Jack Chen, CEO and Co-Founder SWIDIA.
In our data-driven world, companies are constantly tracking a set of metrics such as views, conversion rate, user acquisition rate, etc. Some metrics are more important to a business than others. That’s why founders and CEOs should consider identifying the one or a few metrics that really matter to the long-term growth of their companies. Many successful product-driven companies use a powerful framework known as the North Star Metric (NSM).
‘Model startups’ like Airbnb and Uber are usually raised as winning case studies of this framework. While the North Star Metric framework has proven effective, it’s important not to neglect user experience, new opportunities, and long-term thinking.
What is the North Star Metric?
The North Star Metric is a company-wide metric to which every team in a company drives growth. Each team’s priorities are aligned with the NSM. Choosing a single focus point means that everyone’s energy and resources are invested in pursuing that one metric. It has its advantages of unified planning and measurable impact. Therefore, it is critical for companies to choose the right NSM and communicate clearly within the team to achieve their maximum growth potential. Without a defined NSM, companies can lead their team down an unintended path.
How to define your NSM?
Most companies can define their NSM based on a combination of their business model, product experience, and growth stage. But the challenge is to make sure you bet on the right horse(s) at the right time.
In general, NSM can be grouped into six categories: revenue (e.g., GMV), customer growth (e.g., number of paid users), consumption growth (e.g., message sent), engagement growth (e.g., MAU), growth efficiency (e.g., CAC ) and user experience (eg NPS).
Ultimately, the goal of most businesses is to be profitable. However, this does not mean that earnings should always be your NSM. Some companies even avoid revenue as their NSM for good reasons. In some companies, revenue is dependent on factors beyond their control and is not operational. In addition, an NSM focused on revenue may not be inspiring to the team.
For example, Airbnb’s revenues depend on exchange rates and host pricing decisions. Airbnb therefore avoids using earnings as their NSM, but focuses on the number of nights booked. This is a good NSM because it takes into account both sides of the market: the booker and the landlord. It also reflects team efforts more directly than revenues. Other examples of NSM from well-known companies are Spotify, which focuses on listening time, and Uber, which focuses on the number of trips per week.
Do you need to have more than one NSM?
If your business is at an early stage, I think it’s best to focus on one metric where everyone is doubling their efforts to drive noticeable business growth. This is an example of the classic 80/20 rule. If I’m Cameo in Series A, I’d be pumping all my efforts into GMV.
As your startup scales, it’s worth considering the tradeoffs of focusing on a single metric. Some questions to consider: Is market demand changing? Are there new winds that threaten resilience? Is my team rotating too much on one aspect of the business and hindering growth? Do I have new goals?
Most importantly, as the team grows, different departments will have areas of focus that don’t always match the input that drove the original NSM. A later proposal for startups is to have teams focus on actions across three pillars to achieve meaningful outcomes that fuel the NSM: business model (user or customer growth/revenue), product experience (variations of user retention and engagement), and phase growth (experiments that provide leading indicators for business pivots/expansion opportunities). This prevents unnatural behavior and rewards your team for focusing on their strengths. It makes work relevant for everyone and covers risks in the event of over-rotation.
In general, it is still fundamental to focus on one core metric. Everyone on your team can look in one direction for motivation and overall progress. However, when it comes to the daily input and output in different teams, it will rarely move the needle. Choose wisely and be crystal clear about your NSM. But also be prepared to adapt your NSM as your business scales and evolves.