Leading and lagging indicators provide useful ways to look at the cause and effect relationship among various KPIs. It can get a bit complicated the deeper you dive.
To keep things simple, think about breaking things down to an ACTIONS=RESULT equation, where leading indicators represent the action and lagging indicators the result. To apply this, take the result you’re looking to achieve (your lagging indicator) and work backwards to identify what actions are needed (the leading indicators) to meet that goal. It might seem a little confusing now, but I’ll walk through some examples. First, let’s dig into the nuances of both leading and lagging indicators.
Driving Success Using Leading Indicators
An easy way to think about leading indicators is as benchmarks you can use to measure your progress towards change. These are KPIs that are easy to influence but they tend to be more difficult to measure … net promoter score, customer engagement and customer satisfaction. What makes them harder to measure is that they are objective in nature, designed to gauge customers’ thoughts and feelings regarding your solutions. Other leading indicators are more measurable, such as adoption and usage.
KPIs are categorized as leading indicators when they are applied as a means to achieve a larger goal like increased retention. As such, they can also function as lagging indicators when they themselves are the end goal.
In no particular order, the most important KPI leading indicators are:
- NPS: NPS is essentially the answer to asking your customers “How likely are you to recommend our product or service to others?” This feeds directly into the last stage of the Customer Success lifecycle, advocacy. As a leading indicator, you can use it to affect KPIs (and lagging indicators) such as retention, growth and churn.
- CSAT: As the saying goes, a happy customer is a loyal customer. CSAT scores offer easily interpreted quantitative data that you can apply to lagging indicators like retention and growth. They let you quickly identify trends and possible solutions. You can even compare how your score benchmarks with other companies across the country using the American Customer Satisfaction Index.
- Activation: This is one of those multi-functional KPIs. It can be a goal in itself, which would make it a lagging indicator. It is also one of the primary drivers of customer ROI. Reducing the time it takes a customer to activate their license and become active on the system will help effectively shorten time-to-value (TTV), which would make it a leading indicator.
- Usage: Usage is another chameleon KPI. It functions as a leading indicator when looking to improve retention and reduce churn. The more a customer relies on your service or solution, the less likely they are to be wooed away by a competitor.
Tracking Results Through Lagging Indicators
In our simple equation, lagging indicators are the metrics by which you can determine the success of your leading indicator efforts. Did reducing activation time increase retention? Did your focus on quicker, more effective onboarding improve your cross-sell or upsell numbers? Lagging indicators are easy to measure because they are quantitative, typically measuring change as hard numbers, ratios or percentages. Your leadership is paying close attention here as there is often revenue tied to these. Unfortunately, they are also much harder to affect, because you have to do so indirectly by focusing your efforts on the associated leading indicators.
Also in no particular order, the most important KPI lagging indicators are:
- Renewals: This KPI is a strong barometer of how happy your customers are with your product and the support behind it. Some of the leading indicators that can have the greatest impact on your renewal rate are adoption, customer engagement score, and productivity of your Customer Success Managers (CSMs).
- Growth: This is one of the most common lagging indicators we see at ESG. Growth means new opportunities and new revenue streams. Retention, churn, cross-sell and upsell are all major leading indicator contributors to achieving growth goals.
- NPS: As I mentioned, NPS can play either indicator role. When increasing your NPS is the defined goal, then it’s being employed as a lagging indicator. Time to onboard, TTV, and customer engagement score are all KPIs that can positively or negatively affect your NPS.
- Churn: This is probably the most notorious of the lagging KPIs (and one most companies hate to have to address). Cancelled subscriptions decrease recurring revenue, which in turn puts more pressure on increasing acquisitions. Accelerating onboarding, reducing TTV and increasing adoption are all excellent leading indicators in your fight against churn.
It’s easy to feel overwhelmed in a sea of KPIs, especially if you’re experiencing a high churn rate or you’re coming up on a stressful renewal season. But, with the right approach to your data and metrics, you’ll gain a clearer understanding of not just your business but its ability to help your customers succeed. All the information you need is there. You just have to know what to look for — and how to apply it.