What Is a Key Performance Indicator (KPI)? Definition and Guide

A key performance indicator, or KPI for short, is one gauge of how well your business is hitting its performance targets. Profit, sales growth, and employee retention are popular KPIs, but you can’t really determine what appropriate KPIs are for your company until you do some goal-setting. Your KPIs naturally result from annual business goals you set. They’re kind of like a GPS, which keeps you on the right path to your desired destination.

How many is too many KPIs?

KPIs are also used at different levels. Your business should set top-level KPIs that all employees should be working to hit, and then each business unit and department should have their own performance measures that relate back to the overarching KPIs.

But don’t go overboard – try and limit the number of KPIs at each level to no more than six. More than that and your efforts, and your employees’ focus, may become spread too thin to make a difference.

So the business might have four or five KPIs to guide the company’s annual growth, and then each business unit would have their own three or four KPIs that dovetail with the company KPIs, and the departments that make up each business unit might have their own KPIs specific to their role within the company.

For example, themarketingdepartment might be focused on percentage of returns or the number of social media posts each week, while shipping might measure speed of packing and percent of on-time deliveries.

Effective KPIs

To be useful measurements of a company’s performance, KPIs need four characteristics:

• Impact the bottom line- Ultimately, every KPI should have a positive impact on the bottom line, whether that involves tracking expenses or online open rates.
• Able to be measured- The best KPIs are simple and easily calculated. However, if you’re not tracking certain data – or it’s simply not possible to gather it – don’t waste your time trying to come up with an indicator.
• Timely- To be useful, you need access to real time KPI results. Learning that last year’s customer satisfaction rating was a 9.8 isn’t helpful if you got the data nine months later.
• Actionable- Most importantly, KPIs need to help you take action to improve. They need to help you understand what needs to be done to make a difference.

Popular KPIs

Each company’s KPIs will be different based on their corporate priorities. Walmart, for example, might focus on financial KPIs, since their goal is to save their customers money. Zappos might be more interested in tracking online shoe order size. And LL Bean might track number of purchases per customer.

It all depends on what’s important to your business and what you suspect will have the biggest effect on your overall profitability and sales growth. You might decide that monitoring weekly foot traffic, percent of returns, and profitability will be the most important pieces of data to study.