What Is A Key Performance Indicator And How It Works?

What Is A Key Performance Indicator And How It Works? - Moniedism

In the business world, the acronym KPI does not go unnoticed. If these lyrics don't mean anything to you, it's time to find out what they mean. After all, KPIs are a fundamental part of business success.

Every manager must know them and know how to use them to extract valuable information that can help in their work.

To give you an idea of what KPIs are, know that they help to recognize whether a or not company is on the right track .

In this article, you'll get the inside scoop on what KPI is and how it works.

What is KPI (Key Performance Indicators)?

KPI is the Key Performance Indicator acronym which in Portuguese means Performance Indicator Key. It is a management tool used to measure the performance of an initiative, task or project.

With the KPI, it is possible to assess the growth of a given process and identify whether the effort expended has given the expected result.

In other words, KPIs are indicators that demonstrate the behavior of your product or business.
They help you recognize whether the initiatives and actions taken by you and your teams are meeting expectations or not.

The word "key" in the name gives the main role to these indicators. In other words, they are relevant parameters that provide a strategic vision and help in decision making.

Therefore, not every metric is a KPI. But, on the other hand, every KPI is made up of metrics. If it still seems a little confused, don't worry: we'll talk more about it later in this text.

What is a KPI for?

You should see the KPI as a powerful tool for business management. After all, it serves as a subsidy for leaders and entrepreneurs to be able to measure the effectiveness of their work.

Given this information, then, they are able to define strategies and processes so that the company can achieve its goals and objectives.

If the KPIs present a positive result, that is, the expected achievement, it is a sign that the efforts made were adequate, and it is even possible to reinforce them to bring even more results.

On the other hand, if the KPIs indicate behavior that is below expectations, it's time to rethink your ideas and follow another plan.

Did you see how these indicators behave like a manager's right hand man?

How important is it to use KPIs?

Importance of Key Performance Indicator - Moniedism

Once you understand what KPIs are and what they are for, this is an easy question to be answered, isn't it?

In fact, in a way, it has already been clarified. But as it costs nothing to highlight the advantages of KPIs, let's get down to business.

Without them, the company has no vision of the performance of its actions. It is these indicators that help identify whether a target is being met or not.

Overall, then, KPIs provide an overview of the current state. In other words, everyone can see what is happening and how long it takes to reach the desired level.

KPIs can also be used to assess the work of teams in a more specific and detailed way. In this way, the indicators contribute to a clearer direction on what is expected of each one.

As a result of this transparency, communication and engagement are strengthened. All of this reflects on a fundamental aspect for the success of any company: commitment and productivity to achieve business goals.

What is the difference between KPI and Metric?

Key Performance Indicator (KPI) vs Metrics - Moniedism

We come to the point of differentiating KPIs and metrics. Being aware of this difference is critical to learning how to define and apply KPIs correctly.

Metrics and KPIs, in fact, are very similar. And that's why they are often confused. What's more, they are closely linked, which can be even more embarrassing.

But don't worry, we'll clear them up from now on. A metric is an indicator that points to a certain behavior, but it is not usually associated with a goal.

The KPI, on the other hand, is based on metrics to measure the stipulated goals .

How about seeing an example to help assimilate this distinction?

  •  Metric: number of non-blog visitors
  •  KPI: e-book download rate.

Note that the metric (in this case, the number of visitors to the blog), is essential to calculate the download rate of the available e-book.

However, alone, it only provides a measure and not a data that is capable of measuring the effectiveness of actions.

How can KPIs be applied?

Now that you're up to speed on KPIs and you're well aware of the difference with metrics, we can move forward and approach application in a practical way.

First of all, you should keep in mind that there are several options KPI. In other words, there are different indicators to measure the performance of your initiatives and processes .

To put them into practice, it is worth bringing together the team or people identified as key players to discuss which KPIs make the most sense.

Remember that KPIs work like a compass. That is, as a navigation and guidance tool. Your indicators will lead to future paths. Therefore, always think ahead , in what you hope to achieve.

Also, try to define no more than five main KPIs, which are the indicators that will guide corporate decisions.

In the case of specific KPIs, which are the responsibility of departments, there is no specific quantity.

Just be careful not to overdo the number, as it will be more difficult to measure and track all indicators at the same time.

When defining the KPIs and the period for measurement, make sure that those involved in the goal are really aware of what they are expected to accomplish.

What are the existing KPIs?

existing key performance indicator - moniedism

You can't count KPIs on your fingers, not even using multiple hands for the task. This is because there are numerous indicators, whether they are capacity, productivity, quality, profitability, profitability, competitiveness, effectiveness or value.

It is noteworthy, however, that KPIs are usually divided into three categories, which are:

Primary KPIs

While the name suggests something basic, the definition of primary KPIs is not quite that.

In reality, they are the most strategic. Primary KPIs are characterized by the intelligibility of information. That is, quickly and easily show relevant data that indicate if the company is on the right path .

That's why primary KPIs are preferred by business management.

Some examples:

  •     Conversion
  •     Acquisition cost per lead
  •     Total revenue
  •     Revenue per purchase.

Secondary KPIs

Secondary KPIs, in turn, play a tactical role. That is, they are related to the set of resources used to achieve a result.

For this reason, these KPIs are closely monitored by area managers and process managers. In short, they are indicators that support the results achieved with the primary KPIs.

Some examples:

  •     Cost per lead in relation to funnel step
  •     Cost per visit
  •     traffic source
  •     Price per transaction.

