Glossary keyword - KPI (Key Performance Indicator)

KPI (Key Performance Indicator)

Key Performance Indicator (KPI ) measures how efficiently a business achieves its goals and objectives. Many companies around the world use KPI to measure performance in every aspect of the business. A key performance indicator is anything that an entrepreneur wants to measure in his business. This may include inventory, a level of customer satisfaction, or sales & revenue. 

KPI Essentials 

The essential thing you need to know about KPI is that there are two types of key performance indicators. Those are leading indicators and lagging indicators. Understanding a correlation and relationship between leading and lagging indicators is important because, often, what entrepreneurs need to drive is lagging indicators and not leading indicators. The effects of not having KPI Let’s imagine you have a restaurant and a customer satisfaction score that needs to be high so customers will keep coming back to eat your food. So customer satisfaction is something you are tracking. 

Drop-in Satisfaction 

But what happens when customer satisfaction starts to drop? By the time your customers are unhappy, it is too late. They have already had a bad experience, and they are never going to come back. Worst of all, they are probably going to tell their friends, and their friends will not come to the restaurant either, which would have been prevented via key performance indicators. 

So what do you need? You need a leading indicator. The leading indicator might be something like time from when customers order until their food comes. So if the time from order to the food is down to around four to five minutes, your business is good. The customers are getting their food on time without getting impatient, which makes them happy. So when those customers are happy, the customer satisfaction scores come back as well. But you should be aware of the delay. You can have a delay from a few minutes to as much as months. If a customer had a bad experience this week, they are not going to visit your restaurant the next week, and the scores are not going to come back in. This is what is happening in the leading indicator example. 

Leading Indicators

The importance of Key Performance Indicators Leading indicators always show real-time performance, so it is essential to have those key performance indicators to keep an eye on how well your business is doing. In the example above, your leading indicator is the time from the order of food to its delivery. Your lagging indicator, on the other hand, shows your customer satisfaction, which is always a delayed figure. 

Let’s imagine you do not have your leading indicator, and the food delivery time starts to increase, making your customers unhappy. But you do not realize it because your lagging indicator does not show the drop on your customer satisfaction just yet. So you think that you are doing great and are not aware that there is a problem. By the time ordering the food times show up on your lagging indicators, probably after a few weeks or a month, you see a sudden drop in the level of customer satisfaction, and you are out of business. 

How to Prevent It? 

What you need to do is to understand your company’s lagging indicators - the things that you really want to drive and then drive those back to your leading indicators. If you can guess what the cause and effect relationship between those key performance indicators are, you can drive your business to higher levels and make instant changes before impact hits your bottom line. If you know what those leading indicators are, you can drag ordering the food times down, which is what McDonald’s did and make your customers happy and satisfied.

 

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