— Author: Vladimir Super-BusinessDad —
I've navigated through various companies and industries over my 12-year career. During this time, I've encountered diverse reporting mechanisms aimed at measuring company success. However, one glaring observation stood out: the predominant focus on revenue as the primary target at the start of each year. Yet, here lies the catch—revenue often emerges as a consequence rather than a driving force..."
TL;DR
Revenue often emerges as a consequence, not a cause, prompting the need for a guiding metric.
The North Star metric aligns efforts, provides clarity, and fosters sustainable growth.
While not a panacea1, it requires careful selection and integration into business strategy.
What should we aspire to?
In the realm of capitalism, companies are inherently profit-oriented, with the year-end Profit-and-Loss account looming as the ultimate measure of success. Yet, this is a lagging indicator—a consequence rather than a cause.
To drive revenue growth effectively, we must identify and prioritize factors within our control. Enter the North Star metric—an essential indicator unique to each industry and company. By understanding our business deeply, we can pinpoint this guiding metric and steer our efforts towards sustainable growth.
Defining the North Star Metric
The North Star metric serves as a pivotal measure aligning with the core customer problems a company seeks to address.
Broadly, there are six categories of North Star Metrics2:
Revenue (e.g. ARR, GMV):
The amount of money being generated — the focus of ~50% of companies.Customer growth (e.g. paid users, marketshare):
The number of users who are paying — the focus of ~35% of companies.Consumption growth (e.g. messages sent, nights booked):
The intensity of usage of your product, beyond simply visiting your site — the focus of ~30% of companies.Engagement growth (e.g. MAU, DAU)
The number of users who are simply active in your product — the focus of ~30% of companies.Growth efficiency (e.g. LTV/CAC, margins)
The efficiency at which you spend vs. make money — the focus of ~10% of companies.User experience (e.g. NPS)
The measure of how enjoyable and easy to use customers find the product experience, overall — the focus of ~10% of companies.
Bulls**t or a gem?
Let’s say it straight - neither.
Amidst the clamor surrounding the North Star metric, I remain impartial, keen to evaluate both sides and discern what resonates with my current context.
Now, let's delve into the common pros and cons associated with the North Star metric.
Pros of North Star Metric
Focus: Helps teams align efforts towards a single, overarching goal.
Clarity: Provides a clear direction for decision-making and prioritization.
Measurement: Facilitates tracking and evaluation of business performance.
Alignment: Promotes cohesion across departments and functions.
Growth: Guides sustainable long-term growth strategies.
Cons of North Star Metric
Oversimplification: May overlook other important metrics and aspects of business performance.
Misalignment: If chosen poorly, can lead to misdirection and ineffective strategies.
Rigidity: Might limit adaptability to changing market conditions or emerging opportunities.
Tunnel Vision: Risks focusing solely on short-term gains at the expense of broader objectives.
Complexity: Implementing and operationalizing the metric across diverse teams and functions can be challenging.
How Have I Set Up My North Star Metric?
In the era of information overload, businesses can easily find themselves drowning in a sea of Key Performance Indicators (KPIs), revenue being just one among many.
However, I've opted for a different approach: identifying a single, precursor metric to revenue and focusing my efforts on its growth.
For my product teams, this metric is the number of transactions users initiate in our solution. As this figure climbs, it signifies increasing value delivered to our clients. Consequently, we assess new features based on their potential to boost transaction volumes.
In the sales realm, the emphasis is on pipeline building over immediate closures. By consistently nurturing leads, we ensure a robust pipeline, even if not every prospect converts immediately.
Immediate Action: Three Key Steps to Implement Now
To leverage the North Star metric effectively:
Do the diagnosis: Assess your company's unique needs and goals to identify a relevant North Star metric.
Set clarity: Foster alignment across teams by communicating the chosen metric and its significance.
Monitor: Develop systems and processes to track progress and adjust strategies accordingly.
Final Thoughts
While the North Star metric isn't a cure-all, it serves as a guiding light amidst the sea of data. However, it's essential to strike a balance and not overlook other crucial indicators.
As a business owner, it's your duty to define this indicator for your team, a singular point of focus amid the complexities of daily operations.
In moments of uncertainty or confusion, remind your team to look to the North Star. Let it illuminate the path forward and guide the company toward its future.
Quote of the week
I would greatly appreciate it if you could share your thoughts on this subject in the comment section. The entire community can benefit from a variety of perspectives, helping us collectively find the best solutions.
If you have friends who might be interested in these topics, please consider spreading the word. The more minds we have engaged in these discussions, the better we can become as both businessmen and fathers.
A panacea is any supposed remedy that is claimed to cure all diseases and prolong life indefinitely.
From the article “Choosing Your North Star Metric” by Lenny Rachitsky