Since the early 2010s, Product Led Growth has become the standard for new software product development. For years, OpenView Partners has been tracking PLG companies in their annual survey and shared that there are “40 large public companies with a PLG model, including all of the top IPOs in 2021.” Additionally, 54% of respondents to OpenView’s Product Benchmarks 2022 report went to market with a Free Trial or Freemium approach. That number rises to 61% for the Forbes Cloud 100, according to OpenView.
PLG relies on customer acquisition through Free Trial or Freemium user experiences that encourage usage, create stickiness, and ultimately generate sales conversions. Measurement of that user experience requires a combination of product, marketing, and sales metrics.
PLG Analytics
According to Product Led Growth Metrics by ProductLed.org, companies use two PLG Analytics theories to measure product efforts. First, Pirate Metrics, defined by David McLure in 2007, refers to Acquisition, Activation, Retention, Referral, and Revenue, or AARRR. Next is ProductLed Growth’s Product Flywheel, which defines Beginners, Evaluators, Regulars, and Champions along their journey.
While those theories are instructive at a conceptual level, adding product measurement to a more traditional Marketing and Sales funnel makes more sense.
Recently, the CEO of a PLG-focused software company asked about metrics to measure the success of a product launch. The company found success listing earlier products on a software development marketplace. Now they were breaking from that Go-To-Market approach and selling their new product directly. From a previous experience measuring freemium conversion at TripAdvisor, I responded with my take on the CEO’s question.
Product Led Growth Funnel
My response first considered driving traffic to the top of their PLG funnel. Marketers at PLG companies balance Inbound Content strategies (Organic), Outbound Sales and Marketing strategies (Direct), and Search and Social Advertising (Paid) strategies to drive traffic for their product. Organic, Direct, and Paid Channels leverage web, email, or Google advertising. Content shared across those platforms will perform differently. Understanding the channel and content driving trials and conversions is critical in knowing where to increase or decrease budget and work efforts.
Next, I considered the product experience to determine which measurable activities cause free trial users to convert to paying users in the middle of the funnel. First, you would measure usage over time to see trends using a “cohort analysis.” Then you can show increases or decreases in measures like Usage Hours, Features Used, and Users per Account over time. Ultimately the cohort would show a correlation between those measures and conversion to paying customers in your analytic models.
Your revenue success depends on keeping and growing customers, so measuring user, account, revenue retention, and expansion at the bottom of the funnel becomes critical. Product teams will look carefully at the Average Revenue per User or Account (ARPA or ARPU) depending on your product. Marrying your marketing and product development efforts at the top and middle of your funnel to ARPA or ARPU will align conversations across PLG teams.
Top of Funnel PLG Metrics
Web Traffic – Should be split between direct, organic, and paid as described above. Split web traffic at the platform (LI, Goog), campaign, content, etc. level to steer the budget to successful channels.
Note: Time on page and number of viewed pages may be helpful but are often misleading measures. Streamlining the experience will get users to download and use the product, so declining trends for those metrics may be positive indicators.
Mid Funnel PLG Metrics
User Engagement may include download clicks, product installs, and registrations for your product. Measuring dropoffs at each relevant stage will show where product and web development focus is needed.
Free Usage Hours – Should be measured per install, product feature, or user.
Note: You should track the effect of marketing nurture from email follow-up, paid advertising, and other campaigns to understand the impact on usage and conversion. Holdout campaigns, where you only market to 50-75% of the audience, will help measure marketing impact.
Bottom of Funnel PLG Metrics
Conversion Rate – Purchases divided by free users will show whether your product meets projections. Trending up in conversion is a sign of improved development and marketing.
Paid Usage Hours per User – As features become more relevant, the product should become stickier for each user. If this trend reverses, you may have expanded too far and should expect future retention issues.
Retention / Attrition Rate – Depending on your product, you can measure attrition based on users, accounts, or impact on ARR (Annual Recurring Revenue).
Winbacks – Every churned customer is a potential future win back, so value messaging should be tested and refined.
Avg Revenue per User or Account (ARPU or ARPA) – Are you adding features that expand revenue over time? Are accounts encouraged to add more paying users?
Annual Recurring Revenue (ARR) – The metric your founders and boards discuss. Product ARR shows growth in cash flows and is a direct line to company valuation.
Note: Conversion velocity is an essential measure and should increase as you improve the product and messaging.