'North Star Metrics' in Consumer Businesses

Hey You,

I couldn't help but start off with highlighting the subtle war on left vs right winged culture on the internet that’s being fought under Elon Musk’s veil. There’s no right or wrong here, but just that social media is amplified as a vehicle of expression rather than information dissemination. But again, we’re a diverse race and we’ve never been able to separate opinions from facts.

It’s incredible to see what social wars of this decade could look like. For those who have little idea, feel free to type any of the keywords above and you’d know what’s going on in the world.

Now on to why you’ve opened this email:

I’m super stoked on this Sunday’s edition. In a way this helps me solve for the challenge we often face, even with high-growth businesses that we work with, at Lights Out: lack of a singular focus across decisions.

Just before we dive in: The popularity of this newsletter is surprising me every week. If you’ve been added by a well-wisher or you’ve signed up yourself, it’s going to be a fun journey from here on. You are part of avid readers of experiential content on product, design & technology. 

Subscribe

I would absolutely love your feedback on what content you would like to see here or just your favourite editions so far. Hit me up on Twitter and let's chat.

Let me start by cautioning you that North Star Metrics (NSM’s) are overrated. But it’s still worth a dive into understanding how they drive decisions within your business.

In the interest of this read, let's define NSM: every company will choose a guiding metric to make most of its decisions. And therefore all it’s efforts and brainpower will flow in this direction.

Here are a set of NSM’s that businesses typically choose to go with:

1. Metric: Revenue (i.e. ARR or GMV): Description: Straight focus on Topline: money being generated.

Used by: DTC & consumer-tech businesses

1. Metric: Customer Growth (i.e. paid users, marketshare): Description: The number of users who are paying.

Used by: Consumer-tech (usually driven subscription businesses)

1. Metric: Consumption growth (i.e. number of orders): Description: How intensely consumers use / buy from your product

Used by: DTC & consumer-tech businesses

1. Metric: Engagement (i.e. MAU or DAU) Description: Activity or usage of your product

Used by: Consumer-tech (usually driven subscription businesses)

1. Metric: Engagement (i.e. MAU or DAU) Description: Activity or usage of your product

Used by: DTC & consumer-tech businesses

Some businesses could also choose ‘user experience’ as a NSM, but since that forms a minority, we’ll skip that in this discussion.

So how do you pick your NSM?

Choosing your NSM largely depends on the phase of the business lifecycle you are in. for an early stage startup, new user acquisition and retention, both would be significantly important, because you are trying to establish product-market fit.

For a late stage business, increasing TAM would be more important to test out newer markets.

Some questions that you could internally ask, to build on your NSM:

• What is the core reason users come to your product? This is in line with first principles thinking. If this one reason part of your business was to be knocked off, the relevance of your product would no longer stand. (Eg: Users come to CRED to make credit card payments)
• What is the most important driver for your business, in the short-term? If this was to start diminishing, chances are you would be out of business. (For Spotify, if people stop subscribing, it would cease to exist. Or for a DTC business, if they can’t sell their core or hero product, it would start impacting them negatively)
• What action of the user / customer should we be prioritising? (For some it could be linking their bank accounts for subscriptions, whereas for some it could be time spent on the app)

Why should Revenue NOT become a NSM:

While it’s easy to pick and say topline or revenue would become a NSM, it's counterintuitive to growth. Here’s why:

• You focus on higher revenue no matter what price-point
• User experience could take a toll
• Engagement would no longer become a reason for you to optimise
• Retention would be sacrifice, therefore increasing dollars spent in advertising to acquire new customers would be the sole focus and this could severely impact cash burn in the short-term

I could point out multiple reasons why I vehemently oppose focus on revenue as the sole focus. But if you pick your NSM well, revenue will flow as a by-product.

So now let's continue on how do you refine on your search for your NSM:

• Break your goals down into short-term and long term for the business. In the short-term (next 1 year or so), your NSM could be super-niche and focussed on what you need immediate results on. (Eg: Metrics that are one step lower than revenue, such as number of paid customers, are more relevant because teams can assume that a paid customer is finding value in the product, so the company (and thus the teams) are delivering value)
• Gradually as the business stabilises, you start to pick more long-term bets on aspects like engagement, time spent on the application, etc.

Drivers of NSM:

Every business must choose a SINGLE NSM to retain focus for a specific period of time. This helps drive all decisions, top down in one single direction.

However,

You could pick independent drivers for each team, that end up impacting the NSM.

So if ‘customer growth’ is a NSM for a consumer , the drivers that could lead to it’s success would be:

• Traffic to your site / application
• Free sign-ups
• Free to paid-user signups
• First time-users
• Improving on-boarding flows to acquire new customers
• User retention / loyalty
• Referrals
• New market acquisition / brand collaborations

With these in mind, the marketing, sales, product teams can channelise their approach to making better decisions. Revenue would invariably become an output, but not the driver of these decisions.

And finally, some examples of NSM based on different sectors:

Consumer Marketplaces would focus on Consumption Growth as a NSM. Where demand vs supply is core of the business, it’s essential to optimise time spent on the product or increased discoverability of options for customers, as an area of focus.

Consumer Subscription Businesses would focus on Engagement or New Acquisitions as a NSM. Focus on engagement (e.g. DAU and MAU, respectively) because these businesses have a large free-user base that eventually migrates to paid; thus, the more engaged their free users are, the more they know they’ll add paid customers. 

DTC Businesses would focus on TAM or Retention as a NSM. Focus on user acquisition is great to increase TAM, but could the focus also be on repeat purchases especially if CAC’s are really high. Based on where they are in their lifecycle, they would focus on one of these.

I wanted to write this newsletter to nudge teams to start having conversations on NSM’s, if not arrive at one right away. It increases focus and adds more perspective to WHY you’re doing what you’re doing.

Well, that’s it for now. Until next time,

With Gratitude,

Sak.