Introduction:

Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company's strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.

Types of Key Performance Indicators (KPIs):

Financial Metrics:

Key performance indicators tied to the financials typically focus on revenue and profit margins. Net profit, the most tried and true of profit-based measurements, represents the amount of revenue that remains, as profit for a given period, after accounting for all of the company's expenses, taxes, and interest payments for the same period. Calculated as a dollar amount, net profit must be converted into a percentage of revenue (known as "net profit margin"), to be used in comparative analysis.

Customers Metrics:

Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention. Customer lifetime value (CLV) represents the total amount of money that a customer is expected to spend on your products over the entire business relationship. Customer acquisition cost (CAC), by comparison, represents the total sales and marketing cost required to land a new customer. By comparing CAC to CLV, businesses can measure the effectiveness of their customer acquisition efforts.

Process Performance Metrics:

Process metrics aim to measure and monitor operational performance across the organization. By dividing the number of defective products by total products produced, for example, businesses can measure the percentage of defective products. Naturally, the goal would be to get this number down as low as possible. Throughput time represents the total amount of time it takes to run a particular process. For example, a drive-through restaurant throughput can measure how long it takes to service an average customer; from the time they make their order to the time they drive away with their food.

Limitations of Using Key Performance Indicators:

• The long time frame required for KPIs to provide meaningful data
• They require constant monitoring and close follow up to be useful
• They open up the possibility for managers to "game" KPIs
• Quality has a tendency to drop when managers are hyperfocused on productivity KPIs
• Employees can be pushed too hard aiming specifically for KPIs

5 Key KPIs:

KPIs vary from business to business. But in general, five of the most commonly used KPIs include: