• 02.10.2021 04:30

    North Star Metric: What is it and Why is it Important for your Business?

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    Hello!

    The North Star for centuries was used to provide direction. Although it wasn’t the only star used to navigate, the idea of a single metric to provide direction does keep things simple and focused. It wasn’t too long ago that only small amounts of data were used to analyze a business. Most focused on simply revenue, costs, and ultimately profit. However, the rapid expansion of technology and a once-unimaginable scale of data collection created new ways of indicating success. To keep everyone on the same page, companies are putting greater focus on a single metric that best predicts how successful the business is and where it’s going.


    What is the North Star Metric?


    North Star metrics are critical to the success of any business. They give you a clear idea about how your company is doing and help guide future decisions with data-driven decision making that leads towards increased revenue, lower costs or better customer retention. North Star metrics are a set of performance indicators that measure success in the customer journey. It's important to track them so you can see if your users' journeys were successful.

    North Star metrics provide valuable information on an organization’s financial performance over time as well as insight into what's going right for them in terms of marketing spend versus return on investment (ROI). This makes it easy when looking at this type if report because all the numbers add up!

    The north star metric is the key metric for the success of a company. It can be looked at in several ways.

    A metric that:

    • best predicts success
    • the core driver of growth and value
    • identifies the core mission or ambition of the company
    • creates focus and is easy to understand
    • is measurable and accountable

    However, you want to describe it, it boils down to being the most important metric for the success of a business. This metric is generally determined by the visionary of a company such as a founder or CEO and varies by organization and industry. Also, to note is how your industry judges value. Some industries judge their primary metrics off of user attention, others by transactions, and some by productivity.

    Some Possible Examples: 

    • Airbnb: nights booked
    • Spotify: time spent listening
    • Facebook: active users 
    • Uber: rides per week
    • Netflix: user retention 
    • Amazon: transactions per user

    These are hypothetical scenarios but the bottom line is that customers pay for value and a solution to a problem. The north star metric can cut through the noise and pinpoint if value is added. The company will have other metrics of value that can be used as indicators but having a single identifier of strategic focus and ultimately success is necessary.

    A lot of companies, leaders, entrepreneurs and leaders have adopted the North Star metric methodology. It has been proven to work well in many organizations around the world because if you know what your main focus should always remain then nothing else really matters. It helps them understand their driving force and measure progress in an organization.

    Case Study: Netflix

    If we look at Netflix as an example, we can easily point to the benefits of no commercials, a large catalogue of content, and the convenience of streaming on-demand as major selling points. Let’s now assume that these are the most important aspects for their customers. How do we objectively assess success?

    First, let’s look at the total minutes watched. This metric gives Netflix extremely useful information on their client’s interests and possibly the quality of content. They may even be able to market this information to investors or pitch these stats to content creators. Having 99 million views for the movie Extraction in its first month for example does at least hint that users are interested in watching this type of film. Although useful, using minutes watched as the north star metric could be confusing.

    For example, if minutes watched is the most important metric, then the goal should be to ensure people watch as much as possible. However, Netflix negotiates contracts for licensing agreements based on viewing predictions and one could argue that the company may want to limit views to negotiate a lower rate. This would allow the company to push users towards its original content while having the ability to advertise a wide range of overall content for current and potential users. Also, Netflix collects fees at a flat rate. Minutes watched may predict the retention of subscribers but it’s also possible that it does not.

    What if however, we were to say that the Netflix strategy was to obtain and keep as many subscribers as possible?

    Well, in this case, retention makes sense as a possible north star metric and a leading indicator or success. Minutes watched in this case is a complementary indicator of who is likely to stay. They may even use this metric for A/B testing to see if it indicates retention. It doesn’t matter if you watch for an hour or 100, you pay the same rate. The important thing is who stays. Retention also allows investors to value the company which could be favorable for further financing growth. It also allows Netflix to judge the value of their content, platform, and whether the price is fair. In this case, Netflix will focus on retaining users in any way possible and every decision is made with this in mind.


    Why a North Star Metric? What this Metric Matters?


    Clarity and Focus

    When it comes to customer value, you really can't go wrong with North Star metrics. The goal of a good north star metric is to indicate future success. Every product should have one, and it can help you measure your company's progress in achieving the metrics by creating benchmarks for managers or employees who work with each business unit within an organization.

    Add Clarity and Focus to Your BusinessA north star metric also allows for clarity and focus throughout the company. From the boardroom to the sales floor, each member of the organization can work towards a common goal. If the goal is to book as many nights as possible, every strategic decision should be done to accomplish this goal. Of course, there will be different ways to achieve this goal but overall everyone is on the same path. Should we lower prices? Create a higher supply? Incorporate value-added activities? Improve the interface? A combination of these? There’s no exact answer without the data but first, let’s have everyone focused on a shared goal.

