I'm a big fan of metrics. Prior to starting my own business, I spent eight years working as a high-frequency trader where literally everything I did was based on metrics. I'd create algorithms that would trade stocks at microsecond speeds for fractions of a penny based solely on financial data. I couldn't have cared less about the individual stocks I was trading, as long as the numbers made sense.
I've taken that same mindset to my business, using numbers whenever I can to back decisions and analyze our performance. I understand that metrics aren't something everyone enjoys, but I recently stumbled across a simple metric-based concept that I think every entrepreneur should be thinking about.
Essentially, if you were to only track one metric in your entire business--this would be it.
The North Star metric
I first heard of this concept in Liam Martin and Rob Rawson's recent book, Running Remote, although it's not a new idea by any means. In the book, they speak about the importance of metrics for remote companies and explain that every company should ideally have what is called a "North Star metric." This is the one number that will align your entire team around a common goal while also telling you how the business is performing.
Many companies have used the North Star metric to great success. Airbnb, for example, uses "nights booked" as its north star. Facebook measures how many customers get seven friends to connect. These metrics give everyone at the company something to rally behind. And instead of having to sort through a variety of different metrics, this one tells you everything you need to know: are we improving or not?
It's not only a way to measure progress, it's a way to spur progress among your entire team (without any confusing math).
Finding your North Star
Martin and Rawson say that your North Star metric lies between engagement and monetization. If you can find one metric that shows how engaged your customers are and how much money you're making, that's going to tell you a lot about the health of your company.
These are also the two things your employees should be most concerned about. Regardless of departments and roles, the vast majority of employees at a company are focused either on increasing revenue or creating happier, more engaged customers.
Therefore, combining these two factors into one metric is the best way to find your North Star metric.
The golden ratio
At my company, Leverage, we track a lot of metrics. And although we don't have a formal North Star metric at the moment, we've been focused on this combination of revenue and engagement for a long time.
We track it by using a ratio of two metrics. The two metrics are lifetime value of a customer (LTV) and the cost to acquire a customer (CaC). Essentially, we're asking ourselves, "how much does it cost to acquire a customer?" and then once we have that customer, "how much revenue can we expect to generate from them over their lifetime?"
By combining these into a ratio--LTV:CaC--we can predict the expected ROI from each customer we acquire. If it costs $1,000 on average to acquire a customer and the average lifetime value of each customer is $10,000, then our LTV:CaC ratio is 10. Essentially, that means we're getting a 10x return on our marketing and sales expenditure.
But beyond the money, a high LTV:CaC ratio implies that great things are happening in our business.
When CaC is low, it shows that marketing and sales are working well as we're acquiring customers with minimal spending. And when LTV is high it shows that delivery is working well because we clearly have happy, engaged customers that want to pay for our services.
Most people at the company are focused on either one or both of these metrics, so combining them into a ratio tells us basically everything we need to know and gives everyone across our various departments something to strive for. We can all celebrate together when the LTV:CaC ratio improves.
I know I said we didn't have a formal North Star metric, but... I think we do now?