Wes Bush: Product-Led Growth

Product-Led Growth

By making it easy for people to experience the value of our product, we transformed it into a powerful customer acquisition model.

Truly great software companies are built to be product-led.

As the SaaS industry evolves, I believe there will be two types of companies: Sales-led companies represent the old way. It’s complex, unnecessary, expensive, and all about telling consumers how the product will benefit them. These companies want to take you from Point A to Point B in their sales cycle. Product-led companies flip the traditional sales model on its head. Instead of helping buyers go through a long, drawn-out sales cycle, they give the buyer the “keys” to their product. The company, in turn, focuses on helping the buyer improve their life. Upgrading to a paid plan becomes a no-brainer.

Design Your Strategy

Why Is Product-Led Growth of Rising Importance?

Initially coined by OpenView, Product-Led Growth is a go-to-market strategy that relies on using your product as the main vehicle to acquire, activate, and retain customers.

The Three Tidal Waves Coming for Your Subscription Business:

Tidal Wave 1: Startups are more expensive to grow.
Tidal Wave 2: Buyers now prefer to self-educate.
Tidal Wave 3: Product experiences have become an essential part of the buying process.

A go-to-market (GTM) strategy is an action plan that specifies how a company will reach target customers and achieve a competitive advantage.

Pros of a sales-led go-to-market strategy:

Ability to close high Lifetime Value (LTV) customers.
Perfect for hyper-niche solutions. The product-led model is built for a large TAM where you can scale rapidly.
Perfect for new categories. When you’re launching a new category, you have to change the way people approach problems. As a result, it often makes sense to start with a sales-led approach to better understand the customer’s pain points, objections, and core problems implementing your solution.

Cons of a sales-led go-to-market strategy:

High customer acquisition costs (CAC). Paul Graham, founder of Y Combinator, states, “The more it costs you to sell something, the more it will cost others to buy it.” The customer acquisition model is leaky. In a sales-led organization, the customer acquisition model has a big leak. According to SiriusDecisions, 98 % of marketing-qualified leads (MQLs) never result in closed business.
The organizational structure hinders great product development.

Truly great SaaS companies are built to be product-led.

Market dynamics and consumer behavior have changed-increasingly consumers expect to use software and extract value from it before buying.

Over the years, countless SaaS businesses have opted to switch from a sales-led GTM to a product-led GTM strategy to create a moat around their business.

A product-led marketing team asks, “How can we use our product as the # 1 lead magnet?” A product-led sales team asks, “How can we use the product to qualify our prospects for us? That way, we have conversations with people that already understand our value.” The product-led customer success team asks, “How can we create a product that helps customers become successful without our help?” While the product-led engineering team asks, “How can we create a product with a quick time-to-value?”

Pros of Product-Led Growth:

Dominant growth engine. Product-led businesses tend to scale faster than their competitors in two powerful ways: Wider top-of-funnel. Rapid global scale.
A significantly lower CAC.

Free software also builds a moat around your business in three powerful ways: Faster sales cycles. High revenue-per-employee (RPE). Better user experience.

Rob Walling, the previous CEO of Drip, offers a warning: “Freemium is like a Samurai sword: unless you’re a master at using it, you can cut your arm off.”

Choose Your Weapon—Free Trial, Freemium, or Demo?

My MOAT framework to help you pick the right go-to-market strategy for your business:

Market Strategy: Is your go-to-market strategy dominant, disruptive, or differentiated?
Ocean Conditions: Are you in a red- or blue-ocean business?
Audience: Do you have a top-down or bottom-up marketing strategy?
Time-to-value: How fast can you showcase value?

Jason Lemkin, 15 the founder of SaaStr, argues that you need 50 million active users for freemium to work.

Both freemium and free-trial models work much better than the traditional sales model (i.e. demo requests) in the dominant growth strategy because you keep costs low and prevent competitors from stealing your market share. That’s your competitive advantage: low cost for an exceptional product.

The freemium model thrives in the disruptive environment. Keeping costs low draws in prospects using existing solutions. Since the product is a scaled-down version of an existing solution, it must be easy to use. You can use a free trial with a disruptive growth strategy, but it weakens the “magnetic draw” enjoyed by the freemium model.

