KPIs: An In-Depth Guide to Mastering Key Performance Indicators
What is a KPI?
"KPI" is an acronym in the world of business, finance, marketing, and more. It stands for Key Performance Indicator.
A Key Performance Indicator is a very simple concept: it's a specific, measurable value that shows how effectively something is meeting its goals.
KPIs let you pinpoint exactly what's driving you forward.
They can be used to guide strategy, track growth, and foster a culture of accountability and performance.
And once you're past the basics of KPIs, there are some very neat advanced techniques with them that I'll show you how to use, too.
But there are pitfalls to KPIs as well, due to a phenomenon known as Goodhart's Law. We'll get into that later.
And finally, we'll discuss how our example businesses can each use KPIs to their advantage.
Let's dig in.
The Basics of KPIs
The best way to understand KPIs is through examples.
If you're trying to exercise more, some of your personal KPIs might be things like "number of reps," "amount of weight," "number of days at the gym," etc. These are meaningful numbers that show your status.
Tracking them day-to-day, week-to-week, shows your progression over time.
Business KPIs are very similar, and can be roughly broken down into various types.
Common KPI Types
These KPIs apply to most types of businesses, and can even usually be adapted to single-person influencer businesses with as much effectiveness as they have on massive corporations.
Sales KPIs might include metrics like sales growth, cost of customer acquisition, or sales target achievements. For an influencer, these might be affiliate link clickthrough rates, or conversion rates on sponsored posts and collabs.
More advanced sales KPIs could include lead conversion rates, upselling and cross-selling rates, customer lifetime value, and more. These and other advanced KPIs are often combinations of other KPIs, fitted together to show insights beyond the obvious.
Customer KPIs are all about keeping your customers happy. These include things like customer retention rates, net promoter scores, and customer satisfaction indices. Or, if you're a smaller business or an influencer, these might include numbers like followers and follower growth rate.
More advanced customer KPIs include churn rate, customer loyalty index, and first contact resolution rate.
Operational KPIs help you keep track of your day-to-day processes, the functioning of your business. This might mean production volumes, delivery times, and operational efficiency ratios. These can help you identify and reduce bottlenecks.
More advanced operational KPIs include capacity utilization rate, order accuracy rate, and inventory turnover. Or, for an influencer on social media, these could include post frequency and comment response time.
Financial KPIs are what many of us might first think about – metrics like gross profit margin, net profit, return on investment (ROI), and cash flow. While these might be the end goal for most businesses, tracking only these metrics would leave you blind.
More advanced financial KPIs include debt-to-equity ratio, working capital ratio, and a vast number of other accounting ideas. For an influencer, though, they also include sponsored post revenue, ROI from merchandise, etc.
Employee KPIs are very important too. Turnover rate, employee engagement, productivity rates, and other employee-centric metrics can help you keep a strong and happy workforce.
Uncommon KPI Types
Other types of businesses may have more specific KPIs, and you should consider what unique metrics your business can track. Here are some examples.
Environmental KPIs are most relevant for companies operating in manufacturing, energy, logistics, or—obviously—in environmental conservation. They include things like carbon emissions per unit, water usage, waste produced, and percentage of recycled materials used.
As global consciousness recognizes the importance of environmental concerns more and more, these will only become more important for all businesses to pay attention to. Even influencers should think about the sustainability of their brand partnerships and merchandise sources.
Innovation KPIs are typical for tech firms, R&D industries, and companies trying to stay ahead of the curve. They might include number of patents, percentage of revenue from new and emerging fields, and time from idea generation to market launch. Influencers can also think about how many niche-breaking ideas they've tried, or how many new formats they've experimented with.
Supply Chain KPIs relate closely to our operational examples above, but focus on supply chain management, which is especially important for retail and ecommerce. Fulfillment time, supplier defect rate, and delivery accuracy may all be examples of supply chain KPIs.
Risk Management KPIs are particularly relevant for finance, insurance, and other industries dealing with significant uncertainty and the chance for major disruptions. Examples include risk mitigation completion rate, losses due to identified risks, and now even more in the cybersecurity realm – such as percentage of employees trained in cybersecurity and scams, or downtime due to security incidents.
An influencer might think about sentiment analysis, reputation management, and controversial post percentage, especially if they post content that could easily get them "cancelled."
Diversity and Inclusion KPIs are gaining more importance in the era of increasing focus on social justice and equality. These might include the proportion of employees from underrepresented groups, pay equity ratio, and employee survey scores on perceived inclusion. A good HR team and a great deal of D&I consultants are instrumental for this in large organizations.
