A Complete Guide On How To Set Smart KPI Targets And Goals
Table of Contents
3) Benefits Of Setting KPIs Targets & Goals
5) How To Implement A KPI System?
In a world where data represents a major competitive advantage for businesses, the need to monitor performance based on specific goals and targets is critical. It is not enough to track relevant customer or sales data. In order to really ensure you are growing and making the most out of your data-driven efforts, it is necessary to implement measurable goals that will allow you to efficiently assess your strategic efforts.
That said, there are various methods and tools businesses use to manage their data and optimize their performance. One of the most powerful ones being key performance indicators (KPIs). KPIs are a type of measurement that helps organizations evaluate their success in different activities and areas. With that in mind, setting KPIs targets and goals proves to be a very successful practice.
In this guide, we will cover all relevant aspects related to KPI targets. Starting with a definition, going through some benefits and tips on how to define them, and finishing with a list of examples generated with a modern KPI tool. Let’s hit it off with a definition!
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What Are KPI Goals?
KPI goals are long-term performance measurements used by businesses to ensure a final objective is achieved. To do this, organizations set various KPI targets that are used as the means to achieve the general goal.
As a basis, businesses need KPI goals and objectives to paint a picture of what long-term success looks like to them. In order to ensure that these aims are being achieved, it is necessary to break them down into smaller targets that serve as a benchmark for the journey a company should follow.
What Are KPI Targets?
KPI targets are short-term performance measurements used by businesses to track the progress of their strategies towards achieving general goals. With the help of KPI reports, all of these targets can be visualized together to get a complete picture across departments.
In this post, we will focus mostly on the use of targets, however, it is fundamental to mention goals as the basis. A KPI goal is the strategic objective your company is trying to achieve, for example, double revenue in the next 5 years. While targets are the specific more operational measures that will help you understand if you are achieving those objectives, for example, a 20% increase in customer acquisition, a 10% increase in the average transaction size, etc. In short, these two progress measurements work together as part of a whole business strategy.
Benefits Of Setting KPI Targets & Goals
As mentioned, strategic KPI tracking is a fundamental practice for any business that wants to succeed through data. For that purpose, setting KPI goals and targets is the way to go. This is because they help you understand if you are on the right track when it comes to various activities and strategies. For instance, you might see an increase in revenue, but how can you be sure that this increase is enough to meet your objectives in the long run?
By setting clear and attainable KPI smart goals you make sure you are working towards a clear objective. This means an overall increase in the efficiency of your business, as your teams are motivated and connected to reach a common goal. In time, this will create a performance-focused culture that will not only lead your organization to grow but will set it apart from its competitors.
How To Set KPI Targets?
Now that you have a notion of the value of setting KPI targets, you might be wondering how do I implement the correct ones? One of the greatest mistakes companies make when dealing with key performance indicators is thinking they work on their own. On the contrary, data doesn’t speak for itself, you need to give a sense and context to the information you have available.
We already mentioned that goals and targets are not the same things. The first one works for a bigger outcome, such as increasing revenue, while the second one represents the means to achieve that general goal such as a marketing campaign for a specific product that in the long run can bring more revenue. Now, once you’ve defined your general aims, it is time to define your KPI targets. To help you on this task, here we list a few critical steps when it comes to setting them.
1. Use KPI standards
The first step and arguably one of the most important ones is to start by defining the key performance indicators that you will track. As we mention in our guide on KPIs vs metrics, not everything that can be measured needs to be measured, therefore, there are some steps you need to follow in order to avoid distracting your analysis with too many KPIs. For this purpose, there are two techniques that are widely used in the selection process. Let’s see them more in detail.
S.M.A.R.T: This acronym stands for Specific, Measurable, Attainable, Relevant, and Time-Bound and it works as a checklist for businesses to pick the right KPIs. In short, based on the SMART criteria, your key performance indicators should be specific to your goals, easily measurable, realistically achievable, relevant to your current business context, and timely.
6 A’s: Following on the same line as the SMART criteria, the 6 A’s method also works as a checklist to pick the right indicators. According to these criteria, your KPIs should be aligned, attainable, acute, accurate, actionable, and alive. In other words, you should choose indicators that are aligned with your goals, realistic to your current situation, easy to understand and measure and flexible to change.
