What Are Business KPIs And How To Develop Them?

Imagine this:

You are an entrepreneur who has just launched a business. You have successfully built a product or a service, and have hired a talented team to deliver it. Before launching your business, you studied the entire business ecosystem of your industry. Based on those findings, few goals were laid down for the entire team.

But did you take the time to quantify those goals? If not, how do you plan to measure your business's success?

Peter Drucker, a popular management consultant, quoted, “ What gets measured, get’s improved.” And we couldn’t agree more.

The long-term performance of your entire team can be gauged through quantifiable measurement. This in turn gives you, the owner, an overview of how your business is performing.

This quantifiable measurement of achieving key objectives is called Key Performance Indicators (KPIs). KPIs help determines how well organizational goals are being met. The best part? KPIs can be set depending on the niche and which business ecosystem your organization is a part of. You can personalize KPIs for each department of your business.

Now that we have introduced you to KPIs, let’s understand them in detail.

Table Of Content

1. What are Key Performance Indicators?

2. Importance of KPIs

3. Type of KPIs (And Examples)

4. Most Commonly Used KPIs

5. Advantages of KPIs

6. Biggest Mistakes with KPIs

7. How To Develop KPIs?

8. Frequently Asked Questions

9. Conclusion

What are Key Performance Indicators?

In simple words, KPIs are a measure that helps us know whether we are meeting our goals or not.

KPIs are quantifiable. It means it can be counted. This helps us to compare them to a benchmark number. Example - Approaching X no of clients with your product.

But measuring KPIs makes complete sense when they help us achieve an objective. The objective could be to achieve X revenue per month or sell X number of products in a month. So, KPIs are tied to achieving a business objective.

But, in any business ecosystem, achieving an objective alone is not enough. Achieving those objectives in a specific period is of greater importance.

Example - Selling 1000 units of a product in 4 weeks.

So, to summarize

Desired Outcome (Objective): Sell 1000 units of a product

Timeframe: 4 weeks

Plan of Action: Meet customers to sell a product.

KPI: Number of units sold per week. (This helps determine if we are on track or not.)

A business owner or entrepreneur must define and set KPIs that integrate with their company’s long-term vision. This helps determine if the company is heading in the right direction or not.

Importance of KPIs

Okay, we understand that KPIs should be quantifiable, and help achieve business objectives. But can’t we do without them?

Glad you asked.

There are a host of reasons why KPIs are important.

1. Measuring KPIs help achieve your business targets

KPIs help with the measurement of performance. Often KPIs are confused with business targets or objectives. But KPIs help in performance measurement.

Let’s understand with an example.

The marketing team in your organization is given a goal to reach 10,000 monthly website traffic hits. So, their weekly traffic goal becomes 2,500. The key performance indicator for this business goal would be to measure the number of website traffic in a week. If it is 2,500 in a week, then your team is on track. If not, as a team manager or business owner, you could determine the possible reasons for not achieving the particular goal.

When we track the performance of a team or organization in such a fashion, it helps in the effective performance measurement of business targets. Accordingly, decisions are made and actions are taken.

2. KPIs help gathers useful data

A lot of activity goes on inside an organization. From sales, marketing, and HR to customer support. It can get quite intimidating and confusing at times.

But, if we decide to make use of Key Performance Indicators, organizations are forced to collect data. This increases accountability and in turn, empowers employees.

Data-driven decisions help make objective decisions, which are in any organization's best interest.

3. Increases Accountability

Developing KPIs helps improve the team's accountability. All teams are rewarded and judged based on their performance. Key Performance Indicators help ensures that their performance is directly linked to their business's goals.

As a result, decisions are objective and accurate. This leaves little or no space for ambiguity.

4. Promotes an environment of learning and feedback

Business KPIs help in getting better feedback and create an environment of learning. All because feedback can now be measured and objective.

This gives the employees an opportunity for them to communicate with their respective managers whether a particular KPI is unrealistic or difficult to achieve.

Now that we understand KPIs and their importance, let’s dive into the types of KPIs.

Type of KPIs (And Examples)

1) Sales KPIs

Sales are the lifeblood of any organization. It helps generate revenue which helps the entire business machinery run. Sales teams are often assigned financial KPIs. This helps determine whether teams are hitting their targets in a timely manner or not.

Sales KPIs include:

Customer Lifetime Value (CLV)

The Customer Lifetime Value KPI helps determine the amount of revenue an individual customer will contribute to your organization. SaaS companies have a high CLV since they tend to use them for long periods and pay for them repeatedly.

Customer Acquisition Cost (CAC)

CAC is a ratio between the total amount spent to acquire new customers divided by the total number of new customers acquired. This helps the sales team understand whether their efforts are yielding the right amount of customers or not. A high CAC means a smaller number of new customers are generated.

