Leading and Lagging Indicators 101

Leverage your indicators by detecting what explained and what will explain your business performance.

When it comes to measuring the success of a business or organization, indicators are used to track progress and identify areas for improvement. Two common types of indicators are leading and lagging indicators. While both are important, they serve different purposes and can provide different insights.

Leading and lagging. Image generated by DALL-E.

Leading Indicators.

Leading indicators are measures that provide insight into future performance. They are forward-looking and predictive, and are often used to anticipate trends and changes before they happen. Examples of leading indicators include employee engagement surveys, customer satisfaction surveys, and sales pipelines. These indicators can help organizations identify potential problems before they occur, allowing them to take proactive steps to address them.

Here are some detailed examples of leading indicators for a standard e-commerce retail business:

1. Website Traffic: Tracking the number of visitors to your e-commerce website is a leading indicator that can help you anticipate future sales trends. You can use web analytics tools to monitor website traffic and identify any changes in customer behavior.
2. Conversion Rates: Conversion rates indicate the percentage of website visitors who actually make a purchase. By tracking this metric, you can identify areas for improvement in your website design, product offerings, and marketing campaigns.
3. Cart Abandonment Rates: Cart abandonment occurs when customers add products to their online shopping cart but then leave the site without completing the purchase. By tracking this metric, you can identify any friction points in your checkout process and take steps to reduce abandonment rates.

Here are some detailed examples of leading indicators for a SaaS business:

1. Free Trial Sign-ups: Free trials are a common way for SaaS businesses to attract new customers. By tracking the number of free trial sign-ups, SaaS businesses can gain insight into how effective their marketing campaigns are at attracting new leads.
2. User Engagement: User engagement measures how often users interact with your product or service. This metric can help you identify how often users are logging in, which features are most popular, and where there may be opportunities to improve the user experience.
3. Net Promoter Score: The Net Promoter Score (NPS) is a metric that measures customer loyalty by asking customers how likely they are to recommend your product or service to others. A high NPS indicates satisfied customers who are likely to be long-term customers.

If a company does not track and report leading indicators, they risk missing early warning signs of potential issues or missed opportunities for growth. Leading indicators provide forward-looking insights into a business’s performance and help to identify trends and potential areas for improvement.

Without tracking and reporting leading indicators, a company may not be able to identify issues that are emerging, such as declining website traffic, low conversion rates, or poor customer engagement. This can result in missed opportunities to take corrective action before the issues become more significant.

Moreover, leading indicators are often used to make strategic decisions and allocate resources within a company. If a company does not track and report leading indicators, they may not be able to make informed decisions based on data-driven insights, which could lead to ineffective strategies or inefficient resource allocation.

Lagging Indicators.

Lagging indicators, are measures that provide insight into past performance. They are backward-looking and reactive, and are often used to evaluate the effectiveness of past actions or decisions. Examples of lagging indicators include financial statements, customer retention rates, and employee turnover rates. While lagging indicators are important for evaluating past performance, they do not provide insight into future performance.

Here are some detailed examples of lagging indicators for a standard e-commerce retail business:

1. Sales Revenue: This is a key lagging indicator that measures the total amount of sales revenue generated by your e-commerce business. By tracking this metric over time, you can assess the effectiveness of your marketing campaigns and product offerings.
2. Average Order Value: This metric measures the average amount spent by customers on each order. By tracking this metric, you can identify opportunities to increase revenue by encouraging customers to add more products to their shopping carts.
3. Return Rates: Return rates indicate the percentage of products that are returned by customers. High return rates can be an indicator of quality issues with your products or a mismatch between customer expectations and product descriptions.

Here are some detailed examples of lagging indicators for a SaaS business:

1. Monthly Recurring Revenue (MRR): MRR is a key metric for SaaS businesses that measures the amount of revenue generated from subscriptions on a monthly basis. By tracking MRR, SaaS businesses can identify revenue trends over time and assess the effectiveness of their pricing strategies.
2. Churn Rate: Churn rate measures the percentage of customers who cancel their subscription or stop using your product or service. High churn rates can indicate issues with product quality, poor customer support, or ineffective pricing strategies.
3. Customer Acquisition Cost (CAC): CAC measures the cost of acquiring new customers through marketing and sales efforts. By tracking CAC, SaaS businesses can identify how much they are spending to acquire new customers and assess the effectiveness of their marketing and sales strategies.

Very soon I’ll have a dedicated post to MRR.

If a company does not track and report lagging indicators, they risk missing important insights into their past performance and may not be able to identify trends or areas for improvement. Lagging indicators provide a retrospective view of a business’s performance over a specific period, and as such, they are essential for assessing the effectiveness of past strategies and making data-driven decisions for the future.

Without tracking and reporting lagging indicators, a company may not be able to identify issues that have already occurred, such as high customer churn rates, low customer retention, or declining sales. This can result in missed opportunities to improve the company’s strategies, products, or services to prevent further losses.

