This paper outlines one of the many frameworks a startup can use to determine their key performance indicator from which to drive all their growth efforts.
This framework is helpful for business models that can track customers' recurrency (e.g., purchases, transactions, usage) at a user level.
The methodology is based on analyzing historical data, so six or more months of operation is recommended for this process to be valid.
Throughout this paper, we will use Muni (community group-buying company) as an example to illustrate the framework. Muni’s operating model: Community Leaders acquire Final Users, who purchase through the platform. Community Leaders group the orders, and Muni delivers all the orders to the Community Leader, who is in charge of the last-mile delivery.
A NorthStar metric is a key performance indicator (KPI) representing a business's overall goal or vision. It is a metric closely tied to the company's core value proposition and is used to measure progress toward achieving the business's primary objective. By focusing on this metric, startups can ensure their efforts align towards driving sustainable growth.
The main benefit of having a NorthStar metric is that it provides a clear and concise focus for the business. A single metric representing the business's primary goal allows employees to quickly understand what the company is trying to achieve and how their efforts contribute to this specific goal. The organization should be aware of the NorthStar metric, and each person should understand the levers they can pull to move toward the NorthStar.
By regularly monitoring the chosen metric, businesses can identify trends and patterns in their performance and adjust tactics to ensure they are on track to achieve their goals. It should be measurable and actionable so the company can take concrete steps to improve performance.
Retention is critical for maximizing user lifetime value (LTV). When customers continue to use a product or service over an extended period, they provide a steady stream of revenue that can offset the cost of customer acquisition (CAC). This is why tracking LTV/CAC, a metric that helps businesses determine the return on investment (ROI) for their customer acquisition efforts, is critical.
Retention rate refers to the percentage of users from a specific cohort a company retains over time. Also, a retention rate can indicate the percentage of orders, transactions, money, etc., from the users of a specific cohort that a company maintains over a given time.
Retention curves are the graphical representation of retention rates. They are instrumental in comparing different cohorts and their retention over time.
By doing different cuts to your cohorts using a series of variables, a company can identify the demographic and transactional characteristics of the users with the highest retention rates, thus having the highest lifetime value.
Early-stage startups may face a lot of "noise" in their retention curves while defining their value proposition and figuring out how to communicate it to the right audience. By doing the different cuts to the curves, we can isolate the “noise” and (1) gain visibility of the customers that have excellent retention; at this stage, not all users may align with the startup's value proposition, so it’s not necessary to retain all of them, and (2) determine which behavior to push to maximize retention.