Key Performance Indicators: What They Are and How to Use Them

KPI (Key Performance Indicator) is an important metric for evaluating efficiency. Through KPIs, the effectiveness of a company's or team's work is determined over a certain period of time.

Source: assessteam.com

What KPIs are Used For

Let's take a closer look at what KPIs are and why they are needed.

It is a misconception to consider KPIs to be simply a tool for motivating staff. Primarily, they are used to assess the success of strategies or plans. A system of key performance indicators provides an understanding of whether your business is moving toward its goals.

Applying KPIs will help:

Track results. Simple indicators measure the effectiveness of the work of individual teams and the entire company.
Organize work more efficiently. Performance metrics show what is happening inside your company, how things are going, and who is responsible for what.
Make plans. KPI indicators identify areas that need improvement. This will allow you to adjust your plans and set new goals.
Maintain team motivation. Clear evaluation criteria help employees focus on important tasks and stay motivated.

Types of KPIs

There is no universal list of indicators. They are selected depending on what your company does. The indicators should provide a comprehensive picture of the results.

Here are some key performance indicators used by companies:

Results. This metric reflects both the quality and quantity of work. For example, it indicates the number of calls made. Additionally, the results metric is useful for determining the average service rating.
Costs. It assesses the time and resources required to accomplish a particular task. It's utilized to cut costs, speed up order processing, and optimize production efficiency.
Productivity. This metric compares results with the time spent, providing insight into how many tasks an employee or team completes within a certain period, such as how many orders a department processes in a week.
Efficiency. This involves assessing the results in relation to the resources used.

Marketing KPIs

Every team, and even individual positions, should have their own KPIs. Naturally, the KPIs for the marketing department will differ from those of the accounting department.

KPIs are frequently used to assess marketing campaigns and mailings. Here are some metrics used to evaluate the effectiveness of email strategies:

Email Conversion

Conversion doesn't necessarily imply a sale. It can encompass any user action, such as subscribing, clicking a button, or downloading a brochure. You determine what constitutes a conversion and then simply calculate the percentage of customers who have taken a particular action.

Email Open Rate

You calculate the percentage of people who opened your email.

How to calculate it: Open rate = (Number of opened emails / Number of delivered emails) * 100

This metric assesses how well your email subject line performed and suggests the best time to send emails.

Click-through rate (CTR)

This is the percentage of users who clicked on a button or followed a link in the email.

How to calculate it: CTR = (Number of clicks / Number of delivered emails) * 100

This metric will indicate how engaging your content is and will help segment based on which links attract more attention. It also evaluates the quality of the email body and button.

ROI (Return on Investment)

This metric determines how effectively your expenses are paying off.

How to calculate it: ROI = (Profit - Expenses) / Expenses * 100

Trigger emails, precise segmentation, and testing can help increase ROI.

Bounce Rate

This is the percentage of emails that didn't reach the recipient for some reason.

How to calculate it: Bounce Rate = (Number of bounced emails / Number of sent emails) * 100

There are soft and hard bounces. Soft bounces occur due to temporary issues like the mailbox being full or email server downtime, while hard bounces happen due to invalid email addresses. It's better to remove recipients with hard bounces from your list to maintain your sender reputation. If you have many such bounces, email providers may classify you as a spammer.

Unsubscribe Rate

This is the percentage of people who have decided to opt out of receiving your emails.

How to calculate it: Unsubscribe Rate = (Number of unsubscribes / Number of your subscribers) * 100

This metric indicates how effective your strategy is and which email caused the most unsubscribes.

Growth of Mailing List

This metric measures the growth of your subscriber base.

How to calculate it: Growth of Mailing List = ((Number of new subscribers - (Unsubscribes + Bounces + Complaints) / Total number of addresses in the database) * 100

Spam Complaints

Here you identify how many people have complained about your mailing. You can find this information in your mailing reports. To prevent your emails from being marked as spam by mistake, make sure to include a visible unsubscribe button.

Utilization of KPIs

Implementing KPIs involves several steps: defining goals, creating a matrix of key indicators, working with motivation, and training.

Step 1. Begin by defining your goals. What do you aim to accomplish? This could involve increasing profit, reducing errors, or decreasing turnover in a specific department.

Step 2. Determine which factors influence the achievement of your goals. For example, revenue depends on the number of sales and the average order value. Thus, key indicators for a sales manager include the number of calls and the average order value.

Step 3. Then, establish numerical values for these indicators. For example, 20 calls per day or a value calculated according to a formula.

Step 4. Discuss this with managers or key employees. They have the necessary experience and will help determine realistic key indicators.

Here are the criteria to consider when setting performance indicators:

The metrics should be clear and specific.
They should be easy to measure.
They should be realistic.
They should contribute to achieving the goal.
They should have specific timeframes.

Step 5. Create a matrix. This is a simple way to track and evaluate progress. The KPI matrix typically consists of several components:

KPIs. These reflect the factors influencing the effectiveness of employee or team performance.
Importance or weight. Ranges from zero to one, determining how much the metric impacts the outcome. This value is assigned by experts.
Minimum acceptable value (also called baseline). This determines whether the quality of work is satisfactory.
Average results or norm. What has been achieved in a similar timeframe in the past.
Target result.
Actual result achieved.
KPI Index. The variance between actual and target results. Calculation: Actual / Goal * 100.
Overall results for all KPIs, taking into account their weights. Calculation: KPI Index 1 * Weight KPI 1 + KPI Index 2 * Weight KPI 2 + KPI Index 3 * Weight KPI 3.

Step 6. Encourage employees through a motivation system. The system should be transparent. When employees understand what they are being rewarded for, they are motivated to put in more effort. You decide how your reward system operates—this could include additional time off or bonuses.

Step 7. Train your staff. Inform them about the new goals, how their efforts impact the company's success, why these performance metrics were determined, and how to calculate them. Find out what your team thinks. Bear in mind that such innovations often provoke dissatisfaction among teams, and adaptation takes time. It's important to explain to them how the KPI system works and address any objections.

Step 8. Appoint someone to handle KPI calculations. Do this in Google Sheets or Excel. The team adds their reports to the spreadsheet, and managers review the data.

Step 9. Conduct an analysis. Determine whether achieving KPIs affects work quality. If not, consider revising the metrics or strategy.

Advantages of KPIs

The system helps evaluate employees and business processes clearly and fairly.
It fosters team motivation and maintains control over its tasks.
It quickly identifies errors and shortcomings in work.

Disadvantages of KPIs

Calculating and interpreting KPIs is not always straightforward.
Incorrect metrics do not improve the situation but force employees to perform meaningless tasks just to check boxes.
It increases the workload for management: reports need to be checked and calculations verified for accuracy.
The team needs time to adapt to the new rules, so KPIs are introduced gradually.
Sometimes, the introduction of a new system causes dissatisfaction, leading to a decline in team motivation.

Conclusion

Key Performance Indicators (KPIs) are metrics that evaluate your work. They provide a clear understanding of how successfully you are accomplishing your tasks and indicate areas where improvement is needed. These metrics apply not only to individual employees but also assess the effectiveness of teams and business processes.

Utilizing these metrics enhances company productivity. They are not just numbers; they are tools that guide you toward achieving necessary outcomes.

KPIs are tailored specifically for each position and department. There are marketing effectiveness metrics, sales department metrics, accounting metrics, and many more. This approach ensures that every part of the company is working toward its unique goals.