Questions to ask yourself when deciding on your market strategy: Do you want to offer the best solution for the lowest price? (Dominant strategy) Do you want to offer the best-customized solution for the highest price to underserved customers? (Differentiated strategy) Do you want to offer the simplest product for the lowest price to over-served customers? (Disruptive strategy) Or are you planning on using a hybrid strategy?

Ocean Conditions: Are You in a Red- or Blue-Ocean Business?

Red-ocean companies try to outperform their rivals to grab a greater share of existing demand.

Blue-ocean companies access untapped market space and create demand, and so they have the opportunity for highly profitable growth.

Within your market, some segments could be in a red ocean while others are in blue oceans.

If you’re in a blue ocean and have a quick time-to-value in your product, use a product-led model. However, if your product is complex, start with a sales-led go-to-market strategy to educate your audience and create demand. Still, ask “when” not “if” you’re going to launch a product-led arm of the business.

If you’re in a red ocean, use a product-led model to widen your funnel, decrease your CAC, and expand globally. You need to grow as fast and profitably as possible.

Questions to ask yourself when deciding between a blue or red ocean: Am I creating or capturing existing demand? Does the product have a quick time-to-value? Will a marketing, sales, or product-led GTM suit my business the best?

Audience: Do You Have a Top-Down or Bottom-Up Selling Strategy?

Companies that use the top-down selling strategy: SAP, Oracle, and IBM.

When using a top-down selling strategy, your sales team targets key decision-makers and executives. Typically, these deals include large product rollouts throughout an entire business.

If you’re selling large deals, top-down systems are essential. Typically, the larger the sale, the more service and training a customer requires.

Companies that use the bottom-up selling strategy: Slack, DocuSign, and Atlassian. Bottom-up selling strategies are the norm in the consumer market.

Unlike the top-down selling strategy, where it may take months or years to close a sale (and another year to understand how to use the product), bottom-up selling strategies demand quick adoption and simplicity.

Benefits of a Top-Down Selling Strategy:

High ACV.
Additional Services.
Low Customer Churn.

Disadvantages of a Top-Down Selling Strategy:

Poor revenue distribution.
High CAC.
Long Sales Cycles.

Benefits of a Bottom-Up Selling Strategy:

Wider top-of-funnel.
Lower CAC.
Predictable sales figures.
Revenue diversity.
Scale globally fast.
Fast sales cycles.

Disadvantages of a Bottom-Up Selling Strategy:

The main disadvantages are financial.

Contract size.
Non-paying customers.
Significant investment.
Expertise shortage.

Freemium and top-down selling. The freemium model rarely works with a top-down selling strategy.

Freemium or free trial and bottom-up selling. If you go with a bottom-up selling strategy that attracts middle management and teams, you help your potential buyers use the product, experience meaningful value, and make the case to purchase your solution to upper management.

Free trial and top-down selling. Having a free trial with a top-down selling strategy is a grey area.

Top-down selling puts the burden on the sales team. A bottom-up approach lets the prospective customer discover the product’s value on their own.

Questions to ask yourself when deciding between a top-down or bottom-up selling approach: Are you currently targeting people who can easily use your product and experience its value? What is your ACV for each customer? Is it high enough to justify a low- or high-touch sales model?

Time-to-Value: How Fast Can You Showcase Value?

To create a successful product-led business, you need a quick time-to-value.

To help pinpoint your product’s time-to-value, analyze your existing user base. Regardless of your product or industry, these are the four types of users:

Mission Impossible Users. Your user has low motivation and finds it hard, if not impossible, to use your product.
Rookie Users. Your user has high motivation but finds it incredibly difficult to use your product.
Veteran Users. Your user has low motivation but finds it easy to use your product.
Spoiled Users. This is the outcome to optimize for. Your user has high motivation and finds it straightforward to use your product.

Choose Your Product-Led Growth Model with the MOAT Framework

Use a free trial or freemium model, consider whether a hybrid model might work, too. Below are three of the most common hybrid models.

Hybrid Model 1: Launch a new product.
Hybrid Model 2: Go freemium, with a trial If you have a product with lots of features, this strategy can work well. As long as your freemium version is valuable, you can layer on free-trial upgrades within the freemium product.
Hybrid Model 3: Go free trial, follow with freemium.

