Leading and Lagging Indicators: What is the right way to measure performance?

“If you can’t measure it, you can’t improve it.” – Peter Drucker

The reason why we measure our own performance stems from the believe that there is room for improvement. Knowing that you are “doing something” is not enough. Instead, you need to know what you are “doing wrong” and what you are “doing right”. If it’s wrong, stop. If it’s right, continue.
This is where leading and lagging indicators comes into the picture.

A leading indicator is a predictive measurement that can be used to influence change, whereas a lagging indicator is an outcome measurement that can only record what has happened.

A classic example is driving sales to your ecommerce store. What measurements come to mind? Conversion rate? Website traffic?

What is a lagging indicator?

Conversion rate is a lagging indicator because it’s an outcome of what you had done to drive sales (e.g. running ad campaigns). For clarification, conversion rate is the percentage of visitors on your website who decided to make a purchase. You take the total number of website visitors who made a single purchase and divide that number by the total number of people who visited your website. (Kissmetrics) Outcome-based metrics, such as conversion rates, are easy to measure because the numbers are readily accessible. As a result, we find ourselves heavily focused on measuring outcomes.

The benefit of measuring a lagging indicator is the ability to track progress. If your conversion rate is falling, you know immediately that you aren’t driving sales to your store. The downside of measuring a lagging indicator is the fact that it is an after-the-event measurement. This means you cannot use take this measurement to influence the future.

What is a leading indicator?

On the other hand, website traffic is a leading indicator because it can help to predict how likely you are in driving sales to your ecommerce store. The assumption is that the more traffic you receive, the higher the probability that people will purchase from your website. Given this insight, you would focus on activities that can increase your website traffic and ultimately contribute to overall sales. Such activities can include running ad campaigns or publishing content on different social media channels.

The benefit of using a leading indicator is the ability to adjust your course. For instance, if you decide to run ad campaigns on different channels (e.g. Facebook, Linkedin, Google, etc.), you can track which channels are driving the most traffic to your website. Based on this information, you can adjust your initial decision by redirecting your focus on selected channels. However, do you see any problems here?

Let’s say you decide to focus on running Facebook ads because it drives the most traffic to your website. It’s great that you’ve managed to increase your website traffic, BUT did your conversion rate increase correspondingly? This poses two problems:

1. Taking actions that affect the leading indicator but not your end goal

Just because Facebook ads are driving more traffic to your website, this doesn’t mean more people are purchasing your products. On the other hand, although LinkedIn ads are driving less traffic, the traffic it directs to the website may result in higher conversions. If you end up allocating your entire budget to Facebook ads, then you’re missing out on sales opportunities.

2. Believing that the leading indicator will result in the achievement of your end goal

The observation that increasing website traffic will lead to more sales is an assumption. You can have more people on your website, but this doesn’t guarantee that they will buy your product. Instead, sales can be affected by other factors such as the loading speed of your website; this raises the question as to whether or not website traffic is a valid leading indicator. Consequently, people shy away from the use of leading indicators because it takes time to assess their validity.

What is the right way to measure performance?

Leading and lagging indicators go hand in hand. In order to measure your sales performance, you need to measure both your conversion rate and website traffic. If you rely solely on conversion rate, how can you identify the actions that you need to take in order to increase sales? Contrarily, if you rely solely on website traffic, how can you know that you are indeed driving more sales? As a result, a lagging indicator without a leading indicator means that you lack clarity on how an outcome will be achieved and miss early warnings on whether or not you are moving towards your strategic goal. Likewise, a leading indicator without a lagging indicator means you lack confirmation on whether or not you are indeed achieving your end goal.  (intrafocus, Lead and Lag Indicators)