What is a Key Performance Indicator?

A Key Performance Indicator (KPI) is a metric used to evaluate the success and performance of some aspect of an organization. This can include its operations, processes, objectives, goals, etc.

Essentially, if a firm or an organization is wondering how one of these aspects is performing, it uses the KPI metric to determine its efficiency and quality. KPIs are crucial in assessing a company’s strategic, financial, or operational achievements. More importantly, they can also reveal the firm’s flaws, suggesting the areas where a company needs to improve to do better moving forward.

KPI Fundamentals: What do you need to know?

KPIs are a handy metric across the board. Historically, they were used in almost any field, from sports to management practices, business, and more. In business, KPIs are crucial for aligning business activities with organizational goals.

That way, a business can assess the performance and success of any individual team or department and calculate its contribution level to the overall mission. This makes them a handy tool for measuring the success of strategic initiatives, such as cost reduction, market expansion, the ability to attract new customers or keep the existing ones, and more.

As we will see in the following segments, KPIs can be versatile and applied across numerous business functions, from marketing and sales to operations, finance, and more.

What are the main characteristics of KPI?

Let’s look at its main characteristics with the Key Performance Indicator definition out of the way. Those include:

  • Quantifiable metrics — KPIs are usually presented as figures and percentages, offering the most precise picture regarding the firm’s performance in a particular area. Suppose the executives know how this area is performing compared to others or compared to some past period. In that case, they can assess what potential changes have led to this performance increase or decrease, or if none — what needs to change to improve the sector.
  • Measurability — When it comes to making KPIs, it is essential to use data that is collected, analyzed, and tracked. This implies that a business needs to regularly collect data, process it, and ensure its accuracy and security.
  • Relevance — Another essential thing to note about KPIs is that they are directly related to the business’s specific goals. As such, they reflect what is most critical for the company’s success.
  • Visibility — KPIs need to be readily accessible to decision-makers and other teams within the company. As such, they are commonly displayed and distributed in reports or on dashboards. Simply put, they must be easy to find and simple enough to be understandable to all organization members.
  • Timeliness — Lastly, timeliness. This means KPIs need to be monitored regularly, allowing businesses to notice changes and react to them as new trends replace existing ones. Some aspect of the company starts performing better or worse than the rest.

What are the most common KPI types?

Before we move on to examples of KPIs, it is essential to note that there are several different KPI types. Specifically, we have:

1. Financial KPIs

Financial KPIs are metrics used to assess and measure the company’s financial health and performance. They can focus on revenue, profit margin, gross profit, net profit, operating profit, earnings per share, return on investment, and more. As the name suggests, they can provide insight into the firm’s financial stability, profitability, and efficiency. They are also crucial contributors to making informed decisions, such as setting financial goals and deciding whether the company can or should make a specific investment or acquisition.

2. Operational KPIs

Operational Key Performance Indicators are another type of KPI that assesses the effectiveness, efficiency, and overall performance of the business’s day-to-day processes and operations. They are used for monitoring different aspects of business operations, gathering data regarding their efficiency, and showing which elements of the business can be used. They should be optimized to improve the company’s performance.

3. Customer-centric KPIs

Customer-centric KPIs are the metric that focuses on the company’s customer relationship. Essentially, they allow the firm to understand, measure, and improve its interaction with the customer base, improving their experiences and ensuring that they experience productive interactions.

Since business success for most companies depends on the customer walking away satisfied with their interaction and purchase, this is a crucial sector, so customer-centric KPIs carry massive importance. Gathering, analyzing, understanding, and acting on this data can allow businesses to build strong customer relationships, increase customer satisfaction, drive customer loyalty, attract new customers, ensure customer recommendations, and more.

The other side of the coin is the company’s employees, who make the entire corporate machine continue to run and operate. This is why employee-related KPIs are so important, as they are used to assess and measure aspects of workers’ performance, engagement, and, most importantly, satisfaction within the organization. A satisfied employee is likely to be more productive and engaged, which was confirmed by countless studies in the past.

However, a business needs to rely on KPIs to assess employee satisfaction levels and make changes where required. Finding that employee performance or engagement in a particular aspect of a company can indicate that employee satisfaction is not at its highest, which can be an excellent way to identify potential internal issues.

Examples of Key Performance Indicators

Now that we know the Key Performance Indicators’ definition and critical characteristics, let’s look at what can be a KPI in business. Some of the most common indicators used by companies for decision-making can include the following:

  1. Revenue Growth — Tracks increase in sales or revenue during a specific period
  2. Return on Investment (ROI) — Assessment of the profitability of investments and marketing campaigns
  3. Customer Satisfaction Score — Evaluates customer satisfaction and happiness with the service/purchase of the company’s product.
  4. Website Traffic and Conversion Rates — Monitors web analytics to evaluate online performance
  5. Customer Acquisition Cost — Calculates the cost of getting new customers
  6. Customer Churn Rate — Measures at which rate the customers leave or stop using the company’s products or services
  7. Inventory Turnover — Assesses how quickly inventory is used up or sold
  8. Employee Turnover Rate — Tracks the rate at which employees leave the company
  9. Net Promoter Score — Measures customer loyalty and the likelihood of them recommending the company to others

How do you choose the right KPIs?

