May 10, 2021

How To Develop KPIs In 7 Steps

People.ai
How To Develop KPIs In 7 Steps

Key performance indicators, or KPIs, are the cornerstone for exacting lasting change and improvement. However, they’re often misinterpreted, which can lead to improper implementation. So, how do you develop effective sales KPIs for your organization?

Keep reading to learn everything you’ll need to know about making improvements within your team, department, or entire company. In this guide, we go over the basics (and more):

  • What KPIs are in sales
  • Why they’re important
  • How they’re used within organizations
  • How to choose the right KPI
  • Developing your own KPIs

What Are KPIs in Sales?

KPIs for sales teams are the key performance indicators that sales managers use to track the effectiveness of current sales efforts, strategies, and performance. These are usually developed in tandem with marketing KPIs to measure conversion rates, hone the sales funnel, and provide insights for future strategic decisions.

Why Are KPIs Important in Sales?

KPIs are important because they align key business objectives with performance over time. Sales key performance indicators are necessary for effectively improving business growth.

But while they can pave the way for reaching business goals, informing marketing campaigns, and hitting sales targets, they can also be a source of inefficiency within sales teams. However, this only happens if sales managers aren’t sure which KPIs suit their organization.

What exactly does that mean? Let’s break down essential sales KPIs and how they impact the organization.

Well-designed goals and key business objectives are vital for business owners and must be communicated effectively to the entire team. From these objectives come your sales strategies and marketing campaigns, which also require actionable insights for regular re-evaluation. To get these insights, you need performance metrics or KPIs to measure the effectiveness of your methods.

In short, KPIs turn key business objectives into tangible metrics, which help the entire sales team stay on track and re-evaluate their sales performance.

Different Kinds of KPIs

Modern sales teams have a long list of tasks and goals they need to fulfill, which means that there are several kinds of KPIs that they aim to meet. Here are a few common types of key performance indicators that can be implemented on a team level:

  • Quantitative KPI: This refers to everything that can be measured in concrete numbers. For example, “Generate 300 sales qualified leads in a month.”
  • Qualitative KPI: This includes everything that can’t be measured in numbers, like feelings and sentiments. For example: feedback from focus group discussions.
  • Leading KPI: This KPI can predict the outcome of a future sales metric. For example, “Increased website clicks lead to an improved conversion rate.”
  • Lagging KPI: This KPI describes a past result for sales teams. For example, the customer retention rate from last year.
  • Input KPI: This refers to all the average time, assets, resources, and employees necessary to meet specific strategic objectives. For example, budget and team size.
  • Process KPI: This KPI assesses overall productivity within a sales organization. For example, sales volume, or number of phone calls made per day.

How Are KPIs Used in an Organization?

KPIs are essential for turning strategic goals into actionable tasks for the entire team. But how exactly are they used within a sales organization? Here are a few common ways business leaders leverage KPIs to improve overall productivity.

Performance Tracking

One of the biggest advantages of having well-tuned KPIs is that it helps individual sales reps move toward the organization’s overarching goals. KPIs can be applied to almost any part of the sales process—this can include anything from group metrics like monthly sales growth and customer retention rates to individual goals like customer response time and the number of closed deals.

Note that these specific KPIs only apply to an organization’s sales department and need to be adjusted for other departments or individual positions within the company.

Creating a Culture of Learning

“Company culture” may sound like a meaningless corporate buzzword, but it has a considerable impact on sales activity and employee performance.

Key performance indicators are one of the many factors that determine a company’s culture and overall morale. For example, if KPIs are used to acknowledge and reward sales teams’ efforts, employees will be more motivated to hone their skills around the sales cycle. That said, this outcome entirely depends on sales managers and their philosophies.

Promoting Accountability

A sales goal isn’t achieved by one person alone. Instead, the sales pipeline usually involves a small battalion of sales reps, an entire marketing team, and the execs in charge of sales development and enablement. Every person part of the sales process has specific tasks that can be measured by KPIs, which presents the opportunity for accountability and ownership.

This can be effective if the average sales rep feels a disconnect between their efforts and the sales goal. By identifying the most important revenue goals, KPIs can better direct sales efforts and produce impactful results.

