This post is the fifth and final in a five part series celebrating Test Double’s five-year run on the Inc. 5000 list of fastest growing companies:
- Widen the Goalposts for Success
- The Customer is Usually Right
- Profits are Good, Actually
- Do Right by Everyone
- Find your Leading Indicators (this post)
I mentioned earlier that lists like the Inc. 5000 and news reports about startups focus on revenue more than other metrics. They use revenue because it’s easy to measure, provides a meaningful point of comparison, and a number companies are typically eager to publicize.
But if you’re looking for metrics to help you make the right management decisions, revenue can’t tell you all that much. That’s because revenue is a lagging statistic, meaning it represents the result of countless disparate actions you took in the relatively distant past. That’s not to say it isn’t useful: lagging statistics can help you answer past-tense questions about how successful you’ve been relative to other time periods or how big an impact some massive change has had on your business. But if revenue goes up one quarter and drops the next, you’d need additional information to answer why that happened and what to do next. If all you have are lagging statistics like revenue, your data will be too old and too opaque to offer the insight needed to make timely, informed decisions.
And if your business has grown so much that you made it all the way to reading this fifth piece of advice, you’re probably ready to start identifying actionable metrics and signals that can be used to predict and control the downstream outcomes you care about. The good news: identifying the right leading indicators will help you understand which activities drive your company’s growth, giving you more fine-grained control over when you grow and by how much. The bad news: accurate and predictive leading indicators are unique to every business, so you aren’t likely to find a management book that spells out what you need to measure or a SaaS product to package it into shiny graphs & reports for you. Getting this right takes serious legwork.
Arriving at the right numbers to gather, track, and make decisions on requires a lot of careful thought and experimentation. One useful exercise is to start with a desirable result and trace backwards to the earliest states and behaviors that would subsequently lead to that outcome. For a relatively common example, let’s consider identifying leading indicators that can be used to forecast closed sales deals:
- Let’s say your desired outcome is $1,000,000 in annual services sales (before considering what percentage of those sales you’re able to successfully deliver and get paid for)
- Suppose the step just before a signed deal is a contract proposal. You might ask, “what percentage of our proposals get signed?” If your close rate is 33%, then you don’t need $1M of proposals, you actually need $3M worth of them to predictably hit your $1M sales target
- Keep stepping back. If the previous major drop-off in the sales process is an introductory conversation to identify an opportunity, then ask what percentage of conversations ultimately lead to opportunities. Let’s say the answer is 10%, which means we need a staggering $30M worth of conversations to reach $1M in sales
- But how much is a conversation worth? To answer that, we need one more data point: average deal size. If each closed deal averages out to $15,000 then we can use it to divide our huge $30M number and realize we’ll need a staggering 2,000 meetings to hit our goal
- There are 12 months in a year, so (last bit of math, I swear) that means we should expect to need 167 conversations with potential buyers each month if we’re going to hit our sales goal of $1,000,000
After kicking the tires a bit more, “meetings with potential buyers” could be a perfectly reasonable leading indicator for sales. In any given month, if we’re on pace to have 167 meetings, we’re probably on track to hit our goal. But if it’s the 29th and we’ve only logged 115 calls, we’ll know we’re in trouble long before we’d see a dip in revenue. And it’s about more than getting information earlier: shifts in the numbers raise questions we can hope to answer creatively and productively. I’d much rather be asked “how are you going to find 48 leads to talk to?” than “our annual sales goal was $1,000,000 but we only got $700,000… what happened?”
Even perfectly suited, accurately tracked, and well managed metrics are no substitute for putting in the work and taking time for thoughtful introspection. But smart use of leading indicators can do more than update management on the status of the business, they can prompt creative problem-solving before a situation becomes so overwhelming and urgent that there’d be little hope of finding a solution.
Eventually you’ll get to a point where your day-to-day focus will be increasingly on uncovering and refining the activities that you’ve proven will lead to your success. That work will never be done, but you’ll have an idea of whether it’s working if you see lagging statistics like revenue and profit start sorting themselves out predictably, even without your constant attention.
So that’s a wrap! I hope you enjoyed these five reflections that our experience at Test Double has taught us about how to reliably grow a business when you view growth as a means to accomplishing great things and not as an ends unto itself.