We have been seeing product-led growth (PLG) being the go-to growth strategy for many businesses and we have been seeing those who have adopted the strategy are reaching their desired goals one by one.
There are 21 large companies that have adopted a product-led growth model. The fact that the total market capitalization of these companies is $208B, is an implication of how these companies are performing better post-IPO.
These numbers speak for themselves for the general success that the product-led growth approach brings for business but how do you track the success of YOUR product-led company success?
What metrics will you use to measure success?
Before getting started, let’s talk about what product data means for a product-led business and how using product data can be the game-changer for helping you reach success and tracking it for your business.
Why is Product Data so crucial for PLG?
Product data is crucial for product-led growth because it helps you understand user behavior, identify pain points, and find out which features of your product are the most successful.
In other words, it does not only help you identify where your users struggle the most when using your product but it also helps you learn which features are most used and useful for your users.
This way, product data shows you your success and also your failures so that you can improve on them.
You can not only collect product data through your existing paying customers but you can also collect it from freemium or free trial users.
One of the biggest advantages of being product-led and offering free trials or freemium is the product data that you can gather. Even though many freemium or free trial users might not even convert into long-term paying customers, you will have a lot of data that you can leverage to make educated decisions.
When it comes to utilizing product data for your product-led business there are two challenges:
Knowing how to collect the data and how to convey it to the right team.
When asked about the subject, PLG experts gave us great answers:
You need to put some serious effort into collecting and using the product data. It definitely is one of the biggest advantages of a product-led company, but it can also be very painful if you fail to collect and use it.
You need to consider product data and product data analysis, alongside the business KPIs, something that is neither easy nor standard for any organization, but they’ve been used to product data; this is something that changes by the day. The more you segment your users in the product and their behavior, the more you streamline down your product qualified leads. And then any other product KPI that needs to come alongside your business. So, this requires dedicated effort.
Product data really is a big challenge. There isn’t one CRM or one data center to rule them all because there are different ones from Google Analytics to Mixpanel to other ones where you have to gather multiple types of data. You have to gather the power of user data; you have to gather events, the events like people do inside the product, and pull that in together. What I’ve seen other companies do is create a data warehouse on their own.
Just by reading these insights into product data, you can better understand that it is truly a challenge for a product-led company. However, once you nail using product data, you will be much more likely to track and improve the success of your product-led business.
Product Metrics you need to track for PLG
Let’s begin with the pirate metrics that are known as AAARRR, first outlined by David McClure.
These are a five-step framework for SaaS growth, and they give you the ability to identify the weakest point in your company and see where you should concentrate your efforts.
Let’s look at the 6 metrics of the Pirate Funnel (AAARRR):
#1 Awareness – It is the number of users your product reaches. (Awareness was not included in McClure’s original Pirate Funnel; however, it was later added by Growth Tribe in 2016.)
#2 Acquisition – It refers to the number of users who visit your website and sign up for your product.
#3 Activation – This is the number of users who are taking the first step in your product. (For example, signing up or downloading the app)
#4 Revenue – The number of users who start paying for your product. And it also refers to how much they pay.
#5 Retention – The number of users who come back for a second or more time.
#6 Referral – The number of users who recommend your product to their peers (friends and family.)
One last thing before moving on!
Alongside tracking important metrics, you can take the Product-Led Growth Flywheel as an important framework to follow for the success of your product-led business.
By following this framework, you can align your teams and help them provide an excellent product-led user experience to create higher satisfaction and advocates for your brand.
Here you can see how the Product-Led Growth Flywheel looks like:
Since the product-led mindset is shaped around the end-user mindset, following this framework and trying to provide a satisfying user experience is what will help you truly achieve product-led growth.
Now, let’s elaborate on retention which is also a part of the pirate metrics, and then further move on to other important product-led growth metrics.
1- Retention Rate
Customer retention is a very powerful metric that shows you how relevant you can stay in solving the problems of your customers and providing value to them.
If you have a low retention rate, then you should seriously consider what you might be doing wrong. One of the most common reasons that you have a low retention rate is that you may be failing to guide your users in finding the value of your product because you provide a poor user onboarding experience.
According to a survey, more than half of users said that they have returned a product because they didn’t know how they could use it.
Just by looking at this statistic, you can see that you can retain a huge number of users through an excellent user onboarding process.
Here is how you can calculate customer retention:
Stickiness is another crucial metric that you need to track for your product-led business. It is a metric that shows you how often users come back to your app.
