Product-Led Growth Template to Model MRR Growth

Product-led growth (PLG) is a go-to-market strategy where companies leverage their product to serve as the primary driver of customer acquisition, conversion, and expansion. Many SaaS companies such as Slack, Airtable, and Dropbox implemented a PLG model and quickly became some of the fastest growing and most efficient SaaS companies in the market. When a few companies experience this magnitude of success, others tend to quickly follow suit. Venturebeat estimates that 58% of SaaS businesses already have a PLG strategy in place and 91% plan to increase their investment in PLG.

With 91% of SaaS businesses investing in product-led initiatives, there doesn’t seem to be a wealth of modeling resources available to help these businesses understand how to model their acquisition, conversion, and expansion. And since the self-service PLG model is significantly different from a traditional sales-led GTM approach, it requires a different approach to modeling.

Create a Plan to Set Company Growth Targets and Measure Product-Led Performance

This interactive model seeks to help businesses understand how to model product-led growth and create a plan to measure their performance against. The goal is to be able to model the acquisition of free users, the conversion of free users to paid users, and the expansion of the customer base over time.

This is important for businesses pursuing PLG strategies, so that they can set expectations for the business and have a plan in place to retroactively measure performance against. By breaking down the various steps of acquisition and conversion, businesses can identify the areas where they are executing well and the areas where they are leaving money on the table.

Template Inputs & Forms

When you’re creating a thorough MRR model, there tends to be a significant number of inputs that can be adjusted to change the outlook of the model. To avoid overwhelm for the simple use cases, you can create a more basic version with only a small subset of the inputs used in this version. For a basic high-level model, we’d recommend using inputs for Start Month, Visitor to Free Conversion Rate, Free to Paid Conversion Rate, and ARPU.

Start Month

The first month you expect to launch your product and begin generating free and paid users‍

Visitors in Month 1

The total number of visitors you expect to land on your product in the first month‍

Monthly Visitor Growth Rate

The percentage of growth in monthly visitors that visit your product

• We recommend breaking this growth rate input into multiple periods that make sense for your GTM plan. In our app, we broke out the monthly growth rate by year so that each year can have a different expected visitor growth rate.‍

Visitor to Free Conversion Rate

The percentage of visitors that landed on your product and converted into free users of your product‍

Free User Retention Rate

The percentage of free users that you expect to remain active in using your product each month‍

Free to Paid Conversion Rate

The percentage of free users that have tried your product and convert into paid users‍

Gross Churn Rate

The percentage of paid users that you expect to churn each month‍

Average Invitations per Free User

The average number of users that each free user invites to your product each month (this helps to factor in the virality of product-led software)‍

ARPU (average revenue per user)

The average revenue generated per user. Typically this is measured as a monthly figure‍

Net Expansion Percentage

Based on the previous month’s MRR, the net percentage of expansion MRR expected in the current month

Data Sources

You don’t necessarily need any datasets to properly set up the model. If you already have a product in market, then we’d certainly recommend using your current product metrics to feed the model.

It is often helpful to use external datasets as a guide for setting the target benchmarks. If you need a few references to help determine where to set your inputs, these resources may be helpful:

• Openview
• Recurly

Setup and Methodology

Columns: Monthly time series, starting with the current month, projected for 48 periods.‍

Rows: For each month in the time series, calculate the following:

• Total Unique Visitors: Insert the Visitors in Month 1 (input) into the start month (input). For each month thereafter, multiply the previous month’s unique visitors by the monthly visitor growth rate (input). Each month before the start month should be null
• New Free Users — Invited: Multiply the total unique visitors by the visitor to free conversion rate (input)
• Churned Free Users: Multiply the prior month’s total active free users by one minus the free user retention rate (input). Be sure to use parentheses.
• Converted Free Users: Multiply the prior month’s total active free users by the free to paid conversion rate (input)
• Total Active Free Users: Calculate the cumulative active free users at month end by taking the prior month’s total active free users and adding the free users converted and the free users invited and then subtract the churned free users and the converted free users
• New Paid Users: Set this equal to the converted free users already calculated
• Churned Paid Users: Take the prior month’s paid users and multiply by the gross churn rate (input)
• Total Paid Users: Calculate the cumulative paid users at month end by taking the prior month’s paid users and adding the new paid users and subtracting the churned paid users
• New MRR: Multiply the new paid users by the ARPU (input)
• Churned MRR: Multiply the churned paid users by the ARPU (input)
• Expansion MRR: Multiply the prior month’s total MRR by the net expansion percentage (input)
• Total MRR: Calculate the cumulative MRR at month end by taking the prior month’s MRR and adding in the New MRR and the expansion MRR and subtracting the churned MRR

Output

By creating this model, you should be able to calculate the total number of free users, paid users, and MRR for each month in the model. Beyond that, you should also have a framework in place to break down each of those metrics into the different acquisition, conversion, and expansion metrics to understand successful and problematic areas in your product-led funnel.

To best visualize user and MRR growth over time, consider using the following visualizations and key metrics:

Visualizations to Consider:

• MRR waterfall chart to show beginning MRR, New MRR, Churned MRR, Expansion MRR, and Ending MRR
• Funnel diagram to show visitors converting to free users converting to paid users
• Area chart to plot MRR growth building over time
• Table with the model details that allows stakeholders to filter by month

Key Metrics to Consider:‍

• Total MRR after 12 months post-launch
• Total free & paid users after 12 months post-launch
• Time in months to hit $5K in MRR
• Time in months to hit $10K in MRR
• Time in months to hit $100K in MRR

Conclusion‍

Setting company growth targets before you’ve launched a product can feel overwhelming and a bit handwavy. Putting together a model can help to organize your thinking and build conviction in the targets that you set. In the end, the model will still rely on your best guess. But at least it provides a concrete framework to look back on and adjust as you go to market.

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Originally published on the Superchart site. Find the most recent version of Rule of Thirds for Slides from the original post.