them. The segmentation also improves its measurement.

#2 Don’t just rely on Google Analytics to find KPIs. Also, use other data sources.

#3 Show key trends and insights (first in words format and then in graphical format). Use date range of at least 3 months, better 6 months. Remember 2 months don’t make a data trend.

#4  Show which KPI is up or down.

#5 Describe the impact of the KPI on the company’s bottomline.

 

#6 Recommend actions that impact the business bottomline.

#7  Skip lame KPIs. For example, do not use the bounce rate as KPI. This is because it does not correlate well with conversions. Use the bounce rate as a diagnostic metric.

#8 Remove the cluttering of metrics from your dashboard. Present only those metrics which are really relevant in your reports, which are meaningful to your decision-makers. Don’t do data puking.

#9 As a web analyst, the only conclusion that can be drawn from your KPI analysis should not be to do more analysis. You should not say ‘do more analysis’ in your recommendations because it is your job. 

#10 Include recommendations in your KPI analysis. An analysis without solid recommendations is just data puking. It has no commercial value.

How to make solid recommendations:

  • If we do this then we should get that.
  • The company should do ‘X’, which will cost ‘y’ but could bring additional revenue ‘z’.
  • Include surprises in your recommendations. If some of your recommendations do not surprise you then you haven’t done enough analysis. 
  • Compute the impact of each of your recommendations on the business bottomline in monetary terms.
  • Prioritize your list of recommendations on the basis of their impact on the business bottomline.
  • Recommendations must be about changing things about the website, campaigns, strategies, etc. 
  • The recommendation should not be to do more analysis. 
  • If you want senior management to implement your recommendations then you must show the expected outcomes.
  • Compute and show the cost of delaying in implementing the recommendations. 

Recommendations:

1st Priority: ……………………..

Cost of delaying the implementation: 1-month delay can result in $___ of lost revenue.

2nd Priority: ……………………..

Cost of delaying the implementation: 1-month delay can result in $____ of lost revenue.

3rd Priority: ……………………..

Cost of delaying the implementation: 1-month delay can result in $____ of lost revenue.

 

#11 Design your dashboards with your target audience in mind.  Don’t make the insight obvious. Spell it out. 

#12 Wherever possible, present all the data in bulleted points (use numbered list).

#13 Add annotation and graphic elements to your reports, tables, and graphs (like arrows, brackets, etc).

#14 Always format the data in your tables. Make your data tables easy to read.

Table formatting Tips

  • Use conditional formatting to highlight data trends.
  • Use callouts in your formatted table
  • Insert rectangles to drive attention to your data.
  • Use numbered list
  • Use colors

#15 Don’t jump to conclusions in your reports. Based your recommendations on the basis of analysis. 

 

#16 Try to use at least one competitor in your analysis. Decision-makers usually pay great attention to what their competitors are doing and are more likely to consider your recommendation if it is already being executed by their competitors.

#17 Don’t repeat what one can easily find through graphs and charts.

#18 Avoid using screenshots from Google Analytics reports for your strategic dashboard. Most of the time they are just data puke. 

#19 Don’t fake data if you don’t have one. Don’t make numbers out of thin air.

#20 Don’t select KPIs just to impress your decision makers or just because they are popular in your industry.

 

#21 Decide in advance how you want to present your data. Decide what you want to highlight. Your agenda.

#22 Your summary dashboard should fit into a single page and it should summarize all your analysis and provide recommendations. Assume the executives read only this. So make sure it conveys everything of importance and yet can be read quickly and easily.

#23 Dashboards created in Google Analytics can become data puke very quickly. So be cautious when you use the G.A. dashboards for your KPI analysis.

#24 Your dashboard should show ‘Acquisition’, ‘Behaviour’, and ‘outcomes’. Organize your dashboards into three columns: acquisition, behavior, and outcomes.

#25 The data that you present on the dashboard must help in understanding the acquisition, behavior, and outcomes. 

 

#26 If you can’t organize a dashboard created for each KPI into acquisition, behavior, and outcomes then make sure that you have some KPI dashboards which cover acquisition, some KPI dashboards which cover ‘behavior’ and some dashboards which cover ‘outcomes’.

#27 The actual number of slides/KPI dashboards in each category (acquisition, behavior, and outcomes) would depend upon your ‘Web Analytics Measurement Model’. 

#28 Whenever you do competitive analysis always compare it with your business. Because comparison ads ‘context’. Never present data without comparison.