Moreover, lagging indicators are often used as performance benchmarks by investors, analysts, and other stakeholders. A company that does not track and report lagging indicators may not be able to demonstrate its past performance to these stakeholders, which could lead to a lack of confidence in the company’s future prospects and potential missed investment opportunities.

How to identify you own leading and lagging indicators?

To detect leading indicators, businesses should adopt a proactive approach to data analysis and focus on identifying metrics that have a strong correlation with their desired outcomes. Here are some strategies to consider:

1. Set clear goals: Before identifying leading indicators, businesses must define their goals and objectives. This will help to identify the key performance indicators (KPIs) that are most relevant to their business.
2. Analyze historical data: Analyzing historical data can help to identify patterns and correlations between different metrics. By looking at the data over time, businesses can identify potential leading indicators that have a strong correlation with their desired outcomes.
3. Conduct A/B testing: A/B testing involves comparing two versions of a website, product, or service to see which performs better. By testing different variables and tracking the results, businesses can identify leading indicators that have a strong impact on their desired outcomes.
4. Monitor social media and customer feedback: Social media and customer feedback can provide valuable insights into customer behavior and sentiment. By monitoring social media and customer feedback, businesses can identify potential leading indicators, such as changes in customer sentiment or spikes in complaints or inquiries.
5. Use predictive analytics: Predictive analytics involves using statistical algorithms to analyze historical data and predict future trends. By using predictive analytics, businesses can identify potential leading indicators that have a strong correlation with their desired outcomes.

To detect lagging indicators, businesses should take a retrospective approach to data analysis and focus on identifying metrics that are most relevant to their past performance. Here are some strategies to consider:

1. Analyze historical data: Analyzing historical data is crucial for identifying lagging indicators. By looking at past performance over a specific period, businesses can identify metrics that have a strong correlation with their desired outcomes and use them as lagging indicators.
2. Conduct trend analysis: Trend analysis involves looking at past performance over time and identifying patterns and trends. By analyzing trends, businesses can identify potential lagging indicators, such as declining sales, increased customer churn, or declining customer satisfaction.
3. Use benchmarking: Benchmarking involves comparing a company’s performance with industry standards or best practices. By benchmarking their performance, businesses can identify potential lagging indicators and use them to identify areas for improvement.
4. Track customer feedback: Tracking customer feedback, such as customer satisfaction surveys, can provide valuable insights into past performance. By monitoring customer feedback, businesses can identify potential lagging indicators, such as declining customer satisfaction or increasing complaints.
5. Conduct post-mortem analysis: Post-mortem analysis involves analyzing the results of a project or initiative after its completion. By conducting post-mortem analysis, businesses can identify potential lagging indicators, such as missed targets, cost overruns, or delays.

I don’t want to track them separately. Or track them at all.

If a company does not track leading and lagging indicators separately, they risk missing out on valuable insights into their business performance. Leading and lagging indicators provide different perspectives on a company’s performance, and tracking them separately helps to identify early warning signs of potential issues or missed opportunities for growth.

If leading and lagging indicators are not tracked separately, a company may not be able to identify trends or patterns that are emerging, or understand the impact of changes made in response to leading indicators. This can result in missed opportunities to take corrective action before issues become more significant, or to capitalize on opportunities for growth.

Without tracking and reporting lagging indicators, a company may not be able to identify issues that have already occurred, such as high customer churn rates, low customer retention, or declining sales. This can result in missed opportunities to improve the company’s strategies, products, or services to prevent further losses. Without tracking and reporting leading indicators, a company may not be able to identify issues that are emerging, such as declining website traffic, low conversion rates, or poor customer engagement. This can result in missed opportunities to take corrective action before the issues become more significant.

How often should be they reported?

The reporting frequency and format for leading and lagging indicators may vary depending on the specific business and its goals. However, it is generally recommended to report leading indicators more frequently than lagging indicators.

Leading indicators are forward-looking and can help businesses anticipate future trends and make proactive changes to their strategies. As a result, they should be monitored regularly, typically on a weekly or monthly basis. Lagging indicators, on the other hand, provide a retrospective view of a business’s performance over a specific period, and as such, they do not require the same level of frequent monitoring.

In terms of reporting format, leading indicators are typically presented in a dashboard format or in real-time, so businesses can quickly assess their performance and identify any areas for improvement. Lagging indicators, on the other hand, are usually presented in a monthly or quarterly report that provides a more comprehensive view of the business’s performance over a longer period.

In a nutshell, leading and lagging indicators are both important tools for measuring the success of an organization. While they serve different purposes, they can be used together to provide a comprehensive view of an organization’s performance. When choosing which indicators to track, it is important to consider the specific goals and objectives of the organization, and to use a combination of leading and lagging indicators to gain a complete understanding of performance.