Private tech companies are generally valued on revenue – not profit.
And because of this, boards, investors and – to some extent – founders obsess over the Annually Recurring Revenue (ARR) metric.
But revenue is a lagging indicator of value creation. It can also be a misleading indicator. Indeed, some companies manage to grow ARR, only to find that customers start churning after a year because they don’t use the product.
Those SaaS companies may have a good sales motion. But they don’t have product/market fit.
Finding product market fit
A good rule of thumb for when you have product market fit is that you have:
- paying customers, that
- get value from your product, and
- are willing to refer you to their peers.
Number one and three are easy to measure. But number two is the most important early on. If you don’t have customers that get value, then you don’t have a sustainable business.
Oh yes, to make money, you have to capture value. But in SaaS, value capture is often the easier bit. The hard bit is to create real, sustainable value.
And so how do you measure number two?
Enter the North Star Metric (NSM).
What is the North Star Metric?
It is a way to measure the value you create for your customers. One metric you can use to align your organisation to what matters.
And many great startups identify a North Star Metric that helps orient all their activities towards customer success.
NSM examples
- Intercom – Number of customer interactions
- Zoom – Weekly hosted meetings
- Slack – Messages sent within the organisation
If you can find your NSM, you can use it to help align your team. And then you’ll have taken a great step towards building a customer-value-focused startup.
More In Depth Examples
| Company | Example | Rationale |
| Airbnb | Number of nights booked | The number of nights booked correlates with: – the value a customer receives from a good experience using Airbnb – the value a host receives from getting a space booked |
| Zoom | Weekly Hosted Meetings | The more meetings that happen over time, the more value customers receive from using the communication tool. |
| Slack | Messages Sent Within The Organization | Slack’s value comes from reducing emails and improving in-office/WFH collaboration. The more messages are moved to Slack, the more value customers receive from using Slack. |
| Uber | Riders per week | Uber’s a two-sided platform. Both riders and drivers receive value from their NSM. The driver gets paid. The rider gets to their destination. |
| Amazon | Number of purchases per month | Why a number of purchases and not $ sold? NSM is customer focused. The purpose of Amazon is to help customers find and buy what they need. If the number of purchases grows, the company will be successful. |
| Shopify | Each Customer’s GMV (Sales) | Shopify’s customers are e-commerce shops. And Shopify’s goal is to help them sell more. So it makes sense to have the GMV/Sales be the NSM. |
More examples on this excellent blog by Gokul Rangarajan.