Starting a business and creating a great product is something that entrepreneurs are good at and, if done right, most of them successfully launch their businesses without severe challenges. However, starting a business is not equivalent to running a business.
Running a business is challenging, and improving profitability is a whole new game.
Collecting, analyzing, and using the data that your business collects for decision-making is essential for business growth. You have to deal with several metrics in order to move forward.
For instance, customer acquisition cost, churn rate, revenue, gross margin, variable vs. fixed cost, etc. are some of the critical metrics that a crucial for a business’s growth, according to Martin Zwilling.
One of the most important metrics, among several others, is the North Star Metric (NSM) that was introduced by Sean Ellis. It helps you identify if your business is moving in the right direction - what exactly a North Star does.
If you’re new to the NSM, this guide is for you. It will cover everything related to the North Star Metric, what exactly it is, how it’s different from other metrics, how you can use it for your business, and much more.
What is the North Star Metric?
It is the metric that captures your product’s core value that it delivers to the customers. This metric has the potential to grow your business exponentially.
In simple words, it is the metric that your entire business, departments, teams, and individuals focus on to achieve sustainable growth. For instance, your marketing team should have a goal to generate leads and your sales team will be interested in generating sales. Both marketing and sales teams have different objectives.
With NSM, however, a single metric is followed by all the teams and everyone concentrates on the NSM and the business works as a unified whole and moves in the right direction that’s best for business’s growth.
Let me give you an example.
Facebook’s North Star Metric is Active Users (daily and monthly). Facebook is all about its users, it’s a social network and it will go bankrupt if people stop using it. So what they have focused on is active users – the more the better.
Facebook’s NSM is clearly visible on its Company Info page.
The key statistics include information on daily and monthly active users. This is the metric they are interested in.
The NSM is customer-driven. It is focused on the value that your product delivers to the customers. So Facebook’s primary product is its platform and users stick with it due to the value they get from the platform.
Now it isn’t necessary to state your business’s North Star Metric on company’s page. You don’t have to do it. However, it has to be communicated clearly so all the teams can move in the right direction.
Once you know the NSM, it becomes the center of all business activities and everything else revolves around it. It becomes your business’s BIG goal.
Your employees know what their business is all about and what is expected of them.
Why Your Business Needs It
So what’s so special about the North Star Metric?
Why you should care?
Why not go without it?
Well, there are quite a few amazing benefits that businesses get from the NSM which no other metric provides.
It doesn’t mean that the North Star Metric is some kind of silver bullet that will change everything overnight. Of course, not. It is a metric which can be misleading, like any other metric. It can be misused. It can be problematic at times.
However, when compared to other metrics, it outperforms big time. Here are a few major benefits that make it better than its counterparts.
1. Sustainable Growth
The NSM is all about growth and this is what makes it better than other metrics.
LogMeIn shifted to NSM and it started growing exceptionally, and today it is a $6 billion company.
Focusing on the NSM will put your business on the right track and it will continue to grow. It becomes the centralized metric that all the teams try to achieve.
It’s focus is nothing but growth.
It is focused on delivering value to the customers and to retain customers which makes it an outcome-focused metric.
It’s linked to customers, what makes them happy, and what makes them stick with your business. Additionally, it is a generalizable metric that all departments and teams can follow.
It’s a business metric and not just any departmental metric.
3. One Goal
All the employees and teams clearly understand the NSM and they know what’s expected of them. Even if their primary goal isn’t directly related to the NSM (such as copywriting, designing, finance, etc.), they will still be able to see how their work adds value and helps their business achieve success.
Everyone knows what their business is all about and how to measure success. This makes it easier for your workforce to figure out how their work impacts business success.
4. Team Alignment
According to Sean Ellis, one of the best aspects of the NSM is that it significantly improves the team and departmental alignment. All the teams across your company will focus on one and only one thing: The North Star Metric.
This alignment means a lot for businesses. Researchshows that companies with well-aligned sales and marketing teams have 38% higher sales win rates and 36% higher customer retention rate as opposed to companies with poorly aligned sales and marketing teams.
Imagine having all of your teams aligned and working together to achieve one goal.
5. It is Simple
The NSM is simple by nature for two reasons.
First, it is a company-wide metric so it has to be kept simple so everyone understands it. For instance, Facebook’s Active Users is a very simple metric that non-Facebook users can understand with extreme ease.
Second, it describes the value customers get from your product so it cannot be something hard to understand. I mean, if you cannot explain in one or two words the core value your product delivers, you need to tweak your product.
The value your product offers has to be simple enough so you can explain what it is that you’re offering.
How to Find North Star Metric of Your Business
Everything about the NSM is great except it has to be found.
It’s not one of those metrics that is explicitly (or even implicitly) visible or one that you can calculate with a mathematical formula.
Every business has its own unique NSM metric. You have to find your business’s NSM to move forward.
Before finding your business’s most essential metric that will put your business on the right track, there are a few critical things that should be considered.
1. The NSM has to be customer-driven.
2. It should be a single metric.
3. It should be quantifiable.
4. It should be linked to sustainable growth.
With this in mind, let’s see how you can find the NSM for your business.
