How To Pick The Right North Star Metric For Your Start-up

What is a “North Star” metric?

A North Star metric captures the core value of your product or service. It’s the one metric that is most reflective of your business’s growth and, consequently, your long-term success. Depending on your business model, however, you could have up to three North Star metrics.

North Star metrics should not be confused with Key Performance Indicators. While it’s common to focus on just one North Star metric to guide your growth, you need to track several KPIs to ensure your business stays on the right track. 

What is the framework for selecting the right North Star metric(s)?

Before you decide on a North Star metric for your start-up, it’s crucial that you:

1. Revisit your business model and map out all the different monetisation types. Find out which stream(s) of revenue are the biggest contributors to growth. 
2. Examine how your users engage with your product or service. This reveals the set of behaviours or actions that lead to increased revenue. 
   

This analysis should help you determine where future growth will come from.

Your North Star metric(s) might change over time if the user landscape changes and your business finds more relevant, rewarding ways to grow and monetise your product or service.

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Once you have worked out your primary revenue streams and identified the user behaviours that impact revenue, match them with the right set of metrics. 

Most metrics fit into six categories:

1. Activity growth

Metrics in this category track how many users are actively using your product or service.
Examples: Daily Active Users, Weekly Active Users, Monthly Active Users.

2. Consumption growth

Metrics in this category track how deeply users interact with your product or service.
Examples: Nights Booked, Median View Hours per Month, Bank Accounts Linked.

3. Customer growth

Metrics in this category track how many users pay for your product or service.
Examples: Number of Paid Subscribers, Monthly Transacting Users, Marketshare.

4. Growth efficiency

Metrics in this category track how efficiently you manage your costs compared to revenue.
Examples: Lifetime Value, Customer Acquisition Cost, Gross Profit, Sell-Through Rate.

5. Revenue

Metrics in this category track the income and expenses your business generates.
Examples: Annual Run Rate, Billings, Gross Merchandise Value.

6. User satisfaction

Metrics in this category track how users perceive your product or service.
Examples: Net Promoter Score, Cohort Analysis, Viral Coefficient.

Some business models and their North Star Metric(s) 

Freemium

Examples of companies: Slack, Strava, Dropbox.
Relevant categories of North Star metrics: Activity growth, Customer growth, User satisfaction.

A freemium business model thrives on hooking free users and encouraging them to share the product with their family, friends and colleagues. Ultimately, they want to make it sticky enough for users to pay for an upgrade.

These companies focus on the number of active free users, user satisfaction and the conversion from free to paid subscribers. 

Subscription

Examples of companies: Blue Apron, Patreon, Netflix.
Relevant categories of North Star metrics: Customer growth, Consumption growth, Growth efficiency, Revenue.

Several types of metrics are interdependent for subscription-only businesses.

First, it’s important to track how subscribers use the platform, as this points to the quality of the products. High quality influences customer growth, which increases the ability to improve and expand the product range. All of these factors ultimately drive increased revenue.

Marketplace

Examples of companies: Airbnb, Uber, Plaid.
Relevant categories of North Star metrics: Consumption growth.

Companies operating with a marketplace model take a cut from each transaction made via their platform. As a result, they make more with a higher volume of transactions. 

Therefore, these companies focus on metrics that track consumption growth, such as the number of nights booked, rides taken and orders made.

E-commerce

Examples of companies: Casper, Warby Parker, Bonobos.
Relevant categories of North Star metrics: Growth efficiency, Revenue.

E-commerce businesses incur multiple layers of costs to source, design and manufacture their products. Their focus is to optimise their profits to achieve growth. Hence, they must focus on revenue and their efficiency in managing costs.

Advertising

Examples of companies: Meta, Snap Inc., Twitter.
Relevant categories of North Star metrics: Activity growth.

Businesses that earn money from ads need to focus on activity growth. The more active users they have on the platform, the more likely companies will want to advertise on it.

Is it possible to have just one North Star metric?

It’s common for companies to focus on a single North Star metric and channel their talent and energy towards achieving a single goal. 

No matter the role of your employees—creative, business development or marketing—everyone will have a shared understanding of where the company wants to be by a given time.

Companies with multiple revenue streams typically have several North Star metrics. 

For example, Spotify earns through paid subscriptions (music and podcasts) and ads. Therefore, they likely track their active users, the number of paid subscribers over time and the consumption hours for their podcast business.

What after you’ve identified your North Star metric(s)?

When you’ve decided which metrics to track, you should reassess your current activities. Focus on the ones that feed these metrics and identify the levers that can move the numbers upwards. 

For example, Airbnb’s North Star metric is “nights booked”. To push up the overall number of nights booked, the team needs to assess their guest conversion rate, add more listings to their website and find ways to bring more users to the platform. 

With these three levers established, the various teams can work on the factors within their control to increase the North Star metric.

What if you’re not in the growth stage yet? 

All the companies mentioned in this article are in the “growth stage”. This means that they’ve secured financing and proven some sort of product-market fit. At this point, their focus is to scale and add to what’s already working for their business.

If you haven’t raised any funding yet or are still fiddling with your product-market fit, it’s premature to start measuring things like revenue, monthly active users and customer acquisition cost.

Instead, figure out if you’re building something people want. One way to find out is by measuring your Cohort Analysis. 

When you start tracking different cohorts of users, you can draw insights like whether your product remains useful to them over time, how updates and new features affect their buying behaviour, and how each cohort impacts revenue. 

What to remember about North Star Metrics?

Stay focused and aligned about your North Star metric to achieve growth.

But don’t forget to assess your metrics regularly. Pivot when you feel your metrics are no longer aligned with the developments in your industry and your company mission. Doing so will keep your metrics relevant and help you track your business performance accurately.