According to Cambridge Dictionary, a KPI or a key performance indicator is “a way of measuring a company’s progress towards the goals it is trying to achieve”. It’s a term that every business owner should be familiar with and something they should be able to put into practice. That’s because KPIs help you measure how effective your company is in achieving its business objectives and yes – you do need to know it to be able to evaluate the performance and make smart business decisions.
For a comprehensive view of the outcomes of your business activity, it’s best to set both high-level KPIs, measuring the overall performance, as well as low-level KPIs, allowing to assess the processes in particular departments. Why is it worth it? Because only then can you get a full insight into the areas of your business that contribute towards your success the most and those that need to be improved.
Ok, but the fact that you know what KPIs are doesn’t necessarily mean you know how to go about defining them. First thing you need to remember about is that effective KPIs are business-specific. That’s why, rather than adopting KPIs that have been recognised by the industry, try to identify those that reflect the objectives defined for your company in particular. So the first step is to set company objectives and only then can you define KPIs that can measure them. Bear in mind you should choose ones that are reliable, measurable and easy to forecast.
The best way to go about defining KPIs is to adopt the SMART technique. Your KPIs, which are based on your objectives, should be specific, measurable, attainable, relevant and time-bound. Every KPI should be related to a particular business result with a clearly defined performance measure. When defining KPIs, you should think of the desired result and its relevance for your business, the way of measuring the progress and influencing the result, then you should decide who will be responsible for the result and how you will know it has been achieved and, last but not least, set the frequency of reviewing the progress.
Once you define a KPI, make sure you share it with your employees and stakeholders, review it regularly and update whenever necessary, to adapt it to the needs of your business and the current situation.
There are lots of different KPIs that are commonly adopted by businesses to measure the outcomes of their activity. Let’s now take a look at some of them, categorised by the business area they concern.
The Net Profit Margin KPI is an important measure of how efficient you company is and whether it’s able to control its costs – in other words, how profitable it is. Net Profit Margin calculates how much profit a company makes on each dollar of the revenue made. How is it calculated? By dividing your company’s net profit within a given timeframe by the total amount of money earned within the same timeframe. The net profit takes into account all expenses of your company and therefore helps you make informed financial decisions, both affecting the nearest future as well as long-term.
The acronym stands for earnings before interest, taxes, depreciation and amortization. It’s a KPI that measures the company’s overall financial performance, rather than just the profit your business is generating. To calculate it, you need to subtract the expenses of your company (excluding interest, taxes, depreciation and amortization) from the total revenue. Adopting this KPI makes it possible for investors to focus on a business’ baseline profitability, not taking into account the capital expenses.
OCF is a measure of the total amount of money generated by a business’ daily operations. It provides information on whether a company is able to maintain a positive cash flow necessary to grow or requires external financing to expand the capital. To calculate the Operating Cash Flow you need to start with the net income, add any non-cash expenses and adjust for changes in working capital. A big advantage of this KPI is that it’s very difficult to manipulate and the ability to generate positive cash flow from a company’s daily operations is a factor that is highly valued by investors.
The Return on Equity KPI measures a business’ net income against each unit of shareholder equity (net worth). It shows whether your company’s net income, as compared to its overall wealth is sufficient for the company’s size. In simple terms, it tells you whether or not your business is generating enough net income and therefore how much it’s likely to be worth in the future. A high ROE is a sign for shareholders that the investments are appropriately optimised to grow your business.
Monthly Sales Growth is a KPI that measures the increase or decrease of the sales revenue by month. Monthly monitoring of sales helps predict the trends in sales revenue and adjust activities accordingly, rather than reflect on the trends after they have manifested. This KPI helps define future revenue objectives and keep a balance between performance and sales efforts and is particularly important for small businesses to help them grow. To calculate the monthly sales growth you need to use the following formula: (current month’s total sales – previous month’s total sales) / previous month’s total sales x 100.
