Decoding Business Growth: The Art and Science of Choosing the Right North Star Metric
The Role of Data in Defining Your North Star Metric
A North Star metric is a key performance indicator (KPI) that a company uses as the leading measure of its success. The term is derived from the North Star (Polaris), which mariners historically used as a navigation guide.
This metric should represent the core value your product delivers to customers. It helps the entire company focus on delivering this core value, which should ideally drive success.
For example:
- For a social media company, their North Star Metric might be “Daily Active Users” because they are primarily concerned with keeping users engaged with their platform every day.
- For hotel booking sites, it could be “Nights Booked”, as this indicates that people are using their service to find accommodations.
Choosing the right North Star metric is crucial. It should be something that reflects the value customers get from the product and also leads to sustainable growth for the business. All departments in the company, from engineering to marketing, should understand and be oriented towards optimizing this metric.
However, it’s also important to remember that while the North Star metric is a critical guide, it’s not the only measure of success. Companies should monitor other KPIs to ensure a balanced approach to growth and avoid potential pitfalls like neglecting user satisfaction or long-term sustainability.
Choosing the Right North Star Metric
Here is a good process to define the north star metric
- Define your core customer value proposition
- Brainstorm measurable metrics that indicate delivering that value
- Analyze which metric best aligns to long-term business goals
- Identify 1–2 alternate metrics to maintain a balanced view
- Set up processes to continually monitor and reassess metrics
I will give some generic examples and we will go through two detailed examples in the next section.
1. E-commerce : Core Value: Providing a smooth, convenient shopping experience. Number of daily or monthly transactions, total transaction value, or repeat customer rate. These metrics represent the level of shopping activity on their platforms.
2. Software as a Service (SaaS) Companies : Core Value: Enabling customers to efficiently solve problems and achieve goals with software tools. Active users or subscription renewal rate. These metrics demonstrate the utility and value of their software.
3. News or Content Sites : Core Value: Delivering engaging content that informs and interests readers. Daily or monthly page views, or the number of articles read per user. These show the level of engagement with the content they provide.
Let’s take two specific examples and go in depth.
Organic Meal Delivery Service
Core Value/Mission: Our mission is to provide convenient, healthy, and organic meal options for health-conscious consumers.
North Star Metric: The Number of Weekly Active Subscriptions. Regular subscriptions indicate the value customers find in our service, making this a key indicator of growth.
One might ask, how do we handle subscribers who are not consistently placing orders?
Here are a few possibilities:
1. Number of Active Subscribers per Month: Here, “active” is defined as any subscriber who places at least one order in a month. This metric excludes subscribers who don’t use the service but maintain their subscriptions.
2. Monthly Recurring Revenue (MRR): This metric focuses on the revenue generated by subscribers each month. If the service offers different pricing tiers or add-on options, MRR can be particularly useful as it captures both the number of active subscribers and the amount they’re spending.
3. Number of Subscribers Spending Over certain amount per Month: If the business has a specific revenue goal per customer, such as $20, tracking how many customers meet this threshold each month can be beneficial.
Let’s consider another example:
HealthTech — Virtual Exercise App
Core Value/Mission: To facilitate fitness and wellness in a convenient, accessible format.
North Star Metric: Daily Active Users. Given that regular exercise is key to fitness, the number of daily users could be a powerful indicator of the app’s impact and customer engagement.
One might ask, how do you differentiate between users who log in to chat vs. those who complete one workout vs. those who complete ten workouts for the North Star metric?
Here are some suggestions to attract users and also to actively facilitate their fitness routines:
1. Number of Completed Workouts per Day: Instead of focusing solely on the number of users who log on each day, this metric would track the number of workouts completed. It provides a more accurate representation of actual product usage and customer value delivery.
2. Average Daily Active Workout Users: This could be defined as the number of users who complete at least one workout per day. This metric focuses on the most engaged users and excludes those who only log on to chat or do not participate in workouts.
To distinguish between those who do one workout versus those who do ten workouts, you might consider using an alternate metric such as:
1. Average Number of Workouts per Active User: This will give you an understanding of the level of engagement among your active users. If this number is high, it means that your users are highly engaged and derive significant value from your app.
2. Number of High-Engagement Users: Define a threshold for high engagement, such as 5 or 10 workouts per day, and then measure how many users meet or exceed this threshold. This can help you understand the extent of super users on your app.
Using data to define North Star metric
Lastly, another metric I like is one that makes use of data to define the metric. If the data suggests that users who complete at least three workouts per week are less likely to churn, then this would be an excellent North Star Metric for your fitness app. The North Star Metric should reflect behavior that drives the most value for your customers and your business, so in this case, a focus on retention through regular engagement makes a lot of sense.
So the North Star Metric could be defined as:
Number of Users Completing at Least Three Workouts per Week: This provides a clear measure of the behavior that is most predictive of user retention, and it aligns with your mission to help users maintain regular fitness routines.
This would give you a clear focus for product development and marketing strategies — anything that helps more users reach that three-workout per week threshold is likely to drive growth and customer satisfaction.
Conclusion: Keep Metrics Aligned With Goals
The North Star metric should align with core customer value. But maintain a suite of metrics to monitor other aspects of the business. The ideal North Star reflects behavior that is predictive of success.
In summary, identifying the right North Star metric involves:
- Determining the core value offered to customers
- Finding the best proxy for that value
- Confirming it aligns to business goals
- Balancing with other metrics for a complete view
When chosen appropriately, a North Star metric can be a powerful tool to focus teams and drive growth. But it requires an understanding of the specific drivers of customer value and business success. The metric should be periodically evaluated as goals evolve. With the right North Star guiding decisions, companies can stay oriented towards delivering meaningful value to customers.