If you have a self-serve product that can provide value to users, you will highly likely have a high stickiness rate. It basically suggests that users can find value in your product and they cannot get enough of it.
Looking at this metric, and analyzing product data you can tell a lot about the strengths and weaknesses of your product. You can see which features of your product help you have a high stickiness rate and which ones are less used, and this way, you can improve your weaknesses and make your strong sides even stronger.
Also, by analyzing the users of the segment with high stickiness, you can focus more on creating a similar target audience because it will be the segment that is the least likely to churn.
Here is how you can calculate the stickiness of your product:
3- Product Adoption Rate
Product adoption is another crucial metric for measuring the success of any product-led company. It is, by definition, a process by which users hear about a new product or a service and become recurring users of it.
It refers to the percentage of new users to all users.
Here is how you can calculate your product adoption rate:
Number of new users x 100 / Number of total users
For example, if you have 11 new users in a specific month and the number of total users is 100: Your adoption rate is 11/100 x 100 = % 11. You can calculate on a daily, weekly, monthly, or yearly basis.
4- Feature Adoption Rate
If you want to achieve growth through a product-led approach, you would want each feature of your product to provide value to users and therefore be adopted by them.
Considering only 12% of a product’s features are the attraction points of the majority of clicks on products, your goal should be to increasing this number and getting a step ahead of your competitors.
Here is how you can calculate your feature adoption rate:
5- Churn Rate
Churn basically means your customers ending their relationship with your company for any reason possible. Unlike the metrics above, a high churn rate will keep you away from your growth goals.
This is why you would want your churn rate to be as low as possible.
In order to do so, you should make use of the product data and customer feedback, and identify the pain points so that you can fix and improve them.
In this regard, churn is as crucial as acquisition and retention when it comes to product-led growth.
Here is how you can calculate your churn rate:
6- Product-Qualified Leads (PQLs)
For product-led businesses, Product-Qualified Leads are one of the most powerful indicators of the success of your marketing and product.
PQLs refer to the users who are activated as a result of completing key actions in your product and making benefit through those actions.
It is also a crucial challenge for product-led companies. If you want to achieve product-led growth, then you would want to target qualified users instead of targeting anyone.
With the help of product data, identifying and improving your product’s activation event, and your users’ “Aha!” moments, you will have a much better understanding of how to increase PQLs.
If you want to find your product’s activation event, you should interview users, do A/B tests, and analyze session recordings that help you identify your users’ behaviors that correlate with conversion and retention.
7- Customer Lifetime Value (CLV)
CLV is intertwined with some of the metrics above and from a business perspective, it is another important metric that you should keep an eye on.
It refers to the amount of revenue that you can expect from a customer during their journey with your business. By tracking CLV, you can identify various customer segments for generating revenue and create a better strategy for acquisition and retention costs.
Here is how Hubspot calculates CLV:
And here is how Customer Value is calculated:
8- Time to Value (TTV)
Time to value (TTV) refers to the amount of time that it takes your users to reach their Aha! Moment.
As mentioned earlier, the product-led mindset is having the end-user mindset and providing value to customers through your product. The longer time it takes your users to find out how they can benefit from your product, the higher churn rates you will have.
You should keep in mind that your users’ time will be very costly to you if you were to waste it for no reason.
In this respect, you should aim to reduce TTV so that you can have high retention rates and help your product-led business thrive.
One of the best ways to shorten the time that your users find value in your product is to provide an excellent onboarding experience and guide your users with product walk-throughs.
9- Expansion Revenue
Expansion revenue measures the revenue you generate from your existing customers through anything further than the initial purchase such as upselling, cross-selling.
It is a must-track product-led growth metric simply because growth is not only about generating revenue through acquiring new customers but also through upselling and cross-selling.
Here is why it makes sense:
Upselling existing customers is 2x cheaper than it is acquiring new ones; and, generating expansion revenue is 3x cheaper than new customer CAC.
Here is how you can calculate expansion revenue:
Summing the total new MRR from up-sells and cross-sells.
10- Average Revenue Per User (ARPU)
The average revenue per user shows the amount of money generated from a single user on average. As in many other metrics, you can educate yourself through product data and user segmentation, and understand which type of users are best to target.
It is another great metric that helps realize your potential for growth on a single customer level.
Your Average Revenue Per User for various segments of your users tells you if you are on the right track with your growth goals.
Average Revenue Per User simply calculated as:
Total MRR / Total number of users (over a period of time) = ARPU