Practical KPIs

Practical KPIs are also called operational indicators. This is because it is data that requires further analysis.

In addition, the practical KPIs provide more detail for understanding the results obtained in the secondary and primary KPIs.

These indicators are usually monitored by professionals in each sector.

Some examples:

  •     Pageviews
  •     Visitors per page
  •     Page rank
  •     Most accessed content
  •     Social interactions.

Examples of Key Performance Indicator

Examples of Key Performance Indicator - Moniedism

In the previous topic, we saw some examples of primary, secondary, and practical KPIs that are closely related to digital business .

Now, let's look at indicators that extend to other business areas and find out how calculated these KPIs are .

Check it out below:

Customer Lifetime Value (CLV)

This KPI represents the value consumed in products or services for the period in which a customer maintains a relationship with the company.

In other words, it is the profit margin that the company expects to obtain throughout the relationship with a customer for a specified period.

The calculation used to arrive at the CLV is as follows:

  • Average Ticket x average purchases per customer each year x average relationship time

To find out if the indicator is positive, one must consider aspects such as: customer acquisition costs (CAC) and various expenses, from operational to expenses marketing , for example.

The CLV is a KPI that supports the decision of strategies related to getting customers.


Turnover is one of the main indicators used by the area Human Resources , but, in reality, it is an index that must be carefully viewed by business management.

This KPI shows employee turnover, that is, the number of professionals who leave a company in a given period.

This turnover can be voluntary, when the employee resigns, or involuntary, when he is fired.

To calculate the turnover calculation, you need to make the following :

  • Employees who left the company / total employees in the same period x 100

At the end, you will get a percentage.

According to experts in the field, the ideal turnover is up to 5% , but this is a generic parameter and does not reflect the reality of each business.

That's why it's important to focus on your company's numbers.

If before your turnover was 15% and now it is 10%, this is a sign that things are improving, do you agree?


The productivity indicator can be used to measure the productivity of the operation, for example, or to measure the performance of employees.

This type of KPI is often tied to comparisons. Suppose your purpose is to identify the level of productivity of your workers. In this case, you can assess how much each produces in a given period of time.

Thus, whoever has produced the most items is the most productive employee. But here is a caveat. Productivity is not just about agility. Quality is also a determining factor.

Furthermore, when evaluating an employee, team or sector, don't forget to consider the variables that influence the delivery of results.

The resources available, the time and the complexity of the task must be taken into account.

But overall, the productivity KPI is an excellent indicator for identifying the discrepancy between performances.

Stock Turnover

If your goal is to monitor inventory and the turns in and out of items in it, here's an indicator to support your goal.

Use the following formula:

  • Total sales / Average stock

If you don't know your average stock , do the calculation:

  • Starting stock + Ending stock / 2

The Inventory Turnover KPI allows you to identify the items with the highest turnover sales and those that have been idle for a long time.

With this information, you can plan the purchase of inputs more efficiently, in addition to establishing other strategies to leverage sales.

How to define a KPI?

You saw in the topic above some examples of KPIs and, before that, the existing categories of indicators.

The question that remains is: Which KPI to use?

The truth is, there is no right answer to this question. Or at least the indication of ideal KPIs. That's because every business is a business. Also, everything will depend on your goal .

Therefore, to define a KPI, you must be clear about what you hope to achieve. From there, make an analysis of the stage in which your company is. And then set the most pressing goals you want to accomplish.

With all this in mind, it will be easier to choose the efficient indicators. To help you through this process, make sure your KPIs meet the following criteria:

Be in tune with business goals

This, without a doubt, is the main tip to support the definition of KPIs. If you don't know what are your business goals , then you need to take a step back and structure your company's strategies.

From there, you should assess the existing KPIs and identify which ones are in line with your goals.

Help support decision making

You can find more than one KPI that aligns with your business goals. Of course, it is possible to work with a group of KPIs as long as the number is not exaggerated.

But it is important that the chosen indicators help and facilitate your decision making. If the KPI doesn't provide a good vision of which way to go, it may not be right for your company.

Are based on secure and easy-to-analyze data

This is a basic recommendation, but it is worth reinforcing. To establish a good KPI, you need to be assured that the information is legitimate .

After all, basing your actions on false or inaccurate data will not help your business at all. It should be added that, in addition to being reliable, the data must also be easily obtained and analyzed.

Have a defined period

Each and every KPI needs a certain period. That is, the goal must be temporal.

Therefore, when defining the KPIs that will be used, also determine the frequency of measurement. It can be yearly, monthly, fortnightly or weekly.

The frequency, in fact, must be defined together with the deadline for reaching the stipulated goal.

From there, ensure that the indicators are monitored at the right time , even to have time to rethink the strategies if the performance is far below expectations.


As they say in the market, organizational management is not an art, it is a science. Thus, it must be based on studies, data, numbers and facts. That is, in information that can be proven. And KPIs serve just that purpose.

Indicators provide a current view of the company , product or process, based on defined parameters.

They help to scale the performance and allow to assess whether the objectives are being met. With performance indicators, business management becomes much more strategic and efficient .

After all, the information obtained from the KPIs support the decision-making process, making it more agile and assertive.

Therefore, every company that aspires to success must bet on KPIs. Along with other tools, your business has everything to prosper.

If you are an entrepreneur, manager or intend to become one, remember that, for good management, you need to improve several aspects.

Did you like this article about KPI? Did you understand how to define them and put the indicators into practice in your company? So, take the space below to share your opinion.

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