Productizing our thesis with software

Part II — What are leading and lagging indicators

This is a 6 post series covering the core components of our investment thesis

In the last post, I touched on the upside of the online economy as it relates to our core thesis at Birch Global Group. This post will cover the use of leading and lagging indicators in an internet business.

“If you can’t measure it, you can’t improve it.” — Peter Drucker

What are Leading and Lagging Indicators?

Leading and lagging indicators are two types of measurements used when assessing performance in a business.

Leading indicator: Predictive measurement

Lagging indicator: Output measurement

The key difference, leading indicator influence change, while lagging indicators record what happened.

Lagging indicators

The benefit of measuring a lagging indicator is the ability to track progress.

Examples

Conversion Rate

A conversion occurs when a user completes a predetermined action on your site, e.g. clicks a button, submits a lead generation form, reaches a specific page, or any other goal of interest.

Action Tip: Examine call-to-actions and leverage A/B testing.

Average Order Value

Average order value (AOV) tracks the average dollar amount spent each time a customer places an order on a website. To calculate your company’s average order value, simply divide total revenue by the number of orders.

Action Tip: Use this KPI to provides insight into your customers’ spending habits, and determine which items represent the most value to them.

Leading indicators

The benefit of using a leading indicator is the ability to adjust your course.

Examples

Site Traffic:

How many people are visiting your site on a daily, weekly, and monthly basis.

Action Tip: Ascertain which days customers are most likely to visit your site and investigate why certain days are more popular than others.

Average Session Duration:

Total duration of all sessions (in seconds) / The number of sessions

Action Tip: Figure out whether or not your customers are engaged by the content on your website.

Conclusion

Leading and lagging indicators go hand in hand in the measurement of performance. For example, if you need to measure sales as it relates to a lagging indicator like conversion rate, you’ll need to measure a leading indicator like website traffic. Relying solely on conversion rate, leaves you without identifying the actions needed to increase sales. Contrarily, relying solely on website traffic, you’re missing data on what’s driving sales. The combination of the two confirms whether or not you are indeed achieving your end goal.


Additionally

Leading indicators can be used to predict an outcome, making it an interesting alternative data point in an underwriting model. For example, if a certain leading indicator is correlated to sales, it can be used to evaluate the likelihood of repayment. This is what drives one component of Dinote’s underwriting model.

Dinote is a dedicated capital provider for digital native businesses. Online merchants connect their data to the platform to measure performance and access credit.

Dinote is currently in private beta, and will start issuing its first credit product cohort-by-cohort at end of 2019!

The goal of this series is to bring awareness to our software solution Dinote.

If your curious about what we’re building at Birch Global Group sign up for our updates here!