Build Your Foundation

Build a Product-Led Foundation

Product-Led Growth is a life raft that will save you from the flood of rising customer acquisition costs and decreasing willingness to pay for your product.

The UCD framework, which shows you how to build a solid foundation for your product-led business.

Understand your value.
Communicate the perceived value of your product.
Deliver on what you promise.

Understand Your Value

Most technology companies get caught up in the features and don’t really know why people buy their product.

The three reasons that people buy a product:

Functional Outcome: the core tasks that customers want to get done.
Emotional Outcome: how customers want to feel or avoid feeling as a result of executing the core functional outcome.
Social Outcome: how customers want to be perceived by others by using your product.

One of the biggest differences between sales- and product-led companies is that the latter consistently monitor these usage patterns to see if users are accomplishing meaningful outcomes.

A value metric is the way you measure value exchange in your product.

Ultimately, value metrics are the linchpin to successful execution of a product-led go-to-market strategy.

Your value metrics play a vital role in how you price your product, set up your product metrics, and build your team.

According to Patrick Campbell, 18 CEO of ProfitWell, there are two types of value metrics: functional and outcome based. Functional value metrics are “per user”. Pricing scales around a function of usage. Outcome-based value metrics charge based on an outcome, like how many views a video received or how much money you made your customer.

As Campbell notes, value metrics outperform feature differentiation with up to 75 % less churn. Outcome-based value metrics take this a step further with an additional 40 % reduction in churn.

This trend continues further when looking at expansion revenue. Both types of value metrics still outperform feature differentiated pricing models with at least 30 % more expansion revenue, but outcome-based value metrics push those gains to nearly 50 %.

According to Campbell, a great value metric must pass three tests.

It’s easy for the customer to understand.
It’s aligned with the value that the customer receives in the product. Consider the low-level components of your high-level outcome. When it comes to your product, what core components lead someone to experience a meaningful outcome?
Grows with your customer’s usage of that value.

As ProfitWell’s Patrick Campbell explains, “The reason per user pricing kills your growth and sets you up for long term failure is because it’s rarely where the value is ascribed to your product.”

So why is user pricing still the most common way people price solutions, according to the Pacific Crest Survey? Part of the reason is that companies just don’t know better. Most companies don’t have anyone to evaluate objectively if per-user pricing makes sense.

I’ll go through two different strategies that — depending on your company size — can help define your value metric. For best results, I’d recommend using both approaches in unison. Step 1: Subjective Analysis. Step 2: Data-Driven Approach.

To get meaningful insights out of your product data, look for patterns among your best and worst customers. For instance, ask yourself these questions when analyzing your data: What do my best customers do regularly in the product? What do my best customers not do in the product? What features did my best users try first during onboarding? What similarities among my best users — demographics, team structure, ability — led to success? For churned customers, ask: What were some of the main differences between their user journey and that of your best customer? Specifically, what activities were different? What outcomes did your churned users achieve and not achieve? Were these churned customers in your target market? Why did the majority of these customers churn?

Communicate Your Value

Communicating your value is at the crux of a Product-Led Growth strategy. Sales-led companies love to hide their pricing behind closed doors, asking potential buyers to request the price. Product-led companies eliminate this unnecessary friction with up-front pricing for most starter plans.

Communicating your value warrants an entire chapter because, in a product-led business, your revenue and customer acquisition model are married together.

A sales-led business can bank on relationships to sell large contracts. In a product-led company, your customer acquisition model is built around your product.

How to Treat Your Pricing and Customer Acquisition Model Right:

Don’t overcomplicate your pricing page.
Don’t create a free plan with no incentive to upgrade. Without data, it’s easy to give away too much for free. On the other hand, it’s also way too easy to give away too little. By doing so, you make it extremely hard for new users to see value in your product — the powerful, fun features are hidden behind closed doors.
Don’t make it a no-brainer for the majority of your customers to downgrade. Most businesses I’ve worked with typically have 10 – 15 % of customers at risk of downgrading.

Let’s explore the four main options for SaaS businesses.

