Strategy

Finding the Right North Star Metrics for Your Startup

Finding the Right North Star Metrics for Your Startup

North Star Metric is a core metric that is aligned across a company and determines the direction toward which a company's efforts head. While it is an integral part of any startup, it is also important to find the right metric(s) for your startup and use them effectively. Lenny Rachitsky, an angel investor who previously led growth and community building at Airbnb, has beautifully written about the types of NSMs, which one to use, and why you should use them.

There are six categories of North Star Metrics:

  • Revenue (e.g., ARR, GMV)
  • Customer growth (e.g., paid users, market share)
  • Consumption growth (e.g., messages sent, rides booked)Engagement growth (e.g., monthly active users, daily active users)
  • Growth efficiency (e.g., LTV/CAC, margins)
  • User experience (e.g., net promoter score)

Which NSM(s) to Pick?

It totally depends on your business model and the type of startup you are running. Here are some use cases:

  • Marketplaces and platforms (Consumption growth): Marketplaces and platforms generate money and growth from usage. Companies like Pathao and Uber will make money if a user books a rider or orders food.
  • Paid-growth-driven businesses (Growth efficiency): Companies with multiple layers of cost and spending highly on customer acquisition tend to focus on optimizing margins and ensuring LTV/CAC. Companies like Blue Apron, which deliver physical products, focus on optimizing margins, while fully digital companies like Calm, which spend heavily on digital ads, focus on measuring LTV/CAC to ensure efficiency.
  • Freemium team-based B2B products (Engagement and/or customer growth): This applies mostly to B2B SaaS companies where they need to acquire as many free users on their platform as possible and eventually lead them to upgrade to a paid plan. Thus, companies like Slack and Asana focus on engagement to ensure users are growing on the platform over a certain timeline.
  • UGC subscription-based products (Consumption growth): Twitch is the best example of this, where streamers stream videos and users watch them. For Twitch, consumption is important as it leads viewers to share the content and drives growth.
  • Ad-driven businesses (Engagement): The most common example is Facebook or any other social media platform that relies on ad revenue. Engagement leads to traffic, and traffic leads to revenue.
  • Consumer subscription products (Engagement and/or customer growth): Companies like Duolingo and Tinder are perfect examples. Duolingo, a language learning app, has a large free user base from which a portion will eventually convert to paid users. For Tinder, the natural churn rate exists as people find their partners and leave.
  • Products that differentiate on experience (User experience): Superhuman is a perfect example. The premium $30/month email client relies on its user experience and thus justifies its high price. The "jobs to be done" framework can also be used to determine what customers do on your platform and find the right metric(s).

Should I Pick One NSM?

Most companies have one single NSM. However, if you have multiple products and layers of focus, several NSMs can be used. The benefit of using one single NSM is that it provides clarity and focus.

To make sure of a successful output metric, it is important to know the input metrics. Below infographic attached to the post explains it:

Image Credit: Future

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