Guest post by Ron Stefanski.
Every business needs reliable metrics to monitor and evaluate performance, progress, and success. Leading and lagging indicators are measurable values that let you know how well you’re doing in your efforts to accomplish your business objectives.
Marketing performance indicators keep you focused on what‘s really important by keeping your attention on exactly what you must do to reach your business goals faster.
This post outlines the differences between leading and lagging indicators, as well as providing some examples of each so you get a clearer idea of how to measure current performance and produce desired results in the future.
What’s the Difference Between Leading and Lagging Indicators?
Leading Indicators are the day-to-day business activities that lead to the results of lagging indicators—that is, the goal you’re trying to achieve in your business. These “lead activities” or “input” are what drive business performance and success, and make future results more predictable.
Leading indicators encourage business stakeholders to ask questions like:
- What systems, processes, or setups can I use to achieve this goal and enjoy higher levels of success?
- Which skills can the team (marketing, sales, customer service, production, etc.) improve to achieve the desired result in a more efficient way?
- What steps can we take to speed up product development?
Leading indicators provide benchmarks, and if those are met, they will be indicative of your ability to meet overall objectives and KPIs (key performance indicators).
Lagging indicators are measurable values of a business’s intended goals or objectives, such as sales growth, customer retention, and profitability. Lagging measures report past results, or end results of previous marketing efforts, such as total sales for the month, gross or net profit, and cost of sales.
So while leading indicators are used to predict future results, lagging indicators report past results that have already happened.
As such, leading indicators are dynamic, but can be hard to measure, whereas lagging indicators are easy to measure but not changeable.
Lagging indicators encourage business stakeholders to ask questions like:
- How much product was produced?
- How many people attended an event?
- What response did it receive?
Lagging indicators can take a long time to change and show the later-stage results of your efforts.
If you want to change your current results, you must focus on leading indicators. These are actions you have control over that can lead to different results.
Having said that, lagging indicators are still an important element of your overall performance management framework as they represent the undeniable truth of how your business is doing, so make sure you strike a balance between focusing on leading and lagging indicators.
Five Examples of Leading Indicators
There are many different types of indicators that provide insight into different aspects of a business.
As an example, an enterprise software company with a yearly subscription fee might have these three examples as top marketing performance indicators:
- Number of users who renew their annual subscription at or before mid-term alerts;
- Percentage of customers who sign up for multi-year plans; and
- Number of customers who subscribe to a piece of software or use a service like a podcast hosting platform, website builder, or email marketing tool
It can be different for each business or industry, and it’s up to you to choose the right leading or lagging indicators for your business.
Below are a few examples of key measurable values that you can focus on to help you better understand how you can use these measures to analyze your business’s performance.
1. Emails Sent
Someone in marketing might have a leading indicator like the number of outreach emails sent out as part of their content promotion strategy.
This indicator increases the odds of bloggers and influencers in their space linking to their website—although it may be a bit harder to measure if their emails successfully lead to posts being mentioned.
2. Daily Active Users (DAU)
A daily active user is a leading metric. If active users are dropping, it will obviously have an effect on revenue.
A mobile game company might use this leading indicator to measure the potential of the business. This metric tells them how many users are active each day.
They may also track weekly active users (WAU), or monthly active users (MAU), although this metric won’t be as precise. It counts users the same, whether they used the app once or a hundred times that month.
A better way to gain insight from these metrics is to track DAUs and the ratio of daily/weekly to monthly users.
3. Social Media Posts Shared
This is a simple yet important leading indicator metric to track, particularly if you want to grow your brand presence online.
You might simply look at the number of posts shared within a specific time period in order to gauge how effective your content strategy is.
There are also a variety of other leading indicators from social media that you can track on Facebook, Twitter, TikTok, Instagram, LinkedIn, and other sites.
These include metrics like:
- Engagement: Number of subscribers, likes, clicks, shares, comments, mentions, profile visits, active followers, etc.;
- Reach: Number of new followers, impressions, traffic data; and
- Leads: You can measure how many of your fans and followers turn into leads and customers.
Successfully tracking these and other social media KPIs will help you gauge performance changes and provide evidence of progress towards your desired business goal.
4. NPS (Net Promoter Score)
Your net promoter score is another clear leading indicator you can use to determine how your customers feel about your brand.
Simply ask them how likely they are to recommend your product to others. Measure their response on a scale from 1 to 10, with 1 being least likely and 10 being most likely.
Responses of 7 or higher show that customers are very likely to continue with your business. Responses that are less than 7 are red flags and should be used as opportunities to find ways of improving your product or service in order to increase your NPS score.
5. Product Adoption
This is a stage at which customers start to realize continuous value from your product or service and become regular users.
Measuring this metric allows you to discover if a customer is likely to remain loyal to you or leave you for a competitor.