Meaningful Goal Setting

Some sales managers may impose generic KPIs on their sales teams, leading to redundancies and disorganized business decisions. An individual’s KPI must be based on the function of their positions, which makes the job feel more meaningful.

Tracking Growth

It can be challenging to measure how much a single product or organization has grown over time. Luckily, KPIs provide concrete numbers representing monthly sales, customer loyalty, and the effectiveness of marketing campaigns.

Beyond giving business leaders actionable insights, past data from KPIs can provide a bit of perspective on how much growth the company has experienced.

How to Choose the Right Sales KPIs for Your Business

The biggest challenge of setting a key performance indicator is choosing the right one for your business. There are two rules of thumb when approaching this predicament.

The first is that everything that gets measured gets improved. The second is that your KPIs are supposed to measure the most impactful indicators for sales reps and other employees.

With these two guides in mind, ask yourself the following questions to discern the essential sales KPIs your organization needs:

What Are Your Goals for the Business or Position?

As we mentioned earlier, KPIs have to be aligned with the overarching strategic goals of the company. Knowing what you want to get out of the next year or quarters is essential. If you’re not sure what you’d like to achieve over the next few months, it’s worth sitting down and identifying some of the pain points you’d like to fix.

For example, let’s say your current goal is to improve your company’s monthly sales growth over the next year. Let’s see how this goal transforms into a KPI.

How Can You Measure This Goal?

Since you want to measure sales growth over time, your measurements are relatively concrete. Specifically, you can tally the previous period’s sales revenue and compare it with the current period’s to determine if there’s been a positive or negative change in the numbers.

That said, these larger goals can be broken down into smaller ones that can be assigned to specific people.

What Vanity Metrics Will You Avoid?

Let’s say that you run a company that conducts its business primarily online, and most of your conversions come from social media. If you want to improve your company’s sales growth, you may be tempted to focus on likes or shares, but these may not matter in the way you think.

In this specific example, likes and shares are considered vanity metrics. These numbers may provide the “feeling” of growth, but the people sharing or liking a post may not necessarily be paying customers. Because of this, likes and shares may not become a part of your KPI planning.

What Are Your Lagging and Leading Indicators?

Lagging indicators represent past data, while leading indicators can predict future data.

In the case of improving sales growth, your lagging indicator would be the previous period’s sales revenue, while your leading indicators can include a variety of factors.

How Many Key Performance Indicators Do You Need?

When it comes to the number of KPIs you need, the answer is the less, the better. However, that doesn’t mean you should zero out your goals. So, why are fewer KPIs considered best practice when most people think that achieving a long list of goals is better?

It comes down to the law of diminishing returns. Let’s say you have 4–10 KPIs for your marketing team. Realistically, they will probably only achieve 1–2 goals on the list. This is because more goals mean more business decisions, leading to disorganization and splitting within the team. The result is that less work gets done with more effort expended.

On the other hand, imagine your sales managers set only 1–3 KPIs for the entire team. In this case, it’s entirely likely that the team will fulfill all of your goals. But it doesn’t end there—your sales force will also be able to allocate resources and staffing more efficiently because of these focused goals.

Simply put, the more goals you have, the more likely your workforce will be spread thin. Instead, simplify your objectives and choose only the most important ones for KPIs.

Sales Metrics vs. Sales KPIs

Sales metrics and sales key performance indicators are often used interchangeably, but they actually refer to two distinct things. Confusing the two could even impact an organization’s overall strategy implementation. So, how do these two differ?

Simply put, KPIs are about targets and goals, while metrics are anything that measures a process or task. However, these two terms aren’t mutually exclusive. Furthermore, while all KPIs are metrics, not all metrics are KPIs.

For example, if you’re a manager at a sales firm, you might categorize outbound calls as a metric and the resulting increase in sales as a KPI. Another difference between the two is that you would track outbound calls monthly, but not the increase in sales.

How to Develop Sales KPIs

Now that you know what KPIs are, the different kinds of indicators, and how to choose the right ones for your business, it’s essential to familiarize yourself with how to develop your own KPIs. While this process may feel similar to choosing KPIs for your team, setting your goals from the ground up is a more focused and technical process.

