Leading vs Lagging indicators: What’s right for your startup?
As some of you may know already, Key Performance Indicators aka KPIs are a way of measuring the quality or productivity of your startup, an individual department, a campaign, or even individual performance.
When you have effective KPIs in place, it becomes possible to tell if something is working as expected or not. Equally, these KPIs can also help you figure out what needs improvement so that you can make changes where they’re needed.
For every KPI you set for your startup, it is important to know whether it’s a leading or a lagging KPI. These two types of KPIs are very different from one another because they each focus on different things: lagging indicators look at past performance only; whilst leading indicators provide information about both current performance and expected future results.
In this two-part series, we explain the two types of KPIs - leading and lagging - in more detail and share how best to utilise these to get deeper and more actionable insights about your startup.
In focus - leading indicators
Let’s begin with leading KPIs.
Leading KPIs (also called leading indicators) are measurable aspects of a business initiative which let you anticipate the final outcome. Hence the term leading indicators.
These are aspects that have a direct connection or correlation to the final target outcome that you are working towards. They must be measurable, actionable, and quick to calculate
Let’s understand how to define and use leading indicators through some examples:
For a SaaS startup, a typical target outcome is the number of paying subscribers. Further, it is common for startups to offer a free trial period ahead of customers signing up to become paid subscribers.
If such a startup sets a target outcome to acquire 100 new paid customers every month, they can use number of new trial accounts as a leading indicator.
To illustrate this with numbers:
- Let’s say for every 10 trial accounts, 2 of them convert to paid customers. This implies a 20% conversion rate
- For the startup to reach its target of 100 new customers, it will need about 500 trial accounts (20% of 500 = 100)
- In this case, the number of trial accounts will provide a leading indication of whether the startup is on course to reach its target for paid customers
- If the sign-up rate of trial accounts is slow (e.g. only 120 accounts have been created in the first two weeks), it would be safe to assume that the startup will not hit its target. With only 120 trial accounts and a 20% conversion rate, they will only have 24 paying customers, which falls far short of their target of 100 paid customers
- In this case, the startup can revisit its marketing campaign and take a closer look at how to improve uptake for trial accounts
- Conversely, if the trial sign up is faster than expected, the startup can expect to overshoot its target for paid subscribers. They can use this leading insight to ensure they have the right level of customer support to manage more than 100 paid subscribers by the end of the month
How can startups leverage leading indicators?
- Identifying problems and successes early - Leading indicators help spot and predict problems before they snowball into something major. Alternatively, they also help identify where growth is coming from and give decision-makers evidence to double down on their current strategy
- Short feedback loops - Team members can get quick feedback on their work, which will help them assess whether they need to change their approach to certain tasks in order to meet the startup’s goals. This is really powerful for startups that tend to have limited resources. They let you optimise where to spend time and effort (and therefore money)
- Fundraising - Leading indicators are really useful data points for investors who use them to draw a picture of your startup’s future potential
What to keep in mind while working with leading indicators?
- Leading indicators have a tendency to be volatile, which means that they can change rapidly and unexpectedly
- It's advisable to pay attention to the data source and how it was collected. If there is any doubt about the quality of data, it is best to use multiple sources of information if possible
- The best way to use leading indicators is to build models that use multiple indicators together. This will give you a more accurate prediction than using just one indicator alone
In summary, leading indicators are a really useful tool for startups that usually need to make quick decisions with limited resources. What leading indicators will you set for your startup?
It is important to track both your leading and lagging indicators in unison to get the full picture. In part two of this series, we will cover lagging indicators.