Find your North Star in the night sky to guide your business to success!
In the world of business, having a singular goal to focus on can be the key to success. That’s where the North Star Metric (NSM) comes in. Coined by startup investor Sean Ellis, the NSM is the measure of the value a company is delivering to its customers and is used as a means to predict the growth of the business. It’s a tool to simplify meetings and help all teams within a company stay aligned toward one singular goal.
For instance, if you are a social media company like Facebook, your NSM could be the daily active users on your platform. If you run a video-sharing website, like YouTube, your NSM could be the number of minutes of content being watched. Do you want to know what your NSM is? Use the following steps to figure it out.
Locating your company’s North Star Metric
What your NSM should be
An NSM must be able to perform three functions. It should:
- lead to revenue growth,
- reflect the values of your customer base, and
- be a measure of your progress.
To find a metric that meets all three of those criteria, you need to first think about the problem your product solves. Once you have figured that out, you can decide on a metric that represents how well your company is solving that problem. To make sense of this, let’s look at Netflix as an example. As a media streaming company, Netflix’s value lies in the content and entertainment it provides its customers. Thus, to measure how effective it is in keeping its customers entertained, Netflix uses watch time as its NSM.
What your NSM shouldn’t be
Experts advise that choosing revenue as your NSM may not be the best idea. This is because revenue only tells you how much money is coming in at the end of a financial period and does not provide any information about customer satisfaction and long-term retention. Focusing solely on revenue also tends to be more backward-looking than forward-thinking. Instead of revenue, it might be a better idea to focus on what drives revenue for your company. For instance, Airbnb has the number of nights booked as an NSM, and Uber uses the number of rides booked. Both metrics reflect how much money a company is making as well as other aspects like customer satisfaction.
North Star Metric vs. One Metric That Matters Most (OMTM)
While the NSM is a long-term guide for your company, many other metrics can be used as a marker for the progress of specific teams or projects within the company. These metrics are called OMTMs—like gross processing volumes (GPVs)—and can be used to support the NSM by keeping the company’s projects on track. While NSMs only change when a company decides to shift gears and re-think its mission, OMTMs are only meant to be used by specific teams for a period of two to six months. Unlike NSMs, they should be replaced by a new metric once enough progress has been made.
North Star Metrics based on the type of company
Different industries have their frameworks for defining what a good NSM is. Here is a brief overview of some of the most commonly used NSMs in specific industry areas.
E-commerce platforms
For an e-commerce company, the NSM must revolve around sales and customer loyalty. The focus could be on tracking the number of orders completed weekly, the average value of daily orders and a customer’s lifetime value to the company. These metrics allow e-commerce companies to assess the effectiveness of their customer retention strategies and identify areas where they can improve.
Business to Business Software as a Service companies (SaaS)
In the realm of Business to Business Software as a Service companies, much like the e-commerce platforms, tend to focus heavily on the retention of their customers, their interactions with the platform and monthly recurring revenue. For instance, the messaging service Slack and collaborative online document startup Coda retain customers through the freemium model. They get customers used to the platform through the free version, which allows them to become accustomed to the service. As the customer base within a company grows, they often end up shifting to the paid version of the service, resulting in higher recurring revenue for the company.
Media companies
For most media businesses, just like Jumpstart, it’s all about engagement. It is important to prioritize metrics like newsletter sign-ups (you should totally sign up for ours btw!), subscriber retention and total time spent consuming content. The goal is to create a loyal audience that consistently engages with the brand. Measuring these metrics can help determine what kind of content resonates best with your target audience.
Risks of focusing too much on a single North Star Metric
While focusing on a single metric may sound great in theory, in practice, it can lead to stagnation and a lack of creativity. Often, businesses will end up finding emphasizing one single metric very limiting as a marker of success. Besides, focusing on one single metric can also put you in a tough spot, particularly when the company makes an error in choosing an NSM.
One of the best examples of measuring multiple variables to ensure growth is Spotify. Since the company provides two different services—music and podcasts—it makes sense to have more than one NSM to track the number of paid subscribers, consumption hours (for the podcasts on the platform) and monthly active listeners to measure growth in both services.
Hence, companies should keep tabs on all metrics that could be their NSMs if they have more than one major offering. By evaluating all potential metrics regularly, you can determine which one fits your business the best.
Also read:
- What Are the 5 Basic Resources Needed to Start a Business?
- How to Bootstrap Your Startup From Scratch
- When Should You Start Expanding Your Startup Business?
Header image courtesy of Unsplash
