Kpi

Key Performance Indicator (KPI)
Written by Himanshu Sharma, Founder of Optimize Smart
© Copyright 2020 Optimize Smart. All rights reserved.
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Copyright Optimize Smart 2020 Page 2

About the author

Himanshu Sharma is the founder of Optimize Smart, a UK based digital marketing
consultancy that specializes in analytics consultation and conversion optimization.
Himanshu has more than ten years’ experience in SEO, PPC and web analytics. He holds a
bachelors’ degree in Internet Science and is a certified web analyst. He is both Google
Analytics and Google AdWords certified. He was nominated for a Digital Analytics
Association award for excellence. The Digital Analytics Association is a world-renowned
not-for-profit association that helps organizations overcome the challenges of data
acquisition and application.
Himanshu runs a popular blog on OptimizeSmart.com which gets more than a quarter of a
million visits a month from over one hundred countries. He is the author of three bestselling
books on conversion optimization, attribution modelling, and email analytics:
He runs a popular web analytics training course on optimizesmart.com. Through this

comprehensive course, you will learn and master all of the elements that go into extracting
insight from data and optimizing the online performance of your business for sales and
conversions.

Introduction to key performance indicators (KPI)
A key performance indicator (or KPI) is a metric that is one of the most
important indicators of the current performance level of an individual,
department and/or a company in achieving goals.
Before you can identify KPIs, you must know your goals as an employee, as a
department, and as a company.
Your goals must align with your company’s core business objectives and you
must know how to achieve them (i.e. strategy) .
Only then you will be in a position to find KPIs which align with your business
KPIs.
For example, for an individual like SEO, the goal may be, to increase the
organic search traffic of his website.
But at the organization level, his goal is most likely to increase customer
acquisition and decrease customer acquisition costs through search engine
optimization.

Similarly, for a department like ‘customer support’, their goal may be to solve
all customer inquiries within 12 hours.
But at the organization level, their goal is most likely to improve customer
satisfaction and retention.
Whether you are an individual or a department, your goals must align with
your company’s core business objectives.
Everyone in the company must be pushing towards the same organizational
goals. This is the only way to ensure maximum productivity and profitability.
Thus there can be two broad categories of goals for each employee or
department:
1. Internal goals
2. External goals (high-level goals)
Internal goals
Internal goals are directly tied to achieving optimization objectives and may or
may not be directly tied to core business objectives.
For example,

If you are running an SEO campaign, your internal goal may be to improve the
quality of your outreach emails so that you can earn more high-quality
backlinks for your website which in turn can increase the organic search traffic
on your website.
External goals (high-level goals)
External goals are directly tied to achieving core business objectives.
So if you work as an SEO then improving the quality of your outreach emails
cannot be your high-level goal (or external goal).
This is because improving the quality of email outreach can never really be a
core objective of any business.
Increasing customers’ acquisition and decreasing customer acquisition costs
can be the core objectives of a business.
So as an SEO, your high-level goal is most likely to increase customer
acquisition and decrease customer acquisition cost through search engine
optimization.

Similarly, if you manage PPC campaigns then your high-level goal is most likely
to increase customer acquisition and decrease customer acquisition cost
through paid search optimization.
Thus external goals are those core business objectives that you can achieve
within the area of your responsibility and expertise.
Alignment between internal and external goals
Each employee/team/department needs to have both internal and external
goals and there needs to be an alignment between their internal and external
goals.
Only then they will be in a position to achieve their core business objectives
within the area of their responsibility and expertise and that too in the most
efficient manner.
Let us look at the internal and external goals of our SEO guy.
Internal goal - improve the quality of outreach emails
External goal - increase customer acquisition and decrease customer
acquisition cost through search engine optimization.

Now once the SEO improved the quality of his outreach emails, he can earn
more high-quality backlinks for his website.
Which in turn can increase the organic search traffic of his website and which
in turn can increase customer acquisition and decrease customer acquisition
costs through search engine optimization.
Thus there is a clear alignment between the SEO’s internal and external goals.
Our SEO guy knows exactly how his day to day work activities impact the
business bottom line.
Unfortunately, this is not the case with many companies where
employees/managers have a hard time understanding how they are adding
'value' to the business bottom line and whether what they are currently doing,
is really worth the time and investment.
By aligning/re-aligning your internal and external goals on a daily/weekly basis,
you and your team can stay focused and productive and achieve the
organizational goals (core business objectives) in the most effective manner.

