What is a KPI?

How to create one, best practices, and examples to get you started.

KPI Overview

A Key Performance Indicator (KPI) is a way for organizations to measure their growth against key business objectives. For example, key performance indicators help businesses measure things like revenue and employee satisfaction. By tracking KPIs, companies can determine how successful they have been at reaching new targets over time. Higher-level KPIs may span multiple teams or departments, while lower-level KPIs may be focused on increasing conversion for a specific user flow.

KPIs are essential for data-driven organizations since they empower them to know what business metrics have changed, why they changed, and what opportunities still lie ahead.

How do you create effective KPIs?

There's no "right" way to develop KPIs, as each company has different strategic goals they want to achieve, so there isn't one perfect formula that will work for everyone. Instead, the best strategy is to identify which metrics are most important for your business and tracking them over time.

For instance, if a software company's goal is to increase new users, one possible KPI could be the monthly user signups. Or, if you're an e-commerce business, your KPI might be the number of returns customers are making.

KPIs using the SMART framework

You can use a simple framework to create KPIs that will help them reach their strategic goals. The acronym stands for Specific, Measurable, Attainable, Relevant, and Time-bound.

Specific: Make sure the KPI is focused on one key issue or goal

Measurable: Create clear objectives with concrete numbers

Attainable: Be realistic about what may be achievable in a set time frame

Relevant: Choose metrics that are relevant to your business' success at meeting its goals over time and aligns with company values

Time-Bound: Give yourself an end date by which your team must achieve its target against the KPI. (If it doesn't happen by then, either reassess the timeline or pivot your mission).

The key is to make sure that your key targets are both challenging and realistic. It's also important to base your KPIs on meaningful data that accurately reflects the health of your business.

How do I determine which KPIs to use?

To determine which KPIs to use, look at the data in your business and find out which metrics are most important. For instance, if a company's goal is to increase new users, one possible KPI could be the monthly user signups. Or, if you're an e-commerce business, your KPI might be the number of returns customers are making.

Different business units and departments are typically measured against their own KPIs, resulting in a mix of performance indicators throughout an organization -- some at the leadership level and others geared toward specific operations.

When considering which KPIs to use, ask yourself these questions:

1. What is your objective? What would you like to accomplish? Do you want to increase conversions or revenue? Reduce costs or improve efficiency? Identifying a key business goal helps identify the necessary metrics for tracking success.

2. What data do you have available? Before creating a KPI, it's important to determine what data is available to you. You may not have access to historical data if your systems haven't been logging or tracking what you're looking for. Your data may live in traditional storage like databases and warehouses, but it also might live in some of the SaaS software your teams are using like HubSpot or Zendesk.

3. What do you want your stakeholders to understand about your KPIs? What business context or qualitative research complements the numbers that you're trying to improve? How transferable are the learnings from your KPIs to other teams within your organization or other business processes?  

6. How often will you review your KPIs? It's important to regularly track your KPIs. Changes to them may mean that the efforts of another team may be impacting your metrics. It may also mean that there are persona or interest changes in your user base.

How do you measure KPIs?

Often the data needed to measure your KPIs lives in your databases, data warehouses, or the software that your teams use, like Salesforce or HubSpot.

Commonality allows you to create KPIs backed by this data and dashboards to monitor them. KPIs are often within a certain period, depending on what you're trying to measure. For instance, you might want to track the number of products purchased per week, or you might want to look at your churn rate per month. 

Leading and lagging indicators

Leading indicators are precursors of future success; lagging indicators show how successful the organization achieved results in the past. For example, metrics like customer retention, customer lifetime value, and revenue growth are referred to as lagging indicators because they track things that have already occurred.

By comparison, KPIs that herald upcoming business development, like sales bookings that will generate revenue in a future quarter, are known as leading indicators. Regardless of the key performance indicator you define, you should know the difference between leading and lagging indicators. While leading KPIs can help predict outcomes, lagging KPIs track what has already happened. Organizations use both leading and lagging indicators to ensure they're tracking what's most important. 

Who should care about KPIs?

Teams often assume that KPIs are for executives or leaders high up within a company, when in truth, KPIs are for any team trying to move a needle. So whether you're in marketing, customer success, or engineering--you'll want to track the KPIs specific to your team's work to understand how well you're doing and what needs more attention.

Why the transparency of KPIs matters

One of the main reasons KPIs matter is that they can communicate how effectively a team or department has performed against its strategic goals. We believe that the more transparent you are with KPIs, the more you empower everyone to drive growth. Within larger organizations, transparency of KPIs allows teams to see what areas of the business need the most attention. In addition, if a team can positively impact a particular KPI, other teams have the opportunity to learn went well and replicated the success in their efforts.

Things to avoid when creating KPIs

Don't treat missed targets as failure

While KPIs are great for measuring your company's performance, it's essential to foster a culture of learning. If a team does not meet their targets for KPIs, it does not mean they have failed; it means they have learned what not to do. Any progress against your KPIs should be viewed as guardrails for your business. Over-achieving on a KPI could mean that you aren't challenging your teams enough and that you should raise the bar.

Missing a target for a KPI means that your teams may have found the team should share the boundaries of your business's product-market-fit and those learnings with the larger team. For example, both success and failure are learnings that should be celebrated and shared with your larger team.

Don't apply KPIs to individuals

While KPIs can be broad and granular, it's important not to apply KPIs to specific individuals. Attempting to do so would imply that every individual can be measured by the same standards, which are not possible and is not conducive to an inclusive work environment. It can also lead to false positives.

Let's say you apply a KPI to a rockstar employee that is crushing all of their goals. However, the way they work hinders their coworkers, contributing negatively to your company culture. Therefore, it would be incorrect to view lower measured performance by the employees around them as the core issue.

Instead, we recommend only measuring the performance of the team as a whole. Focusing on a team's performance rather than an individual gives them the autonomy to work the way they want to and focus only on the results they produce, rather than how they work or whether they work remotely. In addition, diverse teams challenge and broaden the perspective of one another; individual performance may differ over time even if the team's performance is consistently aligned.

To enforce this, Commonality does not have any user-level reporting. Instead, we focus on teams' performance within our alignment and OKR tools. 

How do KPIs and OKRs relate to one another?

OKRs are defined as measurable strategic objectives set for a team to improve a specific set of KPIs. KPIs are the individual metrics that measure progress towards these OKRs and represent how successful teams move the needle. By using data-driven KPIs in conjunction with OKRs within Commonality, you're able to define how you want your KPIs to change, and we'll empower your teams to create the impact you want to see.

What tools can I use to monitor my KPIs?

KPIs are an important tool in measuring progress, but they are more likely to be acted upon if someone is accountable for tracking and reporting on them. Many organizations use KPI dashboards and other reporting tools to help them visualize, review and analyze their performance metrics all in one place. However, many organizations still use spreadsheets to measure performance. Commonality integrates with the software, APIs, and databases you already have so you can create and measure key performance indicators with a single click. In addition, centralizing all your performance data in one place lets leaders access an overview of their performance against key metrics and lets individual contributors identify areas of opportunity.

Commonality allows you to create quality metrics like Net Promoter Score from HubSpot and Net Profit Margin from Stripe. Commonality's KPIs integrate seamlessly with OKRs, and our alignment tools allow you to instantly view the status of all your organizational objectives.

Start tracking your KPIs with Commonality

Understanding your key performance indicators is an important step in understanding how you can grow and evolve as a company. Commonality helps businesses measure their KPIs by providing the tools to track them all, no matter where your data is located.