North Star Metrics

How do you define a North Star metric? Do NSMs focus teams or lead them astray? Do other important metrics get missed when a product team is focusing on a NSM?

These are some of the questions Latif Nanji (Roadmunk), Luxi Shin (CB Insights), Sepand Norouzi (Spotify) and I hashed out last month as part of Roadmunk’s Product to Product event series (great podcast too). We got into some interesting nuances and it felt like as good an excuse as any to break my Medium hiatus.

Here’s my thesis:

A North Star Metric (NSM) can be a powerful tool to focus and align your product team, so long as these four conditions are met:

1. Your NSM accurately reflects value delivery to your users.
2. Your NSM is a leading indicator of revenue.
3. You understand the system of inputs that comprise your NSM (and revenue metric).
4. You can clearly communicate this system of inputs and outputs to key partners in your organization.

Condition #1: Your NSM accurately reflects value delivery to your users.

Growth is only as valuable as your customers. And customers are only as valuable as the product you build for them.

I touched on this a bit in last year’s post on startup growth, but whatever you choose as your North Star Metric, make sure it reflects as directly as possible how customers are capturing value from your product. This essentially means your North Star Metric is a retention metric — an indicator that people are finding something wonderful in your product and coming back for more.

Why not use a revenue metric? Doesn’t a user’s willingness to pay mean they’re finding value in your product? Not necessarily. First of all, revenue models vary and some are pretty abstracted from user value (think ad revenue). Secondly, revenue metrics have a troubling tendency to incentivize the wrong kinds of initiatives. Raising prices or baking in hidden costs might boost revenue for a month or even a year, but over time will erode customer trust and slowly but surely eat away at retention.

Airbnb’s Monthly Booked Hosts and Monthly Booked Guests, Facebook’s Monthly Active Users, Medium’s Time Spent Reading… these aren’t revenue metrics! They’re user behavior metrics. Adding user value is a prerequisite to capturing business value. And as novel features become table stakes, customer expectations rise. Delivering user value requires constant vigilance and investment. That’s why it’s so important to set a North Star Metric that incentivizes user value delivery.

Condition #2: Your NSM is a leading indicator of revenue.

User value delivery might be paramount, but that doesn’t mean we get to ignore revenue entirely. Even if your startup is in blitzscaling mode and forgoing profitability for rapid growth, you should have a clear monetization strategy in mind. For example, if you’re a saas company growing your monthly active users, a freemium product will look like a great acquisition play to drive that NSM. But at a certain point, you’ll need to start measuring ARR alongside MAU to ensure your growth is high-quality and to incentivize investment in monetization — identifying product qualified leads and converting them to paying subscribers.

Condition #3: You understand the system of inputs that comprise your NSM (and revenue metric).

Defining your North Star Metric is one thing. Defining a roadmap to drive that NSM is entirely another. Where should you begin? How are you supposed to move the dial on something as high-level as Monthly Active Users?

In short, you’re not. Instead, break down your NSM into the input metrics that compose it. For example, MAU can be broken down into new user growth, user churn and resurrection of churned users. Each of these metrics can in turn be broken down into more granular conversion rates and multiples. Suddenly, ‘increasing Monthly active users’ gets boiled down to ‘increase conversion rate from channel X to signing up for a free trial— much more actionable.

At any given time, one of these input metrics will be the biggest opportunity given your team’s talents and the balance of your growth system. Try mapping out your growth system in a growth model that quantifies the relationship between your inputs and your outputs. The power here is in more meaningful outcome estimates. As a PM or growth strategist, you’re constantly weighing impact versus effort. With a growth model you can plug in the estimated impact of a potential initiative and see how it will affect your NSM and/or revenue metric. The better you can model your growth system, the better you can prioritize your roadmap of features and enhancements.

Condition #4: This system is well and widely understood by key partners in your organization.

Product success depends upon aligned execution amongst a broad range of stakeholders. North Star Metrics are a great way to communicate the high-level goal to your team— but without a clear picture of the broader system of metrics at play, any given roadmap initiative might feel pretty abstracted from, if not irrelevant to, the NSM.

To build better alignment, invest in communicating (and re-communicating and re-re-communicating) not only your NSM, but also the growth system as a whole — the inputs and outputs that feed up into your North Start Metric. Start with a visualization, for example:

Andy John’s growth model for Amazon.

Google visualizes their SaaS revenue with 3 input metrics, each having their own 2 sub-input metrics.

One danger with Google’s revenue example: Customers could be getting signed and seats being purchased, but if users aren’t actually building habits in the product, those customers are at risk of churning out in the long run. Here’s a humble suggestion for how Google could revise:

Note the accompaniment of retention metric and revenue metric. Also note certain inputs are ‘double-whammies’ — they play into both retention and revenue and are likely high-impact areas to invest product resources.

See something missing? Have a different take? Give me a shout!