The core business objectives
The core business objectives are the results you want to achieve, improve or
maintain as an organization both in the short term and in the long run.
Founders/top management executives should play a key role in setting up and
monitoring their core business objectives.
Your core business objectives can be:
1. Support and maintain the company’s core values.
2. Increase/maintain market share.
3. Increase profitability.
4. Improve brand retention.
5. Provide excellent customers service, etc.
The core business objectives can vary from industry to industry and from
business to business.
Thus there are no predefined set of core business objectives which should be
adopted/copied.

Following are the most common, core business objectives for an ecommerce
business:
1. Increase customer acquisitions (acquire more customers).
2. Improve customer retention (retain customers).
3. Increase sales.
4. Decrease acquisition cost (decrease the cost of acquiring customers).
The top-down approach
Before you can set up KPIs for yourself and your team, you need to have well
defined KPIs for your business (the business KPIs).
But you can set up business KPIs only when your core business objectives are
crystal clear i.e. you know exactly what do you want to achieve as an
organization. Why does your business exist? What is its purpose?
The direction comes from the top.
If the captain is not sure to which port his ship should sail then the sailors can’t
help him, no matter how good they are as an individual or team.
So you need to first get your business KPIs in place.

The key performance questions (KPQs)
The key performance questions (or KPQs) are the business questions that help
you in setting up goals, strategies, and KPIs.
For example, if one of your core business objectives is to increase customers
acquisition, then your KPQs can be:
● How can we increase customer acquisition?
● Can we acquire two times more customers than the last year? Is that
realistically possible?
● If it is possible then what do we need to change/adopt in order to
achieve this goal?
● Why doubling the rate of acquiring customers is important to the
business? How this would impact sales and profitability?
● Who would be responsible for increasing customer acquisition?
● What would success look like?
● What should be the time frame for achieving this goal?
Your ‘key performance questions must help you in setting up SMART goals.

SMART Goals
SMART stands for Specific, Measurable, Attainable, Relevant and Time-bound.
Specific - Your goal needs to be clear and specific. It should target to achieve a
specific outcome.
Measurable - Your goal needs to be measurable.
You should be able to measure the progress or regress towards your goal.
For example, ‘Customers happiness’ can not be your goal unless you have a
mechanism in place through which you can quantify and differentiate between
different human emotions (happiness, frustration, etc).
Attainable - Your goal needs to be realistic.
You should be able to achieve your goal within the area of your responsibility
and expertise.
At the organization level, an attainable goal should be based on SWOT
(strengths, weaknesses, opportunities, and threats) analysis.
Relevant - Your goal must help you in achieving the desired outcome(s).

For example, an internal goal is relevant when it aligns with its corresponding
external goal.
Similarly, an ‘external goal’ is relevant when it aligns with one of the core
business objectives.
Time-bound - Your goal must have a deadline attached to it.
Without deadlines no goal is unachievable.
You can achieve it next week, next month or next year.
There is no urgency.
‘Time-bound’ goals bring urgency and help you in staying focused and
motivated.
Example of SMART goal - increase organic search traffic of the website by 100%
in the next 6 months.
Strategies
Strategies are specific methods you use to achieve your SMART goals.

The key performance questions can help you in coming with effective
strategies.
These questions include why, what, who, where, when and how.
‘Why’ denotes the objective and reasoning of your strategy.
What you are trying to achieve?
What should be the outcome?
‘What’ denotes what is involved in implementing your strategy.
Creating and implementing any strategy requires time, cost, people, subject
matter expertise and other resources.
‘Who’ is involved in implementing your strategy.
These people can be you, your colleagues, boss, clients, etc.
‘Where’ denotes the ‘direction’ in which your strategy should move so that you
can get the highest possible return on your investment.
Your strategy should move in the direction where it helps you in achieving your
goals in the most efficient manner.

Thus ‘where’ can also denote ‘efficiency’.
‘When’ denotes ‘situation’, ‘date and time’, ‘assumptions’, ‘risks’, ‘barriers’,
‘deadlines’, ‘opportunities’ etc.
A strategy also needs to be time-bound in order to be cost-effective. Without
deadlines, there is no urgency.
‘How’ denotes the 'process' you will use to execute your strategy.
This includes coming up with a certain set of tasks.
When these tasks are complete, the strategy is considered to be executed.
Thus a strategy can be made up of one or several tasks.
Without setting up goals and strategies beforehand, you will have a hard time
coming up with KPIs which align with your internal/external goals and core
business objectives.
Types of KPIs
There are two broad categories of KPIs:
#1 Business KPIs

#2 Department/function-specific KPIs
Department/function-specific KPIs can be further classified into internal and
external KPIs
Since KPI is a metric and a metric can be a number or ratio, we can have KPIs in
the form of numbers and ratios.
So we can have number KPIs and we can have ratio KPIs.
Example of number KPIs: Days to purchase, visits to purchase, revenue, etc.
Example of ratio KPIs: Conversion rate, average order value, task completion
rate, etc.
Business KPI framework
A business KPI framework helps in setting up business KPIs.

