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How to Set Your North Star Metric
A few months back, I wrote about the importance of having a north star, especially for aligning your team and organization to one common goal. While there are various external metrics to measure the success of a company like revenue, sales and/or market share, the north star metric really relates to the mission of the company. It defines the purpose of a business. For example, the north star metric for Facebook is the number of monthly active users and for YouTube is the number of minutes played.
Your north star helps you prioritize resources and efforts. It tells you what matters to you the most. A few days back I was speaking with a the CEO of an edtech company. The company has built a robust AI platform and offers tutoring services. The CEO was thinking about his north star metric. The first thing I asked him is to identify whether they are building an “AI company that powers tutoring” or a “Tutor management company, supported by AI”. Depending on the answer, the north star metric could vary from engagement on the AI Platform to number of tutoring sessions.
So if you are looking for setting your north star or the big hairy audacious goal then here are some tips to keep in mind:
Focus beyond revenue
While setting your north star metric, think beyond revenue targets. While revenue is the one of the most critical measurements, it fails to show long term success indicators like overall quality of the product and the value customers derive from the product, which will showcase the success of the product and tie into the revenue.
For instance, at EduKart, the metric was the number of courses on the marketplace platform. This was critical as without a critical mass of courses, EduKart would not really become a true education marketplace.
Align your entire company to the north star metric
Your north star metric should be something that the entire company can align with. It shouldn’t be a metric just for the sales team or the development team, rather something that the entire company can align with and work toward.
For instance in a global edtech organization that I worked for, there was a debate on whether we should focus on higher graduation rates for our learners or focus on a path that can make us a preferred learning partner for Fortune 500 companies. Once this debate was settled, we knew what kind of people to hire for, where to divert our resources and how to prioritize team OKRs.
Your north star should be time bound
Your north star metric defines the purpose of your business over a period of time. The time component is super important as it helps you judge how much you are growing and improving in a particular period of time.
Beware of vanity metrics
Your north star metrics should result in actual growth. If your north star isn’t driving revenue growth, then it might be a possibility that you have chosen a vanity metric.
For instance, if an edtech company chooses graduation rate as a north star metric, then it is pointing to effectiveness of its courses. If that is true, then there will be a strong word of mouth and repeat purchases. So while a graduation rate metric is not a revenue metric, you can clearly draw a line to revenue.
So what should be your north star?
TLDR: It depends on your business.
Some of the most popular north star metrics are:
(Source: a16z blog)
Consumption growth, for marketplaces and platforms
Growth efficiency, for paid-growth driven businesses
Engagement and/or customer growth, for freemium team-based B2B products and consumer subscription products
Consumption, for UGC subscription-based products
User Experience, for businesses that depend on experience
But these are just based on existing examples. Think about what matters the most to your business and decide on your north star metric. A much bigger task after this would be to achieve this goal. As always, execution is the key!
Let’s face the reality that not everyone in the organization can directly help you with achieving the north star metric. So the next step is to break down your big hairy audacious goal into smaller milestones for each team. Identify the levers that move your north star metric and focus your short term goals around those.
The north star metric is a powerful tool that needs to be used very thoughtfully as keeping a wrong north start metric can take the company in a wrong direction. However, when chosen wisely, it can really help drive alignment in the company, which in turn can position the company for a rapid scale up.