KPIs, or key performance indicators, are a set of metrics used to evaluate a company's long-term success. These indicators help businesses assess their strategic, financial, and operational performance, particularly in relation to other companies in the same industry. By tracking KPIs, companies can identify areas of strength and areas that need improvement, and make informed decisions to help drive growth and achieve their goals.
Categories of KPIs
Strategic KPIs: These high-level indicators provide a broad overview of a company's overall performance.
Examples include return on investment, profit margin, and total revenue. These KPIs are often used by executives to make strategic decisions.
Operational KPIs: These indicators focus on a shorter time frame, such as monthly or daily, and measure how a company is performing in different processes, segments, or geographic locations. These KPIs are often used by managerial staff to identify areas for improvement and make operational decisions.
Functional KPIs: These indicators are specific to individual departments or functions within a company. Examples include the number of new vendors registered in the finance department's accounting system or the number of clicks on emails in the marketing department. These KPIs are valuable to the specific group of users for which they are intended.
Leading/Lagging KPIs: These indicators describe the nature of the data being analyzed and whether it is predicting future events or reflecting past events. Leading KPIs may signal future trends while lagging KPIs are a result of past events.
Marketing
Marketing KPIs are metrics that help to evaluate the effectiveness of marketing and promotional campaigns. These indicators often measure the conversion rates of prospective customers or the frequency with which they take certain actions in response to marketing efforts. Some examples of marketing KPIs include:
Click-through rate (CTR): The percentage of people who click on a link in an email or online advertisement
Cost per click (CPC): The amount spent on advertising for each click on an ad
Customer acquisition cost (CAC): The cost of acquiring a new customer, including marketing and sales expenses
Return on investment (ROI): The amount of profit or loss on an investment, calculated by dividing the net profit by the cost of the investment
Conversion rate: The percentage of website visitors who complete the desired action, such as making a purchase or filling out a form
Lead-to-customer conversion rate: The percentage of leads that become paying customers
Social media engagement: The number of likes, comments, and shares on social media posts.
Sales The ultimate aim of any company is to generate revenue through sales. While financial KPIs can measure overall revenue, sales KPIs take a more detailed approach by using non-financial data to understand the sales process more effectively. Examples of sales KPIs include: Customer lifetime value (CLV) A metric that represents the total revenue a business can expect to receive from a single customer over the course of its relationship with the company. CLV is an important metric because it helps businesses understand the value of maintaining and nurturing long-term customer relationships. By understanding the CLV of their customers, businesses can make informed decisions about marketing and sales strategies and allocate resources accordingly. To calculate CLV, businesses typically consider factors such as the average purchase value, the average number of purchases per customer, and the average length of time a customer stays with the company. The CLV formula is: CLV = (Average Purchase Value x Average Number of Purchases per Customer per Year) x Average Customer Lifespan For example, if the average purchase value is $50, the average number of purchases per customer per year is 2, and the average customer lifespan is 5 years, the CLV would be: CLV = ($50 x 2) x 5 = $500 This means that, on average, a business can expect to receive $500 in revenue from a single customer over the course of their relationship. Customer Acquisition Cost (CAC) A metric that represents the amount of money a business spends to acquire a new customer. CAC is an important metric because it helps businesses understand the efficiency of their marketing and sales efforts. By understanding the CAC, businesses can identify ways to reduce costs and improve their return on investment (ROI). To calculate CAC, businesses typically add up all of the costs associated with acquiring a new customer, including marketing expenses, sales expenses, and any other costs related to attracting and converting leads. The CAC formula is: CAC = Total Sales and Marketing Expenses / Number of New Customers Acquired For example, if a business spends $10,000 on marketing and sales expenses and acquires 100 new customers in a given period, the CAC would be: CAC = $10,000 / 100 = $100 This means that it costs the business $100 to acquire a new customer. To determine the efficiency of their marketing and sales efforts, businesses can compare the CAC to the lifetime value (LTV) of their customers. If the LTV is greater than the CAC, it means that the business is making a profit on each new customer acquired. If the CAC is greater than the LTV, it means that the business is losing money on each new customer acquired. Average Dollar Value for New Contracts The average dollar value for new contracts, also known as the average contract value (ACV), is a metric that represents the average amount of revenue generated by a new contract. ACV is an important metric for businesses that sell products or services on a subscription or contract basis, as it helps them understand the value of their new business and the efficiency of their sales efforts. To calculate ACV, businesses typically divide the total revenue generated from new contracts by the number of new contracts signed in a given period. The ACV formula is: ACV = Total Revenue from New Contracts / Number of New Contracts For example, if a business generates $100,000 in revenue from 10 new contracts, the ACV would be: ACV = $100,000 / 10 = $10,000 This means that the average dollar value for new contracts is $10,000. ACV is often used in conjunction with other metrics, such as customer acquisition cost (CAC), to understand the efficiency of the sales process and the profitability of the new business. If the ACV is higher than the CAC, it means that the business is making a profit on each new contract signed. If the CAC is higher than the ACV, it means that the business is losing money on each new contract signed. Average Conversion Time The average conversion time is a metric that represents the amount of time it takes for a potential customer to complete the desired action, such as making a purchase or filling out a form. Average conversion time is an important metric for businesses because it helps them understand how long it takes for potential customers to make a decision and how efficient their sales process is. To calculate average conversion time, businesses typically divide the total time spent on the sales process by the number of conversions in a given period. The average conversion time formula is: Average Conversion Time = Total Time Spent on the Sales Process / Number of Conversions For example, if a business spends a total of 100 hours on the sales process and converts 10 potential customers, the average conversion time would be: Average Conversion Time = 100 hours / 10 conversions = 10 hours This means that it takes an average of 10 hours for a potential customer to complete the desired action. Average conversion time is often used in conjunction with other metrics, such as the conversion rate, to understand the efficiency of the sales process and identify areas for improvement. By reducing the average conversion time, businesses can potentially increase their conversion rate and generate more revenue. Number of Engaged Leads The number of engaged leads is a metric that represents the number of potential customers who are actively interacting with a business and showing interest in its products or services. Engaged leads are considered more likely to convert into paying customers compared to unengaged leads. To calculate the number of engaged leads, businesses typically track the number of leads who have taken certain actions, such as visiting the website, filling out a form, or making a purchase. These actions are often used as indicators of engagement, as they suggest that a potential customer is interested in the business and is considering making a purchase. The number of engaged leads is an important metric for businesses because it helps them understand the effectiveness of their marketing and sales efforts and identify potential customers who are likely to make a purchase. By focusing on engaged leads, businesses can potentially increase their conversion rate and generate more revenue. Summary Key performance indicators (KPIs) are a useful tool for evaluating and tracking a company's performance across a range of metrics. By having a clear understanding of KPIs and how to use them effectively, managers can better optimize their business for long-term success. By tracking the right KPIs, managers can identify areas of strength and areas that need improvement, and make informed decisions to drive growth and achieve their goals. We, at Reef T.R.H, can create the right KPIs indicators for your business for best measurement.