Customer Funnel & North Star Metric Approach to Business Growth

The traditional business growth model focusses on the customer journey aka “funnel” in digital terminology. We determine the major engagement points of a potential customer with the business before becoming a paid customer. And we measure these points as best as we can.

On basis of this funnel data, we keep strategizing and implementing new ideas.

The aim is to improve the conversion at each step i.e. from step A we want more people to move to step B and so on. This includes two activities,

• improving product/service features. For example, a better customer service would lead to more people moving from free plan to premium plan.
• better visitor traffic. For example, 30% of the visitors from Facebook convert to paid customers while only 10% traffic from Twitter converts – making Facebook a preferred traffic channel.

A typical funnel looks like this,

Here’s an example of the Airbnb customer funnel. The typical key engagement points are Registration -> Verification -> Booking. The final Booking metric is the one that brings in actual revenue for the company.

Recently, I came across the ‘North Star Metric’ approach on Growth Hacker.

The North Star Metric is the single metric that best captures the core value that your product delivers to customers. Optimizing your efforts to grow this metric is key to driving sustainable growth across your full customer base.

There seem to be a few differences from the customer funnel model. Here, I am just comparing the two approaches and sharing my thoughts.

Note: I have worked with the customer funnel model, but I haven’t worked with the NSM approach so these are just my thoughts, not actual experience… 🙂

[Update: I earlier thought that these were two different approaches. But I now understand that the NSM is like an add-on to the customer funnel. Unfortunately, in my 40+ brand interactions, none of them had a very clear NSM marked out (except one). While with some of them my interaction was as an external agency, so they may not have shared the details. But the truth is that this is the case of brands just not having their basics in place. A lot of times, brand managers and top-level folks are aware of the needs to identify key growth markers, but they don’t put them in place. And so, in general, I am yet to work with a brand that has a clear NSM in place.]

In the GH article highlighted above, the NSM for Facebook is daily active users. It makes sense because Facebook as a business works only and only because of mass user adoption and continued usage. So if we take Daily Active Users as a core metric and we keep trying to increase it – it addresses many of the funnel points. We would need to,

• Increase number of new users so inevitably the daily active users also increase (assuming some retention)
• Improve retention of new users, thus increasing active users
• Improve UI and deep behavioral study to improve user engagement and retention (get them addicted) (would this include making ads more user-friendly?)

With a high Daily Active User number, ads would also perform better as they get a better audience selection. And so, Facebook also makes higher revenue. In fact higher the Daily Active User stats – higher the revenue through better-performing ads.

What happens if the NSM clashes with the Revenue Generation activity?

In Facebook’s case, the NSM and Revenue Gen activities clash!

Basically, revenue comes from ads but these ads reduce the user engagement by creating a bad experience. So if we only look at the NSM then ads and advertisers should get a lower priority. But this would hardly be the case for most businesses. And this raises the question – are the businesses working all wrong? (Hardly a new question 😉 )

Could Facebook look a much more sophisticated ad experience that does not disrupt the user journey, but rather provides them value? It can charge a higher premium for these ads. For example, currently, users go gaga on some amazing marketing experiences like the Red Bull space jump. But the onus of providing this kind of an amazing experience is only on the brand. Maybe it should also be with the ad distribution platform. Facebook could set up much more stringent ad selection process and then charge a premium.

Currently, the Facebook ad model with bidding and self-selection means that if the ad sucks and doesn’t get much traction the business has to pay more to stuff it on the users. The user can choose to report/stop seeing the ad but that’s more undesirable work for the user. Instead, Facebook could just bar ads with say a CTR of less xx number or keep a max ad frequency of 2. So the user won’t see a particular ad more than 2 times. This way it forces businesses to think better ads. And thus Facebook nurtures its NSM.

However, with a lot of businesses it may seem counter-intuitive but disruptive (even negative) experiences often lead to great revenue growth. For example, welcome mats on the site – they are irritating for a lot of people. But they get results. Forced login to see entire content – again irritating and undesirable but users obey just cause they want the content. Notification plugins – again a large number consider spammy but it gets results. So I wonder if only focussing on one NSM instead of the actual revenue impact makes sense.

When NSM Doesn’t Clash with Revenue Generation

The NSM for AirBnb is considered the number of nights booked. This NSM is now completely tied up with the Revenue, unlike as seen with Facebook. Considering all the company’s effort moving towards improving the ‘number of nights booked figure seems to include everything in the customer funnel approach.

• Bringing in new users who will eventually book nights
• Improving retention of users
• Making Airbnb the first choice for users
• Improving the ease of booking

What about a Business Change like an Expansion?

A while back, Airbnb diversified their offerings. Apart from offering accommodation options, they are also offering experiences like a heritage walk or a cooking class. Would it be easier to ideate such a business expansion through the NSM approach or the customer funnel approach?

As per me, it mainly takes deep customer insight – and this can be achieved as part of both the models. And this is why we say all these models and theoretical aspects go only as far as human ingenuity takes them. If the team delves deep via any model – it works.

Overall Thoughts about the NSM Approach

#1 I feel identifying a North Star Metric within the company is a good idea and can help focus the growth activities well. It allows people to simplify the funnel and just focus on one number. With a larger team, this sounds better.

#2 The NSM not actually contributing to Revenue like with Facebook, is weird. In such a case needs deeper thought.

#3 I would also consider a hybrid model – within the customer funnel highlight a Very Important Metric like the NSM. A comparatively larger share of company resources can focus on this very important metric but the other funnel elements are also catered to with lesser resources. It is also possible to look at two or three star metrics. To avoid any imbalance in company focus.

#4 Even with an NSM only approach, certain teams will still be looking at the entire funnel. For example, the marketing outreach teams – they need to measure their marketing channel impact all the way to the NSM. This anyway creates a funnel dynamics.

These are just some thoughts I had about the NSM approach. It is intriguing but as yet, I don’t have actual work experience with this. Hopefully, in the future!

Any thoughts?