    The North Star Metric is central to capturing what the real core value of your product. Your strategy needs to ensure everyone on your team and within your organization can describe exactly how you create value. They should be able to identify the problem you’re solving, visualize progress, and be accountable for the outcome.


    Case Study: Facebook

    We can look at a company’s vision to predict their north star metric but it’s not always easy to decipher. Let’s look at Facebook’s mission as an example. At first glance, we can think that Facebook's North Star metric would be the number of active users. “Give people the power to build community and bring the world closer together.” Sounds nice but what does that mean? Well, we need to look further. A glance at their annual investor reports creates a better picture of which metrics the company values.

    Add Clarity and Focus to Your BusinessThe top three are:

    • daily active users (DAUs) 
    • monthly active users (MAUs)
    • average revenue per user (ARPU)

    The next three are much the same except using Facebook’s “family of products” such as Messenger and Instagram. Facebook solves an advertiser’s problem of finding potential customers. It’s key to note that Facebook’s revenues come from advertisers. Although Facebook does have a two-sided model in which it attracts users to its platform as well, users and their data are the product. Facebook can leverage its service as a one-stop-shop for many businesses to access data to better target potential clients.

    Looking back at their vision, we can simplify it as “We have the most users and user data all in one place.” Knowing this, Facebook creates a focus for its staff. Retain and increase daily and monthly active users. Although their duties will vary, every strategic decision is focused on the ultimate goal of increasing daily and monthly active users. 

    Things to Remember

    Focus is extremely important to an organization. There aren’t a lot of disadvantages of strategic focus but there are important reminders to be aware of.

    • Single-mindedness: Don’t forget that other metrics are also important to the business or complementary to your north star metric. Also, sometimes you may have to compromise.

    • Your Customers: Don’t be too pushy. Your strategy should focus on solving problems for your customers. Cheap sales tactics or aggressive behavior will likely achieve negative results and drive customers away.

    • Ethics: There’s no better way to lose a customer’s trust and loyalty than using unethical practices to improve your metrics.

    • An ongoing process: Continuous evaluation of your north star metric and other complementary metrics is important. 


    Does Your Business Need a North Star Metric?


    The customer experience is a major consideration in any business. Think about the actual value you bring to your customers but don't stop there. Think about their experience engaging with your brand. Positive customer experience not only does it help your business increase sales, but also makes customers feel appreciated and valued so they come back for more! Finding the right North Star metric for your company with help you improve your customer experience, acquisition and retention.

    North Star metrics allow teams to get everyone in a company focused on one goal. There's an abundance of analytical possibilities nowadays, which means that every department and team can chase their own unique set of performance measures - even if they are not directly related with product or service development!

    You might now be thinking if you need a north star metric. It’s possible you already use one without even knowing it. It’s also possible that you don’t have one and have been lucky enough to be in an industry with a large barrier to entry or enjoy a first mover’s advantage.

    However, if you’re making profits then you better believe someone will notice and try to move into your territory. When the iPhone was released, it was revolutionary. A cell phone that could browse the internet just like a computer wasn’t a normal thing at the time. It didn’t take long for others to follow. Could you imagine selling a phone now without internet access?

    A north star metric is a powerful and fundamental tool in business. It guides decision-making, aligns resources towards their highest value use case while eliminating waste or reusing existing assets for maximum profit margins; it reduces risk because the path to success has been mapped out ahead of time by understanding what action provides benefits to customers with accuracy based on an accurate understanding as opposed to guessing. A good North Star Metric Alignment should be derived from true understandings about how certain actions provide value to customers.

    The North Star Metric is an innovative and forward-thinking way to measure your company's success by only focusing on 1 main goal. The idea behind it is to bring more value to your customers while driving sustainable growth of your business! Whether your company’s strategy is low-cost, differentiation, or a mix of both, you’ll need to ensure you have at least one metric that in a glance predicts success. Without it, your company may lack direction. Without direction, you’ll lose focus.

    How to Discover Your North Star Metric?


    You should build a North Star Metric based on your personal beliefs, your company's vision or core value. So, each company, entrepreneur or induviual should have its own metric.

    This may be a tough one, but you must choose a North Star metric that fits your entire company's vision. Your company's goal is to have everyone on board and working towards that target so they can measure their progress more easily. For example: The design team makes products which are useful for users but also well designed; developers use this as guidance when creating apps because loading time will affect how long someone spends using them in the first place!

    This may end up being the most difficult part of using a north star metric. It’s not always obvious and not everyone in the organization will agree on which to use.