2. Assess your current performance
Now that you’ve selected your main indicators based on two popular KPI standards it is time to start building the basis for your targets. As a general rule, the process of setting them should be based on your own business performance. You can’t expect to achieve a 20% increase in revenue without looking at how attainable this really is for your business. For this purpose, you can support yourself with professional online data analysis tools to deeply explore and analyze your performance data. This way, you will be able to paint a clear picture and generate targets that are realistic and attainable. Setting them based on what we would like to happen instead of reality is motivational suicide. While it seems tempting to say “we will double our sales by next month” it might be very frustrating to work hard and realize that this is an unrealistic expectation.
3. Take a look at competitors
While internal performance is the basis for setting accurate and achievable targets, it is also useful to consider some industry benchmarks. This is done by looking at competitors and comparing them to your organization’s performance in different areas. By doing this exercise you will be able to identify strong and weak points in your strategies and complement this information to set your objectives. Additionally, you can look into future trends with the help of a market research analytics tool and find deeper insights regarding benchmarks in your industry.
Another useful practice when it comes to benchmarks is to go even further than your competitors. For example, if you own a retail business and want to improve your logistics processes, you can look into what successful companies in the logistics industry are doing and generate attainable objectives for yourself.
4. Define short- and long-term objectives
By this point, you’ve selected the KPIs you want to measure, you’ve assessed your performance, and compared it to competitors. Now it is time to start making some decisions. As mentioned, KPI goals are longer-term objectives and targets are the means to getting there. For instance, an objective might have a 5-year duration, meaning you need various smaller aims to measure the progress towards that goal. For this purpose, you need to think of short and long-term aims.
Imagine you want to double your revenue in 5 years. Meaning that if you currently make 10 million in revenue (100%), you should be making 20 million (200%) by year 5. Now, tracking this goal for five years might be confusing, therefore, it is recommended to break it down into smaller objectives. For example, yearly growth. Here, you need to assess your performance to understand how these smaller aims need to be defined. For this, you have two options that make sense:
- Firstly, you could divide the goal into equal parts, that is, a 15% growth each year. However, this could be a bit ambitious and unrealistic from the start as it would leave no room for error. This leads us to our second option.
- Instead, you could set progressive growth objectives that are more realistic and attainable. For instance, you can start by setting a 5% revenue growth in the first year and progressively increase it until you reach the end 5-year goal of doubling revenue.
The image below breaks down both options:
Whichever method you choose, and based on the characteristics of your business (industry, customers, etc.), you should define smaller objectives that involve various departments and areas. Here you need to think from a customer perspective as well as an internal one for employees and other relevant stakeholders. For instance, if part of the revenue growth strategy is expected to come from new customers, you can set progressive acquisition objectives. On the other hand, if you expect growth to come from existing clients you can set a product innovation target that justifies a price rise and directly affect your repeat purchase ratios.
5. Summarize everything and double-check
By now, you should have defined a list of targets for your KPIs that will work across various areas and departments in your company. Now, this is a tedious process and sometimes ambition can get the best out of us. To avoid this from happening and make sure you are working with attainable KPIs targets, it is important to reassess everything before getting to work. You can ask yourself the important questions do I have the money and capacity to get this strategy across? This means if you have enough budget and human resources to develop, you don’t want to overwork your employees or find out mid-way that there is not enough budget to cover the original plans. Another way to do this is to talk with your teams and take their feedback regarding the reality of these aims. Once this is out of the way you are good to go to start acting on your strategies.
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How To Implement A KPI System?
This 5-step process should help you define targets based on your current situation. Now, in order to extract the maximum potential out of your key performance indicators, it is necessary to implement a KPI system that will work across the entire organization. Here we give you a few tips on how to create a system that will allow you to unify all your KPI data.
- Consider general business goals
As we mentioned time and time again throughout this post, the use of goals as a basis for the entire KPI management process is fundamental. For this reason, the first step when creating a successful KPI system should be to look into your general business goals as this will help you understand which elements should be included in your system. It is very likely that your goals will involve several areas and departments, therefore, sitting with various stakeholders and discussing these objectives will help narrow down strategies and pick the right indicators to measure.
- Implement tools to unify your KPIs
One of the greatest challenges when building one of these systems is getting everything together for analysis. Online dashboard tools make this possible by providing a centralized view of all your most relevant KPIs to make informed decisions considering the full picture.