The most important thing for a business that seeks to be effective at measuring and improving performance is to pick the right KPIs. Just using any KPI is unlikely to bring the desired insights and results. Instead, selecting KPIs that adequately align with the business goals and objectives is essential to the process, leading to adequate data-driven decisions.

With that said, here are some tips on how to do it.

  • Identify your goals and objectives. This is by far the most important thing to do early on, as it will clarify your business’s short-term and long-term goals.
  • Understand your key business drivers. Doing so will allow you to learn which key factors impact your business success and which critical areas drive performance or influence your goals.
  • Collaborate with stakeholders. Sometimes, getting the stakeholders’ perspective on what aspects a business needs to improve is useful. You can even go beyond by collaborating with different departments and teams to gather input on which metrics are most important to them.
  • Decide on priorities. There are countless KPIs a business can consider and use to improve its business, and it is unrealistic to think that any business can improve all aspects simultaneously. Instead, they should use the input from stakeholders, combine it with the company’s goals, and develop a list of the most critical KPIs the firm should prioritize. Using such a focused approach is more likely to have a positive impact than spreading your efforts too thin while trying to address too many aspects simultaneously.
  • Compare your KPIs to competitors and peers. Another way to determine which aspects you should focus on is to see what others in your industry are doing. Whether they are peers or competitors, looking into how different firms are trying to improve could lead to new ideas on what you can do to make the company perform better.
  • Set targets and thresholds. By establishing specific targets and points for each KPI, you can set specific goals that will allow you and your teams to have something distinctive to work on. However, try to avoid making the targets overly ambitious and unachievable.
  • Review and adjust. Keep in mind that KPIs should not be static. They are there to assess the effectiveness of your business. As the industry becomes more effective, KPI results will change, which is why it is essential to keep monitoring and analyzing the data, as this will allow you to see how the changes you are making are affecting your business in real-time.

Challenges and pitfalls of KPI implementation

While we have spent most of this guide explaining the benefits of KPIs, it is essential to note that there are specific challenges and pitfalls you can encounter along the way. Here are some such issues that you should keep in mind.

  • You are choosing the wrong KPIs. This first problem is pretty self-explanatory. If you pick the wrong KPIs to focus on, the changes you will make to improve your business will not yield the desired result.
  • You are focusing on too many KPIs. We mentioned already that you need to be careful not to spread your efforts too thin and prioritize specific KPIs over others, depending on their importance.
  • Lack of clarity and understanding. KPIs need to be clearly defined and understood by all business members. Try to avoid ambiguity, as it could lead to misinterpretation and misalignment.
  • Inaccurate or unreliable data. This is one of the common pitfalls where businesses use data of poor quality, which leads to incorrect KPI measurements.
  • Resistance to change. KPIs can often lead companies to implement changes that may be difficult for employees to get used to, leading to resistance to change. In some cases, employees may also resist KPI implementation if they view it as a threat or additional workload. This is why communication is critical for the success of such changes.
  • Unrealistic goals. This is also a common issue with businesses that set too ambitious goals. This can demotivate employees, especially if they do their best and the goal is still not achieved. KPI targets should be challenging but achievable, leading to a sense of pride in the team’s success when it is completed.
  • Not reevaluating KPIs. Finally, some businesses forget that KPIs need to be regularly measured and reevaluated for reasons we discussed in the previous segment. This can prevent them from meeting business needs.

Real-life success stories of KPIs improving businesses

One of the best examples of companies with a strong focus on customer-centric KPIs is Amazon, the world’s largest e-commerce giant. The company’s focus on customer satisfaction allows it to identify areas where it can be enhanced. For example, the company uses Net Promoter Score (NPS) feedback to improve its delivery process.

Then, you have Netflix, which focuses on data-driven content creation. The company uses KPIs extensively to inform its content creation decisions. It collects viewer data to identify which genres are the most popular, which actors are fan favorites, and which plot elements have received the most praise. It then uses this data to create hit shows that tend to see exceptional performance.

Starbucks, on the other hand, is an expert when it comes to the customer loyalty program. The coffeehouse chain introduced the Starbucks Rewards program after tracking KPIs like Customer Lifetime Value and Repeat Customer Rate. It then created a rewards program linked to these KPIs, further improving customer loyalty. The company found that those who started participating in the program usually visited its locations more often, spent more money, and contributed to its success and growth.


Key Performance Indicators (KPIs) are crucial to any business’s success. In essence, they are simply data that shows how a particular aspect of the company performs. However, they also allow companies to draw meaningful conclusions to help them grow.

Of course, there are pitfalls tied to their use, which is why companies must be wise when acting on the data offered by KPIs. However, if you use them right, you can make your business a huge success, withstanding the test of time, outperforming the competition, and even surviving complex markets.