#29 If your analysis doesn’t include recommendations then it is not an analysis.

#30 If your data involves ‘low numbers’ then don’t include them in your analysis. Avoid reporting such data as it is unlikely to be statistically significant. 

 

#31 Include at least one competitive KPI in your ‘web analytics measurement model’.

#32 Show segmentation and distribution if you use the ‘average’ metric as KPI.

#33 Avoid using compound metric.

#34 Figure out in advance that the analysis which you are planning to do is worth doing in the first place.

#35 Your KPI analysis should include:

  • Clickstream analysis (what)
  • Outcome analysis (how much)
  • Voice of customer analysis, experimentation, and testing (why)
  • Competitive analysis (underperforming, outperforming, opportunities you are missing)

 

#36 Use multiple analytics tools in your analysis to execute the ‘strategy of multiplicity’.

#37 If your written and/or spoken words just repeat what is mentioned in the graphs and tables then it means ‘analysis’ is missing and only ‘reporting’ has been done.

#38 When you do competitive analysis and draw trends use at least 6 months of data.

#39 Use Visual Clues (like small colored triangles) to show, how to read the report.

#40 Write your commentary on what the reports tell your decision-makers. Your commentary is more important than your graphs.

 

#41 If after completing the analysis you have no good recommendations, then this is your hint that you may have chosen a week business goal or KPI. You should now amend your WAMM (Web analytics measurement model) and begin your analysis again.

#42 Dashboards are not reports. Since they are not reports, you can’t leave the interpretation of the data to executives.

#43 Your dashboard should be one page and readable. It should fit in one A4 size paper.

#44 At least once a quarter you should re-visit your dashboard. Figure out what is working, figure out what is not working, and then learn to kill metrics.

#45 Dashboards have to be living, breathing things.

Frequently asked questions about KPIs

What is a 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. KPI is used to measure your performance (as an individual, department and/or a company) in achieving key goals. If you are an individual, department and/or a company and you have set up clearly defined goals for yourself then you should use KPIs to measure your performance in achieving your goals. An organization should use KPIs at multiple levels (organization level, department level, individual level).

What is a metric?

A metric can be a number or a ratio. So we can have number metrics and we can also have ratio metrics. The following are examples of number metrics because they are in the form of numbers: Visits, Pageviews, Revenue etc. The following are examples of ratio metrics because they are in the form of ratio: Bounce rate, Conversion rate, Average order value, etc

What are number and ratio 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

What is the difference between a metric and a KPI?

Every KPI is a metric. But not every metric can be used as a KPI.

What is the difference between a KPI and goal?

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 which tells you whether you are on track on achieving your goal.

What is the difference between a KPI and target?

A KPI is not a target. However, it needs the accompanying target in order to be effective. 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.Whereas KPI is a metric which tell you whether you are on track on achieving your goal.

What are the attributes of a good KPI?

A good KPI has got following attributes: 1) It is available and measurable. 2) It highly impacts its corresponding goal. 3) It is relevant to its corresponding goal. 4) It is instantly useful. 5) It is available in a timely manner.

What are the different types of KPIs?

There are three broad categories of KPIs: Business KPI (also known as 'high level' KPI), External KPI (also known as 'low level' KPI) and Internal KPIs (also known as 'low level' KPI).

What is a business KPI?

Business KPI is the KPI set up for measuring the performance of a core business goal. Business KPIs are set at the organization level and focus on measuring the overall performance of a business.

What is an external KPI?

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.

What is an internal KPI?

Internal KPI is the KPI set up for measuring the performance of an internal goal. Internal KPIs are set at an individual level and focuses on measuring the overall performance of an individual. External KPIs can also be used as internal KPIs. There is no hard and fast rule here.

What is 'Key Performance Question' (KPQ)?

'Key Performance Question' or KPQ are those questions which help you in setting up your goals and strategies. For example, if one of your core business goals is to increase customer acquisition, then your KPQs can be, 'How can we increase customer acquisition?'. KPQs are the building blocks of goals, strategies and KPIs.

What are the examples of good KPIs?

Following are examples of good KPIs: gross profit, gross profit margin, operating profit, operating profit margin, net profit, net profit margin, sales growth rate, total economic value, return on investment (ROI), return on ad spend (ROAS), net promoter score, customer lifetime value, customer retention rate, customer profitability score, cost per lead, cost per acquisition, goal conversion rate, ecommerce conversion rate etc.

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Maths and Stats for Web Analytics and Conversion Optimization
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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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