The Definitive Guide: Product Analytics for Product-Led Growth
November 21, 2023
Leading product-led growth companies are growing 50% year over year, far faster than traditional SaaS companies (21%) according to recent benchmarks. It’s no surprise then that PLG is buzzing within the industry.
That said, achieving true product-led growth takes a winning combination of free parts of your product, virality, paying users, and more. Startups spend years (and thousands of dollars) trying to figure out the right model for viral growth – and many never do.
That’s why we’re using this post to share tested tenants for product-led growth and the charts, reports, and analysis you can use to refine your growth strategy. If you’ve ever wanted to answer: can we adopt a PLG strategy, what would we have to do to make it work, or why isn’t our PLG strategy growing our business, this is it.
Overview
At June we’ve been lucky enough to see a bunch of amazing PLG startups scale and grow their product usage too. Seeing them gave us some unique insights into some of the patterns that made them successful.
Let’s dig in. First, let’s get on the same page about what makes a successful PLG business. These are our strong opinions, take them for what you will.
We believe that to be effective at PLG:
- Your product must have a free component that effectively acquires users.
- Your free plan must attract other users to it.
- Your free plan must attract users who will pay you.
- Your paid plan needs a gross margin of 80-90%.
These strategies are an expansion of Christoph Janz’s Three Rules of Freemium with our own additions around why a PLG company needs a free plan and what has to happen for it to work effectively.
Here’s a quick look at what we’ll work through in this post:
Your product must have a free component that effectively acquires users
Product-led growth is defined by (literally) a product’s ability to drive growth. When your product is doing your marketing, you grow when more people experience it. It follows then that a free component is the most effective way to get many people into your product. Whether it’s a free trial, reverse trial, or free plan, a PLG company needs a free component.
If your product can’t acquire customers and convert them on its own, you’ll have to rely on a marketing team. That’s okay, you’re just not suited for pure PLG. Instead, consider hiring a sales team and creating inbound marketing channels.
The free component of your product must also effectively bring in new people and those people must actually use your product; otherwise, they’re just sign-ups on an email list.
Free Sign Up
It’s quite straightforward to measure acquisition. You’ll look at your website to sign up conversion rate. We’ll also flag that it can be worth defining sign ups as someone who actually creates an account, not just enters their email, since there’s generally a larger drop off than expected.
Your website to sign up conversion rate should be between or above 3 to 6%. Anything below 2% is a problem. There are a few key players in the space that convert 18% of visitors to sign ups which is likely a function of stunning products, good pricing, and a viral component.
You’ll also want to look at the raw number of sign ups each month to get a sense of basic business growth.
This can help you predict how you’ll grow down funnel.
Activation
We’ve noted that to be an effective free plan, users must actually use and engage with your product. This means that your free plan must effectively activate and retain new sign ups. Put simply, it must turn sign ups into users.
(Note that we didn’t say “customers” as that would imply someone who pays you).
It’s our opinion that conversion from sign up to actual user happens when your free component provides value and is also self-serve.
Creating Value
Often, startups put their most valuable features behind a paywall because, hey, they just spent two quarters and half a million dollars on those shiny new features. But if you’re PLG you don’t have strong marketing channels. Your free plan is your marketing. And if your free plan doesn’t expose your value, it doesn’t exist to your users. If your users don’t see value, they don’t buy.
Make it Self-Serve
Not many people will tell you that your PLG product needs to be self-serve, but it’s our stance. Here’s why: If your product needs multiple people for set up and implementation before it creates value (for example, it’s a marketing tool that needs engineering implementation, or it’s an analytics tool that needs multiple team approvals) it’s pretty hard to create organic growth because the people you market to aren’t the only people who need to believe and/or pay. That internal collaboration also creates a longer sales cycle here that hinders a viral spark.
Activation is not the same as engagement. Free users might engage with your features, but if they’re not activating through your core functionality, they won’t get your product, why it’s valuable, or – most importantly – why they should pay. That’s why activation is a measure of people who hit your Aha! moment.
So how do you define the Aha! moment?
You’ll start with a hypothesis. For example, sometimes your Aha! moment is tied to a magic number. The most famous magic number is probably Facebook’s “7 friends in 10 days” idea. Facebook realized that if their users added 7 friends within their first 10 days on the platform, they were significantly more likely to retain (aka activate) that person.
You can start to explore your data by comparing user activities across cohorts. For example, here’s a simplified version of how Facebook could have done it:
We also measure activation as a percentage. Activation is a threshold, it’s the percentage of users that signed up to your product. Thus you have your Activation Rate. When you understand your activation, you understand if your product is in a healthy state to turn sign ups into long-lasting users of your product. If your free plan doesn’t activate sign ups, you’re going to have a hard time growing.
So what’s a good activation rate? According to Lenny’s Newsletter:
- The average activation rate is 34%, and the median activation rate is 25%.
- For just SaaS products (removing marketplaces, eCommerce, and DTC), the average activation rate is 36%, and the median is 30%.
We believe that activation below 20% makes it hard to build a business. If you’re B2B, your conversion rate should be even higher since you likely have fewer people entering your funnel.
You’ll also want to look at how quickly someone activates.
When it comes to activation, timing is also an important consideration. For SaaS you’ll want to make sure someone is activating in 1 to 3 days. For B2B businesses that might look more like 2 to 3 weeks.
*A note on retention and active users
There are two other agreed-upon ways to measure the success of your product activation: active users and user retention. Simply put, when a user activates, they are active. If that user stays over time, they are considered retained. For that reason measuring the number of active users (whether it’s daily, weekly or monthly) as well as user retention over time is yet another good measure of product activation.
