Every fundraising story needs a solid financial model with logical and defensible forecasted values — but it also needs something more than just numbers. Investors want to see a much wider picture.
Your business produces piles of quantifiable data and numeric insights every day, and each team reports on myriad events and variables every month. Aggregating those insights into concise benchmarks not only strengthens your investor materials but also creates a vision of your business’s future through leading economic indicators.
This is where metrics — the cornerstone of any assessment of your business’s health — come into play. Your ability to properly use the right metrics (or indicators) while assessing your startup’s performance is paramount. Indicators provide a way to track progress and identify areas where changes need to be made; thus, they serve as a powerful way to explain your business to potential investors.
What exactly are leading and lagging indicators?
Leading indicators are measurements that can predict and track your success and give you actionable insights early — almost in real time.
Lagging indicators, meanwhile, measure past performance by analyzing large sets of historical data. Lagging indicators are only useful if you have a lot of previous data to feed the metric. By monitoring both indicators — you can get a more holistic view of your company’s performance and decide where to focus resources with data-driven decision-making.
Nobody wants to fall into the trap of siloed departments. By deconstructing both leading and lagging indicators — you can identify bottlenecks and shortcomings in your respective sales, marketing, and product strategies. In this article, you will look into leading and lagging in more detail and uncover insights into how to utilize them.
What is a leading indicator?
Do you want the most efficient way to track your success in real time? Leading economic indicators are the answer.
A leading indicator is any piece of data that can give you early information of how well your sales/marketing/product strategies are performing.
Leading indicators not only provide early indications of performance, they also lead to results by showcasing the progress you’re making toward your goal. Typically, leading indicators are metrics that will help keep you on track to hit all the strategic objectives.
Types of leading indicators
For examples of the different types, please review this list of leading indicators:
- Number of outreach emails/calls/meetings
- Amount of daily active users
- Number of website visitors
- Amount of trial subscriptions
- Time spent on the website
- Net promoter score (NPS)
How leading indicators work
Leading indicators are useful data points for investors. When using them you have to consider the following:
- By tracking leading indicators, startups can give their investors a clear picture of their potential future performance, allowing investors to make more informed decisions. For example, the number of hot leads in the sales pipeline can be a good leading indicator of future sales.
- It is also crucial to consider coincident indicators. Coincident indicators are influential factors as they account for the economic conditions of a certain field or area.
- The amount of website traffic or signups is perhaps the most accurate leading indicator and can give insights into future growth.
- Keep in mind that leading indicators can be volatile and change rapidly and unexpectedly.
How to use leading indicators
For example, by tracking leading the number of marketing campaigns and sales appointments, you can see what causes increases or decreases in sales, fill in any gaps in your strategies, and make ongoing adjustments to achieve your goals.
Let’s say you’ve got a specific target for the next quarter: onboard 20% more so-called “premium” users. Before implementing any changes into your sales playbook — you’ll need to set up a leading indicator dashboard. In this case, the leading indicators you could track are clear: emails per rep, calls per rep, and product demos per rep. Using these metrics will give you an early indication of success — unlike “closed deals” indicators.
This is the power of leading indicators.
Benefits of using leading indicators
Leading indicators are always the most measurable, actionable, and quick way to calculate a direct connection and correlation to the final target outcome you’re seeking.
Leading indicators’ predictive measurements can predict and track your success and give you actionable insights early — almost in real time. They reflect changes in your strategy quickly and — when used correctly — they become your North Star, a guide for navigating your monthly, quarterly, and yearly goals. Leading indicators are as important for tracking business performance as the more established and universal lagging indicators.
What is a lagging indicator?
The most monumental, universal, and popular metrics are lagging indicators. Although no less important, lagging indicators differ greatly in nature from leading indicators. As lagging indicators show the later-stage results of your efforts, they’re a straightforward indicator of success and take a long time to change.
Types of lagging indicators
Some examples of lagging indicators include the following:
- Revenue / EBITDA / Net profit
- Annual recurring revenue (ARR)
- Churn rate
- Retention rate
- Number of paid clients
- Expenses
- Customer acquisition costs (CAC)
- ROI
How lagging indicators work
Some points to keep in mind when it comes to lagging indicators:
- Lagging indicators measure past performance by analyzing large sets of historical data. As a result, these indicators are only useful if you have a lot of previous data to feed the metric.
- Lagging indicators assess the outcomes and success of the business, but it can be unclear what led to these results.
- These indicators measure long-term trends, so they can take months or years to change.
- It is difficult to change these metrics because they mainly involve high-level indicators like revenue; small changes in business operations will not make a tangible impact.
How to use lagging indicators
Let’s say you’re targeting 20% annual revenue and your lagging indicator shows that you’re only at 5% after six months — you know that changes are in order.
That’s the beauty of lagging indicators. They’re not inferior to leading indicators in any way. It’s not a competition. In fact, you’ll see that the most vital, universal metrics are lagging indicators. You can’t build a proper business without tracking them.
Benefits of using lagging indicators
Since lagging indicators deal with familiar variables and have definite, clear benchmarks, they can help you see whether you’re on track to reach your goals or not.
Many business analysts love keeping tabs on lagging indicators, as they feel safe measuring clearly quantifiable results or outcomes such as revenue or profit. The most popular universal metrics are lagging indicators, and they are universal to any startup in any vertical. Just remember that they’ll vary depending on your sales and product strategies.
The difference between leading and lagging indicators
Leading indicators can help you to make ongoing adjustments to achieve your target goals, unlike lagging metrics, which tend to make more long-term, overall predictions. The solution turns out to be taking control of your leading indicators so that your lagging indicators can be improved.
Leading and lagging indicators work best together
To really detect the pulse of a company’s performance, you’ll need a mix of leading and lagging KPIs. Both are important for measuring startup performance, together providing a comprehensive picture of what is happening and how to prevent accidents before they occur.
Let’s break this down a bit. Imagine that you have a pipeline volume of 100 leads based on historical data, and you know that the average annual contract value is $20K. This means that for every 100 leads you have in your pipeline, you can expect to generate $2 million in revenue. Of course, not every lead will turn into a paying customer — but, if you have a good mix of hot leads, you can reasonably expect a 5% success rate.
This means that, for every $2 million you have in your pipeline volume, you can expect to generate $100K in revenue. Therefore, if you want to achieve $100 million in annual revenue, you’ll need to generate $100M * 5% / $20K = 250 leads and $5B in pipeline volume.
By tracking this leading indicator, you can quickly adjust your strategy if you see that something isn’t working; for example, you may choose to increase the number of business development managers or take action to improve their outreach performance. Another option could be to think about ways to increase the average annual contract value. As a result, leading indicators can help you to stay on track and achieve your goals.
Looking at another combination of leading and lagging metrics
Keep in mind that the optimal way to truly grasp your company’s performance and to set it on the right track is to implement a performance management system that contains a mix of leading and lagging indicators. Here are some examples of powerful ways of combining leading and lagging indicators:
- Number of trials (leading) + number of paying clients (lagging)
- Number of calls/meetings (leading) + number of trials (lagging)
- Number of daily active users (leading) + number of subscribed customers (lagging)
If your company has a clear mission and a clear purpose, the right combination of leading and lagging indicators will track its performance and get you to where you want to go. By implementing leading indicators that accentuate your lagging indicators, you can measure progress more quickly and take your startup story to its next chapter.