Here’s how to develop your own sales KPIs in seven steps.

1. Determine the Key Strategic Objectives

KPIs are supposed to align team activities with the organization’s greater goal, which means that you have to identify your key strategic objectives. For example, do you want to increase your organization’s overall sales, or do you want to improve your marketing ROI?

No matter your objective, you’ll need to identify your team’s biggest strengths and shortcomings. This will help you wade through the seemingly endless list of goals for your company and discern what your priorities are.

2. Describe the Intended Results

Once you’ve identified your primary goals, you’ll need to figure out what success looks like. For example, let’s say you want to increase profit by X%. In this case, it’s a good idea to look at the end goal and work backward.

Ask yourself: what steps are necessary to achieve this goal? Who will perform these tasks? Do you have enough staffing and resources to support these tasks? The answers to these questions will help you identify the concrete steps to achieve your goals—this, in turn, informs which key performance indicators you’ll focus on.

3. Understand Alternative Performance Measures

Ideally, all KPIs can be directly measured, from dollar revenue to sales to survey outcomes to customer satisfaction. But how do you measure a KPI that can’t be measured in the “traditional” way? The answer is using a correlational model and a little bit of research.

Let’s say you’re trying to measure your brand’s reputation, which can be difficult to quantify. In this case, you could list down all the things that correlate with a good reputation, like shares on social media or inquiries. Another route you can take is finding the factors that contribute to a goal’s completion.

4. Select the Right Measure(s) For Each Objective

Once your goal has been clearly identified and you’ve figured out the steps necessary to fulfill it, you’re ready to start planning which measures to use.

Keep the various types of KPIs and their intended functions in mind when deciding which measure to use. For example, you wouldn’t establish a qualitative KPI for the number of sales made or classes booked in a month. Instead, you’d set a quantitative KPI.

5. Define Composite Indices as Needed

Some businesses have big, intangible goals, which means the data they produce may provide insight into the intended outcome. This is especially true if the data identifies several components or dimensions of a goal. So, how do you create meaningful measures for more complex situations or objectives?

The answer is a composite index. These indices group several KPIs together to track how they impact and affect each other. Composite indices can be extremely helpful when measuring abstract concepts like brand loyalty and sentiment.

6. Set Targets and Thresholds

Now that you have your specific measurements, you’ll need to decide how to interpret the results from these measures. This is done by setting targets and thresholds. Without these thresholds, your indicator becomes more of a metric than a KPI.

So, how do these thresholds work?

Imagine a chart that’s split into three lengthwise portions. The top portion is green, the middle is yellow, and the bottom is blue. For example, if this were a chart indicating sales volume, then an outcome in the green portion would suggest a high sales volume. These thresholds serve as an easy way to track progress over time and reevaluate strategies.

7. Define and Document Selected Performance Measures

Defining and documenting your performance measures are crucial for transitioning from KPI planning to implementation. This process involves clearly describing the standard you’ve chosen to use, including the outcomes it’s supposed to measure, how data is collected, and how often these metrics are evaluated. It also clearly defines essential terms so that data collection is consistent over time.

Whether your organization plans to collect data manually or use something like People.ai’s revenue intelligence platform, defining your tools makes the whole process easier and more consistent.

Key Takeaways

KPIs are essential for growth within organizations, primarily because they keep everyone’s individual tasks and activities in line with larger goals. But beyond setting a focus for your company, they can also serve as a tool for improving morale and promoting accountability within your workforce.

If you’re interested in the best practices for personnel management and improving your strategy, stay tuned to our blog for more insights and updates! Or, if you’re interested in using KPIs to transform your organization’s sales processes, sign up for a free demo today.

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Sales KPI FAQs

What are typical sales KPIs?

Typical sales KPIs include conversion rates, sales cycle length, customer retention, customer satisfaction, etc.

How can sales KPI be improved?

Sales KPIs can be improved by restructuring them for more specific or up-to-date goals. In addition, sometimes KPIs need tweaking to apply to the ever-changing needs of your sales force.

How do I make sure KPIs are met?

Setting realistic and concrete measurements of success are excellent methods for ensuring your KPIs are met. You should also make sure that the proposed KPIs are more or less in line with existing work patterns for the best results.

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