KPI vs Measures vs Metrics: What is the Difference
If you want to learn about KPIs, metrics, and measures – their similarities, differences and significances – just keep reading this article. It will make you understand each term well. Some useful examples are given here to give a true picture about them as well.
KPI vs Metrics vs Measures:
Measures are raw numbers. Metrics are summarized measures which have a meaning. and KPIs are those metrics which express the performance of a company or project either ongoing or completed.
What is Measures?
Measures are numbers (or we may consider them values), if you take them as data. In every organization, policymakers make their decisions based on the numbers. They evaluate business performance by looking at how the numbers are constantly changing, and their decision-making is completely dependent upon these numbers. These numbers are called measures.
It can be summed and/or averaged. For examples: durations, temperatures, and weight. You need to understand dimensions too, because it is often used alongside measures. Dimensions are the categorical buckets that can be used to segment, filter or cluster—such as city, product, colour, and even distribution channel.
Consider this scenario – you may have 40 computers and 80 microphones. The units sold are the measures (40 and 30) and the dimensions are the product type (computer and microphone). You can calculate on the measure. And to do this, you have to consider their dimension level to put them in their correct places in your equation.
Examples of measures
Now we will look at two examples of measure. Our first example is Customer Acquisition Cost or CAC. It is an important concept in the SAAS industry. It refers to the cost for a company to acquire a customer.
If you know that your CAC is 50, you know the number behind the CAS. But do you know the measures behind that number? Many possible measures may contribute to this number. They would include all of your marketing and sales costs, which are actually measures, for a given period of time (another measure here). You would then divide this by the number of customers acquired (another measure in this context) over that same period of time. The result, then, would be your CAC for that time period.
Our second example of measures is a more comprehensive one, which is called balanced scorecard measures. Business Performance is often evaluated using a tool called the balance scorecard. And this balance scorecard is based on measures from four perspectives.
- Perspective 1: Financial measures
Some financial measures are sales or revenue, sales growth, profit margin, cash flow, debt to equity and so on.
However, you should measure non-financial measures as well as considering the financial ones. The other three perspectives consider non-financial measures.
- Perspective 2: Customer measures
It is important to know about your customers, like how many you have, how often they use you, and how many customers you have lost or gained. In terms of customer service, it’s important to know waiting times for assistance, complaints, or reasons customers have complained
However, in a nutshell, there are many things in customer measures, including but not limited to customer satisfaction, customer retention, customer acquisition rate, number of customers, sales volume, and customers per employee.
- Perspective 3: Process measures
Some process measures are average cost per transaction, response time to customer request, inventory turnover, cycle time, warranty claims, waste reduction, space utilization, frequency of returned purchases, downtime, and so on.
- Perspective 4: Employee learning and growth measures
Employee learning and growth measures include employees with advanced degrees/participation in professional or trade associations, training investment per employee, average years of service, absenteeism or attendance records, employee satisfaction, employee productivity, personal goal achievement, and so on.
Importance of Measures
In every industry, market conditions constantly change. The pressure on leaders today is greater than it ever has been. There are many complex external factors in modern business: economic uncertainty, financial fragility, technological advancements, changing employee expectations and so on. And you need to analyze and evaluate every aspect of the organization precisely to survive in this complex situation.
Growing businesses need close and careful management. Tracking measures is commonplace within businesses. It is a way of examining how your business is running. It also provides a framework for how you can improve in future. It’s necessary to improve the weak points without compromising your business’s strong points.
Measures reflect a well-organized company’s strategies and goals indirectly. It is essential to check and review your business goals and performance on a regular basis. It helps you to remain competitive in this market.
It is quite possible to exemplify industry success by metrics and KPIs, other two issues of this article which will be discussed in later parts. But without knowing the measures, these successes can not be understood well.
Limitations of measures
Measures are some numbers. They are quantitative in nature. They do not reflect the qualitative issues. So it is highly unlikely that they capture the full realities of organizational activities that relate to business successes or failures. They can provide an excellent review of past performance in a business organization. But it has little foretelling power for the future.
What a metric is
The two words, measure and metric, can easily confuse you. You may find them used interchangeably. Their meanings are almost identical. A measure is a fundamental or unit-specific term, whereas a metric can literally be derived from one or more measures. So, it is understandable that the term metric is more complicated than measure.
Metrics can be used to evaluate the status of a specific business process. Many times people quote this term as ‘business metric’. It then easily reflects its ‘quantifiable measure’. There might be different metrics for different areas of business. For example:
- Financial metrics display how well you’re managing your finance. Stakeholders and potential investors want to know this information precisely.
