Measuring What Matters - Leading vs. Lagging Indicators

Measuring What Matters - Leading vs. Lagging Indicators

Ever read the small print? 'Past performance is no guarantee of future results.' So why do we manage our businesses that way?

There are two kinds of data that businesses use to make decisions — leading and lagging.

Lagging indicators are what you see most commonly reported: revenue growth, RevPAR, AUM, same store sales, etc. They are descriptive of business performance in the past. 

Leading indicators are predictive and relate to data about things that happen that will affect your business later: demographics, macro-economic factors, etc. If you run a mechanic’s shop and there is an increase in rates of car ownership in your area, that’s a leading indicator — it is information that can predict future demand.

Lagging indicators are useful to measure the impact of decisions you already made. They answer, “Did the thing work?” You use them because they provide a sense of certainty and feel directly tied to the actions you’ve taken. 

But lagging indicators won’t help to grow your business.

Leading indicators can be a challenge to interpret and can be less accurate. While they are not predictive, they are informative. 

Demographics are one of the most predictable leading indicators. Trends about population size and composition, for example, are accurate and widely available (via, for instance, StatsCan). Someone who is twenty years old today is, in thirty years’ time, guaranteed to be fifty. So, understanding the relative size of age cohorts can help you prepare or create new markets. Recent examples of leading demographics signals include:

  • Declining marriage rates — watch out if you are selling jewelry, household goods, or luxury vacations.
  • Shifting gender and age ratios — there is a demographic bulge of women in their mid-twenties that also coincides with peak earning years for women. The older high net worth consumer is going to skew heavily female.
  • Increasing labour participation rates — early indicators of increased incomes, which will drive increased spending, first on staples and later on durable goods. Now might be time to start thinking about functional, upmarket prepared foods.

Not all leading indicators are that general. It’s a worthwhile exercise to think of some that will be relevant to your business. If you are stuck, schedule a chat with me, and I’m sure we can come up with some. 

Lagging indicators are not useless; there’s a reason we study history in school. To properly uncover growth opportunities, at Faculty of Change, we apply a methodology that combines the two:

  1. Leading indicators tell us where to look; while,
  2. Lagging indicators tell us if we are likely to be successful in the space.

Wealth management is a great example here. Women live longer than men—by seven years, on average. Over the age of sixty, the population shifts increasingly female. This discrepancy is actually increasing (for reasons that are not fodder for this newsletter, but we can discuss at a cocktail party or something).

If you are a wealth manager who has opposite-sex couples as clients, if you retain your customers as they age, your client base is going to be predominantly female. 

So let’s look historically about how your business has grown:

  • Have you acquired new clients through hiring advisors with existing clients? Then this insight is not that useful. The advisors are what attract and retain the clients (although maybe knowing about their clients’ changing demographics could help them). 
  • Have you historically been able to attract clients through marketing and brand? Then this leading indicator could make an interesting input into your planning.

Getting your mix of lagging and leading indicators right is an art, not a science! What are you using to tell you where to grow? Get in touch and let’s chat.


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