Best-Judgement Pricing. This is much like it sounds. You and your team decide your price based on what you think is reasonable.
Cost-Plus Pricing. Cost-Plus Pricing works when you calculate the cost of selling and delivering the product, then add a profit margin on top.
Competitor-Based Pricing. Competitor-based pricing benchmarks your pricing based on their data.
Value-Based Pricing. Value-based pricing bases your price on the value you provide.

To determine your price, go through both options below:

Option 1: Pricing Economic Value Analysis. How you can use an economic value analysis to come close to the perceived value of your product. This analysis is perfect if you’re just starting out, don’t have a lot of data, or don’t have buy-in to talk to your customers about pricing.

Option 2: Market and Customer Research. A battle-tested method used by Simon Kucher & Partners, Openview, and Price Intelligently to figure out your customers’ willingness to pay.

If you use an outcome-based value metric tied to revenue, you’ll quickly uncover how much value your product provides. However, if you use a functional value metric or feature differentiation, you need to talk to customers regularly to find out how valuable they find your solution.

You can figure out the acceptable price range in three steps.

Step 1: Prepare Questions to Ask. Kyle Poyar, VP of Market Strategy at Openview, suggests an alternative way of using the Van West Model. What would you consider to be an “acceptable” price (good value for the money) for [our product]? When would [our product] seem “expensive” (they’d have to think twice about buying it)?
Step 2: How to Ask. Survey tools (Typeform, SurveyMonkey); Interviews.
Step 3: Crunch the Numbers.

With the Van West Model, your X-axis includes the prices people said they’d be willing to pay. The Y-axis has the percentage of people who selected each price range. Pay attention to the points of intersection. Between the “Not a Bargain” and “Too Cheap” price ranges, the Point of Marginal Cheapness (PMC) shows where people consider our product cheap. Don’t charge less than that. At the intersection of “Too Expensive” and “Not Expensive,” we find the Point of Marginal Expensiveness (PME). This is an excellent place to be — the point where people start to consider our product expensive. Once you know your PMC and PME, you’ve found your acceptable price range: the space between both points.

Putting together a pricing page doesn’t have to be complicated. You need four elements to make it work: Value Metric; Willingness to pay for all packages; Valued features; Demographic Information.

The valued features is a tricky section. Which features should we include with each plan? According to Kyle Poyar, there are only three main categories:

Leaders “are the hamburger in your McDonald’s value meal; they are what everyone wants and comes to you to buy. These must be included in all packages.”
Fillers “are the fries and coke. They are seen as nice-to-have and sweeten the deal. Customers will cherry pick fillers when sold a la carte, and so a bundle helps drive uptake and a higher average revenue per user (ARPU).”
Bundle killers “are the coffee of your value meal. Few people want a value meal with a burger, fries, coke AND a coffee, and adding coffee to the value meal might even turn people off from buying entirely because they’d end up with more than they need. There will be a handful of caffeine-starved customers who do want the coffee, though, and they can purchase it a la carte outside of the value meal.”

Deliver on Your Value

What we promise in our marketing and sales is the perceived value. What we deliver in our product is the experienced value. Ideally, the perceived value aligns with the experienced value.

It’s one reason why product-led businesses are booming. People want to “try before they buy” and experience your value proposition.

If you fail to deliver, your user experiences a nasty value gap. The bigger your value gap, the leakier your funnel. Tackling your value gap can be the single, most profitable lever you can pull.

There are three main reasons why value gaps are so prominent in the SaaS industry: Your product has serious ability debt; You don’t understand why your customers buy; You overpromise what the solution is capable of.

The Three Value Gaps You Need to Crush Value:

Gap 1: Ability Debt. Ability debt is the price you pay every time your user fails to accomplish a key outcome in your product. As you remove pain and friction from your user’s experience of attaining their valued objective, your total addressable market grows.
Gap 2: You Don’t Understand Why People Buy Your Product. If you don’t know where someone wants to go, you can’t help them get there. Until you know what your users are trying to accomplish in your product, you’ll lead them to mountaintops they never wanted to climb. Once we know the main outcome that our user is looking for, we can catapult them into the area of the product that is most relevant to them. This may sound straightforward, but many businesses don’t know the main outcome that people want to achieve in their product. As a result, they unknowingly force unnecessary steps onto users during onboarding.
Gap 3: You Suck At Communicating Your Value. One of the easiest ways to launch a free trial or freemium model is to launch an MVP version to “test the waters” and see if it’s worth your team’s time and investment. This whole process can take less than 24 hours.