Lenny also provides a few benchmarks on standard retention rates. But, in general, if you’re not a consumer social app, retention should be above 50%.
Virality
You also need a free plan that can acquire other users. Again, PLG uses product, not marketing, to drive acquisition so you need a component of your free product that people will share and one that will convince others that they need your product too. Whether this is through calendar invites (Calendly), branded shortlinks (Buffer), or internal company expansion (Slack), you must make it easy for your users to share your product (because you’re not building any other paid avenues).
Luckily you’ve got options. Your free plan can be shared in two ways: virality or network effects.
“A truly viral product has intrinsic virality, meaning that it’s designed around something that naturally involves other people, things that create two-sided benefit…The network effect, on the other hand, is about value; specifically compounding value. When a customer who has already joined, gains incremental benefit from the latest person who became a customer, you have network effects.”
– Oji Udezue, former CPO of Calendly as told to OpenView.
For example, Slack isn’t necessarily built for virality because it can’t intrinsically jump from organization to organization. Calendly is viral because calendar invites by their very nature include more than one person.
Both can work for PLG as long as your K-Factor is high enough. A K-Factor measures how many people are told about your product by one user, and therefore acquired for free.
K = i * c
i= The number of app invites sent per customer
c= The average conversion rate of each invite
To be honest, not many software companies sit down to determine their K-Factor, but it’s important to consider what part of your product can be shared on the free plan – especially as you gate and keep certain features free. Think critically about how exactly you want to enable your free users to share your product with others.
Can you create virality or are you relying on network effects? How can you incentivize both of these actions?
Authory, an automatic multimedia portfolio builder, ignites the network effect by offering two additional weeks on a free trial if someone shares their app on social media. And if you search for Authory on X/Twitter, you can see just how well this incentive is working.
Another measure of shareability is measuring your top-of-funnel growth. This might look at measuring growth in active users per week.
Growth in active users is often key to a startup’s success. Typically, 10% week-over-week growth is world-class growth and 5-7% is great.
From our end, we believe that active user growth rate is a reliable North Star metric for PLG companies. It tells you if you’re bringing in enough users and if you’re bringing them in effectively. Think of this as the PQL (product-qualified lead) of PLG.
Free to paid conversion
Of course, sign ups and activation might be leading indicators, but if these customers don’t pay you, you’ll fail.
This is a fairly straightforward metric in that you want to track the number and ratio of people who are converting to paid plans. That conversion, however, can happen many ways: in a trial, a reverse trial, or freemium experience.
Generally, 5% of all freemium sign ups convert to paid on average based on OpenView’s benchmarks.
Of course, it’s nice to beat averages, but the key is that you’re seeing conversion from free to paid.
Here’s a clear chart on what’s standard depending on your model.
What’s right for your business is highly specific but do consider your conversion rates and full funnel as you choose.
So what if your conversion rate isn’t great? Your free plan must attract an audience that will convert. In a non-PLG company, if leads aren’t converting, there’s often a positioning problem. There’s a dissonance between who comes in and what happens in the product. In a PLG company, this means looking at what part of the product is primed for sharing and who it’s shared to. Make sure your product can penetrate the communities where your audience hangs out to make sure you have well-qualified sign ups coming in.
Retention
And finally, your paid plan needs a large gross margin. As Christoph Janz says:
“If you have a lower gross margin – for example, because your product is not fully self-service, requires extensive customer support, or is extremely costly in terms of tech infrastructure – freemium will probably not work for you.”
We’d say your paid plan must cover the cost of marketing and product development. We’d highly push for a self-serve component of your product to reduce these costs and make pricing and conversion to pay more accessible. If your paid plan doesn’t meet these criteria, it’s likely that your free users are going to cost you too much, and your business won’t be viable.
This number is a financial metric more than a product metric so we won’t go into detail on it, but it’s expected that as a business you know your costs, revenue, and growth over time.
We’ll also bring back our retention chart from above.
“Retention is not only the primary measure of product value and product/market fit for most businesses; it is also the biggest driver of monetization and acquisition as well.”
Not only is retention the flip side of activation but it’s tied up with LTV. If you’re retaining people longer, all of a sudden each customer is worth more and your revenue projections go up.
Summary of Analysis
To recap, we’ve just walked through five core reports we see as essential to product-led growth:
- Sign up to free
- Activation
- Virality
- Free to paid conversion
- Retention
If you’re looking at all of these, your dashboard might look something like:
Why these reports?
It’s our opinion that to thrive as a PLG business you need to get three out of five of these core pieces right.
For example, if you sign up to conversion rates are down, you can make up for this in your funnel by converting many of your free users. This is key if you have a small audience, a technical product, or a complicated one.
Or you might have a wide top-of-funnel and only convert a few customers. Looking at your total addressable product and simply understanding how your product fits within the market is going to help you determine what’s right for you.
These reports also represent leading, not lagging, indicators for growth. Notice that we’re not looking at revenue, monthly recurring revenue, or churn. By the time you see the impact of strategic decisions in these financially-focused numbers, it’s quite late. Instead, we’re empirically looking at what happens at the start of your customer lifecycle. This helps to incentivize activation over quick revenue, which centers your team on better experiences not just short-term revenue gains.
Final Thoughts
In summary, for an effective PLG strategy your product must have a free plan that acquires new sign ups and activates them, a free plan that acquires other users at scale, an ability to convert free users to paid, and the ability to retain these customers for growth.
This is best measured through your sign up to free conversion rates, activation rates, your ability to drive viral growth, your free to paid conversion rates, and your retention rates.