Good morning and welcome to the thirty-sixth edition of The Skeptic Investor!
2020 has been a historic year, though mostly for the wrong reasons. All of us have spent a majority of our time at home, separated from friends, families and the lives that we were used to living. Having said that, there’s hopefully some positives that we can all take from this year. It’s been a year of discovery and finding new hobbies and passions. For us, the highlight being this newsletter.
As colleagues, we had spoken a lot about writing an article together but we were never able to find the time. Once the lockdown started, we finally got around to it (you can find our first article on the Online-to-Offline business model here.) After that, the newsletter just flowed. Since March we’ve published thirty-six issues, gotten hundreds of subscribers, and built a community we hope to spend a lot more time getting to know in 2021.
We often think about what we should focus on while measuring the success of our newsletter. That’s when we came across the concept of the ‘North Star Metric’. While it is a business-focused metric, it can easily apply to our lives as well. As we enter a new year, a lot us are setting our goals and resolutions for personal growth. The North Star Metric might be able to help you with that.
We have also planned a new community initiative to kickstart the new year. Read on for more details on our first virtual discussion event.
Let’s dive in!
North Star Metric
Every startup starts with a mission or a core value proposition for its customers. While revenue growth, shareholder value creation, and attaining profitability are all important objectives for any growing startup, fulfilling the core value proposition is most important from a long-term strategic point of view. This is where the North Star Metric comes in.
A company’s North Star Metric (NSM) is the single focus metric for its growth strategy. The metric enables a company to track progress along its long-term strategic path and essentially acts as a guiding force for the entire organisation. While the metric is frequently used in the context of a company’s product management and growth hacking functions, it is very well an objective that ties in the entire organisation.
If defined well, a North Star Metric can be an important driver of company culture and decision making, while acting as a leading indicator for value creation and business growth. Hence, it is important to understand NSM both from an entrepreneurial/management and investor standpoint.
Finding The Right North Star Metric
The North Star Metric essentially marries the core customer value proposition of a product/company with its growth strategy. Thus, it is important to start with defining the fundamental customer objectives for interacting with your company. The right NSM focuses on customer delight and relies on the feedback loop created by better data analytics, customer retention, and a favourable Net Promoter Score (satisfied customers acting as promoters of the company) to drive sustainable growth.
For example, a B2C e-commerce marketplace might use “Number of orders delivered successfully without complaints in a month” or a B2B marketplace might use “A customer’s total spending on the marketplace as a share of the customer’s total spending (Share of Wallet)” as valid NSMs. A social media company like Facebook can choose “Monthly Active Users” or “Daily Active Users” while an OTT platform like Netflix can use “time spent streaming” as NSMs. Such metrics balance customer satisfaction and growth and are thus appropriate leading indicators of sustainable business success.
The focus on customer delight implies that a company should ideally focus on “quality” metrics for customer success or engagement instead of lagging financial and performance indicators like revenue, GMV, profits, or the number of subscribers. However, the chosen metric needs to have a direct causal relationship with the financial indicators and needs to be continuously measurable and be time-bound (monthly/weekly/daily).
In the Indian context, Bigbasket uses a North Star Metric called “WYSIWYG (what you see is what you get)”. The grocery major thus measures the completion percentage of customer orders i.e. how much was delivered vs how much was ordered. While being easily measurable, this metric adequately captures customer delight and success and thus fosters a feedback loop of high retention and better data collection.
What Next? Measuring and Strategizing
Once a company defines the right North Star Metric for their offering, the first step would be to measure and monitor progress for the chosen metric. While it seems like a simple and practical consideration, establishing a metric measurement framework can be an especially challenging task for early-stage startups or offline-first companies.
Firstly, it is crucial to choose a metric that can be readily measured. Second, it is important to establish data collection touchpoints. For example, a cloud kitchen company can use “rider” apps to track metrics related to their deliveries. And finally, measurement of the NSM should be incorporated into the instrumentation (tech stack and business processes) of the company. For example, a B2C e-commerce company should incorporate “orders delivered successfully without complaints” as a segment/tag in its back-end infrastructure.
Metrics that involve a “Share of Wallet” or “Share of Earnings” concept pose an additional measurement problem. An example is the “A customer’s total spending on the marketplace as a share of the customer’s total spending” metric. In such cases, a company also needs to measure the total spending or earnings of its stakeholders outside of its own platform. This can be achieved through industry reports, onboarding questions, customer surveys, qualitative data collection or in some cases, by building tools like inventory management into the platform. (Read more on SoW measurement).
