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- Picking your North Star Metric
One of your biggest enemies as a startup is a lack of focus.
As a founder or marketer, there's shiny object syndrome hitting you in the face every day.
"Should I be adding AI to my product?"
"Should we test that new hot channel"
There is a way to defend yourself against this - a North Star Metric.
It's a top-line metric that the entire company can be focused around.
Companies such as Wise, Airbnb and Dropbox have used it to help them grow.
In this newsletter, I’m going to break down some examples, what makes a good North Star Metric and a way to help you pick yours.
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This meme is most startup teams I talk to.
Ultimately they end up tracking everything - and don’t achieve the goals they set out to.
The more you can simplify what you're focused on to the things that matter, the more likely you are to get success.
That's why the North Star Metric is so great.
It guides what direction to go in, what strategy to take and what experiments to run.
It helps you from overcomplicating, procrastinating and working on things that have no material effect on your success.
Here are some examples of North Star Metrics:
A good North Star Metric should:
Express product value
Be related to the strategy
Be a leading indicator of success
Let’s take Coinbase and how they picked a good North Star Metric.
Coinbase’s North Star Metric is: Monthly Transacting Users
1. Express product value
Businesses exist to create value for people.
Your product is how you give people that value.
So any North Star Metric needs to represent the product value of your business.
A core value of Coinbase is to allow people to buy and sell crypto. So their North Star Metric should and does express this.
Rather than just having monthly users - which wouldn’t equate to the product value, they track monthly users who make a transaction.
Every time a user transacts on the platform, they give users the value the business was supposed to.
2. Be related to the strategy
Coinbase’s mission is to increase economic freedom in the world.
They believe by helping more people to transact in crypto, they will achieve this goal.
A big part of their strategy will therefore be to add features that make buying and selling crypto easier.
With their North Star as monthly transacting users, they focus on adding features that helps more people get on the platform.
They build integrations so more users transact, add more accessible coins to the platform and find ways to attract a wider audience.
Picking a different metric might have not been aligned with their mission and sent the company in the wrong direction.
3. Is a leading indicator of success
Your North Star Metric needs to connect to business success i.e. improving the metric will lead to better unit economics, higher retention and more revenue.
It should be a leading indicator of success.
And so that’s why revenue isn’t a good North Star Metric.
Revenue is a lagging indicator of success.
Revenue is a byproduct of the value that you create with your product.
In the case of Coinbase:
By increasing the number of monthly transacting users on their platform, they will increase revenue.
By retaining more customers who then make more transactions, they will increase revenue.
By creating a better product so more users transact, they will increase revenue.
But if you focus on pure revenue, you can create the wrong type of incentives.
“Show me the incentives and I will show you the outcome.”
If you optimise for revenue only, you might build a feature that drives more revenue but makes the product worse or pisses off customers.
So when thinking about your North Star, don’t just use MRR or revenue. Pick the value metric one below it that represents business value.
The North Star Metric is different for every company.
Picking one is the cause of much debate and long meetings. To make it easier, it helps to understand common types of North Star metrics for different industries.
When to Use Engagement-based North Star Metrics:
You have a subscription SaaS, mobile app or social platform driven by ads.
For most types of companies, an engagement or customer growth metric works.
Specifically, an engagement metric would work well if you are a subscription SaaS or mobile app. Slack and Coda would fit in this category.
This is because the business model is largely based on free users converting to paid ones. In order to do that, they need engaged users who have seen value in the product before they upgrade.
For social platforms and products that monetise based on ads, engagement also works. The more users that return to use the product daily, weekly or monthly, the more ads will be sold.
When to use a Consumption-based North Star Metric:
You have a marketplace, platform or let companies access your API
For marketplaces, platforms or APIs, generally, the focus is on number of . As these businesses take a cut of each transaction, optimising for this will lead to greater business success. Airbnb uses nights booked and Uber uses # of trips.
When to use a User experience-based North Star Metric:
You have a product focused on being unique or inherently viral /sharable product
When I was head of growth at acasa, a product to help shared houses track and make payments, the product was inherently viral - meaning that product gets better when others join. Although engagement was important, because of the social dynamics of the product we felt we needed to optimise differently.
So we picked Net Promoter Score:
It was helpful in a number of ways:
It expressed product value - those who rated highly had a good experience
It was related to strategy - It quantified how shareable the product was - those who gave a good score would share it
It was a leading indicator of success - those who were happy users were more likely to turn to customers
Leading Fintech Wise picked a similar metric to scale their company. As ~80% of their new customers came from word of mouth, it made sense for them to optimise this.
When to use an Efficiency-based North Star Metric:
You have a product-driven by paid growth
The North Star metric you optimise for needs to fit your business model. If your business is driven by paid ads, then you need to optimise for a metric that creates efficiencies so the company can be sustainable.
Companies such as Emma, HelloFresh and focus on efficiency: LTV: CAC ratios or Payback Periods.
So a simple way to start picking yours is by thinking about where you sit and starting from there.
You can also analyse the 80+ companies and their North Star as a starting point.
But are you really just tracking one metric?
No.
North Star Metric is a company-wide metric everyone should know.
Product. Customer Support. Engineers. Everyone.
But you should also have team-specific metrics you optimise for.
When working with clients, I help to define a North Star metric for them.
We then create team-specific KPIs.
For example, the product team might have team-specific KPIs around improving retention, user engagement and user satisfaction.
The marketing team had metrics such as Sign-up conversion rate, number of signups and traffic.
Having the North Star metric aligns the company because the marketing team doesn’t drive signups that don’t convert.
The product team don’t spend ages on features that increase engagement but don’t drive more e.g. transactions.
The key to making this work is to make sure everyone knows about the North Star.
Every feature added, marketing campaign created or experiment ran should look to affect the North Star metric in some way long term.
Tip: create a dashboard that everyone can see / easily access. Keep people updated in weekly meetings and make it the bedrock of how you make decisions.
The North Star metric can help you align your teams and keep you focused.
Having one keeps you on the right track.
Resources:
When you’re ready, here’s I can help you grow:
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Cheers,
Theo