People often use benchmarking and KPIs interchangeably, but they actually aren’t the same thing. There are a few subtle differences between KPIs and benchmarking that you should understand before you try to implement these performance metrics into your business.
In this article, we’re breaking some of the differences between benchmarking and KPIs down so you can understand how to implement these strategies more effectively. Whether you use in-house or digital accounting methods, you want to incorporate benchmarking and KPIs into your financial strategy. Continue reading to learn more about the difference between benchmarking and KPIs and how each can help you improve your bottom line.
KPIs are decision metrics you can use to make decisions and track performance in relation to strategic goals. These numbers chart whether individuals or groups are achieving their objectives and they can act as a warning system to notify a company when something or someone isn’t performing as you hoped.
Benchmarks describe reference points that you can use to compare performance against performance. You can use benchmarks to compare processes, products, or operations, and you can use them as comparisons against other parts of the business. You can compare external companies such as competitors and industry practices and benchmarks are commonly used to compare customer satisfaction, cost, and quality,
When you use KPIs, you’re comparing the progress you make on a specific goal. When you use benchmarks, you’re comparing yourself against the performance of others. You can also use benchmarking to compare your existing KPIs with others that different companies utilize. Both of these metrics are used ubiquitously by companies to monitor and quantify their success or failure.
Key performance indicators are tied to financials that focus on revenue and profit margins. Net profit is the most effective way to conduct profit-based assessments and it represents the amount of revenue after deducting expenses. As a dollar amount, you must calculate the net profit as a percentage of revenue used in competitive analysis.
If the standard net profit margin for a given industry is 50%, a new business should expect that it has to meet or exceed that number to succeed.The gross profit margin measures revenues after accounting and expenses is directly associated with the production of goods for sale and it is another profit-based KPI. Financial KPIs known as current ratios focus largely on liquidity and they can be calculated by dividing a company’s current assets by its debts.
Financially healthy companies have positive cash flows and meet financial obligations for annual periods. It’s important to note that different industries rely on different debt financing and companies should only compare current ratios to other businesses in their field. Failure to do so can result in an inaccurate cash flow comparison.
Customer-centric KPIs typically focus on per-customer efficiency, customer satisfaction, and customer retention. Customer lifetime value represents the total amount of money a customer can expect to spend on your company’s products or services over the entire business cycle.
Customer acquisition cost (CAC) represents the total sales and marketing cost required to land a new customer. Comparing CAC to CLV gives businesses an effective way to measure their customer acquisition efforts.
Process metrics are KPIs that measure and monitor operational performance across your organization. You can obtain this metric by dividing the number of defective products by the number of total products produced. For example, businesses can measure the percentage of defective products.
KPIs vary from business to business but they typically can be narrowed down to the five most commonly used KPIs:
- Revenue growth
- Revenue per client
- Profit margin
- Client retention rate
- Customer satisfaction
Measuring KPIs depends on the KPI you’re measuring. Generally, businesses measure and track KPIs using business intelligence software and reporting tools.
Effective KPIs have objective information that helps you obtain easily-understood data. These measurements help you track efficiency, quality, timelines, and performance. They also provide a way for you to measure performance over time and inform future strategies.
To generate a KPI report, you should create an overview first, then clearly define your KPIs and present them using visual mediums, such as graphs, charts, and tables. Finally, you should make edits to the report and refine them so they are easily understood on an organization-wide basis.
Process Benchmarking: Process benchmarking helps you better understand your processes by comparing internal and external benchmarks in effort to optimize your benchmarking tactics. Understanding how other companies create thorough, effective processes, you can better shape your own.
Strategic Benchmarking: Strategic benchmarking compares strategies, business approaches, and business models to strengthen your strategic initiatives. Understanding the strategies that develop successful companies positions you to take advantage of them. When you can build on what works, you gain an advantage.
Performance Benchmarking: Performance benchmarking involves collecting information on the efficacy of your proposed outcomes. You can measure this using either internal or external methods and an example of this type of benchmarking strategy can be seen when studying the performance of an HR team compared to that of a marketing team.
No matter what type of benchmarking you plan to implement in your organization, they all have a common goal: to identify performance gaps and develop solutions. Streamlining processes, reducing costs and increasing profits, and developing a more loyal customer base are the primary functions of benchmarking.
Whether you want to compare your internal performance or outbid a competitor for your niche market, benchmarking in today’s business environment is nonnegotiable. But benchmarking is not the end-all be-all as far as improving your organization’s performance goes. It is simply part of your organization’s overall solution.
The difference between benchmarking and KPIs is subtle, but useful to understand. You can implement benchmarking to compare your company to competitors and develop strategies based on that comparison. KPIs are more about measuring individual performances and setting accurate, effective goals to ensure your organization stays ahead of competition. Using both of these methods is the only way to ensure you get the most out of your business processes and it’s up to you to determine the best way to do so.