What is a key performance indicator (KPI)?
In simple terms, KPI is a kind of performance measurement. KPIs allow for evaluation of success or failure of certain business activity or area. These metrics are often evaluated in temporal context - several times during a set period of time, or the entire lifetime of an organization.
A good example of a KPI that should be familiar to everyone is revenue - income that a business has from its normal business activities. Revenue growing? Good performance. Revenue declining? Not so good performance.
KPIs are useful for more than performance monitoring and evaluation. Well defined KPIs are also very useful to define and maintain performance goals.
Some key points to consider when defining a KPI
When defining and choosing KPIs for a business activity you need to to consider KPI applicability or segmentation and never consider KPIs as raw, isolated and standalone data. In general, KPIs should be considered in context applicable to area or activity the KPI is designed for.
For example, a slight decrease in the total number of visits for an e-commerce website might not always show poor performance, if, as an example, at the same time it is also true that said e-commerce website has a noticeable increase in sales revenue.
This change could also show an increase in quality of traffic - meaning, there are fewer visitors, but the visitors that do arrive are more likely to make a purchase, and are, thus, more valuable.
It is also true that some KPIs might not apply to certain customer segments and some KPIs might not apply to a business or activity completely - for example, lifetime value as a KPI makes little sense in the context where sales are few, years between in context of changing customer base.
Another particularity often missed in regards to KPIs is seasonality. Not all customers, businesses, activities and alike perform alike over a period of time. KPIs can have a seasonality component to them, and depending on business activity and particular KPI, seasonality applicable to the KPI could be anywhere between hours to years.
Common key performance indicators
CR - Conversion Rate
Conversion rate is a rate of something turning into something else - it measures change rate between states of a subject being measured. CR is generally not a standalone KPI - it is related to some subject being measured, for example, one Conversion Rate could be measured between how many customers visit a store daily, and how many customers actually buy something. You can, of course, have several different Conversion Rates related to many different properties. Conversion Rates are also often considered in the context of Funnels where conversion between states of a subject are being measured in relation to one another and over prolonged time periods. An example of this is visitor, turning into a customer, turning into a repeat customer, over a period of customer lifetime.
ARPC - Average Revenue Per Customer
Often also referred to as ARPU (Average Revenue Per User) in web-oriented businesses, ARPC allows measuring how much revenue, on average, a single customer will bring to your business in a certain period of time.
ARPC is often evaluated monthly and yearly, yet in businesses where customer activity is very high (daily or weekly purchases, etc.) this KPI should be evaluated as often as every day.
ARPC is useful for two things - for optimization, e.g. as an indicator to improve to raise the value of a single customer, or for goal setting - to check how many new customers you need to bring to grow your business.
uQL, QL, vQL - Unqualified, Qualified and Valuable Qualified Leads
A lead is a potential or known sales contact, individual or organization that expresses an interest in your goods or services. A returning customer can also sometimes be considered a potential lead.
Three distinct types of leads are often used, categorized by level of knowledge you have about a lead and kind of engagement of a lead.
A uQL or Unqualified Lead is what I often refer to as a “blank contact” - a phone number, email, and a name. This individual or organization might be interested in your services, or they might not be. This includes screened leads which you presume might show potential for a sale, but you do not have any feedback on whether they actually are.
A QL or Qualified Lead is a lead interest of whom in your business is confirmed and given lead meets the requirements to be a customer of your business. For example, a customer which has confirmed interest and have confirmed means to actually afford your business.
A vQL or Valuable Qualified Lead is pretty much a synonym for an existing customer. Valuable qualified leads are all current and past customers, or designated customers who meet certain criteria as vQLs - for example, a customer for a perishable resource or recurring service near renewal. What exactly makes a valuable qualified lead depends on the context of the business. For example in financial services, it could be a consumer with a positive balance and good track record or credit score.
Conversion rates for leads
An entire set of KPIs can be created by measuring how many leads do the transition from state to state - how many leads from unqualified to qualified, to valuable. This can help you to understand, as an example, how many unqualified leads of similar quality you need to get to obtain a certain number of qualified leads.
Churn rates for customers
Very useful KPI to track is “churn” - percentage rate at which customers stop subscribing to a service. A significant increase in churn rates can be an indicator of a serious problem with the business. Churn is also used in customer acquisition to estimate leads needed to fulfill sales goals.
CLV/LTV - Customer Lifetime Value
This KPI is simple - average lifetime value of a customer to date. The higher the value, the better. You can use this KPI to determine who are your most loyal customers and to research why for customer acquisition - very useful for established customer bases.
CB - Customer Base
Count of known customers - registered users, subscribers and so forth. Change to this KPI should be observed over time to detect any positive and negative changes in business strategy and the impact of those changes to customer base stability and growth.
ACB - Active Customer Base
Count of paying customers with any commercial activity within a set period of time. For example, all customers with at least one sale in the last 3 months, or all customers with at least $50 spent during the last 60 months. A very useful metric to observe for changes, and can help with revenue forecasting, among other things.
PCB - Passive Customer Base
Total customer base minus Active Customer Base. Useful for retargeting and re-engagement of passive customers, and potentially turning those customers into active customer base again.
RR and NRR - Recurring Revenue and Non-Recurring Revenue
Useful sustainability metric for subscription and e-commerce businesses, especially to determine the rate of recurring versus non-recurring revenue. As an example, a company purchasing printing supplies every month can be counted as recurring revenue, versus another company who purchased supplies once and bounced. In essence, whatever revenue is periodic and continuous counts as recurring, where all other revenue does not. Applicable to many business models, from e-commerce to software development.
ARR/PRR - Asset / Product Reject Rate
The rate at which various assets and products are rejected by the customer. Your aim should be to reduce this rate as much as possible. High reject rate usually indicates either quality problem or poor presentation (failure to meet expectations). Useful to track at certain points in time - X days after the sale, X weeks after the sale, over warranty period and similar.
CBL - Churn, Bounce, and Loss
CBL is a general KPI that can be applied to almost anything - from the customer base to qualified leads. CBL measures negative conversion - for example, loss of customer between sales stages, loss of website visitors, loss of marketing list subscribers. This KPI is generally related to other KPIs that measure acquisition.
COA - Cost Of Acquisition
Total costs incurred on the acquisition of a new customer. Includes all relevant costs, including marketing, logistics, and similar up to the point when a sale or subscription happens. Usually expressed as the average of total costs divided by the number of acquired customers/sales in a period of time - weekly, monthly, yearly. Useful for financial planning - you would not want to have COA exceed the average profit from the same time.