North Star Metric

What is a North Star Metric?

North Star Metric (NSM, also called the guiding metric) is the one metric that best captures the value customers actually get from a product. A company aligns its product and growth decisions with it, just as sailors once oriented themselves by the North Star, which reliably indicates north. The concept rests on the assumption that lasting revenue arises from customer value delivered repeatedly, and that this value can be condensed into a regularly measurable figure.

The term comes from the product management of growth-oriented technology companies and is not regulated by law. The metric is set by management and product leadership; it is used in the pitch deck, in the equity story and in the investor update. Investors and buyers read from it why the business model is growing; it is evidenced with usage data.

Requirements for a North Star Metric

• Value instead of activity: Registrations and sign-ins show activity. The North Star Metric captures the event in which the customer receives the product's value, for example a completed booking or an automatically completed work step.
• Lead over revenue: Revenue is the result of value delivered. The North Star Metric precedes it in time and explains its development.
• Influenceability: Product, sales and service teams can change the figure through their own actions.
• Period reference: It is measured per week or month. Cumulative figures such as the number of all users ever registered cannot fall and show no deterioration.
• Quality threshold: The definition excludes events with no value, such as incorrectly processed receipts or cancelled bookings.

Whether a metric meets these conditions can be tested. Customers with high value should stay longer, expand their usage and generate more revenue. This relationship is examined with a cohort analysis, which groups customers by their time of entry and compares their behaviour over the months. If no relationship with customer retention appears, the chosen figure is an observation but not a North Star Metric.

North Star Framework: breakdown into input metrics

For day-to-day work, the North Star Metric is too highly condensed. It is therefore broken down into input metrics, usually as the product of a few factors. The North Star Metric and the input metrics together are also called the North Star Framework. For a provider of accounting software, the North Star Metric might be "automatically correctly assigned receipts per month". This results from the number of active businesses, the number of receipts per business and the share of receipts assigned without manual rework.

Each factor gets a responsible person and its own measures: sales raises the number of businesses, product development the degree of automation, customer service the depth of usage. Quarterly goals under the OKR method (objectives and key results) also start at this level. The breakdown also shows which factor triggered a change in the North Star Metric.

Examples of North Star Metrics by business model

Depending on the business model, the following figures are widespread:

• Software for companies: number of customer accounts or teams that regularly use a core function, or number of tasks completed automatically.
• Marketplaces: number or volume of completed transactions between providers and buyers, not the number of listings posted.
• Payment and financial infrastructure: transaction volume processed per period, adjusted for chargebacks.
• Apps and subscriptions for consumers: usage time or number of uses of the core function per week, such as hours listened to on a music service or journeys booked on a mobility service.

If the target group, pricing model or product changes significantly, for example after a pivot (a fundamental reorientation of the business model), the North Star Metric is reviewed; frequent changes devalue it because no comparable time series arises.

Significance for investors and in due diligence

For investors, the North Star Metric shows whether management understands where revenue comes from. A convincing North Star Metric explains why customers stay and expand their usage; it does not replace the financial metrics but explains them.

Due diligence recalculates the metric from the raw data of the product analytics. It examines the definition and its consistency, the exclusion of test and employee accounts and the claimed relationship with customer retention and revenue. Caution is needed if a usage metric is to serve as the basis for an earn-out in a company purchase. An earn-out is a part of the purchase price that is paid only if agreed targets are met after the sale. After completion, however, it is the acquirer that decides on product and resources and thus on the development of the metric.

Worked example: breaking a North Star Metric down into input metrics

A provider of accounting software for craft businesses uses as its North Star Metric the number of receipts automatically assigned correctly in a month. In the first quarter, 800 businesses actively use the product on a monthly average, each with 120 receipts, of which 70% are assigned automatically. In the second quarter, there are 880 businesses with 125 receipts each at a rate of 75%.

• First quarter: 800 × 120 × 0.70 = 67,200 receipts per month
• Second quarter: 880 × 125 × 0.75 = 82,500 receipts per month
• Change in the North Star Metric: 82,500 ÷ 67,200 = 1.2277; minus 1 = 22.8%
• Factor active businesses: 880 ÷ 800 = 1.1000, that is plus 10.0%
• Factor receipts per business: 125 ÷ 120 = 1.0417, that is plus 4.2%
• Factor automation rate: 0.75 ÷ 0.70 = 1.0714, that is plus 7.1%
• Check: 1.1000 × 1.0417 × 1.0714 = 1.2277

The largest contribution comes from the growth in active businesses, the second largest from the degree of automation, that is, product development. Whether the metric is suitable as a North Star Metric is shown by the cohort comparison: businesses with an automation rate above 80% should cancel markedly less often than businesses below that.

Distinction: North Star Metric, OKR, CSAT and vanity metrics

• OKR: a method by which teams set measurable key results for their goals for one quarter at a time. The North Star Metric stays the same for years; OKRs mostly start from its input metrics and change from quarter to quarter.
• Satisfaction scores such as CSAT and NPS: The customer satisfaction score (CSAT) and the net promoter score (NPS) measure by survey how customers rate a service. The North Star Metric measures what customers actually do in the product and therefore does not depend on response rates and moods.
• Vanity metrics: figures such as page views, downloads or reach on social networks, which mostly rise but have no reliable relationship with value and revenue.
• Product-market fit: the state in which a product serves lasting demand. A rising North Star Metric with stable customer retention is an indication of it.

Common mistakes

• Revenue as the North Star Metric. Revenue is a result and does not explain what produces it. Teams get no hint from it as to what to work on.
• Several North Star Metrics. Two or three equally ranked figures remove the prioritisation that the concept is meant to provide.
• Missing evidence. Without a cohort analysis, the relationship between the North Star Metric, customer retention and revenue remains an assumption that investors do not accept.
• Perverse incentives. Without a quality threshold, the metric also rises through events without value, such as transactions recorded twice or cancelled immediately.
• Frequent change. If the North Star Metric is redefined every year, no comparable time series arises, and the claimed development can no longer be followed.

Frequently asked questions

Does the North Star Metric belong in the pitch deck?

Yes, if it explains why the business is growing and is evidenced with data. It is shown alongside the financial metrics, not instead of them, with its definition and time series.

What is the difference between a North Star Metric and a KPI?

The North Star Metric is the one overarching figure for customer value; KPIs (key performance indicators) are all the performance metrics with which a company manages finance, sales and operations. Every North Star Metric is therefore a KPI, but not every KPI is suitable as a North Star Metric. Revenue and margin, for example, measure the result, not the value from which it arises.

How is the right North Star Metric found?

Through analysis of the best customers. The search is for the action in the product that customers with high retention and growing usage perform regularly and customers who cancel perform rarely. If cohort analysis confirms this relationship, the action is a suitable candidate.

Can a company with several products have a single North Star Metric?

Only if the products serve the same customer value. With very different product lines, each line often gets its own North Star Metric, while at company level the financial metrics form the common framework.

Is the North Star Metric a leading indicator?

Yes, that is its function. The metric changes before cancellations and revenue change, and thereby gives management time to react. A prerequisite is that this lead time has been demonstrated in the data.

The Roemer Capital view

Before a funding round, Roemer Capital goes through with the management whether it can name its North Star Metric, define it cleanly and evidence it with cohort data. Investors ask about the mechanism behind growth, and an evidenced North Star Metric answers this question more concisely than any product description.

In the pitch deck, which Roemer Capital limits to 15 to 20 slides with clients, the North Star Metric therefore gets its own slide with its definition, time series and the relationship to customer retention and revenue. Roemer Capital stores the underlying analyses in the data room in a way that lets investors recalculate them.