North Star Metric
Driving Growth With a North Star Metric
When an investor asks you “How’s your business doing?”, what’s the best way to answer the question? A simple “Things are great. We’re growing like crazy.” Doesn’t give much away. However, quoting a metric that encapsulates the value that your company delivers will say much more than a 10-slide presentation. Aligning your company to a single metric will help align product, marketing, sales, operations and logistics. It will also help in aligning various stakeholders within and outside the company.
Figuring out the right metric to align everyone with is equally important. The eulogy of many startups is written by the metrics that they track. Some common examples are companies that make money from transactions aligning the teams for Daily Active Users or App Opens, and productivity startups setting growth targets for paid users rather than usage.
Most often companies tend to track the value accrued to them as a core metric. While tracking value accrued metrics like revenue and profit is great, tracking value delivered to the user best drives the company forward toward long term growth.
Revenue is the price that your customers pay, while your North Star Metric (NSM) is the value that your customers get back for that price - Ward van Gasteren
The North Star Metric captures the core value that the product delivers to customers. Essentially, if your company delivers more value to users, the users use the product more, refer friends who will also be willing to pay for the product. A North Star Metric focuses the company to deliver more value to the company (and in turn drive greater profits).
Setting NSM goals is hard, however, it’s a great way to focus the growth team’s efforts. Additionally, it rallies the entire company to align with creating value for the users.
North Star Metrics of some companies:
Airbnb – Number of Nights Booked
Spotify – Time Spent Listening
Hubspot – Weekly Active Teams
Zoom – Weekly Hosted Meetings
Docusign – Number of Signed Envelopes
Choosing the right NSM is important, otherwise, the company will set off on a different path. To help clarify how NSM is different from other metrics and the KPIs tracked in the company, let’s go through some of them.
These metrics track the funnel. They measure users across Acquisition, Activation, Retention, Referral and Revenue. An improvement in any one of the funnel metrics positively impacts the North Star Metric.
One Metric That Matters (OMTM)
These are metrics that cross-functional growth pods focus on to drive immediate results in some areas. These usually have a life span of 2-3 months. Quite often growth teams use OMTM and NSM interchangeably, however that should not be the case. NSM is a much longer-term metric that is aligned to the company’s mission and goals while OMTM looks at improving a dimension which feeds into the NSM. At a given point in time, multiple teams may have different OMTM but collectively they have one NSM.
How to drive growth using the North Star Metric?
Let’s take the example of an online grocery delivery company. The metric that encapsulates the value delivered to the user would be Number of Groceries Delivered on Time.
Let’s delve a bit deeper:
Why don’t we just use Orders? Why user Groceries in the metric?
An order usually has multiple groceries. Merely putting an order into the metric will not address the value captured by the user if there are stockouts (or the user could not find a particular SKU due to a complex UI). The more groceries that a user can buy from the company the more value is delivered(pun intended).
Why include “On Time” in the NSM?
In the early days of a startup, founders are typically focussed on getting users into the door. However, for long-term sustained growth, customer experience needs to improve and is vital. Customer experience breaks down if grocery orders are not delivered on time (either early in the morning or within a specific time period). On-time delivery is dependent on supply chain and logistics. By omitting it from the NSM only the front-end teams (marketing, sales, service) become responsible for customer value. The back-end teams’ KPIs will also need to be integrated into the NSM to ensure greater (on time) value delivery to the user.
How to drive growth using the NSM?
Start with breaking down the NSM into component inputs that build up to it. Develop hypotheses on which components will move the needle the most. Create growth experiments and department initiatives to drive improvements for each input.
In the case of our online grocery business. We can initially look at one set of inputs that drive NSM growth like this.
We can build this out into a structure so that we cover different user acquisition strategies and how they can be a lever to improve the NSM. Each of the user acquisition strategies will have different growth pods (more on growth pods later in the post) across departments. For example, the paid acquisition pod will include channel specialists who can optimise Google and Facebook campaigns to bring in users at scale with a low CAC. They will work closely with the brand manager to improve brand recall (to reduce CPMs) and work with the product managers to improve the activation funnel.
The referral engine will be improved by a growth pod that will work toward referral interventions and improving the K factor by using the right messaging and incentives. Each pod will work towards their KPIs which in turn improves the NSM.
Similarly, the ‘More Usage’ be broken up into items per orders and further levers that can be worked upon by different growth pods. On the Discovery front, the product team will track the time taken (and clicks required) by a user to reach the product page of a grocery item. They will work on improving the search functionality, developing assets in the app which will aid discovery. The product team responsible for recommendations will work towards a KPI of recommendation efficiency which will require them to work with the data science team to enhance the recommendation engine.
The frequency dimension can be improved by getting users to create more recurring orders or by getting users to order more. Again there are multiple levers for the teams to work on here.
Lastly, efficiency plays a key role in getting the orders delivered on time. This presents a wide array of levers to work on. The backend teams will align their KPIs to dovetail into the NSM.
Remember to work on long term sustainable growth. Many companies do not sunset the KPIs that work for a definite time period and need to evolve to build a robust growth engine. This brings us to One Metric that Matters.
Often startup form teams (I love calling them squads) to launch new services and develop new growth engines. These teams are cross-functional and are tasked with achieving a launch or significant improvement within a fixed period of time.
The teams’ success is mapped to a metric -One Metric That Matters. This metric has high relevance for a fixed period of time. It is often continued to be tracked even after things stabilise due to the initiative becoming into a product by itself or spawning a new department altogether.
The OMTM is very important to bring focus to squads. An NSM however, brings focus and clarity to the whole company.
A great North Star Metric must:
Measure Customer Value - It measures the moment when the customer discovers value in the product. It must be derived from an insight into what action provides realized value to the customer. The measure needs to be quantitative (like the number of deliveries done on time) rather than satisfaction levels of the users.
Be a Leading Indicator of Revenue – Essentially, if your North Star Metric grows, it means that your business grows as well. It should be a leading indicator of future success. Average Time Spent, ARPU, etc are lagging indicators.
Focus on Long Term Growth -The North Star Metric expresses the value delivered to your customers. This would change only when your company changes direction (or pivots).
Be Applicable to all Departments – Funnel metrics (AARRR) can be tracked by growth teams, one metric that matters (OMTM) is transient and will be applicable to specific teams. However, the NSM brings all teams together towards a common goal.
Can be Influenced by the Team: It should be in your team’s control. If the NSM is dependent on external factors then the value delivered by your company is not captured. A hotel booking aggregator should not use 5-star rating of stays as an NSM as the outcome is based on the hotel’s staff and service, not on the booking experience which is geared towards helping a user find the right hotel based on experience ratings, price and location.
Besides this, the feedback loop from a north star metric should be short. If it takes months to measure the metric then you won’t know if you are progressing in the right direction. An NSM should be able to give you feedback in a day or a week on the value delivered to a customer so that you can double down on what’s working, run growth experiments or do a course correction.
A North Star Metric propels growth for the company by bringing in customer focus across teams. Since the metric is a leading indicator of revenue and measures the value delivered to the user, the teams get aligned easily. Teams members get clarity on how the KPIs impact the North Star Metric. Even though each team member will focus on his KPI, the company doesn’t get adrift in the KPI curry and gets focussed on improving the North Star Metric.
More reading on NSM
NSM of an Online Lending Company
NSM of Leading SaaS Companies