Following is the example of a business KPI framework for an ecommerce
website:
Business owners/senior-most management along with department heads must
be involved in setting up and approving a business KPI framework.
This framework is the strategic roadmap for your business and provides the
big picture and the direction in which your company should move to get the
highest possible return on investment.
The ‘core business objectives’ and their corresponding business KPIs must be
shared across your organization so that everyone is aware of what their
company is trying to achieve.
This will help your employees and departments in setting up goals and KPIs
which align with your business KPIs.
Do not mess up at this stage. Remember the ‘top-down approach’.

The direction and clarity come from the top.
Note: Acquisition is also known as 'conversion' or 'customer'. So the cost per
acquisition (CPA) can be the 'cost per conversion' or the average cost of
acquiring a customer.
How to find a good business KPI
The metric you choose as a business KPI must highly impact the corresponding
core business objective.
This is possible only when the metric has the ability to provide
recommendation(s) for action which can have a high impact on the business
bottom line.
In other words, your KPI must have the ability to provide recommendation(s)
for action which can highly impact the business bottom line.
If you are not sure whether or not a metric can be used as a business KPI then
correlate it with its corresponding core business objective and then
determining the following two things:
#1 Determine whether a linear relationship exists between your chosen KPI
and its corresponding core business objective i.e. as the value of your KPI

increases or decreases there is a corresponding positive or negative impact on
the core business objective.
For example, if you sell 'display banner ad space' on your website and 'display
advertising' is the main source of revenue for you then ‘pageviews’ can be
used as a business KPI.
The more page views you get, the more you can charge for every thousand
impressions (CPM) from your advertisers.
#2 Determine the strength of the linear relationship between your chosen
KPI and its corresponding core business objective i.e. as the value of your KPI
increases or decreases there should be a significant positive or negative impact
on the core business objective.
Department/function-specific KPI framework
A department/function-specific KPI framework helps in setting up internal and
external KPIs for each department/function.
Following is an example of a KPI framework for the search engine optimization
of an ecommerce website:

Following are examples of department/function-specific KPIs:
● Sales KPIs
● Marketing KPIs
● Financial KPIs
● Customer support KPIs
Introduction to internal KPIs
Internal KPIs are tied to internal goals and are used to measure optimization
efforts.
They may or may not be directly tied to core business objectives.

These KPIs are internally used by team members to measure and optimize their
marketing campaigns’ performance.
They are not always reported to clients/boss/senior management.
Internal KPIs do not need to be business bottom line impacting either.
For example, the following KPIs can be used to measure your link building
outreach campaigns:
1. Delivery rate
2. Open rate
3. Response rate
4. Conversion rate of outreach
5. ROI of outreach
Often marketers make this terrible mistake of reporting internal KPIs to
clients/senior management.
For example, bounce rate is a good Internal KPI for optimizing landing pages.
But it is not something which you will report to a CEO.

We report only highly business bottom line impacting KPIs to senior
management.
How to find a good internal KPI
The metric you choose as an internal KPI must highly impact the corresponding
internal goal.
This is possible only when your chosen KPI has the ability to provide
recommendation(s) for action which can highly impact your internal goal.
As the value of your internal KPI increases or decreases, there should be
corresponding positive or negative impact on the internal goal and this impact
should be significant.
For example, if one of your internal goals is to improve the quality of your
outreach emails, you can then choose 'response rate' as an internal KPI.
Introduction to external KPIs
External KPIs are tied to external goals and are used to determine how you or
your team/department are performing in achieving core business objectives.

These are the KPIs we generally report to clients/senior management.
External KPIs should be highly business bottom line impacting.
Whenever we talk about KPIs in general, we are referring to external KPIs.
Some examples of external KPIs:
1. Average order value
2. Conversion rate
3. Revenue
4. Revenue per acquisition
5. Cost per acquisition
6. Task completion rate
7. Goal conversions
Note: External KPIs can also be used as internal KPIs. There is no hard and fast
rule here.
How to find a good external KPI
The metric you choose as an external KPI must highly impact the corresponding
external goal.

This is possible only when your chosen KPI has the ability to provide
recommendation(s) for action which can highly impact your external goal.
As the value of your external KPI increases or decreases, there should be a
corresponding positive or negative impact on the external goal and this impact
should be significant.
For example, if one of your external goals is to improve website sales then you
can use 'average order value’ as an external KPI because it can highly impact
the website sales.
You can greatly increase website sales at the present conversion rate just by
increasing the size of the orders.
Attributes of a good KPI
A good KPI has got the following attributes:
#1 Available and measurable
You can use only those metrics as KPIs which are available to you in the first
place.

