Economics/Business

North Star Metric/importance/elements/Why company needs

Every company should work with a North Star Metric, which is a key indicator of sustainable growth. This metric acts as a link between the product or service offered and the business objective as a whole.

The North Star Metric , also called ” metric North Star ” or “metric guiding star “, so named by remembering how the ancient mariners were guided.

High-impact retail, technology, and social media companies first began using a single metric , which encapsulated the company’s entire strategy. We can say that that’s where North Star Metric was born.

Today, this metric is very common in startups and high-impact companies. It is one of the main instruments to guide businesses that have grown very quickly and, therefore, present several management challenges. 

For anyone who wants to measure growth , impact and challenges , this is a great exercise in understanding metrics, data and results.

What is North Star Metric?

North Star Metric (NSM), loosely translated, means guide star metric . It has this name because it carries with it the most important value of the company , which directly impacts customers.

Because it is so important, it is often a great challenge to define what this metric will be within the company. However, this definition allows all sectors and employees to move in a single direction in product, technology, sales, customer success, people management , etc.

However, as we will see throughout this content, many companies make mistakes when choosing certain metrics to track, such as:

  • metrics focused simply on customer acquisition ;
  • vanity metrics like follower growth, revenue, SaaS metrics;
  • result metrics such as profit.

How important is the guide star metric?

Many say that the guide star metric is the only metric that matters. While this is a very categorical statement, it does serve to illustrate the importance of determining a company’s NSM .

Startups in the scale up phase (high growth) face several challenges, from developing a strategic vision to understanding how to monitor performance . Having a guide star metric can be the key to solving these issues .

The sectors of a company have their indicators to follow, such as:

  • HR — turnover , average hiring time, etc.;
  • Marketing — conversion rate, unique users on the site, etc.;
  • Sales — conversion rate by salesperson, average ticket, sales cycle, etc.;
  • Finance — MRR, ARR, LTV, etc.;
  • Technology — lead time, burndown, etc.

How to define the most important among the ones mentioned above? For the HR sector, tracking the development of talent within the company is more important than MRR, do you agree? 

That’s why North Star Metric must be unique to everyone in the company , regardless of industry.

Companies that use the North Star Metric concept

It was the book “Good to Great” , by writer Jim Collins , that spurred the adoption of the NSM concept for large companies around the world. Since then, they have started using different means of measuring their growth and their impact on the market.

Here are some examples of companies that use the guide star metric and what they chose:

  • AirBnb — number of nights booked;
  • Amazon — one-time sales per Prime subscriber;
  • Facebook — monthly number of active users / feed engagement time;
  • Intercom — number of customer interactions;
  • Medium — total reading time per user;
  • Netflix — time the subscriber spends on the platform watching movies;
  • Salesforce — average interactions per active account;
  • Slack — NPS (Net Promoter Score);
  • Uber — total daily rides;
  • Walmart — purchases per user / sessions visited.

What are the elements of the NSM?

The North Star Metric encompasses a set of primary factors that collectively act to impact the guide star metric. 

Whether in HR , product or marketing , for example, everyone can directly influence these smaller factors with their daily jobs.

This combination of key metrics and inputs has three uses: 

  • allows internal communication and team alignment;
  • helps prioritize tasks and accelerate decision-making (informed but decentralized);
  • allows teams to focus on the impact of their actions and sustainable growth. 

1. Results

We can say that the first element of this master metric is the result . North Star Metric is a leading indicator of business results . 

As repetitive as it may seem, this concept needs to be clear , as this indicator is what should bring sustainable growth and value to the end customer. 

As the metric evolves, you can expect your company’s results to adjust over time.

2. Inputs

The inputs are just as important as the guide star metric itself . They are formed by a set of three to five complementary factors , which directly influence the North Star Metric.

Inputs can vary greatly depending on the industry, business model, and unique characteristics of a product. The key is to identify the key factors that contribute to North Star Metric in your company . 

North Star Metric is therefore the main reason inputs exist . Therefore, they need to be well described and actionable.

3. Tasks

North Star Metric and its inputs must be connected to all company activities . This includes research, design, software development , refactoring , prototyping , A/B testing , and others — taking the routine of the product team as an example.

Teams then connect their initiatives to their North Star. Everything must align with the guiding star metric driven strategy.

Why does the company need a North Star Metric?

Most companies seek to define KPIs (Key Performance Indicators, or key performance indicators) that make sense to monitor each action and business decision. 

In the case of organizations that grow very fast, as with startups, having this definition is even more challenging .

The benefits of finding a North Star Metric are many, but they will only be felt along the way as the company travels along its path of growth .

Some benefits are felt in the short term, others in the medium and long term. Regardless of the management methodology that the company adopts, defining a guide star metric can lead to:

  • improved communication ;
  • hierarchical alignment between all teams; 
  • prioritization of activities by all employees;
  • greater visibility and transparency of the numbers that matter.

By defining a guide star metric, it is easy to get all sectors of the company on the same page. Thus, Marketing , Sales , Product , Finance , Technology , HR and all other areas will work together to achieve the proposed goal.

Examples of North Star Metric

To help you visualize what a guide star metric would look like, we’ve brought some examples thinking about different business segments.

Consumer tech :

  • number of daily active users (DAU – Daily active users);
  • number of messages sent per day;
  • customer retention.

Media companies :

  • number of customers consuming news per week;
  • total consumption time (reading, listening or watching).

E-commerce :

  • number of customers completing their first purchase;
  • daily purchase value;
  • lifetime value of a customer .

B2B SaaS models :

  • number of test accounts in your first week of use;
  • number of daily active users (DAU – Daily active users ).

How to define a North Star Metric for the company?

As we know, each company is unique, with its own processes and routines . Therefore, your guide star metric must be defined based on these particularities.

However, there is a little roadmap that can help you define what your company’s North Star Metric will be. However, before we bring this little guide, it is necessary to pay attention to the so-called vanity metric .

The vanity metric, as its name suggests, doesn’t necessarily show you what you need to see , but what you want to see . 

It can mislead you about your product’s performance in the short term, while in fact it doesn’t show success in the long run. So be very careful when choosing a guide star metric. 

Below is a list of topics that North Star Metric must address:

  • generate value for customers;
  • be linked to the product vision and business strategy;
  • predict future results, rather than reflecting past results;
  • be actionable; 
  • be structured in a simple language, so that anyone in the company can understand;
  • be measurable; 
  • not be a vanity metric.

Corporate Culture and North Star Metric

Before defining what your company’s guiding star metric will be, it is essential to review the culture code and understand how the metric will align with the company’s culture . Remember that it is this definition that shows the path the organization should follow.

However, in addition to reviewing the culture code , it is essential that directors revisit the concepts of mission, vision and values . As incredible as it may seem, the guide star metric is directly connected to these concepts . 

As an exercise, bring the entire company together to discuss values, review what needs to be updated, and keep everyone fresh and on the same page.

Once the North Star Metric has been defined, remember to make it visible to everyone in the company , as a constant reminder of how the team must work to achieve the goal.

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