I mention the importance of having KPIs as part of strategic management in business. In this post, we will look a little deeper at the meaning of KPI and some KPI examples. We will also briefly talk about benchmarks because, in part, benchmarks can assist in achieving specific targets.
KPI Meaning
KPI is an abbreviation/acronym and stands for Key Performance Indicator. KPIs are put in place and used so that you can measure a specific performance over time against your business goals. It is critical to the operation of every business and is part of good strategic management as it measures how effectively your business is achieving its goals and objectives. Whilst it’s important to have KPI’s it’s equally important to have BI KPI’s (Business Intelligence KPI’s)
First, it’s essential to understand that KPIs will differ for every business. What may be important to one company may not be to another. It is, therefore, necessary not to get caught up in those standard questions of “what are 5 key performance indicators” or “what are the 4 main KPIs” because in doing so, you will head down the path of creating a list of KPIs that are fancy and that may not be relevant or necessary to your line of work. You can quickly lose focus in doing so.
Your first step is to sit down and figure out what’s essential to your business and the key things that will make it succeed. Then you will measure these to ensure you have achieved your objectives which then meet your goals.
Start with a few. Don’t look at what everyone else is doing, as it may not be relevant to your business. Creating KPIs just for the sake of having them is more detrimental to your business than not having any at all.
I think it’s important not to overload people with too much information and not overcomplicate things. It is more important to explain how the method works rather than throw a lot of business terminology that can get overwhelming and confusing because most of it may not be relevant to a particular business model.
You must identify goals and have clear business objectives. They must be realistic and achievable.
Use the SMART method – it’s smart for a reason!
(Specific Measurable Achievable Relevant Timely)
A goal is generally long-term so it could be over 2-3 years. An objective is more short term and assists in achieving your main goal.
Write these down in simple terms, and then, for each objective, set your indicators.
What is a KPI Example?
Let’s look at the following goal, its objectives and 5 KPI examples:
You own a small manufacturing company that makes t-shirts. You sell these through your online store directly to the consumer.
Let’s look at one of your business goals, some objectives that will help you meet your goals and your KPI’s which will provide the measure of performance to your objectives.
Goal: Increase Profits
(Let’s look at a couple of ways you can increase your profits through objectives.)
Objective 1
- Reduce your costs.
You want to put a time frame on it though and a number. Let’s say in 12 months you would like to see a reduction of 10%.
Now you need some performance indicators, so you can see if what you are doing is achieving a result to your objective which in turn assists your overall goal. Your indicators can and should be measured.
Here are some KPI’s for Objective 1:
- Reduce your staff’s overtime without affecting your manufacturing capacity. (You could look at clever ways to outsource work)
- Increase your production run by eliminating products in your range that don’t sell well enough. Making more t-shirts per day will cost you less and reduce your cost of goods.
- Cut costs on raw materials (renegotiate with suppliers or seek new ones)
- Look at bulk buying discounts
- Eliminate manual procedures that could be computerised and therefore require less time. Time is money.
Objective 2.
- Increase your sales
Let’s say in 24 months you would like to see an increase of 20%.
Here are some KPI’s for Objective 2:
- Create email marketing campaigns. This will be a precise number that will show you whether you are meeting the objective of increasing your sales. (Email marketing campaigns have metrics such as conversion rates, open email rates, and unsubscribe rates, so you can track their progress and ensure they are meeting their own objectives – that’s how you can measure KPI’s)
- If you have extra space in your facility and are not open to the public, you could consider opening a few days a week. (More sales and measurable.)
- Expand your selling platforms. If you only run an online store, look at the option of going onto other selling platforms, such as Amazon, eBay or Etsy. Expand your reach.
- Increase traffic to your online store through various ways such as Google Ads, Organic traffic, and social media (all of these are measurable through reporting tools and analytics software)
All four of these points can increase your sales, and all four have clear indicators which will show how well you have performed in achieving your objectives. Once you have completed your objectives, your main goal will have been met.
As you can see, these all meet the SMART method approach we spoke of above.
They are all very specific, they are measurable, achievable, relevant and time based.
Now, let’s grab a piece of paper and pen and write down everything that applies to your own business.
Go ahead and list your goals, objectives and KPIs. You will see that the flow will come much easier and more natural than following someone else’s that may not be so relevant to you. Here is a simplified version of what we spoke about above:
Key Takeaway
When asking what KPIs are, it’s more important to understand the method in which they are used and how they work. The Goals, Objectives and KPIs should be yours, not someone else’s. Your goals should represent your company’s mission statement. You may have a social priority over a financial one. For example, you could set goals on customer service excellence or employee satisfaction. Only you can set these.
Measuring the advantages of specialization of labour through Key Performance Indicators (KPIs) allows businesses to track productivity and efficiency gains resulting from specialized roles.
KPIs would typically be gathered over time. They are not something that will happen overnight. Therefore it is essential to plan from the get-go when starting your business.
They should be monitored carefully and frequently.
Be careful not to drop your standards or quality when dealing with KPIs. For example, if you are applying an enormous amount of pressure on your staff to meet KPIs, their quality of work could drop simply because they need to complete an expected number. It’s essential to find a balance and understand what is achievable and what is not. You should set reasonable expectations. A great way to do this is to know what you aim for and be realistic. The use of benchmarks can assist greatly.
Benchmarks
Benchmarks are another way to measure certain aspects of your business, but they are mostly done to give you a comparison in your industry. They compare “apples to apples”.
Let’s take, for example, email marketing. Suppose you are a retailer and have a database of 100,000 customers on your mailing list, and you send out a promotional offer to them. You would want to track specific insights that are relevant to the success of your email marketing.
In this instance, you would look at how many people opened the email, how many people clicked on it, or how many unsubscribed. These are examples of insights. You would then compare these to benchmarks.
Example of a benchmark:
Mailchimp (an email marketing service that sends out billions of emails a month to millions of users) tells us in an article that the average open rate specific to the industry of retail is 18.39%. It has an average click rate of 2.25% and an unsubscribe rate of 0.25%. (Email marketing benchmarks and statistics by industry)
This is an example of a benchmark. It tells us that your competitors have these average rates on these particular metrics in this specific industry.
You would then compare yourself to that benchmark to see how you are travelling compared to the rest of your industry.
Suppose you had a target/business goal to increase your revenue using email campaigns; these sorts of benchmarks could assist you in being realistic with your goals and set helpful performance indicators. You are aiming for the best, but having an example will help you understand what the best is and how realistic your goal is and put things into some context.
There is no point in placing unrealistic expectations on neither yourself nor your staff. Your goals must be very specific, you should be able to measure them, they must be realistic, and you should always have a time frame for them. It would be best if you communicated them clearly within your team.