Rare & Unusual KPIs
I believe that looking at some stranger KPIs from time to time can be useful, even if they're not the numbers that you need on every single report.
Data Quality KPIs are valuable for analytics organizations.
Supply Chain Resilience KPIs, an extension of supply chain KPIs above, can help specifically deal with global crises and unexpected disruptions.
Customer Effort Score (CES) KPIs focus on the effort that it takes an average customer to use your product or service. How many steps to task completion, how many clicks on a site?
Agile Framework KPIs are of course important for companies working in heavy Agile methodologies, such as average lead time for tasks, frequency of backlog refinement, or the ratio of story points completed to total story points. (If you're not an Agile framework person and didn't understand any of that, don't worry.)
On a lighter note, there are also fluffier employee wellness metrics, like amount of laughter per meeting, number of coffee breaks per day, or number of office-pet interactions. If you're in HR, you may think that these are quirky ideas to make the day more fun – and that may be the case. However, they can also easily come off as corny or out of touch, especially if it seems like you're promoting these instead of actual employee wellness metrics or benefits.
I'm sure that you may be able to imagine some examples unique to your own business.
I commonly advise people that I work with to spend ten minutes brainstorming every single example of their own KPIs they can think of. You'll get the basics down in the first couple minutes, but it's only after they're on paper that you get to the real innovative stuff.
Putting Them Together: The True Power of KPIs
The true power of KPIs isn't just looking at a bunch of different numbers in a vacuum. No, KPIs are only truly useful when you combine and synthesize them into a story.
Say your overall profit KPI was much higher this month than last. Why? What caused it? What other KPIs are you tracking, and how can you use those to explain this?
KPIs should almost always be viewed in conjunction, not isolation. A shift in one KPI will ripple into other areas of your business.
KPIs should also be frequently communicated to every person, at every level of your business. This ensures everyone understands and is working towards the same goals.
During times of change in your business, KPIs can also be important to make sure you're not losing track of the end goal. Times of change are why it's important to track KPIs even during times of stability—you want to make sure you have a good benchmark, so you can track when and what your changes look like.
KPIs are also important due to their objectivity, assuming they've been set correctly. Often, a company's leadership will care very intensely about perception, or things they "feel." While this has its place, objective KPIs can show the truth and point out what really matters.
The KPI to Goal Pitfall: Goodhart's Law Explained
There is a very important potential problem with KPIs that I need to explain to you, so you don't make this mistake yourself.
KPIs are measurement tools to track your progression towards goals. However, KPIs are not goals!
Treating KPIs as goals can quickly lead to backwards incentives and unintended consequences.
Let's say you own a website, and one of your KPIs is "number of website visitors." In other words, you're tracking traffic, which is probably the most common website KPI out there.
That's all well and good, but what if you tell your employees that they'll be paid higher if they can raise that number?
Sure, you might get that number to go higher, but it won't be good traffic. Your employees will be incentivized to get anyone and everyone onto your website, regardless of if they're qualified leads or completely irrelevant people who aren't even in your market.
It might even be all bots and spam, completely fake traffic, just to inflate the numbers.
It's just like back in school. If a teacher had told you that your grade on an essay would be better the longer it was, you would write the longest essay possible—without caring about what it even said.
(If you were really tricky, you'd also increase the margins just slightly, turn up the spacing between letters by a tiny amount, etc.—all techniques that make the paper longer, without actually adding quality.)
This is described by Goodhart's Law: "When a measure becomes a target, it ceases to be a good measure."
This is why it's so important to look at a number of KPIs in conjunction with each other, and remember that they should serve the business goal, not become the business goal.
I'll have more examples in the business section below.
Context Matters Too
By the way, there's another pitfall with KPIs worth mentioning: context.
Let's take the KPI "average time on page," a number that tracks how much time, on average, that people spend looking at pages on your website.
Do you want this number to be high or low?
If you run a website with a lot of content, you might want it to be high, indicating that people are reading your writing.
But if you sell products, a high "average time on page" value means that your customers may be running into problems shopping.
And having a high "average time on page" value on the checkout page is a disaster—you want checkout to be fast and easy, not time-consuming!
Thinking critically and granularly about your KPIs, and the unintended effects and contexts of each, is very important.
Enough with the explanations! It's time to see KPIs in action.
