Key Performance Indicator (KPI)
A Key Performance Indicator (KPI) is a quantifiable measure tied to a goal that shows how well a business, team, or process is performing. Unlike generic metrics, KPIs are selected to reflect priority outcomes (e.g., revenue efficiency, product adoption, service quality) and are reviewed on a regular cadence.
KPI systems often sit inside frameworks like the Balanced Scorecard, which tracks a small, balanced set of financial and non-financial measures (financial, customer, internal process, learning & growth) to align day-to-day work with strategy.
Why It Matters
Focus & alignment: Clear KPIs connect strategy to execution and limit information overload to what leaders need to steer the business.
Better decisions: Good KPIs are evidence for actions—not just reports of the past.
Avoid waste: Misaligned metrics create effort with little impact; aligning analytics to business goals improves results.
Examples (with simple formulas)
Click-through rate (CTR) = clicks ÷ impressions. Example: 5 clicks / 100 impressions = 5% CTR.
Conversion rate = conversions ÷ total interactions (same period). Example: 50 conversions / 1,000 interactions = 5%.
Customer acquisition cost (CAC) = total sales & marketing cost ÷ new customers.
Customer lifetime value (CLV/LTV) = value per customer × average customer lifespan (common formulations vary by model/industry). Use CLV alongside CAC.
Best Practices
Align to strategy. Start with the outcome you want (e.g., profitable growth), then choose a few KPIs that truly reflect it often across Balanced Scorecard perspectives.
Make KPIs SMART (Specific, Measurable, Achievable, Relevant, Time-bound). Example: “Answer all customer messages within 2 hours during business hours by June 30.”
Use leading + lagging indicators. Track inputs that predict results (e.g., qualified demos) and outcomes (e.g., revenue, retention).
Keep a tight set. Too many KPIs dilute focus; the Balanced Scorecard explicitly limits the number of measures to avoid overload.
Define calculations & owners. Document exact formulas (e.g., which interactions count in conversion rate), data sources, and who is accountable.
Review and refine. Retire vanity metrics; if a KPI no longer drives decisions, replace it. (HBR cautions against backward-looking “just numbers.”)
Distinguish KPIs vs. metrics. All KPIs are metrics, but not all metrics are KPIs; KPIs are the few that map to targets.
Related Terms
Metric vs. KPI (KPIs are target-linked, metrics can be descriptive).
Balanced Scorecard (strategy-to-measurement framework).
OKR (Objectives & Key Results) — objectives = what to achieve; KPIs/Key Results = how success is measured.
FAQs
Q1. KPI vs. metric—what’s the difference?
A metric measures something; a KPI is a priority metric tied to a goal/target and decision. Use many metrics for context, but pick a short list of KPIs to run the business.
Q2. How do KPIs relate to OKRs?
OKRs set what you want to achieve (Objective) and how you’ll know (Key Results). KPIs track ongoing performance of critical areas. Many teams use KPIs inside or alongside OKRs.
Q3. How many KPIs should we have?
As few as needed to steer decisions (often a balanced set across strategy areas). The Balanced Scorecard explicitly limits the number to prevent overload.
Q4. What makes a KPI “good”?
It is aligned, SMART, reliably measured, and paired with leading (predictive) and lagging (outcome) indicators so teams can act before results slip.
Q5. Can KPIs be harmful?
Yes, if they’re misaligned or incentivize the wrong behaviors. Align analytics with strategy and revisit KPIs as conditions change.