Volume, margin or conversion rate? What makes the best KPI’s?

KPI’s should mostly follow SMART (specific, measurable, achievable, relevant, timely) principles.  They generally fall into three main categories – Volume, Margin or Conversion.

Volume-based KPI’s aim to increase the dollar value of sales for a company.   An example volume based KPI could be, “to increase the sales to ‘x’ customer/s to more than $1,200,000 over ‘y’ period.”  These targets offer various benefits:

1. Easy measurement and reporting
2. Provide financial target for budgeting and forecasting
3. Assist with cashflow planning
4. Give an element of certainty for resource allocation

However, there are drawbacks to consider:

1. Do not take into account regional variations
2. Lead to unethical sales approaches
3. Decrease profitability
4. Falling behind early in a KPI period can demotivate

Margin-based KPI’s specifically focus on increasing the profit from sales as a percentage of the total profit / sales volume.    An example volume based KPI could be, “to increase and maintain the margin to ‘x’ customer/s to greater than 35% by ‘y’ period.”  targets have several benefits:

1. Relatively easy measurement and reporting
2. Provide financial target for budgeting and forecasting
3. Give an element of certainty for resource allocation
4. Demonstrates company profitability

Nevertheless, there are potential drawbacks:

1. Requires cost information to be shared with applicable stakeholders
2. Less profitable sales may be avoided
3. May be significantly different depending on geographic areas
4. Falling behind early in a KPI period can demotivate

Conversion-based KPI’s based targets measure the effectiveness of a salesperson, i.e. – how many enquiries do the require before securing an order.  An example conversion based KPI could be, “to maintain a 50% conversion rate to ‘x’ customer/s over ‘y’ period.”  Benefits of this type of KPI include

1. Ability to forecast sales volumes/margins based on % of inbound enquiries
2. Is not area specific – level playing field
3. Easy tool to compare sales staff
4. Assist with resource allocation

But..

1. Does not hold salespeople accountable for volume or profit
2. Difficult to utilise without existing sales funnel history
3. Easier to win opportunities gain priority over harder to win higher volume/ margin ones
4. Can lead to short term focus

Ultimately every company and situation are different, and each situation will require different KPI’s to lead employees towards the company goals.  Choosing the right KPI’s can challenge, motivate and inspire a team but the wrong KPI can be very counterproductive and could kill any chance of the company goals being achieved.

We specialise in assisting businesses with setting, reporting and reviewing Key Performance Indicators, please reach out to Full Business Spectrum Consulting if you would like to have a chat with us at info@fbsconsutling.com.au or phone 0468 794 040.

We are here to help your company grow.