The ability to understand, predict, and optimize performance is becoming increasingly important. To achieve this, companies rely on a combination of metrics and indicators that provide valuable insights into their operations. Two categories of these metrics, leading and lagging indicators.
Definition and importance of leading and lagging indicators
Leading and Lagging indicators are forward-looking metrics that give insights into going forward, helping organizations anticipate upcoming outcomes and trends. Lagging indicators are used to record previous metrics. These metrics are retrospective, reflecting past performance and outcomes, often closely tied to revenue figures.
The significance of these indicators is ability to provide a holistic view of a company’s health and direction. Analyzing both leading and lagging indicators, gives organizations a comprehensive understanding of their performance, which cannot be underestimated when trying to make informed decisions.
Application in business
If a software-as-a-service (SaaS) company seeks to boost its premium-tier subscription base new signups can serve as a leading indicator. Tracking the number of users signing up for the premium tier provides valuable insights into the potential growth of this segment. Lagging indicators, such as average revenue per user (ARPU). ARPU sheds light on the actual revenue generated from these premium-tier subscribers, offering a retrospective view of their value to the company.
Examples of indicators
Monthly Recurring Revenue (MRR): MRR is a classic lagging indicator that reflects the monthly revenue generated from subscriptions. It provides a historic view of revenue streams.
Average Revenue Per User (ARPU): ARPU calculates the average revenue generated from each user or customer. It helps in assessing the overall monetization efficiency.
Net Revenue Retention (NRR): NRR measures the revenue retained from existing customers, considering upsells, cross-sells, and churn. It indicates the ability to grow revenue from the existing customer base.
Gross Revenue Retention (GRR): GRR focuses on retaining the initial revenue generated from existing customers, excluding expansion revenue. It offers insights into the company’s ability to maintain its customer base.
Session duration: Session duration is a leading indicator that gauges user engagement. Longer sessions often indicate higher interest and satisfaction.
Number of sessions per user: This metric reveals how frequently users use a product or service. A steady increase in sessions can be a positive sign of user retention.
Activation rate: Activation rate measures the percentage of users who complete a specific action that signifies their commitment to the product. It can be a leading indicator of long-term user retention.
North star metric: The North Star Metric is a unique leading indicator for each business, aligning customer value with business success. It encapsulates the core value a product delivers to its users and is a guiding light for decision-making.
Strategic use of leading and lagging indicators
The strategic deployment of leading and lagging indicators is important for effective decision-making and long-term planning. Leading indicators providing real-time feedback. They absolutely must be continuously monitored to guide daily actions and adjustments. For instance, tracking the activation rate of new users can help identify potential bottlenecks in the onboarding process and prompt immediate improvements.
Lagging indicators are valuable for regular performance reviews and shaping long-term strategies. Analyzing ARPU trends over several quarters can reveal the impact of pricing changes or upsell initiatives on revenue. By examining such historical data, organizations can make informed decisions about their pricing strategy for the future.
It’s important to note that there should be a strong correlation between leading and lagging indicators. Changes in leading indicators should eventually translate into corresponding movements in lagging indicators.
Tools for measurement
Platforms such as Amplitude Analytics offer a user-friendly interface that lets organizations create custom dashboards tailored to their specific metrics. This means teams can monitor their chosen leading indicators in real-time and identify trends or anomalies. While there are many other tools that can be used to measure leading and lagging indicators, Amplitude Analytics is becoming an industry favorite.