Real-World Example Businesses
I've made up four example businesses that represent most of the different types of companies that exist today.
I use these same four companies as my real-world examples across all of my Marketing Info Database and Service pages.
Following these same businesses across each page makes it easier for beginners to understand each topic. And for experts, it makes it more fun to follow along.
My four example businesses are:
- Joe's Java Joint
B2C (Business to Consumer)
A local, non-franchise coffee shop trying to stay trendy. - Cassandra Forecasting Technologies
B2B (Business to Business)
A large company that sells future-predicting software to other companies. - Fortified Federal Security
B2G (Business to Government)
A government contractor that provides physical security & defense solutions. - Hazel Harmony
Independent Influencer
An aspiring musician who plays the harp and makes art on social media.
Joe's, Cassandra Forecasting, Fortified Federal, and Hazel couldn't seem more different in terms of business needs and marketing challenges. But, on every Hulbert Marketing info page, we're going to watch how they each can grow and succeed using the topic at hand.
So how can our friends at each company use KPIs for their benefit? Here's how.
Joe's Java Joint: KPIs for a B2C
We'll be skipping past the most obvious KPIs, like number of coffees sold and profit margin, because that's so basic it almost goes without saying.
Joe's might want to look at customer retention rate. By tracking how many customers come back for a second, third, and fourth cup of coffee, in the same day or week periods, they'll get a good idea of their customer loyalty.
Even further, if Joe's uses a loyalty card or app—like one of those "buy 10 coffees and the 11th is free" tickets—the business could track usage and frequency of these to determine how many loyal customers it has, and how often they return. Of course, you'd want to track these anyway to make sure you're not giving away too much free coffee to stay profitable!
Looking at average spend per order and per customer in a day will help Joe's gauge effectiveness of upselling and cross-selling.
Joe's should look at customer satisfaction scores based on numbered feedback surveys (quantitative data), but also look at reviews and written feedback (qualitative data). If another, more internal KPI, like average order time or average line waiting time, gets worse at the same time the customer satisfaction scores get worse, Joe's can better understand why customers might be upset.
Using employee sales data and other related KPIs, Joe's can make an Employee of the Month contest that's fair and motivating.
Joe's might notice that their store foot traffic numbers went drastically down for a week. Looking at other KPIs might reveal why, but don't forget to check the context of outside factors too—perhaps that week was full of thunderstorms, or it was Spring Break for the nearby college campus and most of the usual customers were back home instead of studying.
Let's give an example of Goodhart's Law in action here. Suppose Joe's came out with a new policy that prioritized the number of customers a barista served every day above all else.
The result? More customers get served faster, but the baristas now only care about the number. Time spent upselling and cross-selling goes down, so average order value plummets. And as they rush through customer after customer, their service and the quality of the drinks they make also decline.
In the long run, this might lead to Joe's harming its reputation and value, especially for customers who appreciated the friendly customer service and delicious drinks. Instead of making this mistake, Joe's should prioritize a combination of multiple KPIs, like customer satisfaction, drink quality, repeat customer rate, and more beyond just sales and foot traffic.
Cassandra Forecasting Technologies: KPIs for a B2B
For Cassandra Forecasting Technologies, a data analytics company, KPIs are pretty much their bread and butter. But for a larger B2B firm like this, the focus is less about individual customer behavior, and more about long-term client relationships.
In the B2B landscape, securing new clients can take a lot of time and money. So Cassandra Forecasting will look at a KPI called Customer Acquisition Cost, or CAC. This is the total, true cost of each new client, from the beginning of the sales process to the signed contract. This can let them optimize the sales process, too.
Looking at the Lifetime Value of a Customer/Client (abbreviated LTV for Life Time Value), Cassandra Forecasting can assess the long-term profitability of their clients and the future sustainability of their business.
And keeping up to date with Client Satisfaction scores is very important, as well as looking at the Customer Effort Levels to gauge just how easy or hard their clients find it navigating through their analytics tools and reports. Both quantitative scores as well as qualitative feedback meetings will help with this.
Examining usage metrics for their tools on a client-to-client basis, then combining that information with churn rate, can help Cassandra Forecasting anticipate potential client attrition so they can address concerns first and keep them onboard instead.
Cassandra Forecasting must use multiple feedback KPIs to judge if "time spent using their tools" and "time spent looking at their analytics reports" are too high or too low. They want their customers to get lots of value out of them (suggesting a greater time spent using and looking at them), but they also want them to be easily digestible and simple to understand (suggesting a shorter time spent using and looking at them).
