Why leading vs lagging metrics matter when selling lollipop hammers
There are a ton of metrics you can measure in your product. You can measure traffic, active users, conversions, signups, churn, MRR (monthly recurring revenue), NPS (net promoter score). Or perhaps its social shares, K Factor, bounce rates, cost per acquisition, lifetime value, and contact rate. There’s a metric available for every aspect of your business. In this blog post I’ll highlight why its important to know the difference between leading vs lagging metrics.
A leading metric is an indicator of the potential of your business. It predicts the future. A lagging metric tells you later what happened. It looks back retrospectively. Both have their purpose.
Sales of lollipop hammers
Imagine you have a mobile app which is a social game. It is free to download and has in-app-purchases (IAP’s) you can buy. One of the metrics you will track is revenue. These are the things you can buy inside the game. These could be power-ups to buy a lollipop hammer to crush candy. Your users typically buy after 2 months of playing the game i.e. 2 month sales cycle. We know that sales of lollipop hammers makes your business go around.
You use the monthly revenue from the sales of lollipop hammers to understand how you are tracking. Lets say you get paid by the app store every 30 days.
You find out one day that revenue has dropped dramatically. Oh noes!
If you see revenues decreasing for lollipop hammers, you will then take some action to work out what happened. Perhaps you might tweak the gameplay to make it harder so users can buy more hammers. Another option involves improving the number of pop-ups for upsells to more powerful hammers. Maybe we should sell them two hammers? Or someone yells “we need more marketing!”. Then you spend more on mobile ads on Facebook to drive more installs. It might take you a couple of weeks to fix the app and publish an update to the app store.
The problem with measuring based on revenues is that you find out too late. By the time you take action and implement it, you’ll probably have another down month of revenue. Your free users start playing the new version of the game and the stats start coming in. But you might not see the full effect until 2 months later when your new users experience the game and start buying the IAP’s.
Further, you won’t know the results til another 30 days later when you see the sales reports in iTunes. Your in-app-purchase revenue will lag behind your changes. This is why its a lagging indicator. As mentioned in the Lean Analytics book, the horses have already bolted from the barn door. But you were able to close the door to stop more horses from bolting.
Leading metrics for a mobile game company
Conversely, a leading metric for a mobile game company will be monthly active users. This is known as MAU. MAU tells you if a user is active in the month. They might have used the app 1 time or 100 times, but it counts as a single MAU. There is a similar metric for daily active users and weekly active users. If they are active at least once in the period, it will count as an active user. A mobile game company will definitely track daily active users and the ratio of daily to monthly users.
An active user is a leading metric. We know that if active users is dropping, this will have a flow on effect on revenue.
Lets keep it simple and say I have 400k MAU every month and 3% convert at $1 for lollipop hammers. In 2 months time when those users convert, I’ll make $12k in revenue.
In the next month, I have 300k MAU and the IAP conversion remains the same. I will expect a decrease in revenue. I don’t need to know what the revenue figure is. I simply know something bad is going to happen because MAU has dropped. But in case you are wondering, it will be $9k.
A leading metric is an indicator that I need to get to work immediately if that MAU figure drops. It tells me about the potential of my business. It is a prediction of my success.
Another leading metric I could track is downloads. If downloads are dropping, then I will expect active users and revenue to also fall if everything remains the same. I need to know the impact of leading vs lagging metrics.
Leading vs Lagging metrics for SaaS business
At Atlassian where I work, we have products that are software as a service (SaaS). We track a number of leading vs lagging metrics for these products. The metrics range from monthly active users, NPS, revenue, and churn. This is typical of any SaaS business.
If you measure NPS (net promoter score), revenue, or churn, these numbers happen after the fact. They tell a story of what happened. Hence these are lagging metrics.
If a customer gives a negative rating for NPS, then its very late in the relationship. They are unhappy with the service and it may be too late. If a customer churns which means they cancel the service, the customer has left. They are gone. I need to understand if I’m measuring the frontend or the backend of that relationship.
So Matt, should I lead and not lag?
Not necessarily. You have to pick the metric that is best for your business. I’m simply telling you the difference. Its likely that a mobile game company or a SaaS company will track several metrics including leading and lagging metrics. Its not one to the exclusion of the other. Leading and lagging metrics can be paired together.
However please note my one metric that matters rule. You have to pick the metric that is best for your business.
Some considerations I ask myself when picking a metric are:
1. If my business failed tomorrow, what would it be due to?
2. If I measured this number and knew the outcome, what would I do differently?
3. Is this a leading or lagging metric?
If you would like to know more about this topic of leading vs lagging metrics, I can recommend reading these sources:
I’m out like lollipop hammer sales,
This blog post was originally published on inspiredworlds.com. Check it out for more articles!