Dan Martell - Finding Your North Star Metric (Examples from the Best SaaS Companies)

00:00:00.000 Hey there, I'm Dan Martell,

00:00:01.120 serial entrepreneur, investor, and creator of SaaS Academy.

00:00:03.340 In this episode, I'm gonna teach you

00:00:05.000 how to find your North Star metric.

00:00:08.200 I'm gonna deconstruct it, explain it,

00:00:09.860 share some of the top SaaS companies' examples

00:00:12.720 and help you figure it out.

00:00:13.880 And be sure to stay at the end

00:00:14.600 where I'm gonna share with you an exclusive resource

00:00:16.440 called the Precision Scorecard.

00:00:18.820 So what you do is you take your North Star metric

00:00:20.740 and you stick it in the Precision Scorecard playbook

00:00:23.000 to hold your whole team accountable

00:00:25.160 to moving it up and to the right.

00:00:27.560 Let's get into it.

00:00:30.000 So I first learned this strategy from my buddy Sean Ellis. Sean is the creator of the term

00:00:46.540 growth hackers and created the concept of the North Star metric. He made it popular through

00:00:52.000 a framework he teaches called the high tempo testing. Now, why do I think it's so powerful?

00:00:56.820 when I was building my company, Clarity,

00:00:59.520 the team and I, we had raised 1.6 million in funding.

00:01:02.140 We were struggling to find our rhythm

00:01:04.540 from a product development point of view,

00:01:06.180 from a monetization point of view,

00:01:07.500 from a growth point of view.

00:01:09.420 And I remember calling Sean, I was down in LA

00:01:11.640 about to go on this week in startups with Jason Calacanis.

00:01:14.640 If you haven't seen, that's a very old episode,

00:01:17.520 but I was about to go on to talk about

00:01:19.320 our previous acquisition, Flowtown.

00:01:20.780 I remember I was standing in the parking lot,

00:01:22.740 Renee was there, my wife, fiance at the time,

00:01:24.960 and I was talking to Sean

00:01:26.460 And I was like, dude, I'm trying to figure out

00:01:28.080 like, what do we focus on?

00:01:29.260 We're building a marketplace.

00:01:30.240 If you've ever done a marketplace, it's crazy.

00:01:32.440 It's like having twins at the same time.

00:01:35.660 And he explained to me, he says,

00:01:37.540 dude, you need to figure out what your North Star metric is.

00:01:40.100 You need to figure out the metric that you know

00:01:42.700 that if you move up and make better

00:01:44.980 that your customers are getting value

00:01:46.400 and the business is getting value.

00:01:47.720 So I went back to the team, sat down,

00:01:50.000 did a strategy planning session,

00:01:52.480 whiteboarded a bunch of different options.

00:01:53.960 And for us, we came up with a metric called

00:01:55.800 EDS, expert driven signups. Why? Why do we go through that framework? Here's the deal. We knew

00:02:02.900 we needed to drive growth and signups, but we couldn't do it through paid acquisition because

00:02:06.840 of the percentage we were taking in the marketplace didn't support paid channels. So what we decided

00:02:12.340 is try to figure out strategies that would get the experts when they signed up to promote their

00:02:16.400 own profile, no different than Airbnb would do for like people that had listings. And we literally

00:02:23.000 just focus on that number and every week, every two week sprint would just get better at it and

00:02:27.700 better at it and better. And then that's when the flywheel started to take off. And the amount of

00:02:31.600 experiments that we went through was crazy. But the part that made it easy is that we had that one

00:02:37.760 metric to focus on. So I want to share with you kind of like four areas to look at to figure out

00:02:44.360 your North Star metric today. So number one, what's the definition of a North Star metric?

00:02:48.800 Here's the way I think about it.

00:02:50.720 It is a number that tells you

00:02:52.940 that not only your customers are getting value,

00:02:55.840 but the business is getting value.

00:02:58.140 And it is usually a leading indicator

00:03:01.060 to kind of revenue growth.

00:03:03.440 So it's some kind of activity

00:03:05.240 that's happening in your product.

00:03:07.020 It's specific to you that tells you

00:03:09.700 that the customers are getting value

00:03:11.580 and you should derive value through the form of revenue

00:03:14.940 if it's working out.

00:03:16.760 Okay, so that's the definition for me

00:03:18.400 of a North Star metric.

00:03:19.520 Number two, focus on the game.

00:03:21.460 So there's three games.

00:03:23.040 And when I say games,

00:03:23.920 it's kind of like every business

00:03:25.680 has a different game they're playing.

00:03:27.220 They're either playing one of these three.

00:03:28.620 They're playing an intention game.

00:03:30.640 So this would be like a Facebook or a Netflix.

00:03:33.440 So attention, they're a transactional game.

00:03:36.100 So this is like an Amazon

00:03:37.200 or some kind of e-commerce company like Shopify

00:03:39.540 on the transaction side.

00:03:42.260 Shopify is probably not the best idea,

00:03:43.980 but you get the picture.

00:03:44.860 So it's kind of like transactional commerce.

00:03:47.060 And then third would be on productivity.

00:03:50.140 The productivity game is most software

00:03:52.040 as a service company, SaaS company.

00:03:53.760 So this is like a Trello, Asana, Salesforce, et cetera.

00:03:57.860 You get the picture, Slack, Dropbox,

00:04:00.540 anything that is around productivity.

00:04:03.060 First, you need to figure out what game you're playing in.

00:04:05.940 So if you're watching this here,

00:04:06.780 software as a service company, a SaaS company,

00:04:08.860 you are focused on productivity.