    Implement, Track, Re-evaluateTo narrow down your search, there are a few questions to ask:

    • What problem does our product/service solve?

    • Why do we do it better than anyone else?

    • Is our profit model aligned with the problem we’re solving? If not, is this an issue?

    • If you had to choose one metric other than profit to describe your success, what would it be?

    • What metric best links my company’s vision to my product strategy?

    You may have narrowed it down now to a few different metrics. It’s possible your team will all be on the same page but it’s also important to now challenge that idea. Ask yourself and your team why, then ask it again, and again until there’s nowhere else to go. Facebook’s average user metrics perfectly align with both sides of their business. For users, they can feel that everything and everyone they need can be found there. Advertisers feel confident that their ads have the best chance at success. For Facebook as a public company, the most important aspect of the business is profit. Customers however don’t care about Facebook’s profits, they only care about the problem Facebook is solving for them. So instead of profits, Facebook focuses on solving problems for their customers and profits naturally flow into the business.


    Implement, Track, Re-evaluate


    Implement

    With many companies today fixated on growth and sales, it is difficult for them to identify a single metric truly representative of future success. The leadership team may be confident in their ability to do so if they are aware of the company's current state as well as what its long-term goals will need based off this information.

    Now that the hard work is done it’s time to implement your strategy. First, ensure everyone is on the same page. An open discussion to describe the importance and process to everyone from top to bottom is key. Without it, you’ll just be banging your head against the wall very soon. Before each decision, everyone in the organization should ask themselves if a decision improves the north star metric. If not, go back and re-evaluate.

    Track

    The takeaway message here is that if you can pinpoint the early actions leading to customers becoming retained, then it's likely a strong leading indicator for future business outcomes. Your product (a service or an offering) should act as your north star when mapping out how best to engage with prospects in order find out which one will get them hooked - and keep 'em around!

    Don’t just talk about it but track the results and compare how each decision is affecting your north star metric. The length of time to see results may vary and will have to be adjusted for your business. Also, track other metrics to see if they act as leading or lagging indicators.

    Re-evaluate

    You’ve been making decisions and tracking your north star metric (as well as other metrics). You may notice that it’s working perfectly. In that case, congratulations. But now it’s time to check in with your employees, partners, departments, etc. Take a good look and have a discussion about why things worked, why some didn’t, and how you can improve further.

    You may also notice that you’ve chosen the wrong metric and things are off course or the problem you thought you were solving for your customer isn’t as important as you thought. Take a look at some other metrics and have discussions with your departments. Did financing hold you back? Did marketing miss the mark? Was everyone focused on the same goal? Did a competitor simply just do something better? Take the time to figure out exactly what went wrong. If it means starting over and choosing a different direction or metric, then so be it. It’s better to take a step back than to slowly fade away. 


    Let a North Star Metric Drive Success

    The North Star metric is definitely NOT a vanity metric. North star metrics aren't just a fad, they're the way to go. By finding the right North Star metric, you will figure out what game your company is playing and how it fits into your customer engagement model so that marketing strategies can be tailored accordingly for maximum impact!

    North Star metrics are the best way to measure success. They tell you if your business is growing, or stagnant and they give a clear indication on where changes need to happen in order for things get better with time. The North Star Metric is a key measurement that's most predictive of long-term success. By knowing how your organization retains users, it will help the company focus on what really matters.

    North Star metrics must do three things: lead to revenue, reflect customer value and measure progress in order for the company be able grow sustainably and start the "rapid growth mode" phase. If every department contributes on improving this one thing then everyone should see benefits as well!

    North-star Metrics offer crucial information about how well an organization has been doing over its lifespan as it provides insight into areas such as customer engagement levels which can lead directly towards determining future revenue streams based off past successes! The North Star metric framework should be at the center of your growth strategy. Having a north star metric isn’t a guarantee of success. Far from it. The quality of your evaluation is what’s important. A ten-minute glance and a short memo to staff won’t lead to any meaningful results. A well-thought-out evaluation that leads to a strategic focus throughout the company however will. Remember the north star metric evaluates how successful you have been in solving a problem your customers are willing to pay for. Your success depends on your ability to do this better than anyone else. So why not use a metric that shows you if you’re doing it? Strategic focus is what makes and breaks organizations. Your north star metric if nothing else will help align the goals of your business and get everyone on the same page. If you haven’t already, get started and let a north star metric drive your way to success.

    The North Star Metric concept is still a good idea but teams should have their own metrics to measure progress and inspire them. However, one metric that applies for the entire company doesn't make sense most of time. Instead every specific team member or group could track their success with different KPIs (or metrics) which will give more meaning in what's being monitored instead from just reaching goals externally imposed on an individual level without understanding why he/she was doing it all along!

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