An NSM is a leading indicator of a company’s financial success and hence needs to be the target of all the strategic and tactical initiatives of all the company’s departments and teams. Both NSM and company growth are output metrics. The next step is to define a set of input metrics (at a department or function level) that can be leading indicators of NSM. Breaking down the NSM into further sets of input metrics brings strategic direction to the company.
From an investor standpoint, an in-depth look at both the output and input metrics gives valuable cues into the growth trajectory of a startup.
Case Study: Spotify
Spotify has a great North Star Metric, which has nothing to do with their revenue or profit, or the number of artists or songs on their platform. According to their Head of Growth, Mayur Gupta, their NSM is “time spent listening.”
Why is this a good NSM? Well, for one, it is a great way to measure the value that customers derive from Spotify. People might subscribe to Spotify and not use it. Millions of artists may list themselves and their songs on the platform, and not have any listeners. However, if people are spending actual time listening to content on Spotify, it is a great sign. The more the time spent listening, the more Spotify knows that their platform has value and the better their chances of customer retention and positive word-of-mouth growth.
Moreover, like any good NSM, it tracks the entire funnel (or the ‘Pirate Metrics’). By measuring ‘time spent listening’ Spotify can measure users across Acquisition, Activation, Retention, Referral and Revenue. An improvement in any one of the funnel metrics positively impacts the NSM. Merely measuring new playlists created or app opens does not necessarily mean anything. However, if the overall time spent listening to content is increasing, it is likely that everything else is increasing.
Conclusion
The proposition of a North Star Metric is an enticing one. The NSM allows for organisational alignment, accountability, and provides strategic direction to a business. This proves to be an extremely valuable resource for entrepreneurs, managers, product leads, and investors. As businesses grow and become more complex, it may be prudent to incorporate multiple NSMs for different products or business teams.
However, it is important to realise that NSM is not a silver bullet. A single metric may not always capture all the objectives of a business and may de-prioritise those that are left out. For example, apart from engagement, an important consideration for many SaaS tools is monetisation. However, a customer delight NSM like “active users” or “number of messages” may not be capturing the monetisation objective. Therefore, it is sometimes important to focus on a limited suite of output metrics that adequately capture all business objectives and balance critical trade-offs.
Virtual Community Event
The idea of the North Star Metric as the centre point of startup growth strategy really intrigued us. We, thus, decided to dive deep on the North Star Metrics used by some of our beloved Indian startups and want you to be a part of the discussion as well.
We are organising a virtual case-study discussion on North Star Metrics for some of our favourite Indian startups. What should be the NSM for Byju’s or Postman or Rebel Foods? What about early-stage startups like DeHaat and Hashnode?
Fill this form to indicate your interest to participate in an intense session of community brainstorming. We would love your suggestions as well.
What We're Watching
On April 11 2017, the bus of German football team Borussia Dortmund was attacked with roadside bombs in Dortmund. While speculation was rife that it was a terror attack, it turned out to be something very different - a stock market scheme.
On the day of the attack, a 28-year-old German-Russian citizen, identified as Sergej Wenergold had bought ‘put warrants’ for €78,000. Put warrants are derivatives that increase in value as the underlying security drops in price, a mechanism similar to short-selling. They would have made him a large profit of up to €3.9 million if Dortmund's share price were to plummet after a successful attack. Learn more about it in this short video.
What We’re Listening To
Kris Cordle is the CEO of Devenu Collaborations, a firm dedicated to helping rapid-growth CEOs scale. You’re probably wondering what makes her qualified to do that. Well, for one, she’s worked directly with the CEOs at Yahoo, Twitter, and Slack. She joined Twitter and Slack early on and helped them scale into public companies. Prior to Devenu Collaborations, she was most recently Chief of Staff at Slack.
No, she didn’t come from a business-oriented family. In fact, she was raised in a religious cult. In this episode of The Knowledge Project, she discusses “her upbringing in a religious cult and how that shaped her world, automatic rules for success, lessons in decision-making and scaling, why it’s particularly hard for founders to scale, the common patterns to success and much more.”
Twitter Thread of the Week
What We're Reading
Since its original release in 2011, Sapiens by Yuval Noah Harari has become a worldwide phenomenon. In order to reach a wider audience, a couple of months ago he released the first volume of the full-colour illustrated adaptation of the groundbreaking book.
Through this innovative format, he tells the “story of humankind’s creation and evolution, exploring the ways in which biology and history have defined us and enhanced our understanding of what it means to be human.” It’s definitely worth a read - especially if you haven’t read the original version!
That's all for this edition! We hope you liked it and would love to get any feedback you may have. This newsletter is written and curated by Mishaal Nathani and Ashutosh Gehlot.
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Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in the newsletter constitutes a solicitation, recommendation, endorsement, or offer by us or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.