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Choosing Your North Star Metric: A Guide for Startups

Blog,Positioning

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11/03/2024

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By :

DigitalLatheef

In the world of startups, where focus and direction are crucial for success, choosing the right North Star Metric (NSM) is paramount. This single metric acts as a guiding light, aligning all company efforts towards a common goal. But with various options and potential pitfalls, selecting the ideal NSM can be a daunting task.

This blog post delves into the different types of NSMs, explores the considerations for choosing the right one, and offers insights into adapting your metric as your startup evolves.

Understanding the Different Types of North Star Metrics

NSMs fall into six broad categories, each reflecting a distinct approach to growth:

  • Revenue (ARR, GMV): This metric prioritizes financial growth, focusing on the total amount of money generated. Around 50% of companies surveyed utilize this approach.
  • Customer Growth (paid users, market share): This category emphasizes acquiring new paying customers, with 35% of companies focusing on it.
  • Consumption Growth (messages sent, nights booked): This metric measures the intensity of product usage beyond simple visits, favored by 30% of companies.
  • Engagement Growth (MAU, DAU): This category focuses on actively engaged users, regardless of their paying status, with another 30% of companies adopting it.
  • Growth Efficiency (LTV/CAC, margins): This metric prioritizes the efficiency of acquiring and retaining customers, favored by 10% of companies.
  • User Experience (NPS): This category focuses on user satisfaction and ease of use, chosen by 10% of companies.

Selecting the Right NSM for Your Startup

The optimal NSM for your startup depends on several factors, including:

  • Business Model: Marketplaces and platforms often prioritize consumption growth, while subscription-based products might focus on engagement or customer growth.
  • Product Growth: Freemium products might prioritize engagement to convert free users, while paid-growth businesses might focus on LTV/CAC.
  • Maturity Stage: Early-stage startups might prioritize cohort retention before transitioning to a more specific NSM.

The provided framework offers a starting point, but don’t be afraid to consider alternative metrics specific to your unique business model. Companies like Shopify and Patreon exemplify this by focusing on “active merchants” and “activated supply,” respectively, metrics tailored to their specific growth strategies.

Beyond Revenue: Why It Might Not Be the Ideal NSM

While revenue is often seen as the ultimate goal, it might not be the most effective NSM for several reasons:

  • Spiky and Operational Challenges: Revenue can be influenced by various factors, making it difficult to track the direct impact of team efforts.
  • Suboptimal Decisions: Focusing solely on revenue can lead to neglecting other crucial aspects like user experience or long-term growth.
  • Limited Motivation: Revenue goals might not resonate with teams as strongly as metrics reflecting direct user value.

Therefore, consider alternative metrics that better reflect your product’s value proposition and long-term growth potential.

One North Star Metric or Multiple?

While some advocate for multiple NSMs, most successful companies favor a single metric (excluding revenue) for focused decision-making and company alignment. However, exceptions exist:

Layering Quality Metrics: Companies like Superhuman and Slack might combine their NSM with a user experience metric like NPS.
Multiple Products, Different Goals: Companies like Spotify with distinct subscription and ad-supported products might utilize multiple NSMs.

Beyond the North Star: Input Metrics and Adaptation
Choosing an NSM is just the first step. To effectively drive growth, you need to identify the “input metrics” that influence your NSM. These are the actionable levers your team can pull to directly impact the North Star.

For example, if your NSM is “nights booked,” input metrics could be guest conversion rate, number of Airbnb listings, or website traffic. Focusing on these actionable metrics allows teams to develop concrete strategies and align efforts towards the ultimate goal.

Remember, your NSM is not set in stone. As your startup evolves, your understanding of what drives growth will change. Be prepared to adapt your NSM as your strategy and product offerings shift.

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My name is Ferran. I am a Professional Digital Designer and Front-End Developer with over a decade of experience in this field. I was born and raised in Denpasar, Bali.

I developed an interest in art and design from an early age and started my career as a designer in 2008.

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