Average Conversion Time

This key performance indicator measures how long it takes to first contact a lead to closing that lead as a client. A higher average conversion time indicates a longer sales cycle. This indicates the sales team needs to close the sales quickly before a prospect declined their offer.

2) Marketing KPIs

A marketing campaign helps determine the efficacy with which an organization has been able to persuade and impact the mind space of a prospective client.

There are both - offline and online marketing campaigns. But to be specific, we are restricting our examples to online marketing KPIs only.

Online marketing activities include running ad campaigns, landing page conversions, social media content marketing campaigns, and optimizing click-through rates (CTR) for specific campaigns.

Marketing KPIs include

Social Media Followers

An organization or a brand could run multiple social media campaigns on specific days of the month. Campaigns could also be on occasions such as - Black Friday and Cyber Monday. Therefore, to track the output of social media campaigns, social media followers of an account are measured. An increase in social media following during a campaign shows customers' love and admiration for the brand.

Clickthrough Rates (CTR)

This KPI helps measure the number of clicks, and prospective customers performed for a particular campaign. It could include - email campaigns, ad campaigns, or blog posts. A high CTR represents high intent to know about a product or service.

ROI On Ad Campaigns

Running ad campaigns to generate sales is a common strategy for many brands. So, marketing teams track the ROI of ad campaigns they run. A positive ROI indicates if the ad campaign is generating a return on investment made or not. This is calculated based on the sales figures a particular campaign generates.

3) Human Resources KPIs

Human Resources are tasked with finding and recruiting candidates, hiring the right employees, processing payroll, and maintaining employee records.

HR KPIs include

Employee Turnover

This helps determine the contribution of each employee to a business's revenue. The KPIs help calculate whether a particular hire by the HR was beneficial to the company or not. If the KPI is dismal, it could help the HR focus on and use better processes to recruit the right candidate for the organization.

Employee Dismissal Rate

This key performance indicator measures employee termination in an organization. There are a host of factors that may affect this KPI - employee contracts, the definition of roles and responsibilities of employees, better opportunities, and poor work-life balance. If there is a high employee dismal rate due to voluntary resignations, it helps companies review their policies.

Average Time for Recruitment

This KPI measures the average time between an employee leaving the organization and a recruit to fill that same position. HRs are tasked to hire recruits fast. This leads to a lower recruitment average.

4) Finance KPIs

An organizational team such as accounting and sales looks after financial metrics to measure business success. Financial metrics are arrived at from the financial statements of an organization. By analyzing financial statements, financial indicators such as profit, profit margins, gross profit, and net profit are discovered. Also, annual taxes are calculated using financial statements.

Finance KPIs include:

Revenue

This KPI helps determine the total income generated by a business's operations.

Gross Profit

This key performance indicator is arrived at by calculating total revenue subtracted from the total cost of goods and services. This helps calculate the profit margin on all transactions.

Net Profit

By subtracting total expenses (cost of goods/service and business expenses) from total revenue, net profit is arrived at. This helps calculate the true money an organization takes home.

Effective Tax Rate (ETR)

Key performance indicators - ETR indicates the percentage of income an individual or a corporation pays in taxes.

Advantages of KPIs

Key performance indicators not just help in measuring a business's success but also in drafting business strategies.

Increases Accountability

Measuring and analyzing key performance indicators helps increase organizational accountability. Teams can review each other's performance indicators and also find effective methods to function.

Acts As Motivation

Since KPIs are quantifiable, measurable, and objective, it helps find and reveal the truth easily. A great performing KPI can act as a motivation to perform better for teams. Whereas, a poor performance indicator can act as an indicator to perform better.

Revealing and Correcting Inefficiencies

Measuring KPIs can help find fundamental problems in an organization. It helps organizational teams find the root cause of a long-prevailing problem. This could be HR policies, ambitious targets set by managers, or incorrect assumptions. Therefore, a business can solve specific problems.

Promotes Data-Driven Decision-Making

Data is the new gold. And, organizations should make use of it. Using data, decisions are objectively made. Not only does this help solve ‘real problems’ but also develops business strategies that help achieve maximum customer satisfaction.

Mistakes With Business KPIs

KPIs have their advantages and they help in building effective business strategies. But, they are common mistakes that organizations tend

Measuring Anything and Everything

Software and online tools have made tracking data easy and accessible. Therefore, organizations now have access to multiple data points. But, this often leads to confusion. Why? Because organizations tend to track unnecessary metrics that are irrelevant to their goals. This leads to the wastage of precious man-hours, resources, and money.