In your first meeting with the new trialer, do several things:

Qualify them as you usually would.
Ask them about the primary outcome they want to achieve with the product.
Watch the trialer try to achieve an outcome in the product.

After your first onboarding session, here are the next steps: Write down the key outcome (s) that someone wanted to accomplish. Focus on where you need to offer a helping hand. Lastly, clear the damn path.

The Most Common Mistake that New Product-Led Businesses Make

Most SaaS companies launch their product-led model. Then they never update it. Why? Nobody takes ownership.

Train your team.

Put together a small tiger team. On this team, you need these seven people (if you’re a small startup, you can merge some of these positions together): Developer; User Experience Designer; Product Manager (someone to lead the project); Customer Success Rep; Digital Marketer/Inside Sales; CEO; CPO or CTO.

With that team in place, the next step is to develop an ongoing optimization process.

Ignite Your Growth Engine

Develop an Optimization Process

At the Product-Led Institute, we developed the “Triple A” sprint, which focuses on rapidly identifying problems, building solutions, and measuring impact. The process follows a one-month sprint cycle and consists of three “A’s”: Analyze; Ask; Act.

If you have a bad product, no optimization will deliver rocketship growth.

Until you know the inputs (e.g. trade shows, advertising, email marketing) that drive desired outputs (e.g. ARR, customers, MRR), you won’t build a sustainable business.

Which Outputs Should You Track? One of the beautiful things about a SaaS business is that you can analyze almost anything.

In a product-led business, these are the macro outputs you need to track: Number of signups; Number of upgrades; Average Revenue Per User (ARPU); Customer Churn; ARR; MRR.

To optimize any business, you need to ask three questions:

Where Do You Want to Go? Some businesses use a North Star Metric to symbolize this focus, while others pick a revenue number.
To get your business closer to where you want to go, you need to know which levers to pull. Which Levers Can You Pull to Get There? According to Jay Abraham’s multiplier perspective, there are three levers you can pull for growth: Multiplier 1: Churn; Multiplier 2: Average revenue per user (ARPU); Multiplier 3: Number of customers.
Once you’ve identified the top lever, it’s time to brainstorm which inputs will kick your business into high gear. Which Inputs Should We Invest In? To help you find the right inputs, recall the UCD framework and why companies fail: You don’t understand your value. You aren’t communicating your value well enough. You aren’t delivering on your value fast enough.

Compile a list of items that could improve your product experience. Filter these ideas. How you do it doesn’t matter as much as having a defined process.

I use the ICE prioritization method, developed by Sean Ellis, to score each input on three elements: Impact. How big of an impact could this input have on an output I want to improve? Confidence. How confident am I that this input will improve my output metrics? Ease. How easy is it to implement?

Ideas are easy. Execution is everything.

Process beats tactics. Following the Triple A sprint framework puts you on track to grow your business consistently.

In a market where, over the last five years, CACs have increased more than 50 % while willingness to pay is down 30 %, we need to instill a culture of optimization.

The Bowling Alley Framework

The Bowling Alley Framework is a powerful onboarding strategy.

When it comes to increasing your customer base, use bumpers to guide your user to the outcome that your product promises. When users get sidetracked or leave the product, it’s our duty to bump them back in the right direction. To master the Bowling Alley Framework, you need to do three things: Develop your straight line. Create a product bumper. Build a conversational bumper.

As Richard Kipp, CPO at Grow, reminds us, “As you remove pain and friction from your user’s experience of attaining their valued objective, your total addressable market grows.” One of the best ways to remove pain and friction is to develop a straight-line onboarding experience.

A straight line is the shortest distance to get from Point A to Point B. Unlike a sales-led organization, in which the goal is to take people from Point A to Point B in a sales cycle, we want to take people from Point A to Point B in their lives. This is done by letting users try before they buy and doing everything we can to help them experience the value of our product.

As you can see, knowing your users’ intent behind using your product helps us catapult them to the areas where they can experience value as soon as possible.

