KPIs help evaluate the performance of a company, departments, and specific employees. We explain the pros and cons of a key performance indicator system and how to develop one.
What are Key Performance Indicators – KPIs
Why are KPIs calculated?
Pros and cons of the KPI system
Types of KPI
How to define KPI
Rules and examples of KPI calculation
How to Develop and Implement a KPI System
Expert advice
What are Key Performance Indicators – KPIs
Table of Contents
KPIs (Key Performance Indicators) are key performance indicators that are important for achieving the company’s goals. The main goal of any business is profit, so to assess the effectiveness of achieving this goal, the average revenue per client (ARPU, Average Revenue per User) and return on investment (ROI, Return on Investment) are considered.
In addition to profit growth, there may be other goals: entering a foreign market, developing a new product, becoming the first in your niche. The choice of key performance indicators depends on the global, strategic and tactical goals of the company.
KPIs are always expressed in numbers or percentages. They are used to track progress in different areas of the company’s work. For example, key indicators can cover parts of the marketing funnel , the results of different departments, or the effectiveness of a specific employee.
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Why are KPIs calculated?
KPIs are important not only in marketing. Here is what the implementation of a key performance indicator system gives to a company:
● Measurability of goals
The KPIs system translates goals into numbers. This helps to see and analyze successes and failures, rather than work blindly. If you do not calculate in advance how many purchases per month and with what average check will bring profit to the company, then the marketing and sales departments will not track in time that sales figures are too low. Because of this, they will not take measures to correct the situation: they will not adjust advertising campaigns or the strategy for communicating with clients. As a result, employees find out that they worked ineffectively when they can no longer do anything about it.
● Employee motivation
Goals that are formulated in numbers are clear to the team. Employee KPIs are often used to calculate salaries if they consist of a salary and a bonus for work efficiency. In some companies, achieving KPIs is a condition for increasing salaries once a quarter or six months. The role of KPIs in the employee motivation system should be recorded in the employment contract.
● Connection between the goals of the company and employees
Ideally, in a KPI system, company goals flow smoothly into department goals, and department goals flow into the goals of each team member. Then employees see their contribution to the common cause and know why their work is important to the company.
For example, a traffic manager attracts new users. The efficiency of his work is affected not only by the number of users, but also by the overall return on marketing expenses. Therefore, his set of KPIs will be approximately as follows:
– the number of site visitors,
– the cost of a click or transition to a link in an advertising banner (from English CPC, Cost per Click),
– the cost of one target action of a client on the site (from English CPA, Cost per Acquisition),
– the return on an advertising campaign (from English ROAS, Return on Advertising Spend).
The traffic manager determines how many people will visit the site and what kind of visitors they will be. Potential buyers will perform a target action, such as placing an order or leaving contact information. People who are not interested in the product will close the page. With their actions, the traffic manager directly influences the payback of a separate advertising campaign and indirectly influences the payback of marketing costs in general.
● Distribution of responsibility
Often, companies assign responsibility for each KPI. A clear understanding of who is responsible for what helps to avoid mutual accusations of failures.
Sometimes responsibility for a key performance indicator can be divided between several departments. For example, the retention rate, which is calculated using the formula:
Retention rate = number of active users at the end of the period / number of active users at the beginning of the period * 100
For example, a mobile app for learning English was installed by 1,000 people, and 800 of them immediately registered and took the first lesson. A week later, out of 800 people, only 450 moved on to the next lessons. The retention rate on the seventh day was 450 / 800 * 100 = 56%.
This metric is the responsibility of the marketing and product departments. The marketing department retains users through loyalty programs and returns them through various communication channels, such as newsletters and push notifications. But the retention rate is also directly affected by the product department: the quality of the product determines how many users will use it again.
KPIs that are closely related to the product are also called product metrics.
Pros and cons of the KPI system
Pros
✅ Helps to objectively evaluate the results
KPIs are the efficiency of employees, which is expressed in numbers. With their help, they summarize the team’s work, evaluate the results of a separate event or the company’s activities as a whole.
✅ Helps to find problems and growth points
If you manage to achieve KPIs within the set deadlines, it means the company is moving in the right direction. If not, it means there is a problem somewhere.
For example, it is important for a marketer to regularly monitor KPIs performance indicators in order to stop a failing advertising campaign before it wastes the budget.
✅ Helps to plan and make decisions
Constant monitoring of KPIs helps to plan the work of different departments and the overall product development strategy, forecast expenses and profits, and make decisions on the need to develop new functions.
