Keeping track of how well your business is operating is vital to the success of your business. Metrics and KPIs are frequently used to measure how well a business is doing, but unfortunately, these terms are often inaccurately used interchangeably. Without clearly defining and correctly using these terms, it is difficult to near impossible to address business outcomes based on them.
So what makes a KPI and business metric, and how exactly are they different? Follow our guidance below.
KPIs are key, literally.
First, it is important to understand what a KPI is. KPI stands for key performance indicator. It is a term used to indicate specific, important steps toward meeting the goals of the business. If you are thinking that this sounds like a metric, you are not wrong, but that does not mean that KPIs and metrics are one in the same.
What are business metrics?
A metric is anything that can be quantifiably measured and used to rank progress or performance. A metric is created by using a source that updates regularly with new information and using the data from that source to track progress toward a goal.
Metrics are used to drive improvements and help businesses focus people, funds and resources on what's important.
So what is the difference?
The difference between a KPI and a metric lies in the acronym, KPI. The word "key" indicates that the metrics included in KPIs are of utmost importance. If all metrics were KPIs, they wouldn't be key at all. They would just be regular performance indicators, or just metrics, really. To be a KPI, a metric has to be some special, select metrics that aligns closely with your goals.
Related reading: Guide for Gauging Business Performance
Why does the difference matter?
Knowing the difference between KPIs and metrics will help you use these two statistics in a way that will help your business flourish. Not everything that you measure in your business is going to accurately measure performance, but these things still need to be measured. "Vanity metrics" can be measured to help make certain business decisions but should not be used as KPIs.
What are vanity metrics?
Vanity metrics are the metrics that provide little to no insight into your business. Things like how many social media followers your business has, or how frequently it gets mentioned off-site are examples of this type of metric. While they can provide some interesting data points, vanity metrics should never be included in KPIs.
Why not just measure KPIs, then?
While KPIs provide insight into how your business is performing, other metrics can help you figure out what's going on when one of your KPIs leaves the acceptable range. Essentially, your KPIs will tell you when something is going wrong and the metrics outside of your KPIs tell you how you might go about fixing the issue.
What KPIs and metrics should my business monitor?
The metrics and KPIs that your business monitors will depend heavily on your business infrastructure. Generally speaking, KPIs should be well defined, quantifiable, essential for meeting your goals, and be applicable to your business. Metrics should also be well defined and should help support your KPIs. Here are a few KPIs you should consider keeping an eye on:
- Employee turnover
- Customer retention
- Cost of goods sold
- Return on investment
- Customer churn rate
- Average expense per customer.
KPIs and metrics are very much line-of-business dependent. Determining which metrics you need to track, and which of those metrics should be itemized as KPIs is vital to the success of any business, no matter which industry it operates in. The team at Focused Energy has helped many businesses grow by advising them in their financing and accounting functions. If you would like to enlist the service of Focused Energy, or have any questions about the services we offer, please contact us today.