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We know that good management is a determining factor for every company, but just as important is high performance. Building effective performance management to keep the company healthy is not an easy task, is it? So, check out this content about KPIs to learn valuable tips on how you can implement these indicators.
Execution the board is a strategy in view of execution indicators, known as (KPIs – Key Execution Indicators). With it, it is feasible to quantify the proficiency and adequacy of every single internal cycle, being ready to distinguish disappointments and, hence, being ready to aid your essential planning and quick direction, for instance.
In other words, it enables the continuous improvement of results, which makes it easier to achieve set goals and objectives.
But before actually knowing which KPIs are essential for every business, let’s understand the main difference between the types that exist.
Types of KPIs
The first difference you need to understand about KPIs is the difference between volume metrics and efficiency metrics. One of the biggest mistakes when analyzing KPIs is looking only at one metric or another. In these cases, the chances of interpreting data in the wrong way are high. Understand from the example below:
The increase in the number of visits to your website is a volume metric, but this does not mean that the layout change made to your page is perfect or even that you are following a minimum level of quality. Because other variables may have influenced this type of event, such as another influential website having mentioned you and, consequently, the number of visits having increased.
To test whether the layout change was successful, look at the efficiency metrics alongside this volume metric, and do an A/B test.
As an example: The total volume, the absolute number of hits, will not bring this answer. However, if you compare the number of conversions, such as registrations to your email list, between the old version and the current website, it will indicate more precisely whether that change was positive or not.
Just as it is not enough to just look at sales volume or revenue to know whether a launch was successful. You also need to evaluate costs to calculate profit. Especially the cost per user, which is a very important KPI, especially for digital businesses, which establishes a target for maximum acquisition cost per customer. After all, there’s no point spending 200 reais to acquire a customer that will generate 100 reais in revenue, right?
Therefore, volume metrics are understood as absolute numbers, that is, those that are measured in quantities. The efficiency metric corresponds between the results obtained and the resources used.
Now that we’ve made the difference between these two types of metrics clear, let’s move on to the KPIs that are essential for evaluating your business.
Essential KPIs for every business
Each type of business requires the analysis of specific KPIs, but at least four of them are important for all areas.
1. Revenue and Profitability
The first is the recipe. This KPI is the most important of all, because it is the oxygen of your business. You need to know exactly how much your business generates in revenue and, obviously, also in profit. And you may be wondering: “And how does this relate to the metric?” Let’s explain!
Revenue is the total amount earned from the sale of goods and/or services during a specific time period, whether monthly or yearly. In other words, it may assess sales performance and determine whether the firm has enough cash to cover all expenditures while making a profit. Furthermore, while discussing revenue, we must carefully consider two factors:
1. Gross revenue: this is the business’ revenue, that is, all profits arising from sales;
2. Net profit: is the revenue after deducting taxes, duties, fees, expenses and costs. In addition to returned products and canceled purchases.
Net profit = Total revenue – Total costs and expenses x 100
In this way, profitability indicates the gain of a company in relation to its activity, which makes it possible to verify the health of the business.
2. ARPU – Average Revenue per User
ARPU stands for average revenue per unit. The term “unit” in the acronym also means “user”. In other words, it represents the average income generated by the customer’s purchases over a specific time period. As a result, you must consider the quantity of clients as well as the amount of income generated by each.
The formula is straightforward: total monthly revenue/average of the total number of consumers in a particular month or period + number of customers/number of months.
It is worth paying attention that, if your ARPU is higher compared to the acquisition costs, you may have problems. Customer acquisition costs should always be lower as your company will not be profiting from your revenues.
The main purpose of this KPI is to measure the company’s performance on each customer and as a thermometer to accurately identify positive and negative trends in its services or products.
3. ROI – Return on Investment
ROI, Return On Investment, is a metric that shows how much you are profiting or losing with each investment made.
The formula for this KPI reveals the gain or loss obtained to cover the costs involved in the application. The calculation is very simple. Check it out below:
ROI = (Gain obtained – Investment value) / Investment value x 100
By carrying out this calculation, you can measure the return on the value invested in products, services, campaigns, training and any company activity.
With this in mind, ROI also serves as a parameter to compare your return with that of other companies in the same segment in the market. In other words, it is based on the KPIs that we can check how your competitors are positioning in relation to capital.
4. Converting the sales funnel into KPIs
Keep an eye on this KPI, it is responsible for measuring the ability of a visitor to become a lead and a lead to become your customer.
The conversion rate indicates how well the sales process is controlled. It is through this that we identify whether the operation is healthy or not, in addition to helping to discover specific problems that occur during the lead’s passage through the funnel. In other words, it indicates actions that must be taken to improve the business’s sales strategy.
The calculation is made based on opportunities and sales made, being:
Conversion Rate = Total Sales/Opportunities Generated
To get the value as a percentage, simply multiply the calculation result by 100.
The sales conversion rate is one of the essential KPIs for your business. Even if you have a physical business, but with a large online presence , you also need to pay attention to this data.
Conclusion on using KPIs
The most important thing about KPIs is the fact that they are capable of showing absolutely everything about the influence of your actions on your business. But first, it is extremely important that you direct your gaze. On the other hand, focusing on the wrong KPIs can make your business tip the boat in a completely opposite direction to the one you should be heading towards success.
It also doesn’t mean that the more KPIs you implement, the more you’ll know the health of your business, nor that you should adopt all the KPIs that are considered most important for those who work in your niche. You need to know the market in which your business operates before anything else.
A greater number of KPI options may result, contrary to what we believe, in no decision making. So, start with the basics, know and define your central objective and how you intend to achieve it. And only then think about defining what additional information you will need to improve your performance and growth in the market.