For example, if the net promoter score metric is not available to you then you
cannot use it as a KPI.
Similarly, if you come up with something which is impossible to measure (like
‘frustration level of customers who abandoned the shopping cart for the third
time’) then you cannot use it is as a KPI.
So when you are finding your KPIs, you need to be 100% sure that there is a
mechanism/tool available, to measure and report your KPI in the first place.
#2 Highly impacting
If a metric does not greatly impact its corresponding goal then it is not a good
KPI.
#3 Relevant
If your KPI is highly impacting then it is got to be relevant to its corresponding
goal.
#4 Instantly useful
If your KPI is highly impacting then it is got to be instantly useful i.e. you can
quickly take actions on the basis of the insight you get from your KPI.

#5 Timely
Your KPI should be available to you in a timely manner so that you can take
timely decisions.
For example, if you are using a compound metric (a metric which is made up of
several other metrics) as a KPI and it takes several months to compute it once
and then another several more months to compute it the second time then it is
not a good KPI, as you cannot make timely decisions on the basis of such KPI.
Examples of good KPIs

#1 Gross profit
It is the profit after production and manufacturing costs.
Gross profit = sales revenue – direct cost.
The direct cost can be something like the cost of manufacturing a product
#2 Gross profit margin
It is used to determine the effectiveness of your business in keeping
production costs in control.

Gross profit margin = (gross profit/ revenue) * 100
Higher the gross profit margin, the more the money is left over for operating
expenses and net profit.
#3 Operating profit
It is the profit before interest and taxes.
Operating profit = sales revenue – operating cost.
Operating cost is the ongoing cost of running a business, product or system. It
can include both direct and indirect costs.
#4 Operating profit margin
It is used to determine the effectiveness of your business in keeping operating
costs in control.
Operating profit margin = (operating profit/ revenue) * 100
Higher the operating profit margin, the more the money is left over for net
profit.

#5 Net profit
Also known as net income, net earnings or bottom line. Net profit is the profit
after interest and taxes
Net profit = sales revenue – total cost (this includes any direct and indirect cost
+ interest + taxes)
#6 Net profit margin
Also known as profit margin, net margin, net profit ratio. It is used to
determine the effectiveness of your business in converting sales into a profit.
Net profit margin = (net profit/ revenue) * 100
A low profit margin indicates a higher risk, that a decline in sales will erase the
profit and result in a net loss.
#7 Revenue growth rate
Also known as sales growth rate. It is the measure of the percentage increase
in sales between two time periods.

Revenue growth rate = (current month's revenue- last month's revenue) / (last
month's revenue) * 100
#8 Total economic value
It is the total value added by your product/service/campaigns to the business
bottom line.
Total economic value = total revenue + total value of the assisting conversions +
total value of the last click conversions
The total economic value also takes into account the role played by micro
conversions and conversions which assisted and completed the sales.
#9 Return on investment (ROI)
It is used to evaluate the efficiency of your investment or to compare the
efficiency of different investments.
ROI= (gain from investment – cost of investment)/cost of investment

#10 Net promoter score
It tells how likely it is that your customers will recommend your business to a
friend or colleague. Read more about net promoter score.
Net promoter score = % of promoters - % of detractors
#11 Customer lifetime value
It is the projected revenue (repeat business) a customer will generate during
his lifetime. Different types of customers have different lifetime value (LTV).
One of the best ways to boost LTV is by improving customer satisfaction.
(Average order value) X (Number of Repeat Transactions) X (Average customer
life span in months/years)
Average customer life span means how long he/she remains your customer.
#12 Customer retention rate
It is used to determine how good your company is in retaining customers.
Customer retention rate = [1- (Customers lost in a given time period/total
number of customers acquired in the same time period)] * 100

#13 Customer profitability score
This score is used to separate profitable customers from unprofitable
customers.
Customer profitability score = Revenue earned through a customer – cost
associated with customer’ management/service/retention
#14 Cost per lead
It is the average cost of generating a lead.
Cost per lead = total cost/total leads
#15 Cost per acquisition
It is the average cost of acquiring a customer or generating a conversion.
Cost per acquisition = total cost/ total acquisitions
#16 Revenue per acquisition
It is the average revenue earned through an acquisition.