By bringing our users to the promised land and delivering on our value, the next logical step for them is to convert to paying customer.

How do you develop your straight line? How do you help users achieve their desired outcomes in a fraction of the time? You can do this by: Mapping out the path. Labeling every checkpoint. Developing your straight line.

Map Out the Path.
Label Every Step. Label each step throughout your onboarding experience using the colors green, yellow, or red: Green is absolutely necessary. Yellow is for advanced features that can be introduced later. Red can be removed completely. Removing your red steps and delaying yellow steps moves you closer to building a highway that speeds users to the promised land.
Develop Your Straight-Line. When it comes to your product, cut out as many red and yellow lights as possible.

As in bowling, we need two bumpers to keep our ball out of the gutter. We can use product and conversational bumpers to guide users to a key outcome.

Product bumpers are mission critical. They help users adopt the product within the application itself. Conversational bumpers work to educate users, bring them back into the application, and eventually upgrade their account.

Common product bumpers: Welcome Messages, Product Tours, Progress Bars, Checklists, Onboarding Tooltips, Empty States.
Common conversational bumpers: User Onboarding, Emails, Push Notifications, Explainer Videos, Direct Mail.

Product tours are the ultimate product bumper. They eliminate distractions and give you only a few important options.

Product tours should ask users what they’re trying to accomplish in the product. Product tours should cover important step (s) that set users up for success with the product. High-performing product tours often use a “focus mode” that strips away unnecessary elements, like the navigation bar, until the user completes the product tour. Product tours are typically between three and five steps.

Progress bars indicate how far a user has come, and how far they need to go.

Checklists break down big tasks into bite-sized ones.

Onboarding tooltips help users learn how to use a product. They can reduce the burden on support and scale usability. Use onboarding tooltips to guide users toward experiencing meaningful value in the product. People do not use software because they have tons of spare time and love to click buttons.

Conversational bumpers educate users, bring them back into the application, encourage them to upgrade their account, and notify users of new features. Whether you’re using email, push notifications, explainer videos, direct mail, or even SMS, any communication medium can be a bumper.

Welcome emails have the highest open rates of all user onboarding emails.

Usage-tip emails are helpful nudges that direct users to take steps in the product that set them up for success.

The sweet spot for sending sales-touch emails is as soon as you deliver on your value, according to the UCD Model.

As Joanna Wiebe from Copyhackers notes, case studies are great — as long as you tell the story right. And by “tell the story right,” I mean be a good storyteller: Open with a hook. Lure the reader from one line to the next. Start in the middle of the action. Create compelling characters. Set the story around a central conflict.

Case studies are a powerful way to combat objections. However, sometimes we still need to communicate product benefits. One of the best ways to do this is through better-life emails.

Product-led companies often forget to emphasize the better life that their product offers during the trial period. By assuming users know the benefits, you miss an opportunity to restate your value and build a convincing case.

Too many businesses don’t welcome new customers immediately. Most reach out manually, but it takes time. In the interim, new customers become nervous, wondering if they made the right decision. Don’t make your new customer think twice. Remind them why they made the right decision. Customer-welcome emails are a great way to remind new customers that they made the right choice.

Smart signals tell us when we should send a specific conversational bumper to keep users on a straight line. Here are the four main signals: Signup; Quick win; Desired outcome; Customer. Based on the signal, we can enroll people into different email onboarding tracks.

The focus is to upgrade users into customers. How you reach out depends on your average LTV. If you don’t match your outreach approach with your LTV, you risk running an unprofitable business.

Once a user signs up as a customer, don’t think you’re off the hook. You still have two more levers to pull to grow your business. First, we’re going to cover how to increase your ARPU. Then, we’ll dive deep on retention.

Increase Your Average Revenue Per User (ARPU)

A high ARPU means you can scale faster, use more expensive acquisition channels, and ultimately maximize your customer lifetime value.

On average, a repeat customer will spend 67 % more than a new customer.

For SaaS businesses, here’s the most common way to calculate ARPU: ARPU = Total MRR/Total Users.

