Choosing Your North Star Metric: The Key to Business Success and Growth

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Jul 22, 2023

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Choosing Your North Star Metric: The Key to Business Success and Growth

Introduction:

In today's competitive business landscape, companies are constantly seeking ways to gain an edge over their competitors. One powerful strategy that has emerged is the concept of the North Star Metric. This metric acts as a guiding light, helping businesses identify the key driver behind their success and optimize their efforts towards that goal. Companies like Airbnb, Miro, Netflix, Tinder, and Spotify have all embraced this approach, deliberately focusing on metrics other than revenue to achieve long-term growth. In this article, we will explore the different types of North Star Metrics and how they can be applied to various business models. We will also discuss the importance of mindful consumption and how the Diderot Effect influences our purchasing decisions.

Identifying the Right North Star Metric:

The first step in choosing your North Star Metric is to ask yourself a crucial question: "Which metric, if it were to increase today, would most accelerate my business' flywheel?" By answering this question, you can pinpoint the metric that has the most significant impact on your business's growth. However, it is important to note that maintaining a laser focus on a single metric for too long can have its drawbacks. Teams risk falling into short-term thinking, missing out on new opportunities, and sacrificing the user experience. Therefore, it is essential to strike a balance and periodically reassess your North Star Metric to ensure it remains aligned with your business goals.

Different Types of North Star Metrics:

There are six broad categories of North Star Metrics, each catering to different business models and objectives.

  • 1. Revenue (ARR, GMV): Traditionally, revenue has been the primary metric for measuring business success. However, companies that focus solely on revenue may overlook other crucial aspects of their business.
  • 2. Customer Growth (Paid Users): For companies with a paid-growth-driven business model, customer growth is a key metric. By consistently increasing the number of paying customers, these companies can drive revenue growth.
  • 3. Consumption Growth (messages sent): Marketplaces and platforms often prioritize consumption growth. This metric reflects the level of activity within the platform, indicating its value to users.
  • 4. Engagement Growth (MAU, DAU): Social media platforms like Facebook and Snap target Daily Active Users (DAU) as their North Star Metric. Pinterest, on the other hand, looks at Weekly Active Users (WAU) due to its less frequent usage pattern.
  • 5. Growth Efficiency (LTV/CAC, margins): Some businesses focus on optimizing growth efficiency by measuring the ratio of Lifetime Value (LTV) to Customer Acquisition Cost (CAC). This metric helps assess the profitability of acquiring new customers.
  • 6. User Experience (NPS): Companies that differentiate themselves based on user experience often use Net Promoter Score (NPS) as their North Star Metric. This metric reflects customer satisfaction and loyalty, which are crucial for long-term success.

Applying North Star Metrics to Different Business Models:

  • 1. Marketplaces and platforms: Consumption growth is typically the most relevant North Star Metric for marketplaces and platforms. By increasing user activity and engagement, these platforms can attract more users and create a positive feedback loop.
  • 2. Freemium team-based B2B products: Engagement and customer growth are crucial for freemium team-based B2B products. By keeping users engaged and converting them into paying customers, these companies can drive revenue growth.
  • 3. UGC subscription-based products: For user-generated content (UGC) subscription-based products, consumption is the key metric. When users actively create and share content, it drives the growth flywheel and attracts new users.
  • 4. Ad-driven businesses: Engagement is the primary North Star Metric for ad-driven businesses. Social media platforms like Facebook and Snap rely on daily usage, while Pinterest focuses on weekly usage to maintain user engagement.
  • 5. Consumer subscription products: Engagement or customer growth are the typical North Star Metrics for consumer subscription products. These companies need to ensure that users stay engaged and continue their subscription to drive revenue.
  • 6. Products that differentiate on experience: User experience becomes the North Star Metric for products that prioritize differentiation through exceptional user experiences. By focusing on user satisfaction and loyalty, these companies can create a competitive advantage.

Choosing Your North Star Metric:

While there are various approaches to choosing your North Star Metric, one alternative is to ask yourself, "What jobs are our users hiring our product to do?" By understanding the core purpose of your product and what value it provides to users, you can identify the metric that aligns with those goals. Focusing solely on revenue goals too early can lead to suboptimal decisions. Instead, it is crucial to prioritize user needs and satisfaction to build a solid foundation for long-term success.

Taking Action:

Once you have identified your North Star Metric, it is essential to break it down into its component parts and determine the key input metrics that drive it. By understanding the levers that move your North Star Metric, you can focus your efforts on optimizing those input metrics. Additionally, in the early stages of a company, it is vital to prioritize finding product-market fit. By focusing on cohort retention and ensuring that users stick around after using your product, you can lay a strong foundation for future growth.

Mindful Consumption and the Diderot Effect:

In our consumer-driven society, we often find ourselves constantly buying new products, upgrading to the latest versions, and accumulating possessions we don't actually need. This behavior can be attributed to the Diderot Effect, which describes our tendency to overconsume due to our innate desire for improvement. The Diderot Effect is named after the French philosopher Denis Diderot, who experienced a sudden surge in consumption after receiving an extravagant gift. He found himself constantly buying new items to match the perceived value of the gift, ultimately leading to debt and dissatisfaction. Diderot aptly expressed his predicament by saying, "I was the absolute master of my old robe. I have become the slave of the new one."

However, with a bit of self-control and mindfulness, we can break free from the cycle of impulsive buying and embrace mindful consumption. Here are three actionable tips to help you overcome the Diderot Effect:

  • 1. Beware of the shiny toy syndrome: Buying a new shiny toy often provides temporary satisfaction but fails to bring lasting fulfillment. Take a moment to reflect on whether a purchase aligns with your long-term values and goals before succumbing to the allure of novelty.
  • 2. Create spending limits: Establishing a strict budget can help you avoid overconsumption. By setting spending limits for different categories of products, you can ensure that your purchases are intentional and aligned with your financial goals.
  • 3. Avoid consumption triggers: Identify and avoid situations that tempt you to make impulsive purchases. This could involve unsubscribing from marketing emails, limiting your time on online shopping platforms, or finding alternative activities that bring you joy and fulfillment.

Conclusion:

Choosing the right North Star Metric is crucial for business success and growth. By focusing on the metric that has the most significant impact on your business, you can align your efforts and optimize your decision-making. Additionally, mindful consumption is essential to avoid falling victim to the Diderot Effect and overconsuming. By reflecting on our true needs and prioritizing experiences over possessions, we can find contentment and fulfillment in a world driven by constant consumption. Remember to identify your North Star Metric, break it down into its component parts, and prioritize user needs to build a solid foundation for long-term success.

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