00:04:11.200 Number three, examples.

00:04:12.960 I wanna share a few examples

00:04:14.260 to get you thinking through how this works.

00:04:16.380 So number one, Airbnb, their North Star metric is nights booked.

00:04:21.000 Why?

00:04:21.580 Because as a marketplace, and that's why I focus on expert-driven signups,

00:04:24.960 if people are booking nights at Airbnb,

00:04:29.200 their host and the people searching for places to stay are meeting each other.

00:04:35.480 So that means if that number is nights booked, every night goes up,

00:04:38.500 it means that the supply is available and the people are finding that supply.

00:04:42.300 Facebook, daily active users.

00:04:44.180 So on a daily basis,

00:04:46.760 what percent of their customer base were active?

00:04:49.220 So if they add a new feature,

00:04:50.400 it's all about increasing the activation,

00:04:52.640 getting them back or getting them more engaged, et cetera.

00:04:55.760 So daily active users for Facebook

00:04:57.100 because they monetize through ads.

00:04:59.280 The other one would be Quora.

00:05:01.740 Quora is the number of questions answered by users.

00:05:06.960 So the number of questions users answer.

00:05:09.160 So that is their North Star metric.

00:05:11.840 Slate, which is a content site,

00:05:13.900 is total number of engaged time or total engaged time.

00:05:17.440 That tells them that people are consuming

00:05:20.180 and they can monetize through ads.

00:05:23.680 Salesforce, average record created per account.

00:05:26.840 You know, they wanna make sure

00:05:27.620 that people are using the product.

00:05:28.800 So creating a record in the system

00:05:32.140 from the accounts they have.

00:05:33.440 So what percent of the,

00:05:35.220 or how many records are being created per account.

00:05:37.400 And Adobe, which sells cloud software,

00:05:39.960 they would just do the number of engaged cloud

00:05:42.120 a subscription. So how many people are active or engaged as a subscription owner? And that's like

00:05:50.040 at a high level, really easy for you to figure out. It's what's the thing that you know your

00:05:55.000 successful customers are achieving within your product. And you want to look at it as a percent

00:05:59.820 of your install base typically so that you can figure out if that number is going up into the

00:06:05.200 right. And that's why it's a North Star metric. It is that focus of everybody being able to move

00:06:11.620 it forward. That's another aspect of Northstar metric is can everybody on in the company influence

00:06:17.540 that number? If the answer is yes, it's a good one. But let's dive into the formula specifically.

00:06:23.060 Number four, the formula. So the formula for the Northstar metric is a few things. Number one is,

00:06:29.580 is your customer getting value? If I measure this, does it tell me that my customer is getting

00:06:34.920 value? So that's the first place I would start to look. Within that, I want to know that it's a

00:06:39.440 leading indicator to revenue. So if I measure this, are people that do this behavior, this data point

00:06:45.660 I'm going to measure, will it lead to revenue? And number three, is it specific to my business?

00:06:50.720 That's why it requires some level of creativity to customize your North Star metric because you

00:06:55.980 can't just swipe somebody else's because it doesn't give the full picture of your specific

00:07:01.200 product. So those are the three things I would ask you. Is it something that measures value that

00:07:07.140 Your customer's getting it.

00:07:08.120 Does it, is it a leading indicator to revenue?

00:07:10.340 And is it specific to your product?

00:07:12.180 So ratios, metrics, et cetera, are great Northstar metrics.

00:07:15.900 For example, I'll give you a great example

00:07:17.280 from my friend, Evan, who works in,

00:07:19.940 he leads the service and parts department

00:07:21.540 at the local Volkswagen dealership.

00:07:23.720 And one of their Northstar metrics

00:07:25.380 is called the absorption rate.

00:07:26.820 An absorption rate is the percent of overhead

00:07:29.440 covered by parts and services.

00:07:31.220 Meaning that if they have a $10 million overhead

00:07:33.760 to run their Volkswagen dealership,

00:07:36.780 what percent? Is it 100%, 80%, 110% of the revenue from service and parts alone covers the overhead

00:07:44.240 of the building? That's just their North Star metric. So everybody focuses on ensuring that

00:07:49.860 that is at least 100%. 120 is like really good, I guess. But that is an example of something very

00:07:55.780 specific to their industry that they can measure. So you're going to need to figure it out for

00:08:01.540 yourself so quick recap four things number one the definition of north star metric number two

00:08:06.840 the games focus on the game that you're playing number three examples and number four formula

00:08:13.500 as i mentioned the beginning of this episode i want to share with you an exclusive resource

00:08:18.440 called the precision scorecard it's the framework i use to grow all of my companies to keep everybody

00:08:24.240 focused measure the weekly activity to the monthly to the quarterly to the annual to make sure that

00:08:29.340 we hit our goals. No excuses. Red, green, or yellow. It's a very simple framework. You can

00:08:34.180 click the link to download not only the five strategies that implement it, but I even give

00:08:39.040 you the template so that you can literally look at the six core functions of a software company

00:08:45.000 and implement the precision scorecard for your business. So click the link below to grab your

00:08:49.740 copy. And if you like this video, be sure to smash the subscribe button, like the video. And if

00:08:55.540 there's anybody that you care about, you think you could serve, feel free to share it with them

00:08:59.140 directly and as per usual I want to challenge you to live a bigger life and a bigger business

00:09:03.460 and I'll see you next Monday. What's up with my audio testing? Sweet sweetness.

Dan Martell - January 18, 2021

Finding Your North Star Metric (Examples from the Best SaaS Companies)

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