- Marketing metrics show the overall performance of your marketing team. Multiple metrics are useful, especially if you use multiple platforms. We must consider social media marketing in the first place here due to its immense popularity nowadays. Therefore social media metrics can be a significant help for evaluating the status of your business process.
- Sales metrics tell you the performance of your sales team. If you sell software as a service (SaaS), you can create a SaaS Metrics. It will help you understand how well you are managing your business and generating recurring revenue.
There are multiple areas in every business that you can measure. That is why, metrics come in different classifications.
However, there might be many kinds of metrics within a company or department, but all of them are not required. The list of desired metrics is far more than is practical to measure. A simple method should be executed to prioritize the implementation of metrics. In this regard, the effort and value required to implement the metrics and the results of the implementation should be taken into consideration.
So, one thing is quite clear that every business has its own type and thus requires its own unique business metrics.
Examples of metrics
As you’ve probably realised, there are lots of different types of metrics. Depending on your business and your goals, you might choose specific metrics for your business. However, selecting the right metrics takes time, effort and planning. Sometimes there is a rush to implement metrics in business just only for claiming that metrics are being used. It is considered as an evidence of credibility within a department. The outcome is miserable. As metrics are selected without a great deal of thought, the company suffers from the detrimental consequences of the chosen metrics.
However, a list of 12 key metrics for all businesses is given below. Business goals of each metric are also given here.
- Sales revenue – How many people are buying your product and how frequently.
- Net profit margin – How efficient your company is at making profit.
- Gross margin – How changes to process and production are happening.
- Sales growth year-to-date – What the general trends of your sales revenue are.
- Cost of customer acquisition – How much the Customer Lifetime Value is to learn whether you’re getting a bargain.
- Customer loyalty and retention – How many repeat purchases you secure and word of mouth recommendations you have.
- Net promoter score – How much satisfies your customer is, and how much eagar they are to promote your product.
- Qualified leads per month – How much of your budget is spent on the right audience.
- Lead-to-client conversion rate – How your sales team is performing to turn leads into customers.
- Monthly website traffic – How many visitors you’ve got in your website.
- Met and overdue milestones – What ratio you have got for your targets and achievements.
- Employee happiness – How happy and satisfied your employees are.
To illustrate the idea of metrics, let’s discuss one metric from the above list. Here we are going to discuss sales revenue.
Sales Revenue is a good example of metric. It can tell a lot of things about your company. It can tell whether customers are interested in buying your product/service. It is important to remember that sales results are affected by multiple other factors. Thus it is important to calculate the metric of sales revenue carefully. The equation is calculated by summing up all the income from client purchases, minus the cost associated with returned or undeliverable products.
You need to increase the number of sales if you want to grow your sales revenue. You can take many steps for doing so. You can expand your marketing endeavours, you can hire new salespeople, or you can make discount offers that are hard to resist.
Importance of metrics
Metrics empower you to improve your business – that’s why they’re vital. Metrics are important because they encompass all tractable areas. With metrics, you can improve overall results, or target a particular area of your business. For example, a metric may monitor website traffic compared to a traffic goal. It covers the entire gamut.
Metrics can help you adjust your business systems and people with your business goals. For example, you might discuss different metrics with your employee, customers, or investors. Make sure your employees understand how your business is being measured, and how their role impacts the overall business outcomes. The level of expectations from all sides will be clear only then. When everyone will know how their performance affects the business and how their roles are valued and measured, they will be more motivated to act according to their expected roles. Efficiency and productivity can then be ensured from the very top to the very bottom of your business.
Limitations of metrics
Metrics are actually equations by which we can quantify business growth or success in different levels. But again, like measures, they are quantitative in nature. They reveal ‘what’ are achieved as outcomes, but they do not tell us ‘why’ and ‘how’ these outcomes are achieved.
What a Key Performance Indicator (KPI) is
A Key Performance Indicator (KPI) is a measurable value. It demonstrates the efficiency of a company in achieving its key business objectives. Organizations use KPIs to evaluate their success at reaching targets. KPIs are evaluated over a specified time period, and are compared against past performance of the organization.
Setting the KPIs will vary between businesses. It is important to choose the right kind of KPIs which are suitable for your business. Your KPIs should mean something to your business. They must be measurable, and they must provide results to attain your objectives.