Continuing on the line of targets, a KPI scorecard like the one below is the perfect tool to put together an efficient picture of progress and the latest developments regarding your most relevant indicators. For instance, if we continue with our example of increasing revenue by 50% in 5 years, you will need to monitor performance in various areas such as finances, customers, and internal processes such as HR. This dashboard provides details into all of these areas and compares your current performance to the target, letting you easily spot if you are meeting your expected outcomes or not.
The value of this KPI system is not only that it unifies all aims into one location, but its visual nature makes it easy to understand at a glance. The likelihood of reaching a target is depicted in a range of colors so that you can easily see the status of the different initiatives.
**click to enlarge**
- Ensure accessibility and collaboration
Collaboration is key when it comes to dealing with relevant KPI data. Your business goals attain various departments that need to stay connected in order to build cohesive strategies based on the general company vision. With traditional means of communication such as static Excel sheets or PowerPoint presentations, the topic of accessibility and collaboration becomes a hardship due to the static nature of these tools.
That said, a well-thought-out system should consider collaboration as a basis. Luckily, various online reporting software has been developed to allow users to easily share their KPIs from any device with an internet connection. The online nature of these tools ensures a collaborative environment thanks to real-time access to data.
- Assess KPI progress and readjust
Just like any other analytical process, a KPIs system needs to be constantly assessed to ensure it is aligned with what is expected. In order to keep everything working smoothly, constantly check your KPI progress and be ready to adjust when necessary. The last thing you want to do is realize you will not reach your 5-year goal in year 4.
For this purpose, it is necessary to keep a collaborative environment, sit down with team members and any other relevant stakeholders, and communicate regularly about the status of your strategy. The human factor combined with the power of data can lead businesses to reap all the rewards from their efforts.
KPI Goals & Targets Examples
So far, we’ve covered the definition of KPI targets, outlined a 5-step checklist to set attainable ones, and covered the importance of a system for efficient monitoring and decision making. For the last section of this post, we will see how these two measurements work in action by providing a list of examples in a business context.
1. Goal: Double Revenue
The first in our list of KPI goals examples is about revenue. We already covered this example before in the post, but we will go through it more in detail here.
In short words, revenue is the money generated from normal business operations such as the sales of goods or services. It does not consider costs and it is calculated with the following formula: Revenue = Amount of Sales x Average Price of Service / Sales Price - Sales deductions.
As we can see from the formula, there are various elements that influence revenue growth. Some of them are the number of sales, your average prices, as well as any deductions from promotions. Now, if we follow our goal of doubling revenue in 5 years our targets should follow that same line. Below we mention three examples for this particular goal which can be a fundamental part of a sales dashboard.
a. Average Transaction Size
As its name suggests, the average transaction size measures the amount of money spent by a customer on each transaction. Naturally, the amount of money being spent directly affects the end revenue, therefore, it is an important indicator to define as an operational target.
For instance, if you see that there is potential to grow the transaction size on mobile devices, then you can set an attainable target to achieve that. On the other side, you can look into what channels your clientele buys from the most and set specific actions to target those ones.
b. Upsell & Cross-sell Rates
In short, upselling is encouraging consumers to purchase a more expensive or high-end product or service than the one they are purchasing, while cross-selling is telling them to buy a related or complementary item that the original one doesn't cover. This target is a great measurement to increase revenue from existing customers. It is no secret that keeping your existing clientele is cheaper than acquiring new ones, therefore, it is a great opportunity to exploit your revenue with strategic actions while offering the best opportunities to your customers.
When done correctly, upsell and cross-sell techniques can significantly boost customer loyalty as you are anticipating their needs and providing them with a targeted shopping experience. This is what makes it a great indicator to set as a target given that happy clients mean more sales and revenue, especially for B2B businesses.
c. Total Orders
The total order is a key element that directly influences revenue. It basically represents the number of sales a business is achieving in the course of a month and it is a great target to implement for this particular goal.
While it might seem like a straightforward metric, the total order hides a lot of insights that can be discovered with the right retail analytics software. For example, you can understand rush periods when your clients are buying the most and target them with promotions or discounts to motivate them to buy more and increase your order volume in the process.
2. Goal: Increase Net Profit Margin
For our second example, we will look at the goal of increasing the net profit margin. Essentially, the net profit measures how much profit is generated from your revenue after subtracting all related costs. It is calculated with the following formula: Net profit margin = [Net Income (Revenue - COGS - Expenses - Interest - Taxes)] / Revenue x 100
As you can see from the formula, the net profit is highly influenced by costs. While the calculation of the revenue only considers the money coming in from sales, it doesn't consider profitability. A business can double their revenue but with such high costs that will earn them no money in the end.