Sales Opportunities KPI helps sales teams keep an eye on pending opportunities and allocate their resources wherever it’s worth the effort. In this KPI, prospects are organised on the basis of the probability of closing the deal. Therefore, each prospect has a purchase value which is to help the team prioritise their efforts appropriately. The KPI is of great organisational value, helping sales teams react based on the assessment of the value of prospects and therefore generate more revenue.
This KPI focuses on the length of the sales cycle and the way it influences the number of closed wins. Analysing how long it takes for sales reps to close deals helps you understand the results your team gets and find out how you can improve performance. It also ensures higher predictability and therefore helps plan future activities. What’s of great importance here is to not only analyse the length of the process from the first contact with the lead to the moment it’s closed, but also reflect on it after some time to see how successful the deals are in the long run.
The Client Acquisition Rates KPI measures the number of leads that convert to customers and, based on that, helps spot the activities that lead to acquiring more clients. Comparing conversion rates to the number of prospects a sales representative reaches to is a good way of measuring their performance and assessing the way they approach prospects, as well as the method of outreach. Client acquisition rate can differ considerably between sales reps and measuring it makes it possible to analyse the reasons and adopt the right approach to prospects.
Once you know your conversion rates, the next thing you need to measure is the Customer Lifetime Value KPI. It will help you understand how much income any given customer brings over the whole period when they use your services. Thanks to that, you can make informed decisions about product development and customer support processes and analyse the factors that influence how long your customers stay with your company. To measure the CLV, you need to divide the average revenue per customer by the customer churn rate.
The Net Promoter Score KPI measures the customer loyalty and satisfaction by verifying how likely your customers are to recommend your services to someone else. This KPI is very important in planning your future operations and helps make meaningful decisions. To measure it, you need to ask your customer the question of how likely they are to recommend your services and they should respond by choosing a grade on a scale from 0 to 10. Then, put their responses into three categories: promoters (9-10), passives (7-8) and detractors (0-6). To calculate your score, subtract the percentage of detractors from the percentage of promoters.
First Response Time is the amount of time from the moment a customer submits a support ticket to the moment they get an initial response. It’s a very important factor that influences overall customer satisfaction considerably. Research shows that a quick first response increases customer satisfaction as it shows them that someone is looking into their problem, even if the response doesn’t provide a solution or answer just yet. To measure this KPI you simply need to subtract the time of the customer request from the time of the initial reply.
The Customer Retention Rate KPI measures your business’ ability to retain your existing customers over a set period of time. It’s an important KPI to measure, since the cost of acquiring a new customer is much higher than the cost of keeping an existing one and your regular customers are likely to spend more on your services than newly acquired ones. You can calculate customer retention rate by dividing the total number of retained customers (number of customers at the end of a period minus the number of new customers acquired during that period) by the total number of customers over a given period of time.
This KPI allows you to measure how much it costs you to acquire a new customer through inbound marketing versus outbound marketing. Thanks to that, you can see whether your investments have a positive impact and then decide how to allocate budget for particular campaigns. In simple terms you will know how much you should be spending on a new customer to make it profitable. How to calculate cost per lead? You simply need to divide the total costs of generating leads by the total number of acquired leads.
By calculating the inbound marketing return on investment, you can assess your monthly and annual performance and decide which activities are worth investing in and which are not. Since inbound marketing requires ongoing attention, it’s vital to assess the profit it generates in relation to the investments it requires. In the case of this KPI it’s necessary to take a long-term perspective (at least 7 months), as only then can it be of real value.
The Conversion Rate KPI is crucial for measuring the success of any marketing campaign. It tells you how many of your ad recipients convert into website visitors, how many visitors covert into leads and then into sales. Since the aim of marketing campaigns is to increase sales, tracking the conversion rate is crucial to determine how effective your marketing activities are. Based on that, you can decide where to allocate more resources and which campaigns don’t bring the desired results. To calculate the conversion rate, you need to divide the number of conversions by the total number of visitors and multiply it by 100% to get a percentage value.
What KPIs do you measure in your companies? Do you find them a valuable source of information?