Understanding a business's key performance indicator(s), or KPI, is critical to identifying and enhancing business value. KPIs measure what it is that drives a business' value.
For example, the customer retention rate is a KPI for a business that relies primarily on recurring customer revenue (such as the provider of this blog tool or other subcription-based business models). The reason for such is that the marketing and adminstrative costs to maintain an existing customer are typically significantly less than the marketing and adminstrative costs to obtain and setup a new customer. Therefore the higher the customer retention rate (or lower the customer attrition rate), the better operating margins are. All other things equal, that translates into higher value.
Now while a KPI is often measured in financial or other quantitative terms, it is generally driven by operational activity. Illustratively, restaurant owners measure seat turnover rates and average check as KPIs for their business, but what drives those rates? Customer satisfaction? Rate of menu changes? Reservation policies? Size of the wine list? When owners make the connection between operational activity and KPIs,they can then develop and implement strategies that enhance value, and measure their success to that end.
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