What is KPI (Key Performance Indicator)? How is it determined?
Any business meeting, strategy session or performance review if you have, you have probably heard the term “KPI” mentioned many times. Most people in these discussions know that the acronym KPI stands for Key Performance Indicators, but when you research to find out what a KPI really is, you’ll likely come across many different definitions. The thing is that while KPIs are used everywhere in the modern business world, this usage is often wrong. This means that while KPIs are very common, companies that use KPIs effectively and accurately are not. But when used correctly, KPIs can make a huge difference in the success of a business. To correct this inaccuracy, in this article we are going to explain what a KPI is and how companies should use it. First of all, let’s start with the following question:
What is KPI?
In simple terms, KPIs provide a way to measure how well companies, business units, projects or individuals are performing in terms of their strategic goals and objectives.
In the broadest sense, KPIs provide the most important performance information that enables organizations to understand whether the organization is achieving its stated goals. In this way, well-designed KPIs are tools that clearly show current levels of performance and whether the business is where it should be.
KPIs are also useful tools for decision making. Because they help reduce the complex nature of organizational performance into a small, manageable number of key indicators, KPIs can aid in decision-making processes and ultimately help improve performance.
How is KPI determined?
When it comes to setting the right KPIs for your online store, ask yourself, “What goals can lead me to this success?” or “How well does it fit into the target company’s workspace?” Start by asking.
To set the right KPIs, you must first define the goals and objectives of what you plan to achieve. The next step is to decide on specific conditions that will facilitate the achievement of objectives deemed appropriate within a given time frame. Two key components to this are defining a measurable event and a specific time frame. For example, “Increase new visitors by 40% in the next six months.” These elements are critical success factors that will help you understand if you are on the right track to reach your goals. The last step is to set the actual KPI. In the example used above, the KPI might be “Percentage of new and returning visitors compared to the previous month.”
There are a number of different KPIs that online retailers like to track. Note that you should only monitor KPIs that are important to your business, but the most important ones that you may want to check include:
- Conversion rates
- site traffic
- Average page views and time spent on site
- rate recoil
- The number of pages per visit
- Average order value
- Referral sources
- traffic sources
- Supported conversions
- Highest traffic pages and content
- Final sales (daily, weekly, monthly, etc.)
How is KPI calculated?
In addition to knowing what to measure, it is also important to consider exactly how KPI is calculated. Let’s examine five ways to calculate your data to create KPIs:
1. Understand data numbers
Numbers are simple numeric values and are the easiest to calculate. They are useful for measuring something that does not need incidence or other context to show change over time. However, the KPI count does not perform well as it requires more context to represent performance more accurately. For example, the number of workplace accidents may be a good performance indicator, but it may not perform well in monitoring safety between facilities with large differences in employee numbers.
2. Measurement in percentages
Percentages separate numbers by dividing the target people or things by the total size of the population. This number is then multiplied by 100, which results in the percentage. Some examples are:
- The percentage of holidays used
- Sales growth percentage by quarter
- return on investment
Percentages work well for simple examples like whether or not a sale occurred, but not when measuring things like customer satisfaction.
3. The aggregate numbers should not be confused
And totals because they are continuous variables, that is, they are measured and not calculated. This means that totals can be in the form of numbers with decimal places. For example, the total time spent on sales calls at a company this week was 48.5 hours. Some other examples:
- The company’s total revenue
- The total retail product inventory cost
4. Data averages
The mean is the sum of all numbers in the data set divided by the total number of data. Examples:
- Average rating of customer reviews
- Average revenue per sales call
- The average cost of each product
If your data count is low or you have outliers that significantly distort the mean number or the overall distribution of your data product, then the mean is valid. It may not be available, and therefore it may not be an appropriate type of KPI to use. Therefore, it may be best to consider using a broker or a different method to balance this situation.
5. Ratios for comparing numbers
Ratios compare two numbers side by side. Probabilities are indicated by two adjacent numbers separated by a colon. This allows the observer to compare two numbers and their relationships. Examples:
- The number of incoming and outgoing sales calls
- Comparing in-store versus online purchases
Make sure to only use prices when comparing the two numbers.
Examples of key performance indicators
In this section, we will detail some common KPI examples.
