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In this article we cover common KPI formulas for measuring and evaluating business success. We also apply each KPI formula to an example scenario.
Revenue is the total amount of money earned by a business over a given period of time. This KPI is a critical indicator of a company's overall financial health and performance. To calculate revenue, use the following formula:
Revenue = Number of Units Sold x Price Per Unit
Example:
Suppose a company sells 1,000 units of a product for $50 each. To calculate their revenue, we use the KPI formula:
Revenue: 1,000 x $50 = $50,000
Gross profit is the amount of profit a company earns after deducting the cost of goods sold (COGS). COGS includes the direct costs associated with creating and selling a product or service, such as materials and labor costs. To calculate gross profit, use the following formula:
Gross Profit = Revenue - Cost of Goods Sold
Example:
Suppose a company earns $50,000 in revenue and incurs $30,000 in cost of goods sold. To calculate their gross profit, we use the formula:
Gross Profit: $50,000 - $30,000 = $20,000
Net profit margin is a financial ratio that measures a company's profitability by comparing its net income to its revenue. This KPI helps businesses understand how much profit they generate for each dollar of revenue they earn. To calculate net profit margin, use the following formula:
Net Profit Margin = (Net Income / Revenue) x 100
Example:
Suppose a company earns a net income of $10,000 and has revenue of $50,000. To calculate their net profit margin, we use the KPI formula:
Net Profit Margin: ($10,000 / $50,000) x 100 = 20%
Conversion rate measures the percentage of website visitors who take a desired action, such as making a purchase or filling out a form. This KPI is crucial for businesses that rely on online traffic to generate leads or sales. To calculate conversion rate, use the following formula:
Conversion Rate = (Number of Conversions / Number of Website Visitors) x 100
Example:
Suppose a website has 10,000 visitors and 500 of them make a purchase. To calculate their conversion rate, we use the formula:
Conversion Rate: (500 / 10,000) x 100 = 5%
Average order value measures the average amount of money customers spend on each transaction. This KPI is useful for businesses that want to increase their revenue by encouraging customers to purchase more products or services.
To calculate average order value, use the following formula:
Average Order Value = Total Revenue / Number of Orders
Example:
Suppose a company earns $50,000 in revenue and has 1,000 orders. To calculate their average order value, we use the formula:
Average Order Value: $50,000 / 1,000 = $50
Customer lifetime value measures the total amount of revenue a business can expect to earn from a single customer over the course of their relationship.
This KPI is essential for businesses that want to retain customers and increase their revenue over time. To calculate customer lifetime value, use the following formula:
Customer Lifetime Value = Average Order Value x Number of Repeat Transactions x Average Retention Time
Suppose a company has an average order value of $50, a customer makes 3 purchases per year, and the average retention time is 2 years. To calculate their customer lifetime value, we use the KPI formula:
Customer Lifetime Value: $50 x 3 x 2 = $300
Return on investment measures the profitability of a particular investment or marketing campaign. This KPI is critical for businesses that want to evaluate the effectiveness of their marketing efforts and ensure they are generating a positive return on their investment.
To calculate ROI, use the following formula:
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
Example
Suppose a company invests $10,000 in a marketing campaign and generates $20,000 in revenue. To calculate their ROI, we use the KPI formula:
ROI: ($20,000 - $10,000) / $10,000 = 100%
Customer retention rate measures the percentage of customers who continue to do business with a company over a given period of time. This KPI is essential for businesses that want to retain customers and ensure their long-term success. To calculate customer retention rate, use the following formula:
Customer Retention Rate = ((Number of Customers at End of Period - Number of Customers Acquired During Period) / Number of Customers at Start of Period) x 100
Example
Suppose a company has 1,000 customers at the start of the year, acquires 200 new customers, and ends the year with 800 customers. To calculate their customer retention rate, we use the KPI formula:
Customer Retention Rate = ((800 - 200) / 1,000) x 100 = 60%
Net promoter score measures the likelihood that customers will recommend a company to others.
This KPI is crucial for businesses that want to understand how satisfied their customers are and how likely they are to recommend their products or services to others.
To calculate NPS, use the following KPI formula:
NPS = Percentage of Promoters - Percentage of Detractors
Example
Suppose a company surveys 100 customers and 40 of them are promoters, 30 are passive, and 30 are detractors. To calculate their NPS, we use the formula:
NPS = (40% - 30%) = 10%
