In a very unofficial Facebook poll, 100 out of 100 business owners said they wanted to “make more money”. I mean, are there people out there who want to earn less money? Other than Gary Vee?
I haven’t run into one yet.
But the problem with making a broad, sweeping statement like “I want to make more money”, is that it’s aspirational, but not actually connected to anything. I mean, I’d like to be skinnier too, but just saying you want something isn’t quite the same as making a plan to get it.
So today I wanted to get super nerdy with you and talk about leading and lagging indicators. If you’re looking at me crossed-eyed and thinking that sounds SUPER boring, remember, we are talking about how to make a plan for you to make more money 😉
What the heck is a leading and lagging indicator?
Have you ever heard the story about the canary in the coal mine? Back in the early 1900’s, coal miners used to bring down a small, yellow canary in a cage with them as they worked and if there was a carbon monoxide leak, the bird would alert them, so they could get out in time. It was a prediction of things to come.
In business, there are lots of things that can go wrong well before you might see it reflected in your revenue, reputation, or profitability. So what is the business version of a canary in the coal mine?
This is known as a leading indicator. Leading indicators are predictive behaviors or activities that lead to a certain outcome. Examples could be: number of contracts under negotiation.
However, the problem is that most businesses ONLY focus on lagging indicators.
Lagging indicators are always financial. They indicate what you have already achieved. Example could be: Q2 revenue numbers. Using lagging indicators to base business decisions on is like driving while looking backwards the entire way. It’s pretty easy for you to miss major issues or problems that are right in front of you and would only be helpful if the road ahead is exactly like the one you just drove down.
Another major problem is that most monthly reports, databases, and scorecards are solely focused on lagging indicators (revenue, profit, sales, new subscriptions, referral numbers, etc) and not based on leading indicators, which are inherently more valuable and actually lead the business forward to success. In other words, there is no strategy or direction to achieve the desired future outcomes.
Well, how can we find good leading indicators?
Business strategy, put very simply, is a predictable way to get from A to B. In this case, we are trying to determine the metrics we can measure that will get us to a desired future state. Depending on the area of business you are looking at, you will want to figure out how things are interconnected and what possible outcomes you might be able to achieve.
The process to finding your leading indicators will likely look like this:
Do a cause and effect analysis
Understand critical success factors
Decide on desired outcomes
In the following sections, I’m going to walk you through each one of these steps, but as it relates to brand design.
Cause and effect analysis
Branding, marketing, design, user experience, and other “soft niches” like it are often notoriously hard to quantify. Even more, brands build reputation and value over time and as such is even harder to quantify than a direct response marketing campaign, who’s results (new customers, revenue, etc) are seen as an immediate cause and effect of one another. However, like we’ve discovered, only relying on lagging indicators for future growth is far sighted at best and disastrous at worst.
Just because brand growth is seen more over the long term does not negate its massive impact on revenue, profitability, long term success, and viability. In fact, anywhere from 50-90% of a businesses’ value is driven based on these “soft” areas such as brand and product- market fit. So we definitely want to focus on brand growth. We just need to find better leading indicators to measure it with.
Brand growth is not as simple as branding = sales. So what is the cause and effect relationship that we’re missing in the middle of this equation? The cause and effect relationship may look something like this:
Branding -> Awareness -> Interest -> Consideration -> Purchase Intent -> New Lead -> Qualified Lead -> Sale -> Loyal Customer -> Repeat Sales -> Increased Brand Value
So instead of asking, “Does branding increase sales?”, we would want to determine the actual leading indicator in the process that we can pull out and measure. In this case, using a leading indicator such as Overall Awareness (email list size, social media follower size, attendees at events, etc) or perhaps Number of Qualified Leads, will give us a better predictor of future success (in this case Increased Brand Valuation).
Understanding Critical Success Factors
Critical success factors are based on feelings, not numbers. Remember, we want to find numbers to support our leading indicators so we can create a solid strategy to achieve them.
A critical success factor for branding might look like:
Providing a memorable experience
We can turn this into a leading indicator by quantifying it like this:
Participation rate, %
And the lagging indicator in this case would look like:
Retention rate, %
In real time, the business can try to improve the participation rate, but by the time they evaluate how many clients stay loyal to their brand, they are already too late. There’s nothing to be done at that point. So we always want to evaluate and decide on the critical success factors and the leading indicators associated with them to lead to future positive outcomes. And we want to make sure they actually have a positive correlation, meaning, does the participation rate actually effect the retention rate? Your original hypothesis may need to be adjusted as you begin setting your leading and lagging indicators because above all else, you want to be sure you’re actually measuring the right things!
Decide on desired outcomes
Speaking of positive outcomes, before you begin this process, you’ll want to be super clear on the desired outcome you wish to see. In the cause and effect chain above, if Increased Brand Value was not a desired future outcome, the entire chain would need to change. So we always want to determine our direction before we begin.
What are some examples of desired future outcomes you could consider in your business? These could include:
Decreased price sensitivity
Improved market share
Increased customer loyalty
Better positioning for future growth
Each desired outcome will be different based on your business and the business category you are focusing on for this exercise. But just like trying to drive looking backwards will cause you to miss a bunch of opportunities right in front of you, driving without a map will lead you absolutely no where. You’ve got to set an exact destination before you begin otherwise you’ll be highly disappointed by the results.
Once you’ve set your cause and effect, critical success factors, outcomes and leading indicators, you’ll need to quantify. This means you’ll want to add exact numbers and objectives you want to achieve for each leading indicator. What percent of clients need to participate at your event? What is the retention rate you want to see? What is the valuation you want to see for your brand in one year?
We need solid numbers in order to create daily, weekly, and monthly goals to achieve the desired outcomes.
One of my core beliefs is what’s measured gets managed. Unfortunately, the vast majority of small business owners just do not know their numbers. They rarely, if ever, check their finances, read income statements, or set a strategy for business growth. By taking the time to create quantifiable leading indicators and evaluating their impact on lagging indicators, you’ll set yourself and your business up for success long term. Instead of saying, “I want to make more money”, you’ll know you need to focus on earning 15 new qualified sales leads each month to grow your business 10% over the next year. I’d say that’s pretty darn amazing.
Are you going to create leading indicators for your business? What are your desired outcomes? Comment below!
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