Leading and lagging indicators are metrics that tell you about the health of your organization. Leading indicators help predict future performance, whereas lagging indicators give insight into past outcomes. It’s important to track both because they help identify product and business improvement opportunities.
Key takeaways
- Leading indicators predict future performance outcomes.
- Lagging indicators measure past outcomes—for instance, whether you hit a specific goal or not—and are typically revenue-related.
- Leading indicators help guide adjustments in your day-to-day actions, whereas lagging indicators help measure past success and inform long-term strategy.
- The leading indicators you select depend on your business model, type of product, and product goals.
- Teams should use both types of indicators when defining performance metrics.
Leading vs. lagging indicators
Product growth is a journey, and like any journey, you need a map to know where you’ve been and where you’re headed. In product analytics, these are your leading and lagging indicators.
Leading indicators predict future performance and help drive your daily initiatives. Lagging indicators, on the other hand, reflect past performance to assess success and shape long-term strategy.
Leading indicators can be challenging to define because they predict which outcomes will lead to future success. If you’re performing positively on a leading indicator metric, you’re on track to achieve the desired result.
Lagging indicators are more straightforward to assign and understand. Companies usually use revenue metrics as lagging indicators because they give an objective picture of your company's performance last month or year. There is a level of certainty associated with lagging indicators because they reflect events that have already happened, which means there’s a time lag. For example, monthly recurring revenue (MRR) is a standard lagging indicator. But by the time you determine last month’s MRR, it’s too late to change it, and you can use insights as learnings for the future.
In contrast, if you’re measuring app engagement—a leading indicator—and engagement metrics look strong, you can expect to retain users and keep a high MRR. But there’s uncertainty, as your MRR could drop for a different reason. However, leading metrics enable you to act to affect the result. If you notice a drop in app engagement in the second week of the month, you can investigate and solve the issue before people churn and your MRR takes a hit.
The lagging and leading indicators you measure should depend on your strategic goals. For example, suppose you aim to increase the number of premium-tier subscriptions. You might use new signups as a leading indicator—because signups provide additional opportunities to upsell users to premium—and measure average revenue per user as your lagging metric.
Lagging indicator examples
Lagging indicators provide insight into past outcomes and are typically revenue-related and standard across companies.
Examples of lagging indicators for software-as-a-service (SaaS) companies include
- Monthly recurring revenue (MRR) or annual recurring revenue (ARR): MRR and ARR are your organization's total monthly or yearly revenue.
- Average revenue per user/unit (ARPU): ARPU is the average revenue each user generates for your company. You calculate ARPU by dividing the total monthly or annual revenue by the number of users or subscribers you had during the same time.
- Net revenue retention (NRR): NRR is the net total revenue generated, lost, and maintained over a period. To calculate monthly NRR, take your previous month’s MRR plus revenue growth generated through upgrades or cross-sells. Next, subtract the total revenue lost either through downgrades or churn. Then, divide the result by your MRR from the previous month.
- Gross revenue retention (GRR): Measuring GRR alongside NRR can help you examine the health of your business. It’s the same calculation as NRR, except it excludes new revenue generated so that you can see the effect of churn on revenue.
Leading indicator examples
Leading indicators foretell the likelihood of future success, and the ones you track depend on your goals, business model, and product type.
Choose leading indicators that reflect how you will achieve your business goals, like retaining users or expanding your business. Although leading metrics don’t guarantee results, they should correlate strongly with the outcomes you want to achieve.
If your goal is to increase your MRR, your leading indicators should be metrics that map to MRR. For one company, the number of sales calls booked might be an excellent leading indicator—more sales calls should result in more sales. For another, metrics related to customer platform engagement might be more relevant because they reflect customer satisfaction and potential subscriber retention or churn.
The more upstream of revenue the metric is, the more impact you’ll be able to drive. For example, a metric related to your “aha moment” is a good leading indicator because it maps closely to revenue and is an early indicator of the customer journey.
Examples of leading indicators for SaaS companies include:
- Session duration: Session duration tells you how long customers spend using your product. To calculate, subtract the time a customer launches the product from the time they leave or become inactive.
- Number of sessions per user: The number of sessions per user shows how many times customers use your product in a given period, like a day or week. An individual that uses your product with high frequency is likely engaged.
- Activation rate: Activation rate is the percentage of people who complete a specific milestone with your product. The number of new signups or downloads can be misleading because many people might sign up without engaging with a product. You might use completing onboarding or uploading a photo to your platform as your milestone instead.
Your north star metric is another example of a leading indicator. At Amplitude, we believe every organization should align behind one key metric that combines customer and business value.
Facebook’s north star metric was “seven friends in the first ten days” because that was what it took for customers to start getting value from their platform. Once the customers saw value, Facebook was likely to retain them and increase revenue.
As a leading indicator, a north star metric lets you know what is likely to happen. While it’s not guaranteed, it allows you to impact outcomes. The Facebook product team focused on optimizing their platform to encourage the “seven friends” event. They knew that increasing the number of people who hit the milestone would positively impact revenue.
Which type of indicator should you use to understand product performance?
You should use a combination of leading and lagging indicators to measure product performance, as each impacts your strategy differently.
Track leading indicators continuously. Create a dashboard to measure them in real-time and use them to guide your team’s actions day to day.
You should use lagging indicators to regularly review your performance, such as every month, quarter, or year. They should guide your long-term strategy, and remember that adjustments you make won’t impact lagging indicators until months later.
Your leading indicators should strongly correlate to the outcomes of your lagging indicators. If there’s a mismatch, investigate why and consider selecting new leading indicators.
Measure leading and lagging indicators with Amplitude
Every product metric tells a story about your business’s past or future. Together, these leading and lagging indicators provide a holistic understanding of your business health, and you need both to understand business performance.
Use a robust product platform, like Amplitude Analytics, to make your leading and lagging metrics accessible and actionable for your whole organization.
Explore Amplitude’s self-service demo and navigate to the Product Metrics dashboard to see how to start tracking the metrics that matter to your business today.
