Critical Steps to Defining Leading and Lagging Indicators
Lagging indicators in sales define a company’s historical sales figures. These indicators help companies identify high and low demand periods and the overall impact of seasonality on their business. Ultimately, they can be used to explain why a company has more demand in some months as opposed to others.
These lagging indicators can help a company improve its sales forecasts, define its sales closing rates and improve how it manages its inventory of finished goods. However, there’s something else that’s needed. After all, past performance is no guarantee of future results. Therefore, in order to duplicate the success of the past, companies must combine their lagging indicators with leading indicators.
Understanding Leading Indicators
When thinking about leading indicators, think of what your sales team is doing right now that will help your company win business later. Every customer call, every customer discussion, every face-to-face customer visit, and every quotation, plays a role in how much your company sells. Your lagging indicators provide all the historical information about how much you sold and when. However, only your leading indicators can tell you what you must do today, tomorrow, next week, and next month, in order to duplicate and improve upon your past performance.
Leading indicators are similar to benchmarks. They provide an attainable set of goals for your sales team to work on. If your sales team knows how many calls they have to make, then they’ll know how many actual customer discussions need to take place in order to set up a face-to-face customer visit. Once they attain the desired number of face-to-face visits, they should then be able to determine how many quotations will come from those visits. Finally, your company’s sales closing rates will dictate how many of those quotations turn into sales, and how many of those sales turn into repeat customers.
Using Lagging Indicators to Define Leading Indicators
Leading indicators are derived from lagging indicators. All the information you need about setting benchmarks on sales activities comes from what you achieved in the past. For instance, how many calls did your company make last quarter? How many of those calls lead to actual customer discussions? How many of those discussions turned into face-to-face customer visits? Finally, how many of those customer visits lead to quotations, and ultimately, how many of those quotations were closed as sales?
The answer to all of these aforementioned questions comes from the sales figures you generated in the past. It’s these past performance indicators that are used to define your leading indicators. In essence, you define what it took to attain your historical numbers and then you use those values to define how you will attain or improve upon your future numbers.
Building Your Leading Indicators and Future Sales Benchmarks
The ultimate goal is to define your sales leading indicators and future benchmarks. This involves defining the number of activities each salesperson completed in order to attain their numbers in the previous quarter. These numbers will then be used to define how many activities need to be completed in the future in order to meet or exceed your company’s previous sales totals.
Let’s assume that in the last quarter, each salesperson averaged approximately 500 to 700 customer calls. From those calls, the number of actual discussions with key decision makers that took place was anywhere from 250 to 300. Next, the number of actual customer visits was about 125 to 150. From these visits, each salesperson was able to generate 60 to 75 quotations. Finally, each salesperson closed anywhere from 30 to 37 orders during the quarter.
Previous Quarter’s Lagging Indicators
These lagging indicators can now be used to define the activities that must be done in order to attain the same results. We can use these numbers to define the activities that each salesperson should do on a monthly basis. This involves taking the above figures and dividing them by three. The following table outlines how we’ve moved our lagging indicators into monthly leading indicators.
Future Monthly Leading Indicators
We have now defined what is expected by each salesperson moving forward. Each salesperson knows how many calls to make, how many discussions should take place, how many face-to-face visits should occur and how many quotations and sales they should attain.
Other Leading Indicators
Up to this point, we’ve discussed how your sales activities of the past can be used to define your current and future sales activities. However, there are other types of leading indicators, ones that your company can use as precursors to pursuing new business. A perfect example might be a customer’s expansion. If you know your customer plans on opening up a new service facility, a new manufacturing facility, or plans on launching a new product offering, then you can easily use that as an indicator of future sales. Other examples of leading indicators can come from your customer increasing their production capacity, or from them pursuing new markets and industries.
In the construction industry, it’s not uncommon for companies to use new government contracts and bids as leading indicators. Other examples might include an increase in building and construction permits. Ultimately, you must identify the types of leading indicators in your industry that lead to sales. Next, track them to their source and come up with a plan that allows you to pursue those opportunities.
When defining your leading indicators for sales, start by tracking what you did in the past. You may need to start right now and track this information moving forward. However, once you have an established history, putting together your list of actionable items for your sales team should be relatively easy. Once you’ve outlined your leading indicators, you can then tweak them by trying to increase the number of calls and number of customer discussions. That will increase the number of quotations you provide, while helping you to increase the number of sales you close from those quotations.