Below are some of the best strategies and tactics to improve your ARPU:

Use Value Metrics.
Improve Your Pricing. Tiers Removing unneeded pricing tiers can often increase your ARPU — without raising prices. How? It comes down to the Paradox of Choice, a term coined by Barry Schwartz. It boils down to this: The more choices you have, the less likely you are to choose.
Raise Your Prices. Simply increasing your prices for inflation can have an incredible impact on ARPU over the years.
Treat Your Best Users Like the Queen. With an ideal buyer journey, you can generate 80 % of your revenue by focusing on 20 % of your best leads.
Upselling and Cross–selling.

Slay Your Churn Beast

One of the easiest ways to increase your ARPU is to solve for churn. If you can lock down your churn, you’ll grow your business exponentially— increasing the number of good-fit, high-value customers.

Everyone knows the risk of churn, and yet so few companies prioritize reducing it.

This is crazy, especially when you consider that increasing your customer retention rate by as little as 5 % can increase your profits by 25 – 95 %. This is why a shift from an acquisition-first mindset to a retention-first mindset can have an incredible impact on growth.

According to HubSpot, customer churn is the percentage of your customers or subscribers who cancel or don’t renew their SaaS subscription during a given time period.

A holistic approach measures churn in three ways:

Customer Churn. The number of customers lost in a given time period.
Revenue Churn. The amount of revenue lost in a given time period.
Activity Churn. The number of users at risk of churning due to red-flag activity.

Customer Churn = (Churned Customers/Total Customers) x 100.

Here’s the formula to calculate your revenue churn: Revenue Churn = (Churned MRR/Total MRR) x 100.

How do you calculate activity churn? Unlike customer and revenue churn — where there’s a simple formula — the formula for activity churn is unique to your product.

Step 1: Define Engagement for Your Product Before you start, understand that your product is unique — and, therefore, defining engagement for your product will be different than for other products.
Step 2: Start Tracking These Product Activities (i.e. Events).
Step 3: Weigh Each “Engagement” Event. Now that you’re tracking your important engagement events, the next step is to weigh each event based on its impact, or its importance, to overall engagement with your product. This is an essential step — not all activity is created equal.
Step 4: Give It Context by Normalizing Raw Scores. This is why you need to apply a normalization formula to your raw engagement scores.
Step 5: Apply the Scores to Make Them Actionable. Here are a few ways to make this scoring model actionable: Rank Your Users. Score and Rank Your Accounts. Calculate the Overall Score for Your Product. By calculating a score for each one of your users, you can also aggregate those scores to create an engagement score for your product as a whole. Compare Populations or Cohorts. Correlate with Other Business Metrics. Comparing levels of user engagement to other business metrics like sales, retention, growth, LTV, etc., is a great way to forecast business progress based on engagement levels.

Slaying the Churn Beast:

Measure your churn metrics.
Start customers off on the right foot. A robust customer onboarding process is one of the most powerful ways to reduce churn.
Conquer your ability debt.
Send usage-review emails.
Restate your value when invoicing. When you send invoices, remind people that they’re paying for a product that they may or may not be using. If the latter, remind them why they signed up in the first place.
Create churn-prevention campaigns.
Have a robust cancellation process. Not knowing why your customers churned is a missed opportunity. Maybe users just didn’t understand how to use your product.
Tackle delinquent churn. According to ProfitWell, roughly 20 – 40 % of MRR churn is due to failed credit cards. Putting a system in place to recover these customers can be incredibly valuable.
Invest in customer success.
Fix your pricing.

Why Truly Great Companies Are Built to Be Product-Led

The whole model for how businesses do business has changed, especially for B2B. Today, choices are endless, and the buyer has all the control.

As Pete Caputa, CEO of Databox, puts it: The sales-led way of buying software: Read about the software, create a list of features needed, let sales qualify you, do a demo, and twist their arm so they give you a trial. The product-led way of buying software: Just start using the product. Ask for help if you get stuck. Based on your usage and profile, receive personalized recommendations.

Companies that embrace Product-Led Growth align their business model with an undeniable and enduring consumer trend.

Some definitions

Dominant growth is when you can do something much better than your market and can charge significantly less. Differentiated growth requires you to do a specific job better than the competition and charge significantly more. This is not a one-size-fits-all model.

Disruptive growth is when you charge less for what many might consider an “inferior product.” Most people think this is a bad idea, but it’s not.