First, let’s make sure we’re on the same page regarding what the metric is and isn’t because there are a few interpretations out there that I believe to be valid in different situations. For the purpose of this article, we’re going to look at what it means from a SaaS perspective at any stage of your business.
What is a North Star Metric?
This is a metric that allows you to measure whether a customer is gaining the intended value you’re proposing from your product or not. It’s called the ‘North Star’ metric because this is the single source of truth for identifying the right direction, similar to how the North Star can be used to identify definitely which direction is north. When you can reliably focus on just one metric, it makes the process of optimizing for the represented outcome that much easier.
However, North Star Metrics are often used in the context of describing what startups should measure. Startups typically have one core value proposition; thus, they often only need one core metric.
A North Star Metric is not… the only metric you should be measuring. It’s really the end-result of a bunch of interactions with your product. The North Star Metric is thus a lagging indicator and will serve to summarize whether or not users have achieved the end-goal – receiving the intended value proposed.
In order to dig deeper and determine the reasons your North Star Metric is showing whether or not value has been received, you’ll need to look at leading indicators. These are additional metrics that represent key actions taken by users of your application that, if taken, could eventually lead to triggering of the North Star Metric. You can think of these leading indicators as milestone goals in achieving your bigger, end-goal.
More specifically, a North Star Metric can be something the user completes once, but more often it’s an ongoing measurement that a customer completes periodically. This is especially true for SaaS businesses.
In SaaS, North Star Metrics will be recurring. Additionally, you could have more than one metric for your SaaS business. Your company might need more than one if 1) you have many differing user roles for your product, 2) you have more than one key value proposition, 3) when you have more than one product your selling.
Now let’s dive into how to actually go about calculating your metric. Here we break it down into three steps:
1. Consider each product and/or user role independently
A good rule of thumb would be if you can sell products separately, then you will have different value propositions for each, and a corresponding North Star Metric.
Take Intercom for example, their instant messaging, articles, and inbox products all have different value propositions and can be sold separately because they are solving slightly different needs.
Additionally, if you are a B2B SaaS company and have a complex product that serves multiple users at a company differently, then you’ll need to measure how each user is receiving the intended value.
2. What is the core value proposition?
Defining your value proposition should be relatively easy if you’re well aware of what your customers use your product for, and better yet, what they choose your product over competitors for.
3. Selecting the measurable metric: how do we know the user is receiving value?
Finally, you’ll need to find an indicator that signals when the value proposition is reached. Typically, you will want to identify the completion of a certain activity and trigger a custom event. This event record can include data on how much, how often and how long.
For example, take YouTube Red, the subscription video sharing platform. The value proposition for customers is access to video content that is engaging, entertaining, and/or educational. In order to measure this, YouTube would likely record how many minutes of videos are being watched per customer. Thus, the event they would capture is the length of time a video plays for each video played. YouTube then would summarize this data for each customer, calculating the total number of minutes in a given time period, average play time, and much more.
‘Set it and forget it’ SaaS models
Sometimes it’s difficult to actually measure when the customer is receiving value. Some SaaS companies have a ‘set it and forget it’ value proposition. In this case, you might measure plan utilization as a means to measure reaching the core value proposition.
For example, let’s take a look at MailChimp. We can break their product down into two main offerings: email collection and campaign creation. The email collection component is very much a ‘set it and forget it’ value proposition. However, we can still monitor plan utilization. In this case, it would be how many emails are collected out of the total allowed for the plan.
Additionally, let’s consider a company like Calendly that has customers set up a self-serve scheduling tool for meetings. This company would also have a ‘set it and forget it’ model. Customers do the work once, but they gain value when someone schedules a meeting with them. In this case, the event to collect would be when a meeting is scheduled.
You might need to do some discovery of what key metric makes the most sense for your business – especially when you are first starting out and still discovering your initial product-market fit. In this discovery process, choose a few different metrics to collect based on your best guess, and then look for correlations between when people excel with your product and which events are firing accordingly.