The Intersection of North Star Metrics and Software Eating the World

The Intersection of North Star Metrics and Software Eating the World

In today's rapidly evolving business landscape, companies are constantly searching for the key metric that will drive their success and set them apart from their competitors. This metric, known as the North Star Metric, is the driving force behind a company's growth and optimization efforts. Interestingly, some of the most successful companies, such as Airbnb, Miro, Netflix, Tinder, and Spotify, purposely avoid focusing on revenue as their North Star Metric. Instead, they identify the driver behind a given purchase or usage and optimize for that in a way that their competitors can't or won't.

So, how do companies choose their North Star Metric? The first question to start with is, "Which metric, if it were to increase today, would most accelerate my business' flywheel?" This question helps identify the metric that will have the most significant impact on the company's growth. However, it's essential to maintain a balance and not get too fixated on a single metric for too long. By doing so, teams risk falling into short-term thinking, missing out on new opportunities, and sacrificing the user experience.

When it comes to North Star Metrics, there are six broad categories to consider: revenue, customer growth, consumption growth, engagement growth, growth efficiency, and user experience. The choice of metric depends on the nature of the business and its goals. For marketplaces and platforms, consumption growth is often the most common North Star Metric. This metric focuses on the active usage of the platform and drives the growth flywheel. On the other hand, for freemium team-based B2B products, engagement and/or customer growth are often the key metrics. These products rely on active user engagement and expansion of the customer base for success.

In the case of UGC subscription-based products, consumption takes precedence as the North Star Metric. However, it's important to note that consumption and engagement are similar metrics, but consumption is more active. It involves users actively creating content, such as videos, which drives the growth flywheel through content sharing. Ad-driven businesses, like Facebook and Snap, target metrics such as DAU (daily active users) and WAU (weekly active users) to measure engagement. These platforms aim to become daily habits for users, ensuring their continued usage and engagement.

For consumer subscription products, the North Star Metric often revolves around engagement or customer growth. These products rely on keeping users engaged and retaining their subscriptions. Finally, products that differentiate themselves based on experience prioritize user experience as their North Star Metric. These companies understand that a positive user experience leads to customer satisfaction and loyalty.

While revenue goals are essential for a business's success, it's crucial not to focus on them too early in the process. By doing so, companies may make suboptimal decisions, such as spending excessive time optimizing pricing or being afraid to lower prices. Instead, an alternative approach to choosing a North Star Metric is to ask, "What jobs are our users hiring our product to do?" This approach focuses on understanding the value that the product brings to users and aligning the metric with that value.

It's worth noting that there is typically only one North Star Metric for a company. Having a single focal point helps create a cohesive planning and decision-making strategy company-wide. Once the North Star Metric is identified, the next step is breaking it down into its component parts and deciding which metrics to invest in as inputs. By understanding the levers that move the North Star Metric, teams can focus their ideation and efforts on those input metrics.

However, in the early stages of a company, before achieving product-market fit, the singular aim should be answering the question, "Am I building something people want?" Cohort retention becomes a crucial metric at this stage. If a company can't retain users after they've used the product, nothing else will matter in the end.

Now, let's shift our focus to the concept of software eating the world. This idea highlights the pervasive influence of technology in our lives and how it transforms industries and societies. When software eats the world, it disrupts traditional systems and creates new opportunities for innovation and growth. However, it also presents challenges and potential pitfalls.

One of the root causes of societal collapse throughout history has been our participation in rivalrous or "zero-sum" games. Rivalrous goods, such as gold or Bitcoin, are valuable because they are scarce. On the other hand, anti-rivalrous goods, like language, are valuable because they are abundant. When things that should be positive-sum become zero-sum, negative consequences arise.

To navigate this landscape, we need a change in consciousness that recognizes our interconnectedness. When we identify as interconnected parts of an interconnected universe, we inherently become more positive-sum in our thinking. This understanding helps solve the rivalry problem because zero-sum games require a separate sense of self, leading to competition for scarce assets.

In the context of choosing a North Star Metric, understanding the interconnectedness of our society is crucial. By focusing on metrics that drive positive-sum outcomes and aligning incentives, companies can create a more sustainable and successful business model. This requires a shift away from rent-seeking behavior and towards rewarding actual innovation and value creation.

To conclude, choosing the right North Star Metric is a critical decision for any company. It sets the direction for growth and optimization efforts, and it aligns the entire organization towards a common goal. By considering the nature of the business and its goals, companies can identify the most suitable North Star Metric. Additionally, understanding the interconnectedness of our society and embracing positive-sum thinking can lead to more sustainable and successful outcomes.

Three actionable pieces of advice before we wrap up:

1. Evaluate your current metrics and assess their alignment with your business goals. Consider whether there is a more suitable North Star Metric that can better drive your growth and success.
2. Break down your North Star Metric into its component parts and identify the key input metrics that influence it. Focus your efforts and ideation on these inputs to maximize your impact.
3. Embrace positive-sum thinking and seek ways to create value for your customers and society as a whole. Consider how your business can contribute to the interconnectedness of our world and align incentives for sustainable growth.

In summary, choosing the right North Star Metric and understanding the implications of software eating the world are two crucial aspects of navigating today's business landscape. By incorporating these insights into your strategy, you can position your company for long-term success and positive impact.