In this article we cover what KPI analysis is, give you a 5 step framework for KPI analysis and apply it to an example company in the retail industry.
KPI Analysis is the process of evaluating the KPIs a company has set using quantifiable metrics to determine how well a business is achieving its objectives and to identify areas for improvement.
The first step in KPI analysis is to identify the KPIs that the company is currently tracking. This involves reviewing the company's goals and objectives and selecting KPIs that are relevant to them.
Example: A marketing company that wants to increase website traffic could set KPIs for the number of visitors, bounce rate, and conversion rate.
Once the KPIs have been identified, the next step is to analyze their effectiveness. This involves assessing whether the KPIs are providing valuable insights and whether they are measuring what they are intended to measure.
Example: A company that is tracking social media engagement may find that their KPIs are only measuring likes and shares but not comments, which could be a valuable indicator of customer engagement.
After evaluating the KPIs, benchmarks need to be set to establish a baseline for performance. This involves determining what the desired level of performance is for each KPI.
Example: A retail company that is tracking customer satisfaction may set a benchmark of 90% for customer satisfaction scores based on their historical performance.
The next step is to monitor the company's performance against the benchmarks that have been set. This involves tracking the KPIs over time and identifying trends and patterns that could be indicating areas for improvement.
Example: An e-commerce company may notice that their conversion rate is consistently lower on weekends, indicating that they need to adjust their marketing strategies for weekend traffic.
The final step in KPI analysis is to use the insights gained from the analysis to make data-driven decisions. This involves adjusting strategies and making changes to improve performance in areas where the KPIs indicate there is room for improvement.
Example: A software company may decide to allocate more resources to customer support after noticing that their customer satisfaction scores have decreased over time, in order to improve customer retention and satisfaction.
ABC Retail is a medium-sized brick-and-mortar store that sells a variety of consumer goods. The company is looking to improve its sales and profitability, and is using the KPI analysis framework above to gain insights and make data-driven decisions.
Let's say a retail company wants to increase sales and profitability. They could set KPIs for the number of sales, average order value, and gross profit margin.
After identifying the KPIs, the company needs to analyze their effectiveness. For example, they may find that the KPI for average order value is not providing valuable insights because it does not take into account the quantity of items sold. In this case, the company could revise the KPI to measure the average revenue per item sold.
The next step is to set benchmarks for each KPI. Based on historical performance data, the company may set a benchmark of 10% growth in sales, a 5% increase in average revenue per item sold, and a 2% increase in gross profit margin.
The company should monitor their performance against the benchmarks set. For instance, if they notice that sales are not growing as fast as they had hoped, they may investigate potential causes such as changes in the competitive landscape, shifts in consumer behavior, or issues with pricing or product offerings.
Based on the insights gained from the KPI analysis, the company could decide to adjust their pricing strategy, invest in marketing efforts to increase customer traffic, or optimize their product mix to improve profitability. For example, they could offer promotions to increase sales, bundle complementary items to increase the average revenue per item sold, or negotiate with suppliers to reduce the cost of goods sold and increase gross profit margin.
KPI analysis is a critical framework for businesses to gain valuable insights and achieve their goals by identifying relevant KPIs, setting benchmarks, monitoring performance, and making data-driven decisions.