Customer loyalty is uncertain before product adoption occurs, but once adopted, you have a loyal customer who may even become an ambassador for your brand.
Five Examples of Lagging Indicators
As previously mentioned, lagging indicators show the history of a business, which means there’s nothing that can be done to change them. A lagging indicator is sometimes compared to an “output” metric. However, these are still very important indicators that show you the true state of your business.
Here are five common lagging indicators:
1. Revenue Growth
This is one of the most commonly measured metrics for businesses. It’s a financial indicator that clearly tells you how the business performed during a specific period.
Looking at revenue growth lets you know if you’re on the right track, but it doesn’t predict the future (although some businesses still try to use past revenue to determine what to expect in the future).
Measuring the revenue growth at the end of the fiscal year shows you the percentage growth of the business and allows you to keep track of yearly growth.
If your figures are lower than the benchmark or target for one year, it’s a clear indication that you need to find ways to improve your business.
2. Customer Acquisition Costs
Tracking customer acquisition costs is yet another effective way to increase ROI through the use of lagging indicators.
You will always need to generate new customers to grow your business, and the cost is often significant. But you can lower customer acquisition costs by focusing on this lagging metric to find ways of attracting new customers without spending more.
For instance, a platform like Movavi video editor might increase the number of new downloads without incurring additional costs by adding an incentive to users via a customer referral program.
3. Churn Rate
Customer churn is an unfortunate reality for every business. But given that acquiring a new customer can cost five times as much as retaining an existing one, it’s crucial to try to minimize this.
By tracking this metric, you’ll know when it’s time to evaluate your customer retention strategies so you can find ways to reduce your churn rate and improve your ROI.
The best part about tracking this lagging indicator is that you can use churn rates (month, quarter, or year) as leading indicators for the next time period.
4. Customer Satisfaction
In addition to using NPS as a leading indicator, you can also use customer satisfaction scores like CSAT as lagging indicators in your business.
This will help you gauge customer satisfaction so you know the percentage of those likely to remain loyal to your business and brand. If you have a low CSAT score, it probably means you’ll experience high customer churn in the future.
Here’s an example of what a CSAT survey might look like:
5. Renewal Rates
Renewals are yet another important indicator to show you how your business is doing. This is one of the top lagging KPI metrics used by SaaS (software as a service) companies and offers opportunities to boost your ROI.
Keep in mind that all your customer success efforts mean nothing until the final result turns into customer renewal.
Whenever a customer renews their subscription, it’s a clear indication that your past efforts were going in the right direction.
Also, note that small changes often can lead to increases in renewal rates. For example, Assaf Cohen, who runs gaming studio Solitaire Bliss, explains, “We revamped the graphics for our games to reduce bounce rate. To our surprise though, we saw renewal rates for our subscriptions improve as a lagging indicator of our design improvements.”
How to Use Leading Indicators to Increase ROI
Leading indicators tend to be more abstract, which makes them a lot harder to measure than lagging indicators. They are important to track so you know where your business is headed.
Also, if you only measure lagging indicators, like revenue, profits, and expenses, you’ll miss important segments of your market that are purchasing from other channels or locations where you don’t have a presence.
This is where leading indicators come in. Using the previous example, you might create measurements like tracking individual purchases across different regions or channels so you can learn where you might potentially establish a stronger foothold.
Obviously, you couldn’t hope to understand this just by looking at your overall revenue alone.
Long story short, any time you have a question that requires you to look into the future growth and success of your business, then you know it calls for the use of a leading indicator.
How to Use Lagging Indicators to Increase ROI
Lagging indicators are triggered by some event that has already occurred, such as a product launch, sales training program, online course launch, etc.. They are easier to measure and help you determine, in retrospect, how the event went.
For example, you might measure how many people attended your webinar, the number of leads you gathered from it, and audience engagement levels (such as how long attendees stayed and the volume of chat activity.)
But for best results, these types of indicators are best used together with leading marketing performance indicators.
Remember, business success comes from the ability to identify, analyze, and manage these very important drivers in every area of your business. And the best way to manage performance is to merge the insights and predictions from both backward- and forward-looking indicators.
By using both together, you’ll be able to compare them and get more insight so that you can determine trends and see if your outcomes were met.
Hopefully this article has helped you understand how you can use leading and lagging indicators to improve business performance and increase your ROI.
Rather than using one or the other, you can use both of them in tandem to get a full picture of accurate and achievable KPIs. This way, you’ll have an easier time launching your business into high-growth mode.
Are you ready to use leading and lagging indicators to help you increase growth, sales, profit, income, and cash flow? Share your thoughts below!
Ron Stefanski is a online entrepreneur, marketing professor, and founder of OneHourProfessor.com, which helps over 75,000 people each month create and grow their own online businesses. You can also connect with him on YouTube or Linkedin.