1. Sales growth over time
A well-known example of a KPI shows sales growth over time. Sales growth You can calculate by measuring the total number of products sold, the number of services, or revenue and comparing it to the same metric over the previous time period. Sales growth is calculated as a percentage:
Sales Growth = 100 * (Final Sales Revenue – Beginning Sales Revenue) / (Beginning Sales Revenue)
For example, a manager at a local retail store might be involved in sales improvement techniques or selling sales on certain days of the week. They may want to know their sales revenue per day or per employee so they can focus on achieving A manager may want to know sales by region to analyze which regions need better sales training, or to keep common products in stock and reduce inventory of low volume products and change the regional product mix .
2. Gross profit margin
Gross profit margin is the percentage of total sales revenue that a company retains after accounting for any costs of producing goods. This KPI gives you an overview of how efficiently you are running a business. The higher the gross margin, the more revenue the business generates from sales activity.
Gross Margin = (Revenue – Direct Cost) / Revenue
After seeing efficiencies over time, companies can use more specific KPIs to reduce production costs or increase product prices to increase their gross profit margin. For example, a retail company may want to insulate gross margins for each product it owns, thus eliminating products with higher costs and lower sales and lowering production costs for certain products.
3. Return on investment
As a cornerstone of marketing, ROI is a percentage that compares the investment in marketing strategies to the amount of revenue they generate. For example, a marketer who specializes in the appliance industry invests $5,000 in an online advertising campaign to sell more power tools and attributes a $10,000 increase in power tool sales to the campaign. In this case, the return on investment will be 100%. The KPI formula works to calculate the return on investment by subtracting the income from the initial investment and dividing that subtraction by the initial investment (and multiplying it by 100 to get a percentage).
Equation: Return on Investment = 100 * (Return on Investment – Cost of Investment) / Cost of Investment
Return on investment is a powerful tool because it allows companies to compare different marketing activities to see which generates the most profit for their company.
4. Cost per rental
In terms of employee KPIs, rental cost is a common metric. It is calculated by adding recruitment costs inside and outside the company. Recruitment, advertising costs, external agency involvement, review of candidate resumes and interviews, etc. It includes everything.
Cost Per Hiring = (Internal Hiring Costs + External Hiring Costs) / Total Hiring Numbers
When aggregating cost per hire, companies such as hiring new employees and creating training programs that pay less for new employees can focus on hiring practices that reduce the costs and time of hiring and training employees.
Measure by weight in 5.KPI
When combining several KPIs to analyze business performance, it is important to prioritize the KPIs that have the greatest impact on the business. Overall measures of revenue and profitability are often defined as the outcome of any business.
KPIs are a good way to measure performance in all aspects of a business. It is a key component in setting and achieving business goals, evaluating growth and creating an actionable vision for companies of all sizes.
Create a KPI table
Step 1: Determine your baseline KPI.
The first step is to set your baseline KPI. We recommend that your KPI chart focus on an important business problem your digital workplace is trying to solve. The most common business challenges are:
- Corporate communications
- knowledge management
- culture and participation
Step Two: Brainstorm and finalize your main goals.
The second step is to determine what step you must take to reach your success goals. Objectives should be descriptive and aligned with the KPI you choose to focus on.
Step Three: Establish a monitoring and reporting mechanism.
The third step is to decide how you will monitor and report your results. Tracking results should be easy with the benefit of analytics and reporting tools like Google Analytics and Workplace Analytics. You could also consider using surveys or survey-like metrics.
Step 4: Set your goals for success.
The fourth step in the process is to set clear, measurable goals that match the business challenge you’re trying to solve and the goals we talked about in Step 2. Goals need to be measurable, have timelines, and be followed at a regular pace. If you have an existing digital workplace, use the Benchmarking report to enable you to set meaningful and measurable goals.
Step 5: Create programs to drive engagement and adoption.
The fifth step is to create and distribute engagement programs that ensure employee adoption in your digital workplace and help you achieve the goals you set. Ensure that programs fit your strategy and that you have the resources and budget to implement them effectively.
Step 6: Analyze success and continuous improvement.
The final step is to use reports and analytics to measure and analyze your success. It is recommended to establish a continuous improvement program to manage change in the long and short term.
KPI table template
Workplace KPI: Improve company communication.
Time frame: 4 months
Description: This KPI chart provides a framework for measuring success in improving corporate communications, including:
- Increase employee consumption of company communications
- Create more engaging connections
- Being proactive in communicating important company information to employees
- Determine and use the types of content and communication formats preferred by employees