So what's the optimal time? They'll have to run plenty of tests to figure that out.
Imagine if Cassandra Forecasting decided to go all-in on increasing "number of demo presentations" above all else. In other words, they decided to focus on showing their product to more companies, regardless of if those companies were in their market or not.
Sure, they might get some unexpected wins, but it would likely be a waste of their sales staffs' time and energy. And that's a waste of the money they're being paid. Cassandra Forecasting would have better luck focusing on a combination of things, including number of demo presentations, but also "conversion rate of demos to sales" or "ratio of qualified to unqualified leads."
Fortified Federal Security: KPIs for a B2G
The nature of a B2G business often involves lengthy procurement processes, strict regulations, and high stakes. Paying attention to KPIs would be critical for a security firm like Fortified Federal.
Knowing how often contracts are won vs. lost would be integral to Fortified Federal's proposal team, so looking at Contract Acquisition Rate would be very important.
Providing quality services is the only way Fortified Federal wins new contracts, so process KPIs like On-Time Delivery Rate to show how timely they complete their services would help maintain trust.
Since the government is under the constraint of so many regulations, Fortified Federal would want to show that their Regulatory Compliance Rate is a solid 100%. This isn't just a KPI, but a business necessity. But this way, they can turn the metric into a sales point, too.
Winning and completing government contracts can be pretty complex, so Fortified Federal would want to look at many KPIs in combination, and see which combinations frequently occur together on their most successful projects. This would give them an idea of what areas to focus the most attention on, and which needed to be improved on new projects to make them as high-quality as the rest.
Hazel Harmony: KPIs for an Influencer
Hazel, our social media harpist and artist, would have very different KPIs than the businesses above. And yet, when you look at them closer, they're still focused on the same end goals—customer satisfaction and process optimizations.
Engagement rate is an absolutely crucial metric for influencers. The engagement rate is the best single metric to gauge how invested and interested their followers are, and how deep their connection is.
An influencer with a high engagement rate can often be more attractive to brands than influencers with high follower counts but nothing else.
Hazel would look at how many real people like, comment on, and share her posts, how many people comment on her Patreon, how many people chat in her Discord channel every day, etc.
Comparative engagement rate is also important here. Which posts get the most engagement? Harp posts vs. painting posts, or still photos vs. videos – and on which platforms?
Follower growth rate is important, as well as identifying what activities cause the sharpest growth velocities. This can tell you which of your marketing or promotional tactics are most effective.
Hazel might find that her collaborations aren't driving the kind of follower growth increases she had hoped for, which might lead her to change how she collaborates, or to focus on other tactics entirely.
Meanwhile, if she finds that playing at a farmer's market one weekend led to a huge spike in growth, she might decide showing up every weekend should be a major priority.
For real long-term growth and success, looking at brand partnership KPIs is vital for Hazel. She can start off very small, say by promoting her friend's small handmade jewelry business. Then she can track how many times people clicked through from her posts to her friend's website, how many times her "HAZEL10" 10% discount coupon code was used, and the ultimate ROI it brought to her friend's brand.
Showing off these kinds of numbers is what can net her much larger brand deals a lot easier.
When Hazel does collabs with other influencers, she has the great idea to ask them what their usual KPIs are – both what they track, and what numbers they usually see.
Suppose she does a collab with her violin-playing friend Dan, who has a similar audience size but gets twice the engagement on his posts! Hazel will surely want to ask him what he's doing right.
Of course, the common mistake that many influencers make on social media is focusing on follower count above all else—leading to buying fake followers, using bot listeners on Spotify, or by making base-level controversial content that attracts people more for the "ragebait" than for any of Hazel's actual talents. While exploring new content ideas is good, these kinds of tactics are generally not sustainable long-term.
Instead, Hazel should focus on creating good quality content that always matches her brand goals and vision, and trying new things that don't veer too far into "lowest common denominator" territory.
And while I'm not going to say that buying fake followers never works, it's generally not seen as an industry best practice—it's pretty transparent.
What are YOUR KPIs?
Mastering KPIs is more than just a statistical exercise or an accounting novelty. It's a strategic art.
When used with sophistication, the right KPIs can illuminate your business landscape, enhance your organizational processes, and drive you forward to reach your goals.
You've seen how I'd advise these four example businesses on some of their KPI strategies.
I've helped hundreds of other businesses just like these, and beyond. I can do the same for you.
