A North Star metric is the one measurement that’s most predictive of a company’s long-term success. To qualify as a "North Star," a metric must do three things: lead to revenue, reflect customer value, and measure progress. If a metric hits those three points, and every department contributes to improving it, the company will grow sustainably, or so the theory goes.
Why is a North Star metric important?
Teams use North Star metrics to get everyone in a company focused on one goal. Ninety percent of the world’s data has been created in just the past few years and the profusion of analytical possibilities allow every department, every team, and even every contributor to chase their own metrics. If each team defines goals differently, they can work against each other and duplicate effort. When startup investor Sean Ellis coined the term “North Star metric,” he intended it to reduce administration, simplify meetings, and align teams around the singular goal of growth. The term North Star metric—drawn from the common name for Polaris, the star that lies directly above the Earth’s Northern pole—is mostly rhetorical. Companies with complex business models can have multiple North Stars, and any given North Star metric is composed of sub-metrics anyway. Any company that literally foreswore all metrics in favor of just one, such as recurring revenue, would almost certainly fail. The North Star metric is, simply, an exercise in simplifying the overall company strategy into terms all can remember, understand, and apply. North Star metrics are not to be confused with the acronym OMTM, or one metric that matters, a term popularized by the authors of Lean Analytics. There’s a subtle yet meaningful difference. OMTM is intended to mean “one metric that matters right now” and is a leadership tactic for fixing a short-term problem, whereas a North Star metric is intended as a long-term guide. Though, just like the real North Star, it too is impermanent. When the Egyptians built the pyramids, the Earth had a different North Star—Thuban—but it’s crept out of alignment, just as Polaris will in time. Companies should feel equally free to reevaluate their North Star metrics to make sure they still point the right direction, and amend them when they prove flawed.
How a North Star metric works
In daily use, a North Star metric is broken down into smaller metrics that drive accountability and ownership at the individual level. Many of these sub-metrics are team-specific and actionable, so individual contributors can draw a clear connection between their daily duties and the North Star. Take, for example, an e-commerce company with the North Star metric “the number of new customers purchasing each week.” A merchandise buyer at that company could contribute to that parent goal by increasing sales in their category, whereas a web developer would contribute by reducing page load time. Both contribute, but in their own way. North Star metrics must also reflect the customer journey, and measure whether users’ journeys are successful. In the case of the e-commerce company, measuring purchases indicates that buyers have completed their journey, and improving pieces of the journey—discovery, browsing, and checkout—speed customers along and drive more revenue.
Examples of North Star metrics
- Number of weekly customers completing their first order
- Value of daily purchases
- Customer lifetime value (CLV)
- Number of trial accounts with over 3 users in their first week
- Percentage year-two retention
- Monthly-recurring revenue (MRR)
- Signups and retention
- Number of daily active visitors
- Total read time
- Total watch time
- Total assets under management
- Number of daily active users
How to find your North Star metric
To find their North Star metric, companies must decide what is truly essential to the business. Companies are complex and succeed and fail for lots of reasons. But what are the pillars to the business that are, as an architect might say, load-bearing? That if they alone failed, would ruin the company? For many teams, that’s making customers happy, generating profit, and measuring progress toward those goals. A metric that simply makes money without satisfying customers will fail in the long run, as will a company that satisfies customers without being profitable. And a metric that doesn’t measure progress in a way that allows teams to act on its insights and change their behaviors isn’t useful. A North Star metric must reflect all three factors, tailored to each business. To find your North Star metric:
- Ask, what is essential to the business’ functioning? Prioritize a list.
- Ask, what KPIs and metrics measure the top few, key factors?
- Ask, what metric encapsulates all of the above?
- Build a metric hierarchy, with the North Star metric on top of the pyramid
Like a seed, North Star metrics need fertile ground to grow. Companies that select a North Star need the right culture and infrastructure. Without cross-silo relationships and a willingness to prioritize the company good above the team good, some employees may reject the North Star metric, especially if they must change their behavior significantly, or if, like many sales teams, their compensation structure presents a conflict of interest. Companies also need the right analytics tools to measure progress toward their North Star metric and sub-metrics. Without user-friendly analytics that teams can access at a whim, companies can’t tell whether they’re succeeding, and can’t course correct. Most teams find user analytics vital to measuring their North Star metric. User analytics provide user-level insights that most analytics platforms—especially free ones—don’t capture. User analytics:
- Track individual users across platforms
- Generate reports and dashboards
- Use machine learning to detect anomalies in the data
- Offer a user-friendly interface so the whole team can access insights
North Star metrics can be an effective strategy for aligning all teams around a singular goal, provided they’re not taken too literally, are supported by a flexible culture, and measured with analytics tools that helps teams tell whether it’s still guiding the way.
This article was originally posted on Mixpanel blog