That said, a good strategy to follow when it comes to increasing net profit is to lower costs. Let's see this with three KPI targets examples.
a. Rate of Return
As mentioned, one of the factors that can really lower your net profit margin is costs. That said, lowering the rates of return is a successful way to lower costs without having to sacrifice the quality of your products or services.
Returns are expensive because they require extra effort and resources that were not expected. Luckily, most reasons for return are manageable and can be avoided with a little optimization. Therefore, setting a target of lowering the rate of return is a fairly easy way to lower costs and increase your net profit. You can do this by looking into the reasons for returns and extracting conclusions to improve.
b. Spend Under Management (SUM)
The SUM is a metric that tracks the percentage of spending that is actively managed by the procurement manager. It includes strategically managed spend in established areas with suppliers such as control systems to make sure people are respecting the negotiated prices.
The optimization of procurement activities is a great cost-saving strategy that enhances transparency, accountability, and communication between businesses and suppliers. By keeping the spending under management below the expected target you make sure you are saving cots while maximizing your procurement efforts.
c. Production Downtimes
As mentioned, cost reduction can involve several areas of the business. From sales to procurement, we now cover the production area. For manufacturing businesses that work with heavy machinery, downtimes mean less money that can be made and a rise in costs.
That said, the main goal for any manufacturing organization is to keep downtimes at a minimum. To do so, it is necessary to look into the common downtime causes and plan strategic measures to lower them. Once that is assessed you can set an attainable target to measure progress in an intuitive manufacturing dashboard.
3. Goal: Increase Customer Lifetime Value
Our third and final goal is the CLV. The customer lifetime value is a complex performance indicator that can be influenced by several factors. It works as a prediction of the monetary value that will derive from the whole relationship with a customer. The CLV is a great indicator for subscription-based companies as it is easier for them to predict the duration of the relationship, but it can also prove useful to any other type of business. It is calculated with the following formula: Customer Lifetime Value = (Customer Value * Average Customer Lifespan) - Customer Acquisition Costs
Given the complexity and importance of the CLV, increasing it is a common goal for organizations across industries. As seen in the formula, the elements that influence the CLV the most include customer acquisition as well as satisfaction. Therefore, these are great starting points to set our smaller aims.
a. Customer Satisfaction (NPS)
Customer satisfaction is arguably the most important metric to track when it comes to CLV. Naturally, the happier your customers are with your business the more likely they will come back for more.
That said, there are also many factors that can influence customer satisfaction such as the shopping and service experience. This is why a great way to increase satisfaction levels is to invest in offering targeted experiences to increase loyalty. On that note, a good target to implement can be to turn neutral customers into satisfied ones based on these actions.
b. Customer Acquisition Costs (CAC)
As its name suggests, the CAC tracks the average costs of all actions related to acquiring new clients. It considers marketing and sales spending over a period of time and the number of customers acquired during that period.
Obviously, the aim of the CAC should be to keep costs at a minimum. The less it costs you to acquire a client the higher the CLV. Therefore, it is important to set a CAC goal and implement different strategies to achieve them in order to keep the client-company relationship profitable over time.
c. Average Response Time
Last but not least we have the average response time. As mentioned, customer satisfaction levels highly influence the CLV of an organization. And the quality of support you provide to your clients can make them stay with you for long or never come back.
The average response time measures the time between the moment a customer calls and the moment an agent responds to that call. A low response time means you are telling your clients you respect their time and are always available to help them. Therefore, it is important to set improvement objectives to achieve your general goals.
These are just a few of the areas that can be influenced by smart KPI targets. If you want to see other KPI examples for different industries and functions check out our library.
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Key Takeaways KPI Targets
As we reach the end of this guide, we hope you have a clear understanding of the importance of performance monitoring with the use of KPI targets. Making important decisions based on your available data will be useless if you don’t have a thought-out strategic plan to act on your findings.
Today, business analytics tools allow companies to manage data from several sources in an easy and intuitive way. With these solutions, there are no excuses not to extract the maximum potential out of your own information.
If you want to start setting your own KPI targets and monitor them in real-time, then try our modern KPI dashboard software for a 14-days free trial!