Cons
❌ Difficult to develop and implement
It will take from several months to a year to develop your own KPI system for a large company. The entire process of implementing and developing a KPI system can take several years.
In small companies close to the IT sphere, a KPIs system can be created relatively quickly, in 2–4 weeks.
❌ Requires additional costs
To track performance indicators, additional tools are needed. As a rule, they are paid, and their cost depends on the available functionality.
But this is a relative minus – you can start working in free tools like Google Sheets or Google Data Studio. In them, you can calculate the necessary performance indicators and build graphs.
❌ May negatively impact team work
If KPIs are too high and unachievable, employees will not even want to try to achieve them. If the planned indicators, on the contrary, are too low, the team will quickly achieve the set goals, but will try less.
When everyone is focused only on their own KPIs, team members do not help each other solve problems or even begin to chase indicators to the detriment of the work of others. For example, a sales manager, in order to conclude a contract, promises the client to deliver a project within a short time frame, which is why the entire team has to work overtime.
Types of KPI
Key performance indicators are divided into two main types:
● performance indicators (from English output),
● outcome indicators (from English outcome).
Performance metrics
are usually expressed in quantity. For example, releasing three new features, launching two marketing campaigns, preparing 30 banners.
Outcome metrics
measure specific business benefits, such as increasing conversion to paying users by 20%, increasing day 7 retention by 30%, or reducing paying user churn by 25%.
In the KPIs system, it is better to focus on key performance indicators, because they reflect the effectiveness of work, not its quantity. You can launch ten advertising campaigns, but still not receive the expected profit from sales .
According to the speed of obtaining results, KPIs are:
● leading (from English leading),
● lagging (from English lagging).
Leading KPIs immediately show the effectiveness of a marketing event, while lagging ones can only be measured after some time.
For example, a company localized an app for a new country. To support the start of sales, they conducted an advertising campaign for the local audience. The number of users who followed the link and installed the app is a leading KPI. Based on this data, you can immediately tell whether the event was successful. How many users will return to the app in a few days and what the conversion to purchase in the app will be are lagging KPIs .
Both types of KPIs are used to evaluate efficiency. For some, you can immediately get actual figures, for others, you need to wait some time. Lagging KPIs mainly concern the company’s profit, involvement in the product or its quality. You can make forecasts about how many users will return to the application on the seventh day or in a month. To know these figures accurately, you will have to wait.
Key performance indicators are also divided according to work objectives:
1.● Profit KPI,
2.● Return on Marketing Investment KPI,
3.● Lead Collection KPI,
4.● Traffic KPI.
Profit KPIs
are the main indicators related to money. For example, net profit, revenue for a month or quarter. These are usually general KPIs that are used at the level of planning the company’s strategy. They are influenced to varying degrees by the work of all departments.
The indicators that can be used to evaluate the return on marketing investments include ROMI (Return on Marketing Investment) and ROAS (Return on Advertising Spend).
ROMI = (company profit – marketing budget) / marketing budget * 100
ROMI shows whether the company’s marketing costs are generally paying off. If ROMI is greater than 100%, then marketing costs are profitable; if it is 100%, then marketing activities are paying off; if it is less than 100%, then marketing investments are ineffective.
ROAS = revenue from advertising campaign / advertising campaign costs * 100
ROAS is a key indicator for calculating the payback of a specific advertising campaign. Unlike ROMI, ROAS is calculated not from the company’s profit, but from the money that a specific event brought in. Otherwise, the logic is the same: if ROAS is greater than 100%, then the event was profitable, if the indicator is 100%, the costs paid off, but the campaign did not bring profit, and if less than 100%, more was spent on the event than was earned.
Lead collection KPIs
are the number of applications, completed forms, newsletter subscriptions, and other key indicators that are related to collecting contact information. Leads are collected for different purposes. For example, applications go to the sales department, and subscriptions to the company’s newsletter lead the user further down the funnel. .
Key metrics for assessing traffic measure the number of users whose attention was attracted by the product: how many people visited the site, what is the reach of posts on social networks, how many views the video received, etc.
Some traffic KPIs are also called “vanity metrics”: achieving them can motivate a team or be used in investor presentations, but they do not immediately lead to results for the business.
For example, the MAU metric (from English Monthly Active Users) is active users per month. On the one hand, if the online store website is not visited, then there will be no purchases. On the other hand, the influx of visitors in itself does not affect the number of purchases, and therefore the company’s profit.
Often, “vanity metrics” fall into the category of leading KPIs.