You may adopt many strategies to set the appropriate KPIs for your business. In this regard, you may consider the following step-by-step process:
- You may write a brief strategy by defining your objectives.By connecting your KPIs to your strategy, you can refine your focus and make the relevant KPIs more recognizable
- Set some questions which will lead you to the answers focusing on how you will fulfil your objectives.
- Try to figure out what type of data you need to establish your metrics that will eventually answer those questions
- As you know now the type of data or information you need, next you will find the right techniques to get all the measures.
- Try to come up with some explanations of KPIs, interpreting its meaning, monitoring how it’s changing and deciding what that means for the business.
- Communicate your KPIs with other people so they’re easily understood by employees, investors and other business stakeholders
- Review the KPIs from time to time so that they become more effective for making better business decisions. As a result, achieving business objectives will be easier and faster.
In the above ways, you can select the right kind of KPIs for your business. Now we need to put them to use to increase your business success.
Examples of KPIs
Let’s say you are a marine biologist. Establishing average water temperature as a key performance indicator would allow you to notice trends over time, such as how the water temperature in a particular region is rising exponentially faster than all surrounding regions.
Likewise, there are many examples of KPIs in the business world, such as employee performance, operational key performance indicators, and financial key performance indicators.
Answering customers’ incoming phone calls may be an important issue for a company. That company might consider this issue in their KPIs. They may have identified the length of time it takes to answer an incoming customer phone call as a key performance indicator. Their dedicated Customer Service Department team will be engaged in collecting data like the number of incoming customer calls, the specific time period and the number of rings. All these measures will fall into their business metric and eventually reveal the condition of Key Performance Indicator.
In the education sector, the school system should employ its own key performance indicators. They may be set by governments or local authorities. Whoever sets the KPIs, they must have specific targets they wish to achieve.
For example, In UK primary education a target of a certain percentage of children achieving level 4, in the statutory assessment tests, at age 11, is set. This information is used to identify how individual schools are performing in comparison with others.
An important consideration when setting the key performance indicators is their consistency. Once they are established, they remain consistent and are set with regard for the long term. Also, they should reflect a cross section of different measures across an organization.
Importance of KPIs
Companies establish their KPIs according to their business objectives and strategies. Without looking at the conditions of KPIs, they would be left in the dark about their business success. They might intuitively feel that they are having success, but what kind of success? And compared to what? They may know which metrics are trackable, but which ones should they track? For example, many people spend a substantial amount of money trying to figure out the scenario about employee performance and company performance, and how they influence one another.
Sometimes many KPIs are extremely important for business but very difficult to observe. There are many reasons why you should look at unobservable key performance indicators (KPIs). Some of them are:
- There are many observable performance metrics which are unobservable at one point.
- The things that matter the most to companies and to employees’ performance are often unobservable. For example, how do you measure the office culture?
- When key performance indicators are observable, most of the time they are easily operational in manner. They are quantitative and they do not predict where you should go.
Setting business goals and developing strategies to reach them must be aligned with your KPIs. And KPIs help you evaluate your progress, and ultimately give a reliable record of your business growth.
Limitations of KPIs
KPI shows the results but the result may not always reflect the real results. Organizations give an extremely cautious look at their KPIs, whether in the private or public sector. In other words, they consider them as their success index. This may be beneficial in the short term if, for example, there is a particular issue that needs to be resolved. But, in the long term, to concentrate only on a single measure of success can be deceiving. It may distract the policymakers from their point of views. For example, in the education sector, the only measure of success of students is whether they have achieved a certain grade by a certain age. But should this really be the only goal and measure of our schools and education system?
So it can be argued that a true measure of success can only be in a situation where a number of different measures are used. In this way, a more rounded and comprehensive view of all aspects of the organization can be obtained.
As far as limitation is concerned, the common ground of limitations of all these three terms – measures, metrics and KPIs – is quite obvious. They show numbers. Numbers can’t calculate one thing and that is uncertainty. We can’t use these data for 100% accurate forecasting. For example, according to last 10 years data, the growth of the hygienic products market was pretty moderate. But due to coronavirus, the growth of the hygienic products market has skyrocketed.
The final word
In today’s business world, we now compete on data, information and analytics, and we have to be very strategic accordingly. That is why; you need to understand the type of your own business and its objectives. Only then you will be able to understand your required KPIs. You will equip your KPIs with the right kind of metrics, and those metrics will be executed by measures. In fact, continuous measurement and analysis of the right Key Performance Indicators (KPIs) is critical to measuring your business performance. And selecting the right kind of KPIs requires a solid understanding of what is important to your organization and your customers, and what impacts it.