If you’ve overheard any management meeting, strategy session, or performance review at any business, chances are you’ve heard the term “KPI” mentioned many times over. Most people in these discussions know that the acronym KPI stands for Key Performance Indicators. Still, when you research to find out what a KPI (Key Performance Indicators) is, you’ll likely come across many different definitions.
The thing is: While KPIs are used everywhere in the modern business world, this usage is often wrong. This means that while KPIs are ubiquitous, it is not so common for businesses to use KPIs effectively and accurately. But when used correctly, KPIs can make a massive difference to the success of a business.
What is KPI?
In the broadest sense, KPIs provide the most critical performance information that enables organizations to understand whether they are meeting their stated goals. In this way, well–designed KPIs are tools that clearly show current performance levels and whether the business is where it should be.
How is KPI Determined?
When it comes to setting the correct KPIs for your online store, ask yourself, “What goals can lead me to this success?” or “How appropriate is it to the target business’s workspace?” start by asking.
To set the correct KPIs, you first need to identify the goals and objectives you plan to pursue. The next step is to decide on specific conditions that will facilitate the achievement of the targets deemed appropriate within a given time frame. Two critical elements of this are defining a measurable event and a specific time frame. For example, “Increase new visitors by 40% in the next six months.” These items are critical success factors that will help you understand whether you are reaching your goals. The final step is to set the actual KPI. In the example above, the KPI might be the “percentage of new and returning visitors compared to last month.”
There are several different KPIs that online retailers love to track. Note that you should only monitor KPIs that are meaningful to your business, but the most important ones you may want to check to include:
- Site Traffic
- Bounce Rate
- Traffic Sources
- Pages Per Visit
- Conversion Rates
- Average Order Value
- Supported Conversions
- Recommendation Resources
- Highest Traffic Pages and Content
- Average Page Views and Time On–Site
- Final Sales (daily, weekly, monthly, etc.)
How is KPI Calculated?
In addition to figuring out what to measure, it’s also essential to look at exactly how to calculate your KPI. Let’s explore five ways to calculate your data to create KPIs:
- Understanding Data Counts
Counts are simple numeric values and are the easiest to calculate. They help measure something that doesn’t need an occurrence rate or other context to show change over time. However, the count KPI does not work well where more context is required to represent performance accurately.
For example, the number of workplace accidents may be a good KPI, but it may not work well in monitoring safety between facilities with significant differences in employee numbers.
- Measure with Percentages
Percentages detail the counts by dividing the people or things at the target by the total population size. This number is then multiplied by 100, resulting in the percentile.
Percentages work well with simple examples like whether a sale occurs or not, but they don’t work well when measuring things like customer satisfaction.
Counts should not be confused with totals because they are continuous variables, measured and not counted. This means that accommodations can be in the form of numbers with decimal places.
- Averages of Data
The mean is obtained by dividing all numbers into the data set by the total number of data.
Suppose you have a small number of data or have outliers that significantly distort your data’s mean number of overall distribution. In that case, an average may not be accurate and, therefore, not an appropriate type of KPI to use. Consequently, it may be better to consider using the median or a different method to balance this situation.
- Comparing Numbers Ratios
Odds compare two numbers side by side. Two adjacent numbers separated by colons indicate odds. This allows the observer to compare two numbers and their relationships.
KPI Examples and Definitions
KPIs you can use are crucial to assessing future success. You may want to use several of these for each of your teams, or you may choose just a few critical KPIs for your entire business.
Sales KPI Examples
- Sales by [Metric]: Where your sales are coming from, by region, age, gender, demographics, interests, etc. You can separate them according to different criteria. This means which customers are generating the most revenue and which are underperforming.
- Total Sales Volume: It measures the total sales volume in dollars each month. Create a monthly or quarterly goal for your sales team to have a plan for, and be sure to adjust it regularly for sales drops or increases that may occur during seasonal events or holidays.
- Cost of Selling – Volume Ratio: Selling is rarely free. A large part of your budget is probably salary or commissions, marketing costs, etc. It goes to every sale with such expenses. That’s why it’s essential to measure your sales spend compared to what your sales team produces.
Financial KPI Examples
- Revenue: Revenue is not a KPI perse, but there are several ways to measure it in performance, depending on your business. Calculating your profits minus your costs is one of the companies’ main ways to determine whether they generate revenue. You should regularly measure this KPI annually, quarterly, and monthly.
Create an annual income plan to set your expectations, then track your income each quarter and month. Then compare it to your yearly plan to see if you’re meeting your goals or your initial annual.
- Gross Margin: Take a percentage of your total sales revenue. This KPI focuses primarily on profits, not expenditures. It’s an excellent metric to use when comparing your profit.
- Free Cash Flow: produce compared to your company’s operating costs. It would help if you subtracted your capital expenditures from your operating cash flow to calculate your free cash flow. Investors often use this KPI to see if a business is profitable.
- Net Profit Margin: income after deducting all your expenses, such as operating costs, taxes, and interest. Net Profit Margin is more beneficial for internal comparison of your profit.
Customer KPI Examples
- Abandonment Rate: This is an essential metric for the customer support team as it can help you reduce the number of dissatisfied customers. If customers call or chat before speaking to an agent and then hang up or disconnect, it’s essential to understand why. Is your waiting time too long? Did they find the answers elsewhere? Abandonment rates will help you better understand your customers and optimize your customer support resources.
- First Contact Solution: Another important KPI for your customer support team is the first contact resolution rate. Measure the number of customers who need to reach. Then, solve problems faster or where your process needs to be improved to avoid contacting them repeatedly for the same issue.
- Customer Lifetime Value: Customer relationships are essential, but knowing how much value each customer adds to your business.
- Cost of Customer Acquisition: If you want to measure the effectiveness of your marketing, you need to look at how many customers it brings to you and whether it fits the cost of your campaign. To arrive at this KPI, divide the number of new customers you have by your purchase spend.
The right KPIs need the correct data.
Better data combined with better analytical capabilities should enable organizations to explore better and faster decision–making. Schrage says that automating intelligent processes is just as important as increasing human decision–making while also warning that leaders must determine when the algorithm has the “right” to make decisions. They should also consider how KPIs should evolve dynamically as more data becomes available, algorithms become more complex, and employees become more comfortable working with them.