In the world of business, finding the right metric to measure success is crucial. This metric, known as the North Star Metric (NSM), serves as a guiding light for companies, helping them align their efforts and make informed decisions. However, with so many options available, choosing the right NSM can be challenging. In this article, we will explore the different categories of NSMs and how they are utilized by various types of companies. We will also discuss the concept of magical growth loops and how they contribute to the success of businesses.

In the world of business, finding the right metric to measure success is crucial. This metric, known as the North Star Metric (NSM), serves as a guiding light for companies, helping them align their efforts and make informed decisions. However, with so many options available, choosing the right NSM can be challenging. In this article, we will explore the different categories of NSMs and how they are utilized by various types of companies. We will also discuss the concept of magical growth loops and how they contribute to the success of businesses.

When it comes to NSMs, there are six broad categories to consider. These categories include revenue, customer growth, consumption growth, engagement growth, growth efficiency, and user experience. Each category focuses on a different aspect of a company's operations and can be used to measure success in various ways.

Revenue-based NSMs, such as annual recurring revenue (ARR) or gross merchandise volume (GMV), are the most common choice for many companies, making up approximately 50% of NSMs. These metrics measure the amount of money being generated and reflect the financial success of a business.

Customer growth is another popular NSM category, with approximately 35% of companies focusing on metrics like paid users or market share. This category measures the number of users who are paying for a product or service and indicates the company's ability to attract and retain customers.

Consumption growth NSMs go beyond simply measuring website visits and instead focus on the intensity of product usage. Metrics like messages sent or nights booked can provide insights into how engaged users are with a product. Approximately 30% of companies prioritize consumption growth as their NSM.

Engagement growth NSMs measure the number of active users within a product. Metrics like monthly active users (MAU) or daily active users (DAU) indicate how frequently users are interacting with a product. Around 30% of companies use engagement growth as their NSM.

Growth efficiency NSMs, although less common, are still important for approximately 10% of companies. These metrics, such as the lifetime value to customer acquisition cost ratio (LTV/CAC) or profit margins, focus on the efficiency of a company's spending and revenue generation.

User experience NSMs, like the Net Promoter Score (NPS), measure how enjoyable and easy-to-use customers find a product overall. Approximately 10% of companies prioritize user experience as their NSM, recognizing the importance of customer satisfaction and loyalty.

Different types of companies may have different NSMs that align with their business models and goals. For example, marketplaces and platforms, like Airbnb and Uber, often prioritize consumption growth as their NSM. These companies measure the volume of transactions, such as nights booked or rides taken, to gauge their success.

Paid-growth driven businesses, on the other hand, prioritize growth efficiency as their NSM. These companies focus on optimizing their spending and revenue generation to ensure profitability and sustainable growth.

Freemium team-based B2B products often prioritize engagement and customer growth as their NSM. These companies aim to increase user engagement and attract new customers to their product.

UGC subscription-based products, like social media platforms, prioritize consumption as their NSM. These companies measure user activity, such as posts or interactions, to gauge their success.

Ad-driven businesses, such as online media platforms, prioritize engagement as their NSM. These companies measure metrics like page views or time spent on site to evaluate their performance.

Consumer subscription products, like streaming services, may prioritize either engagement or customer growth as their NSM. These companies focus on keeping users engaged with their content and acquiring new customers.

Products that differentiate on experience, such as financial services or language learning platforms, prioritize user experience as their NSM. These companies measure metrics like NPS or learning competency to assess customer satisfaction and product effectiveness.

While these categories provide a framework for choosing an NSM, it's important to note that there's typically only one NSM for a company. The NSM should be the metric that, if increased, would most accelerate the company's growth. It serves as the ultimate goal that guides the team's day-to-day efforts.

To determine the right NSM, companies can use the concept of "jobs to be done." This approach focuses on understanding the underlying customer needs and goals that a product or service fulfills. By identifying the primary job that customers hire the product to do, companies can align their NSM with the desired outcome.

Once the NSM is established, companies need to identify the input metrics that contribute to its growth. These input metrics are the actionable steps that teams can take to impact the NSM. For example, increasing the conversion rate of a flow or driving more traffic to the website through advertising can directly impact the NSM.

In the earliest stages of a company, the primary aim should be determining if the product or service is something people want. This validation phase requires a singular focus on understanding customer needs and ensuring product-market fit.

In conclusion, choosing the right NSM is crucial for businesses to measure success and guide their decision-making. By understanding the different categories of NSMs and how they align with different types of companies, organizations can identify the most suitable metric for their goals. Additionally, incorporating the concept of magical growth loops and focusing on actionable input metrics can further enhance a company's growth strategy.

Three actionable advice before concluding:

1. Understand your business model and goals: Identify the type of company you are and the metrics that align with your business model and goals. This will help you narrow down the categories of NSMs that are most relevant to your success.
2. Focus on the customer: Consider the "jobs to be done" approach and prioritize metrics that directly impact customer satisfaction and product effectiveness. By aligning your NSM with customer needs, you can ensure long-term success.
3. Break down your NSM into actionable input metrics: Once you have your NSM, identify the input metrics that contribute to its growth. These metrics should be specific, measurable, and actionable, allowing teams to align their efforts and make tangible progress towards the NSM.

By following these actionable advice, companies can choose and implement the right NSM, setting themselves up for long-term success and growth.