If you’ve never heard of the North Star Metric, don’t worry - many other business leaders haven’t either.
The good news is if your business is growing, you already have a North Star Metric behind that growth. Now all you need to do is to determine what that metric is.
Here’s our simple guide:
First thing’s first - what is the 'North Star Metric'?
The North Star Metric is a single, consistent metric for your business’s sustainable growth. In other words, it is the key value proposition of your product.
As the phrase implies, it should be the shining light of your business’s long-term growth strategy, guiding it through the good and the bad times, and uniting everyone in your team to work towards the same goal.
Why do you need a North Star Metric for your SaaS company - even when it’s in its early stages?
Every SaaS company should try and define their NSM to measure the value their customers get from their service, even if they’re still trying to figure out what type of customers they should be targeting in the first place. As your business grows, you can keep referring to this metric as a key performance indicator for new product strategies.
The fundamental goal is to make sure your customers always get the best value from your product.
The North Star Metric isn't the same as revenue!
Revenue is a key performance indicator for any business, but it is not your NSM.
Why? Because the revenue you earn is simply the sum of what all your customers pay for your services. This means that customer lifetime value/churn rate aren’t NSMs either, even if they are important metrics for measuring success.
Instead of thinking of the relationship between your business and your customers in a purely transactional sense (paying for a product/receiving the product, cost/revenue) - think of your NSM as a representation of the value your customers get in exchange for their investment in your service.
Good examples of NSMs for different SaaS companies:
- Zoom: The number of weekly hosted meetings
- DocuSign: The number of signed envelopes
- Shopify: The Gross Merchandise Volume (GMV) of each customer
The link between your NSM and your company’s core objective/mission
You could also think of your NSM as the key measurement of the core objective/mission of your company.
For example, Quora's mission is “to share and grow the world's knowledge”. Quora measures this core objective by the 'number of questions answered', which is their NSP and a logical metric for measuring the amount of knowledge shared.
You don't have to define your NSM the same way that other SaaS businesses do - focus on what is most important to the long-term success of your business.
Ask yourself: what is the one key indicator that will ensure your business remains profitable and adaptable to change while simultaneously keeping customers happy?
Consider a time-bound metric at the beginning
If you're a start-up or in the early stages of growth, you might want to use 'months' rather than 'years' as a time-bound metric.
Industries can change rapidly in short spaces of time, and the coronavirus pandemic has demonstrated this well.
Can you have more than one NSM?
Yes, although you may find it easier to focus on one. Many large companies, particularly those which offer a broad range of products and services, may use several NSMs as guiding forces for different areas of the organization.
Just bear in mind that having multiple NSMs can end up pulling your business in different directions. For example, it could make your core mission/objective more ambiguous, so it is better to have just one NSM or as few as possible.
What if the NSM you chose hasn't produced growth?
Then the metric you chose isn't an NSM! Even if the metric in question is growing quickly (i.e., number of subscribers), if that doesn't translate into more revenue, you need to think carefully about what your value proposition is.
If your revenue isn’t growing, chances are your true NSM isn’t either, unless your business is encountering other internal or external challenges.
To put it simply: As your NSM grows, your revenue grows.
Again, however, we must remember that revenue itself is not the NSM.
And can your NSM change as your business grows?
It is not impossible.
For example, LinkedIn used to have an NSM known as 'Number of endorsements given', but this became an unreliable indicator due to the widespread falsification of the endorsements feature. Later, the platform followed Facebook's footsteps and changed its NSM to Monthly Active Users. They have stuck with it ever since.
As we mentioned, the NSM you choose for your company can change, if the original one didn’t correlate with any revenue growth (but that wouldn’t have been your NSM anyway).
Collaboration between your product and data teams is crucial
In a case study titled 'A Hybrid Approach to Developing Product North Star Metrics', researchers concluded that the partnership of product and data teams is key. The researchers examined LinkedIn's approach and found that while the NSM of total endorsements was the 'right metric' at launch, over time it became 'misleading'.
This is because it drifted from the main purpose - to validate someone's skills and enable the viewer to assess their level of expertise.
As we mentioned earlier, however, the endorsement feature was often subject to abuse, and people would give endorsements for 'many reasons' (i.e. not necessarily because someone is an expert at that particular skill!).
Your NSM isn't something you should come up with in the blink of an eye
You need to have a profound knowledge of your product, target market, and how your customers engage before creating your North Star Metric. By approaching it meticulously, you can ensure your NSM benefits your business.
As your business evolves, you will get a better grasp of your customer’s experience, which will help you establish the most valuable and useful NSM.
NSM’s change over time. LinkedIn is proof of this. Don’t be afraid to adapt to change and remember to differentiate your NSM from revenue.