Excluding Team Members While Developing KPIs

Key performance indicators help gauge the performance of the entire team. But sadly, only key management executives develop KPIs. This is a big mistake because it does not account for the experience of the grass-root level workforce. Numbers and metrics are important, but they often do not account for ground realities. This also creates undue pressure on the workforce to meet unrealistic targets.

Non-Extraction Of Insights From Business KPIs

An organization can generate a positive ROI from its key performance indicators if they measure them accurately. Also, relevant insights must be extracted for maximum benefit. Extracting insights also helps realize if those KPIs are relevant to the present business ecosystem.

Not Acting On KPIs

Measuring KPIs is great. But not acting on those KPIs is a huge waste of time, energy, and resources. KPIs help shape crucial business strategies which help fulfill customer satisfaction. This happens only when businesses track and act on their key performance indicators. If the organization isn’t basing its decisions on its business KPIs, it leads to wasted efforts.

Pro Tip

Using online business planning software such as Upmetrics helps develop KPIs and avoid common business KPI mistakes. How you may ask? A well-laid business plan is the bedrock of any successful business. But it takes time and effort to arrive at one. Online business planning tools ensure that you save time, reduce your effort and increase your chances of succeeding.

How To Develop KPIs?

Define Business Objectives

Before you begin building the right KPIs for your team, draft a business plan first.

Even if you are an experienced organization and have been functioning for years, you should lay down your business plan. This helps you be crystal clear about your objectives and define your business strategy. Business plans are best developed via online business plan tools or through business plan software. Not only does it make the process easier, but also makes future iterations and getting feedback simple. A popular online business planning tool is Upmetrics. It has helped more than 110k+ entrepreneurs build business plans.

Assign Responsibilities To Each Team

Although the organization as a whole has one big objective, each team needs to be assigned roles and responsibilities. This helps define KPIs that matter for each team. For example, a SaaS company helps business owners design their own social media posts. The sales team would be responsible for ensuring that their clients are subscribing to their software for a longer duration. Therefore, Customer Lifetime Value is the KPI for the sales team. The longer the CLTV, the more revenue is generated for the organization. In a nutshell, all teams need to have defined KPIs that align with the company’s bigger objective.

Understand The SMART Formula

Business plans are made to define clear objectives. KPIs are assigned to each team based on their roles and responsibilities. But, how are the KPIs created? Using the SMART formula. SMART stands for Specific, Measurable, Attainable, Realistic, and Time-Bound. Creating KPIs based on the SMART formula helps measure a business's success objectively.

Define Measure, Target, Source, And Frequency

The important component of developing KPIs is defining what we are measuring exactly. Is it the number of new customers or the annual revenue? Organizations should also measure the target that they are aiming for. This acts as a performance indicator and helps businesses check progress. Next comes defining the source. What data source should be looked into? Is it CRM or financial statements? For KPIs to be accurately measured, frequency is another important aspect. Is the KPI measured weekly, monthly, or quarterly? These variables help develop KPIs that are efficient and effective.

Review Key Performance Indicators

Defining KPIs is half the battle won. Organizations must also ensure that they review their KPIs once every quarter. This helps them make better organizational decisions and ensure customer satisfaction. The goal of KPIs is to act as a performance indicator. Therefore, KPIs must be reviewed periodically to ensure they are acting as objective performance indicators.

Frequently Asked Questions (FAQs)

Are Business Metrics Same As KPIs?

All KPIs are business metrics. But all metrics are not KPIs. A specific metric helps us find relevant information, but it might not be key. KPIs on the other hand, are key metrics. They are important metrics that help track our progress to achieve business objectives and goals.

Let’s understand them using a tabular comparison.

KPI	Metrics
All KPIs are metrics	All metrics are not KPIs
Help measure progress toward key business goals	Help measure the performance of specific business activities
Relevant across the entire organization	Relevant in a specific department
Help make strategic business decisions	Are more operational or tactical
Follow a specific timeframe or deadline	Ongoing and continuous

Conclusion

Key Performance Indicators help track organizational team performance objectively, which in turn helps make smart business decisions. Not only does it help monitor a company’s health, and track progress but also helps make strategic business adjustments.

But before defining Key Performance Indicators, an organization and its team members should be well aware of their roles, responsibilities, and core objectives. This is only possible when business owners have a clearly defined business plan.

Business planning is now easy, simple, and straightforward. All thanks to online business planning software such as Upmetrics.

Upmetrics helps save productive business hours, helps reduce overwhelm, and ensures business owners focus on what they do best - scale and grow their business.

What’s more? They get tailor-made suggestions for their business. This ensures you get expert advice at every step of the business planning process. You can even create pitch decks for investors, estimate financial projections and get real-time feedback from team members, advisors, and consultants.