How to define KPI
To determine KPIs for different areas of work, you need to build a hierarchy of metrics. Visually, it can look like a pyramid or a tree.
The company’s global goals are placed at the top. Then the big goals are broken down into smaller goals, from which departmental goals are derived. This continues until you get performance indicators that can be influenced.
Rules and examples of KPI calculation
To calculate KPIs, a matrix is used, which helps to visualize how important a certain indicator is for achieving the company’s goals.
The KPIs matrix is a table with a set of characteristics for each key indicator:
Weight
is a value from 0 to 1. It shows the importance of the indicator for the business. The sum of all KPIs in the matrix should equal 1.
The base
is the minimum result that needs to be achieved in order not to go into the negative.
The norm
is the average result achieved for this KPI over a similar period.
A goal
is a result that is planned to be achieved.
A fact
is a result that has been achieved in reality.
The index
is the difference between what was planned and what happened. The characteristic is calculated using the formula:
Index = Fact / Target
To evaluate the effectiveness of the department, at the end of the reporting period, it is necessary to calculate the overall performance ratio for all KPIs that it monitors:
Performance Ratio = (KPI Index 1 * KPI Weight 1 + KPI Index 2 * KPI Weight 2 + KPI Index 3 * KPI Weight 3) * 100
If the performance ratio is less than 100%, then the department has not achieved its KPIs.
The KPI system of a small department consists of five indicators with different weights
The table shows that the planned result was not achieved for indicators 3 and 5, although the other indicators were exceeded. The efficiency coefficient was more than 100%, so the department’s work can be assessed as positive overall.
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How to Develop and Implement a KPI System
To develop KPIs, you need to follow the basic rules:
1. Formulate KPIs based on a hierarchy of metrics.
For example, a company’s business goal is to earn $10 million per year. It is broken down into metrics: new profit and recurring profit. New profit is affected by the number of new users of the product and the average check, while recurring profit is affected by customer retention and return. The hierarchy goes down until all the indicators affected by the work of different departments are derived: product, marketing, sales.
2. Do not set unreasonably high goals right away.
This will affect the motivation of employees. To calculate KPIs correctly, you first need to analyze the current situation: collect data on the results of departments and consult with their managers. Key indicators should lead the company to success and at the same time be achievable. It is better to increase KPIs gradually.
3. Set SMART goals.
To formulate goals for key performance indicators, you can use the SMART framework . Each KPI should be:
1.● specific, formulated in numbers or percentages;
2.● measurable, which is easy to calculate;
3.● achievable, when the set goal can actually be achieved;
4.● relevant, that is, comparable with the company’s goals;
5.● time-bound, when the goal is calculated for a certain period of time.
Examples of setting KPIs according to SMART:
6.● increase customer satisfaction ratings to 85% by the end of the quarter,
7.● increase social media followers by 30% by the end of the quarter,
8.● reduce customer acquisition cost (CAC) by 25% by the end of the quarter.
How to implement a KPI system
Implementation of a KPI system usually occurs in six steps:
1. Define KPIs.
Build a hierarchy of metrics and select indicators that can be influenced at the level of different departments. Before formulating key indicators according to SMART, you need to analyze the current situation with performance.
2. Select tracking tools.
Each tool collects information using different methods, so the same indicators collected by different programs may not match. It is important to choose a tool that shows the results closest to reality and track trends in different key metrics: declines and growth of indicators. For each KPI, it is better to rely on one data source.
3. Present to the team.
Explain to the team how all the key indicators affect the company’s business goals and how the KPIs are integrated into the system. Tell where to look for data and how to analyze it.
4. Assign those responsible.
Each KPI should have a responsible person from the team. For example, an SEO specialist monitors organic traffic on the site, an email marketer monitors CTOR (Click to Open Rate, the ratio of clicks on a link to email openings), and an Internet marketer monitors ROMI. Specialists not only monitor the KPI, but also propose initiatives for its improvement, update the data in the matrix every 2-4 weeks, depending on the speed of change, and analyze the situation. The responsible person must promptly respond to changes and propose solutions: for example, stop the advertising campaign if the indicators are too low.
5. Conclude additional agreements to employment contracts.
If you plan to link employees’ salaries to the fulfillment of KPIs, you need to record this in their employment contracts.
6. Monitor KPIs.
The KPI system needs to be constantly monitored so that it benefits the company. This will allow you to track indicators, analyze results, look for reasons for changes, correct errors, and scale successful solutions. In the process, it may turn out that some KPIs are missing and the system needs to be supplemented with them, while some will turn out to be unnecessary and will have to be abandoned.
