North Star Metric: learning from the best
Most companies get this wrong: considering how pivotal the North Star Metric can be to overall output, getting it right makes a big difference.
For anyone who isn’t familiar with the concept of North Star Metric, it’s the metric companies choose for measuring their overall performance, it’s the guiding light. It helps to align processes and speed-up decision making.
Often companies use revenue as their NSM; it should probably never be revenue.
First of all because revenue is a lagging metric, so it delays decisions, and secondly because revenue is a by-product of value creation. Companies exist for creating value: the more value they create for their customers, the more revenue they will generate.
This table shows the NSM for ten successful Tech companies:
Here is what we can learn about the NSM:
1. It is NEVER revenue
2. It’s easy to understand
3. For all platform business models it is an indicator of the matching between supply and demand (e.g. number of rides for Uber)
4. The NSM reflects the company’s mission:
The NSM should be a quantification of the realisation of the company’s mission.
5. No single metric is never perfect.
The NSM, just like the concept of the Growth Model, are great frameworks, but they will always be imperfect.
This implies that we always need counter-metrics in place; revenue or margin are two great examples of potential counter metrics.
As a company matures and priorities change, the NSM will need to be reviewed from time to time – however it should remain a relevant measure of the success of the company’s mission, which should not change often – so the NSM can change but it should only change slightly. For example:
AirBnB: Nights Booked => Positive guest reviews
Waze: Miles driven => Hours spent stuck in traffic
In my experience not everyone in a company will be motivated by the overall revenue performance – so having a clear NSM that is about value creation is also a great tool for motivation.
The reason I added Walmart in the table above, even if it isn’t a Tech company, is because the NSM was applied exclusively to their digital business, which has been a great success and it’s an example of how an established enterprise, even if it isn’t a tech company can benefit from having a north star metric.
I find the NSM, (together with a growth model), to be a fantastic tool because it helps to join strategy, (the mission), and execution by aligning all teams around a common goal, by helping decision making when teams need to prioritise between multiple good projects and by increasing motivation, (which will impact productivity).
That is why having it matters and getting it right can really make a difference.