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What are Key Performance Indicators (KPIs)?

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Key performance indicators are metrics that originate from business administration. They relate to performance, capacity utilization of a company, the success of the company or the performance of individual units or machines.

Strategic, financial and operational success can be excellently determined with KPIs and are also an aid in comparison with other, industry-related companies.

Understanding Key Performance Indicators (KPIs)

An important note to understand Key Performance Indicators is that they vary greatly between industries and companies, including different company departments. For example, an online fashion company may see annual sales as the most important Key Performance Indicators, while a local fashion store may be more interested in the number of unit sales in a year.

However, KPIs do not always have to be of a financial nature. Either way, they deal with the collection, storage, and cleansing of data in order to clearly highlight results. In this way, sound business decisions can be made on a reliable factual basis.

KPI vs. Metric: Where’s the difference?

Many people use Key Performance Indicators and metrics as synonyms, but a sharper distinction should be made here. Both are quantitative measurements, but are used differently. Metric is just a number. KPI is a number with thresholds. Or: Every KPI is a metric, but not every metric is a KPI.

Speaking with an example, you can say: “I sold 50 potatoes today” → 50 is a metric. And you can say: “I sold 50 potatoes with target of selling 60.” → that’s a KPI.

Different types of KPIs

Although all Key Performance Indicators are linked to strategic goals, there are some differences. The most common types of KPIs are:

  • Strategic KPIs
    • In a hierarchy level, this is at the highest of the KPI layers. In a momentary snapshot, they illustrate to managers how the company is performing. Examples: Total company sales, return on investment, profit margin, market share.
  • Operational KPIs
    • These deal with a shorter time frame and measure how the company develops from period to period. This can be month by month or even day by day. Operational KPIs are often derived from the questions posed by the higher-level strategic Key Performance Indicators. Examples: Sales by region, cost per acquisition (CPA) or monthly transportation expenses.
  • Functional KPIs
    • Fine-grained targets are pursued at this point. A marketing department will logically be interested in different Key Performance Indicators than the finance department or app development. These functional KPIs can be of a strategic or operational nature. Examples: Marketing KPI = traffic on the landing page, Finance KPI = return on investment.

KPI Examples

As already mentioned, each business unit and each industry has its own KPIs. Here are examples of the most important KPIs and how to calculate them:

IT Key Performance Indicators

  1. Uptime Percentage: Measures the percentage of time IT systems are operational and available for use.
    1. Uptime Percentage = (Total Operational Time / Total Time)×100
  2. Mean Time to Repair (MTTR): Measures the average time it takes to repair and restore IT services after an incident.
    1. MTTR = Total Downtime / Number of Incidents​
  3. IT Cost per User: Evaluates the cost of IT operations and support per user
    1. IT Cost per User = Total IT Costs / Number of Users​
  4. Server Response Time: Measures the time it takes for servers to respond to requests.

Marketing Key Performance Indicators

  1. Conversion Rate: Measures the percentage of website visitors who take a desired action, such as making a purchase or signing up for a newsletter.
    1. Conversion Rate = (Number of Conversions / Number of Visitors) * 100
  2. Customer Acquisition Cost (CAC): Calculates the cost of acquiring a new customer through marketing efforts.
    1. CAC = Total Marketing Costs / Number of New Customers Acquired
  3. Click-Through Rate (CTR): Measures the percentage of people who click on an advertisement or link after seeing it.
    1. CTR = (Number of Clicks / Number of Impressions) * 100
  4. Return on Investment (ROI): Evaluates the profitability of marketing campaigns by comparing the revenue generated to the cost of the campaign.
    1. ROI = ((Revenue – Marketing Costs) / Marketing Costs) * 100

Process Optimization Key Performance Indicators

  1. Cycle Time: Measures the time it takes to complete a specific process or task.
    1. Cycle Time = (Total Elapsed Time / Number of Completed Tasks)
  2. Quality Index: Assesses the quality of output by tracking defects, errors, or deviations from standards.
    1. Quality Index = (Number of Defects or Errors / Total Output) * 100
  3. Resource Utilization: Evaluates how efficiently resources (people, equipment, etc.) are used in a process.
    1. Resource Utilization = (Actual Resource Usage / Maximum Resource Capacity) * 100
  4. Process Cost: Evaluates the cost associated with executing a particular process.
    1. Process Cost = Total Cost of Execution

Sales Key Performance Indicators

  1. Customer Acquisition Cost (CAC): Tracks the cost incurred to acquire a new customer through sales and marketing efforts.
    1. CAC = (Total Sales and Marketing Costs / Number of New Customers Acquired)
  2. Customer Churn Rate: Tracks the percentage of customers who discontinue their relationship with the company during a specific period.
    1. Customer Churn Rate = (Number of Customers Lost during a Period / Total Number of Customers at the Beginning of the Period) * 100
  3. Sales Conversion Rate: Evaluates the percentage of leads or prospects that convert into paying customers.
    1. Sales Conversion Rate = (Number of Customers Converted / Total Number of Leads or Prospects) * 100
  4. Lead-to-Customer Conversion Rate: Calculates the percentage of leads that progress to becoming paying customers.
    1. Lead-to-Customer Conversion Rate = (Number of Leads Converted to Customers / Total Number of Leads) * 100

Customer Service Key Performance Indicators

  1. First Contact Resolution (FCR): Measures the percentage of customer issues or inquiries resolved during the initial interaction.
    1. FCR = (Number of Issues Resolved on First Contact / Total Number of Issues) * 100
  2. Average Response Time: Calculates the average time it takes for customer service representatives to respond to customer inquiries.
    1. Average Response Time = (Total Response Time for All Inquiries / Number of Inquiries)
  3. Service Level Agreement (SLA) Compliance: Assesses the percentage of customer service requests that are resolved within the agreed-upon time frame.
    1. SLA Compliance = (Number of Requests Resolved within SLA / Total Number of Requests) * 100
  4. Service Quality Rating: Assesses the quality of customer service interactions based on customer feedback and evaluations.
    1. Service Quality Rating = (Sum of Customer Ratings / Total Number of Ratings)

Why you should use KPIs

Key Performance Indicators (KPIs) serve as invaluable tools for organizations to measure and track their performance across various critical areas. Whether in IT, marketing, process optimization, sales, or customer service, KPIs provide valuable insights into key business processes and outcomes.

Incorporating KPIs into the fabric of an organization’s culture ensures a commitment to continuous improvement and excellence, making them an essential component of modern business management.

 

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