Tips for Creating Effective KPIs for Your Company
Creating effective KPIs (Key Performance Indicators) for your company doesn’t have to be complicated.
Creating KPIs can be broken down into two steps: 1) setting objective, and quantitative goals, and 2) tracking your company’s progress. Creating and tracking KPIs is more effective than other types of business goal-setting because it works with what already exists. There is no need to create abstract, imposing goals that might be unattainable when you’re working with numbers that already exist to predict the future of a company. Corporate global executive Pearl Zhu says, “The use of KPIs is meant to improve and transform the organizational performance.”
Lagging vs. Leading Indicators
When you create KPIs, you’re not just going to focus on what you want for the company’s future. One of the first steps in creating a KPI is to look at lagging indicators: statistics and metrics that show the company’s present success based on past actions and metrics. Customer satisfaction is one example of a lagging indicator. Your company provided a certain level of customer service, and your chosen lagging indicator will tell you whether or not that was successful. While you might have measured client engagement and company costs using a different formula in the past, you will need to measure your lagging indicators using your new KPIs to assess growth accurately.
Leading indicators, on the other hand, may or may not predict future success. There is no way to ascertain the success of a leading indicator. You might predict that your company will see a certain percentage of growth in a new market; this is a leading indicator. Once you carry out a plan and measure how your company is performing in that new market, you have a lagging indicator. Author Peter Drucker, who is known as the “father of management thinking,” says the following: “Work implies not only that somebody is supposed to do the job, but also accountability, a deadline, and, finally, the measurement of results—that is, feedback from results on the work and on the planning process itself.” That’s the goal of KPIs in the long-term—concise, objective measurements that tell employees what they are working with.
Inputs, Process, and Outputs
When you create KPIs, you’re going to be looking at the resources your company uses and the results of certain processes. Resources can include the amount, type, and quality of materials needed to make a product or perform a service, including suppliers and storage, as well as time in hours or employee costs. These are called inputs. You should also measure the performance of processes that your company uses to produce the desired result; for instance, the efficiency of the equipment used to create a product or training employees for processes. Outputs refer to the completed product and its presentation while outcomes refer to sales and the reception of that output by customers.
How many KPIs should I measure?
Now that you’ve had a refresher on some basic KPI terminology and how you should be using it, how do you start measuring KPIs?
Chris Gadek, Head of Growth at AdQuick says, “Four to ten KPIs is an appropriate number for a smaller team. Even if you have multiple teams—a marketing team, a sales team, a finance team—you could create around three KPIs for each team. The goal of creating a KPI is to measure your progress and ultimately guide your teams in making changes that will result in your objectives. You want your KPIs to help your team stay focused, not distract or discourage them.”
Revenue growth, revenue per client, profit margin, client retention rate, and customer satisfaction are just a few KPIs that you can start using. If you love math, then KPIs are going to be extremely satisfying for you to calculate—and even if you don’t, the formulas are fairly straightforward. Luckily, you don’t have to create KPIs on your own. Read on for some commonly used KPIs and how to make them work for your company.
KPIs for Marketing and Sales
CAC (Customer acquisition cost), MQL (number of marketing qualified leads ready for sales outreach monthly), and CLV (lifetime value or revenue per customer) are common KPIs for marketing and sales. The formula for customer acquisition cost is the cost of sales plus the cost of marketing divided by new customers acquired. Ad spends, creative and design costs, marketing technology costs, production costs, and marketing employee costs should all be calculated into the cost of sales plus the cost of marketing. If you don’t have a large marketing team or your business uses organic marketing, you may not want to measure these KPIs.
Gabriel de la Serna, CEO, and Founder of Onpost says, “If you’re looking for more new customers, you can take a look at your marketing KPIs and allocate more of your budget towards marketing tools and ads. And on the other hand, if you’re looking to cut back on marketing spend, you can increase your organic marketing.”
KPIs for Finance
Profitability KPIs include gross profit margin and net profit margin while liquidity KPIs include current ratio and quick ratio (using the most liquid assets vs. using only current liquid assets). Gross margin can be calculated using the formula (Revenue – the cost of goods sold) / revenue x 100. Phillip Akhzar, CEO of Arka says, “Profit margin is an essential KPI for any business to track. It determines which areas of your business are the most profitable and which can be improved.”
If you have a low-profit margin, you might consider reducing operational costs, working on sales strategies, tracking efficiency, or increasing your prices. This is why it’s so important to ensure that each of your teams—finance, marketing, design, etc.—has a few KPIs to measure their progress. If your finance team determines that your profit margin is low and you decide to work on sales strategies, your marketing and sales team will be able to work with them using KPIs like CAC.
KPIs for HR
KPIs can be useful in Human Resources, too. Absenteeism rate, employee productivity, and employee satisfaction can all be evaluated using KPIs.
Cayla Gao, Head of Influencer Marketing at Depology encourages businesses to use HR KPIs sparingly and to balance numbers with direct employee communication and feedback. “KPIs can help determine if a team or department is seeing a low rate of employee satisfaction or productivity. I find that they can be a bit more difficult to measure than other KPIs since goals like ‘productivity’ and ‘satisfaction’ are abstract. That’s why it’s also important to communicate with your team personally if you’re seeing a dip in productivity.”