Revenue per acquisition = total revenue/total acquisitions
#17 Per visit value
It is the average value of a visit to your website.
Per visit value = total revenue/total visits
#18 Conversion rate
It is the percentage of visits that result in goal conversions or ecommerce
transactions.
Conversion rate = (total goal conversions/ ecommerce transactions/ total visits)
*100
#19 Average order value
It is the average value of an ecommerce transaction. Through this metric, you
can measure how effective your upselling and cross-selling efforts are and
whether you are helping people in finding the product they are looking for.
Average order value = total revenue/total ecommerce transactions

#20 Task completion rate
It is the percentage of people who came to your website and answered ‘yes’ to
this survey question: “Were you able to complete the task for which you came
to the website?”
Task completion rate = (number of people said ‘yes’ to the survey question/
Total number of survey responses) *100
There is virtually no limit to the number of good KPIs you can find and use.
It all depends upon the nature of the business and the industry you work in
and your goals.
For example, if you work in an industry where majority/all of the conversions
happen offline via phone calls then you can use ‘Phone Calls’ as your KPI.

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The direction in which your analysis will move, will determine the direction in which
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You get that direction from digital analytics and not from Google Analytics.
You learn to set up KPIs, strategies and measurement framework for

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Key Performance Indicator (KPI)

Written by Himanshu Sharma, Founder of Optimize Smart

© Copyright 2020 Optimize Smart. All rights reserved.

Copyright Optimize Smart 2020 Page 2

About the author

He runs a popular web analytics training course on optimizesmart.com. Through this

Copyright Optimize Smart 2020 Page 3

important indicators of the current performance level of an individual,

department and/or a company in achieving goals.

department, and as a company.

must know how to achieve them (i.e. ​strategy)​ .

organic search traffic of his website.

acquisition and decrease customer acquisition costs through search engine

Copyright Optimize Smart 2020 Page 4

all customer inquiries within 12 hours.

satisfaction and retention.

your company’s core business objectives.

Everyone in the company must be pushing towards the same organizational

2. External goals (high-level goals)

may not be directly tied to core business objectives.

Copyright Optimize Smart 2020 Page 5

External goals (high-level goals)

External goals are directly tied to achieving core business objectives.

cannot be your high-level goal (or external goal).

core objective of any business.

Increasing customers’ acquisition and decreasing customer acquisition costs

can be the core objectives of a business.

So as an SEO, your high-level goal is most likely to increase customer

acquisition and decrease customer acquisition cost through search engine

Copyright Optimize Smart 2020 Page 6

to increase customer acquisition and decrease customer acquisition cost

through paid search optimization.

within the area of your responsibility and expertise.

Alignment between internal and external goals

Each employee/team/department needs to have both internal and external

Internal goal​ - improve the quality of outreach emails

External goal​ - increase customer acquisition and decrease customer

acquisition cost through search engine optimization.

Copyright Optimize Smart 2020 Page 7

more high-quality backlinks for his website.

in turn can increase customer acquisition and decrease customer acquisition

costs through search engine optimization.

business bottom line.

Unfortunately, this is not the case with many companies where

employees/managers have a hard time understanding how they are adding

is really worth the time and investment.

By aligning/re-aligning your internal and external goals on a daily/weekly basis,

organizational goals (core business objectives) in the most effective manner.

Copyright Optimize Smart 2020 Page 8

Founders/top management executives should play a key role in setting up and

monitoring their core business objectives.

Your core business objectives can be:

1. Support and maintain the company’s core values.

2. Increase/maintain market share.

4. Improve brand retention.

5. Provide excellent customers service, etc.

Copyright Optimize Smart 2020 Page 9

1. Increase customer acquisitions (acquire more customers).

2. Improve customer retention (retain customers).

must know how to achieve them (i.e. strategy) .

Internal goal - improve the quality of outreach emails

External goal - increase customer acquisition and decrease customer

defined KPIs for your business (the business KPIs).

Measurable - Your goal needs to be measurable.

Attainable - Your goal needs to be realistic.

At the organization level, an attainable goal should be based on SWOT

Time-bound - Your goal must have a deadline attached to it.

‘Why’ denotes the objective and reasoning of your strategy.

‘What’ denotes what is involved in implementing your strategy.

‘Who’ is involved in implementing your strategy.

‘When’ denotes ‘situation’, ‘date and time’, ‘assumptions’, ‘risks’, ‘barriers’,

Department/function-specific KPIs can be further classified into internal and

So we can have number KPIs and we can have ratio KPIs.

Example of number KPIs: Days to purchase, visits to purchase, revenue, etc.

Do not mess up at this stage. Remember the ‘top-down approach’.

Note: Acquisition is also known as 'conversion' or 'customer'. So the cost per