Many businesses fail to treat year over year growth of metrics correctly when annualising significant changes. Here’s how you can decipher what’s really going on.

It’s good practice for businesses to look at year-over-year (YoY) performance of key metrics, especially within high growth businesses, or businesses with high levels of seasonality. It’s critical to remember that YoY data are determined by two datapoints – this year’s and the previous year’s. When diagnosing changes in YoY performance, all too often businesses fall into the trap of fixating on what has happened in the current year, when a change in the previous year is the true culprit.

If there has been a “shock” to the business, this can be especially problematic. “Lapping” a shock a year later will cause an “aftershock” in YoY data, which can wreak havoc if not properly understood.

What is a shock?

In this context, a shock is any event leading to a significant change in business metrics, which could either be short lived, or result in a lasting step change in performance.

Examples of shocks include:

• An outage or bug that lasted for a fixed duration
• A marketing campaign or promotion lasting for a fixed duration
• Turning on a new channel resulting in a lasting step change in volume
• Lasting shifts in customer behaviour due to external events (eg the Covid pandemic)

“Shock” example: turning on a new acquisition channel

Let’s look at one of these in more detail – turning on a new channel – to understand the risks of not accounting for lapping impacts. In this simple example, a business experiencing steady growth recently switched on a new customer acquisition channel. This instantly step changed their monthly sales, and also step changed the YoY growth rate.

A year later, management are scratching their heads. The YoY growth rate has sharply fallen, and the business is way behind targets for the year (which had been based on continuing at the higher growth rate).

This all stems from lapping the step change in sales. Once the increase has been annualised, the YoY growth rate will return to the steady underlying growth rate, which appeared artificially inflated by the new channel for the year after it came online. This YoY trajectory was entirely predictable, and was mathematically baked in from the start. But without careful treatment when analysing performance and setting budgets, aftershocks like this can easily catch you unprepared.

So how can you prepare your business for YoY aftershocks?

Firstly, don’t get trapped in only looking at YoY data. The actuals, both this year’s and last year’s, are equally important to pay attention to.

Secondly, maintaining a comprehensive timeline of changes or shocks to your business is invaluable. If YoY performance looks suspect, checking this list for what has been lapped recently can massively speed up diagnoses. Building and maintaining these lists can be time consuming, but they are a powerful tool. The best time to start building a list like this was a year ago, but the second best time is now!

Finally, to be able to quantify the impact of lapping effects, you can forecast the expected trajectory of YoY metrics due to lapping and compare actual performance against this. The simplest version of this is to calculate what the forward looking YoY growth would be if you froze the metric at a point in time. The fluctuations in this calculated trajectory show the scale of impact from the previous year’s changes. Any movements beyond this must be due to this year’s performance.

If you’re interested in improving your data management systems to prepare for shocks, we can help. Reach out to us at contact@datavisionservices.co.uk to see how we can best work together!

Guest written by Nick Whitney, Associate Director Strategy & Ops at Bumble

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