The second most important metric for every company
What’s the second most important metric for every company?
Let’s start by clarifying the most important metric for every company.
It is the North Star Metric (NSM), which Sean Ellis elegantly defines as the “single metric that best captures the core value that your product delivers to customers.” Facebook’s NSM is Daily Active Users (DAUs), which captures value delivered to users; Square’s NSM is Gross Processing Volume (GPV), which captures value delivered to sellers; AirBnB’s NSM is Nights Booked, which (since AirBnB is a marketplace) captures value delivered to both hosts and guests.
The North Star Metric is necessary and essential for a company to align its strategy, plans and people around. When company leaders set internal goals or talk publicly about the company’s growth, they do so in terms of the NSM.
But the NSM is not sufficient.
Growing the NSM in a principled way benefits all stakeholders — customers, employees, shareholders. Growing it in an unsustainable or unconstrained way can lead to challenging situations and inhibit long-term growth.
Here are some examples of NSMs growing in potentially unsustainable ways, optimizing for short-term growth and empty calories.
E-commerce: The NSM for an ecommerce company is orders. When the company runs a price promotion, orders get a nice boost. Is this a good way to grow the NSM?
Media: The NSM for a photo sharing utility is DAUs. The marketing team stumbles upon a SEO hack that grows DAUs by 100%, but every user coming through the SEO channel stays on the landing page for exactly 5 seconds before bouncing. Did this tactic grow the NSM in a way that makes sense long-term?
Enterprise: The NSM for an enterprise SaaS company is number of seats. The sales team signs one massive customer and hits the NSM goal for the entire year. The company thinks it hit its goals, but did it really?
All these are situations where the NSM was solid and well-meaning, but since there were no constraints on how the NSM should be achieved or on what “long-term value” means, it led (knowingly or unknowingly) to behaviors that maximize short-term gains over longer term value creation.
So, to reiterate the question posed in the first sentence: what’s the second most important metric for every company?
The second most important metric for every company is a check metric on the NSM. It’s a metric that constrains the NSM and ensures that the NSM grows in a way that is sustainable and creates long-term value.
The NSM and the check metric have an inherent and perpetual tension. The check metric is the yin to the NSM’s yang, and the push-pull between the two is what leads to great companies that maximize long-term stakeholder value.
Every company should therefore have (at least) two top level goals: the NSM and the corresponding check metric.
The check metric goes beyond just outlining a high level goal to emphasizing a key facet of the goal that critically matters to the company. It starts becoming more prescriptive about what actions and strategies create long-term company value.
Let’s look at potential check metrics for each of the three situations above.
E-commerce: A possible check metric could be Gross Profit, which leads to unit economics staying sustainable and strong.
Media: A potential check metric could be Time on Site, which ensures that users who bounce quickly are not deemed as valuable as engaged users.
Enterprise: A simple check metric could be Number of Customers, which avoids customer concentration.
Each check metric listed above is just one possibility of many. Each situation above could have other check metrics, depending on what the company wants to optimize for (eg: in the e-commerce case, another possible check metric could be customer LTV, which is another way of looking at sustainable unit economics). The point is that it’s better to have a check metric than to have none.
Every good company has a NSM. But if you want to build a company where people’s behaviors and actions are aligned with long-term value, don’t stop with the NSM. Put some more thought and add a check metric to your company’s top level goals. You won’t regret it, and your company’s stakeholders will thank you for it.