1. Data Analysis
The first step towards finding the NSM is to analyze all (or at least most of) the existing data that you have. This includes buyer personas, KPIs, customer behavioral analysis, buying patterns, retention rate, acquisition cost, etc.
Try finding answers to the following questions:
What are the most critical success metrics and KPIs for your business?
What makes customers satisfied?
What is the core problem that your product solves?
How do success and failure look like from the business’s perspective?
How does the customer journey look like?
The answers to these (and any other related) questions will reveal information that will help you move in the right direction. What’s important is that you define customer and business success clearly. Customer success isn’t always what your business considers to be a success.
For instance, your customers might consider signing up for the Free Trial as a success while your business might define success in the terms of the number of paid customers who switch to a premium plan after the expiration of the free trial.
There should be a clear distinction between how your customers define success and what you consider to be a success.
Data analysis will provide you with answers to several questions related to customers, value they get from your product, and what they expect from your product. This will give you a basic idea of what your NSM will look like.
2. Identify Core Product Value
The North Star Metric is focused on the value that loyal customers drive from your product. This is what you should identify when you have all the data.
It is essential to merge both customer success and business success. If your loyal customers drive value from your product that isn’t your product’s core feature (or success), there is something not right that has to be fixed first.
However, this rarely happens.
Consider Facebook. Their NSM is defined in terms of active users and that’s actually what majority of the Facebook users consider to be of value (they like being signed in to their Facebook account so they can interact with friends and explore their News Feed). However, not all Facebook users sign in to their accounts daily.
You have to further analyze different critical metrics based on your product, niche, and industry. For instance, if you have a SaaS company, the metrics that you should look for are monthly active users, monthly active users’ growth percentage, app stickiness, retention, subscriptions, and subscription upgrades.
It’s also a good idea to conduct interviews from customer success managers to get better insights into what customers consider to be of value when using your product.
3. Explore Customer Journey
Customer journey analysis will reveal a lot of information about your business’s NSM. Identify sales funnel and see what journey users follow to convert from customers to loyal customers and what makes them stick with your brand.
Every business has a sales funnel, even if you didn’t create one. There is always a customer journey path that all customers follow.
For instance, here is how Facebook’s customer journey looks like:
1. Visit Facebook.
2. Create a new account.
3. Update information, add a profile picture, and invite friends.
4. Explore Facebook.
5. Visit again to check the News Feed.
The purpose of the customer journey is to let customers get to the point where they can drive value from the product. Exploring the customer journey will let you know the most appropriate metric that describes core value.
4. Test and Tweak
Finding the NSM isn’t a simple task. You have to deal with multiple metrics and it will get challenging to pick one metric that’s most relevant. It is never easy, especially for large businesses.
You need to test the core value you identified. It might not be the right core value for your business.
Now there isn’t any straightforward approach to testing and figuring out if you have identified the right NSM.
The customer should get the value from your product. There are multiple ways to identify if it is actually happening. Surveys and customer interviews are best approaches to see if they're actually getting the value they deserve.
Data analysis will reveal a lot of information.
Refer back to the Facebook example. If customers aren’t logging in to their Facebook accounts, it means they're not getting the value they're supposed to get.
There could be several reasons as to why customers aren’t becoming active users and that’s the tricky part.
This calls for extensive testing and tweaking. After you have identified a metric that you think is the NSM, it has to be tested to make sure it actually is the right NSM for your business.
Don’t hesitate to tweak or even entirely change the NSM. Don’t haste.
5. Finalize the NSM
Constant monitoring, testing, and tweaking will help you finalize the North Star Metric for your business that will lead to sustainable growth.
The idea is to make sure that the NSM captures value delivered to the customers.
Incorporate core value into customer journey (aka sales funnel) so customers can easily get to the point where they can achieve success with your product and engage further.
You need to help customers get value from your product so every customer makes it to the NSM.
Think customer onboarding which is aimed to help customers achieve first success with the product. When a customer achieves first success with your product, the engagement increases significantly.
This is what exactly you should do to help customers reach the point where they can get value from your product.
Once you have successfully identified the NSM, the next step is to communicate it and let everyone know about it. Ensure that all the teams work on achieving the NSM either directly or indirectly.
The North Star Metric is an awesome metric that will put your business on the right track. However, it should be used with caution.
The NSM isn’t a silver bullet that will solve all business problems. This isn’t how it works.
It can be, at times, deceptive. It doesn’t always capture all the dimensions of your business such as retention, engagement, and monetization. It’s challenging to find one metric that will capture everything about your business.
And even if you somehow manage to find the NSM, it might be misleading.
This is why it’s strongly recommended to spend a few good months on testing and tweaking the NSM before you finalize it.
It is OK to find an incorrect NSM and chances are, you'll find a lot of incorrect metrics before finding the most appropriate NSM.
Finding an incorrect NSM isn’t the problem.
Not identifying an incorrect NSM is the problem. That’s where it can be misleading and by the time you’ll realize, it will be too late.
As long as you know what you’re doing, you’re good to go.