To successfully conduct your business, you need to have full control over it. There are many key performance indicators that companies use to gain complete visibility of their business operations. These indicators can be grouped into two categories – leading and lagging indicators.
Business performance indicators are usually measured in advance so that the outcome can be adjusted in the favor of the organization. Few indicators are measured beforehand while others are measured based on the result. Let us see what these indicators are and how you can improve upon them.
What are leading indicators?
Leading indicators are the metrics that allow you to measure change. They are the clear indicators through which you know in advance if you are going to achieve your goals or not. By measuring these indicators, you come to know if there are any gaps in your strategies. Then an appropriate action can be taken towards the improvement of the processes.
When you have the power to track the progress of your business in advance, you are in a better position to enhance your business. You don’t need to wait till the end to know the final outcomes. The early warnings of any unfavorable outcome allows you to take proactive measures to improve the parameters towards better outcomes. Hence, leading indicators are useful in any SaaS business aspiring towards operational excellence.
What are lagging indicators?
Lagging indicators are the metrics that allow you to measure results. These indicators are usually measured when the events have already occurred. Hence, it leaves a lesser chance to improve upon the outcomes because by the time you measure your outcomes, it is already too late. Nevertheless, these indicators are still useful for doing the root cause analysis and preventing any negative outcome from happening again.
The difference between leading and lagging indicators dissolves in a process that is constantly in progress. By improving upon the lagging indicators, you are in a way changing the leading indicators for the further process. Especially in customer success, where there is no such thing as post sales, leading and lagging indicators play a pivotal role in enhancing business growth.
Leading Indicators Examples
Leading indicators help you know in advance about the customer’s behavior and sentiments towards your brand. Based on these indicators you can know how likely a customer would remain in business with you. And if not, then these indicators act as early warning signs so that you can take immediate steps to prevent churn. Some of the types of leading indicators in customer success include:
A net promoter score is a clear indicator of how a customer feels about your brand. You ask a simple question to the customer that says “how likely are you to recommend our product to others”? The response is measured on a scale from 1 to 10 with 1 being least and 10 being most likely. Any response less than 7 is a red flag and allows you to know if the customer is going to continue with your business or not.
Customer satisfaction score is another leading indicator that tells about the level of customer satisfaction with your company. Any customer with high satisfaction would most likely remain loyal to your brand. With a low CSAT score you can predict future events like customer churn.
Time to value (TTV)
Time to value is the amount of time taken by the customer to start realizing value from the product after the purchase. This is one of the most useful onboarding metrics and allows you to measure the efficiency of your onboarding process. Customers with a lower TTV tend to become more satisfied with your brand that eventually builds their loyalty.
Product adoption is the stage at which the customer has started realizing continuous value from your product and have become a regular user of it. This allows you to know if the customer would remain loyal or leave you. Until the product adoption has taken place, the probability of customer loyalty is dicey. And once adopted, they tend to become a loyal customer.
Lagging Indicators Examples
As we saw earlier, lagging indicators are the measures of outcomes. All the efforts you put in towards your goals finally culminate to produce outcomes that can be measured through lagging indicators. Few types of lagging indicators in customer success are:
Customer success efforts have no meaning until the final outcome turns into customer’s contract renewal. When a customer renews their subscription, it is a clear indicator that your efforts in the past were in the right direction. This is one of the lagging KPIs which every SaaS company desires the most.
This is another lagging indicator which tells clearly if your organization is on the right track. The revenue growth measured at the end of each fiscal year reveals the percentage growth of a company. This allows you to keep a check on your yearly growth. And any measurement below the benchmarks send you a clear signal that you need to improve upon your business.
This is the most unfortunate outcome or a lagging indicator in any business. When customers churn, it is the right time to evaluate your customer retention strategies and find gaps. Churn rate for any month, quarter or a year becomes the leading indicator for the next time-period.
Interplay between leading and lagging indicators
Lagging indicators can be commonly understood as “learning from mistakes”. Hence, lagging indicators are often used to adjust the leading indicators for better results in the next time-period. Below are a few examples where this practice can be followed.
When you measure the churn rate, it tells you about the performance in the last period examined. So, this lagging indicator can be used to re-adjust leading indicators like:
- Onboarding metrics like time to value, free trial to paid conversion, and customer progress during initial training must be curbed to prevent churn from the very beginning.
- Customer engagement metrics like product adoption rate can also be adjusted to enhance retention.
Customer account expansion
The revenue growth each year through each customer gives you the picture of your progress with a customer. This lagging indicator can be used to adjust leading indicators like:
- The number of upsells and cross-sells needed from each customer account to increase business with them.
- Increase in NPS and CSAT scores for turning customers into brand advocates to drive further business.
Although leading and lagging indicators are quite useful, sometimes companies fall into the trap of using vanity metrics. This brings more confusion and hampers the optimization of business processes. The solution to this situation is to start simple. Start with only one or two business goals and use only the relevant leading lagging indicators to achieve those goals. And as you become adept in this area, expand your horizon to include more such indicators.19
Remember, these indicators are only useful for you to point in the right direction. The final outcomes depend upon the efficacy of your efforts and strategies you design towards achieving your goals.
Rakhin has over 10 years of experience driving business development and client services. In his prior roles, he stayed close to customers to understand their requirements and help them achieve their business goals. He is passionate about customer success.
Published November 06, 2020, Updated March 02, 2023