How to define KPIs

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Key performance indicators are often used, sometimes abused, and seldom understood or well implemented. Real KPIs need to be defined, monitored, and acted upon when they move beyond a particular range. They link the operational level of a company with the strategic decision making. However, oftentimes companies generate numbers and call them a ‘KPI’, but when they change, nothing really happens.

This article will look at what makes good KPIs and how they are defined.

Indicators

Indicators consist of basic data, facts and figures. They depict a value of something, but don’t automatically convey meaning to those viewing them. This data provides a critical basis for the definition of KPIs.

Questions to ask to ensure that you have good indicators:

1. Do they reflect reality? Is it indicative of what is being measured?

2. Is the data timely (recent) and reliable?

Performance Indicators

Performance indicators measure the benefit of something. Analyzing them is a good step towards understanding how well something is working, and whether it could (or should) be improved.

Questions to ensure that you have good performance indicators:

1. Is the measured performance relevant? Does it tell me something useful?

2. What performance is normal, high, low?

Key Performance Indicators

Good KPIs focus on areas which are critical to the success of a business. They indicate where things are running normally and highlight (potential) problems. KPIs help to run a business by providing an indication for whether the company is stable, or if any problems are emerging.

Questions to ensure that you have good key performance indicators:

1. What KPIs reflect critical success factors in my business?

2. What KPIs provide insights in the company’s future and the competitive environment?

3. Is action necessary when the KPI is outside of its normal range?

Always remember, that KPIs are early warning indicators showing the need for action, but they do not provide an answer for the specific actions that should be taken. No single KPI will ever depict the complete picture, it will only provide focus on the problem. A company still has to analyze the specific situation and has to discuss the appropriate response.

Example KPIs

The ‘Land-to-Like’ KPI is very valuable for an E-Commerce site. This particular KPIĀ measures the number of clicks it takes for a potential customer from landing on a website to rating a purchased product.

This KPI reflects a lot about a website, as it contains both static elements (logging in, registering, checkout, product rating), and dynamic elements (finding, comparing, and selecting items to purchase). By analyzing the consumer behavior, conclusions can be drawn that will help a company improving its website as well as the customer experience that will (hopefully) lead to a rise in sales.

As another example, a KPI to question the value of this article is not how long it is (an indicator), how long it took you to read it (a performance indicator), but rather if the time spent reading it was worth it (measuring utility, a real KPI).