Product-Led Growth: Do you know the real value of your SaaS product?
How to use value metrics to understand your customers, and how they helped our portfolio company Meisterwerk find product-market fit
🙌 TL;DR: Jump directly to our slides on value metrics for PLG 🙌
During the past decade, product-led growth (PLG) evolved from a consumer-only play to the most discussed growth strategy for B2B SaaS companies. Generally speaking, PLG puts the product itself at the center of customer acquisition, conversion, and retention, thereby dissolving the traditional functional silos of sales, marketing, and engineering.
The success of B2B SaaS unicorns such as Slack, Twilio, or Airtable clearly showcases the vast potential of this end-user-focused growth strategy. And it’s also reflected by the public markets: As tracked by Openview, the valuations of public product-led companies outnumber those of their sales-led SaaS counterparts. With trends such as the rising consumerization of B2B software and more sophisticated tracking of IT budget in the enterprise, efficient growth strategies focused on user retention become more important than ever.
But as a young software startup, where to begin with the PLG journey? In this article, we dive into the UCD framework (Understand, Communicate, Deliver), borrowed from Wes Bush’s amazingly hands-on book Product-Led Growth, as a good departure for kick-starting your PLG practice. Specifically, we’ll learn how to identify a suitable value metric for your business, and how to put this into action. But we’re not stopping at theory. Using the example of our portfolio company Meisterwerk, we’ll show you how Product-Led Growth can be applied in practice.
1. Forming A Basis for Product-Led Growth: The UCD Framework
The UCD framework presents one of the core concepts from Product-Led Growth and provides the business foundation for product-led strategies. The UCD framework is comprised of three pillars:
- Understand your product value for customers. This fundamental step is all about discovering the actual value customers get out of your product and defining the right metrics to translate this value into measurable numbers, known as value metrics. Value metrics are the centerpiece of every PLG strategy and lead the way for any further action within UCD and PLG overall. We’ll delve more deeply into this part of the framework later in this post.
- Communicate your perceived product value to customers. This step links the product value with pricing. Options for SaaS pricing include best-judgement, cost-plus, competitor-based, and value-based. The latter option should drive the go-to strategy for product-led businesses. By leveraging a data-driven approach including customer and market research, this step assesses questions such as which features should be free vs. premium, as well as the customer’s willingness to pay. Lastly, a clear and simple pricing page on your website presents a crucial element of value communication.
- Deliver your promised product value. While sales and marketing typically promise perceived value, the product delivers experienced value. Both should be aligned to avoid a value gap. Value gaps lead to dissatisfied customers, which in turn lead to churn and lost revenue. To protect against a leaky funnel, it’s important to identify and eradicate reasons for value gaps early on. These could be unnecessary points of friction (ability gap), lack of understanding the customer, or poor communication, such as overpromising.
Altogether, the UCD framework aims to attach a monetary value to the value the product provides for the customer. This framework helps to pragmatically prioritize product features, focus on the right target customer, streamline product journeys, and optimize pricing.
As touched upon above, understanding the value of the product for the customer and developing a metric-driven mindset around the actual product value is crucial for the implementation of further PLG initiatives. Let’s dive deeper into value metrics and how to leverage them to acquire more customers, grow revenue, and reduce churn.
2. Putting Meaningful Outcomes at the Center of Product Strategy: Value Metrics
To start off with the core drivers behind value metrics, let’s ask a crucial (if not the most crucial) question for every software company: Why should customers buy the product?
As proposed in Product-Led Growth, every SaaS startup should take even one step further back and determine which outcome is sold to the customer. Let’s take Calendly as an example. Customers don’t buy Calendly because they need an auto-scheduling tool for meetings. They buy Calendly because they want to dedicate less time to tedious email ping pong and more time to tasks they actually value. Similarly, Slack doesn’t sell business chat software, but offers instead a boost in productivity and team collaboration.
Extending this vein of thought, there can be several dimensions of outcomes that customers expect from a product, i.e. functional, emotional, or social. As a software startup, you must have a clear understanding of all the outcomes that potential users are looking for in your product. To operate in a truly “product-led” fashion, you must monitor, validate, and challenge your assumptions about the customers’ underlying motivations to buy. In order to do so, you’ll need to use real-world data based on ongoing customer research. This is where value metrics come into play: they enable companies to measure, analyze, and compare patterns and drivers that lead users to meaningful outcomes on a consistent basis.
In short, a value metric can be defined as a “KPI to measure value exchange with the product.” To illustrate how value metrics represent the central product-based outcome, let’s look at some hypothetical examples:
As one can see from the above examples, value metrics not only enable the customer to grasp the product value, but also provide a basis for a pricing strategy. Take Slack for example: with the theoretical value metric “number of sent messages,” once a user exceeds a freemium level of messages exchanged, they’re required to upgrade. However, it quickly becomes obvious that value metrics are highly individualized for every company and can be tricky to establish at first; why would Slack select “number of sent messages” and not “number of chat groups” or “number of emoji reactions”? How did they arrive at this particular metric? And what does a good value metric look like?
Although there is much variation between KPIs, the essential characteristics for good value metrics share common traits:
a) Easy to understand for the customer: Each customer should be able to look at your pricing page and know immediately what they’ll be charged for. When operating in established markets, there is no need to reinvent the wheel — competitors’ pricing pages can provide guidance and often use metrics your potential customers already know. For blue ocean markets, however, it makes sense to draw instead on a data-driven approach backed by customer research.
b) Aligned with the product’s value for the customer: The value metric should be built upon the actions within the product that a customer needs to do in order to achieve the specific desired outcome. Therefore, it’s crucial to understand which product components actually lead customers to this outcome and measure their usage, as the above examples indicate.
c) Grows with the customer’s usage: Put simply, the more a product is worth, the more it should cost. As customers are willing to pay more for the desired outcome and start using the product more and more, the pricing should reflect this and they should be charged more. This also goes for the opposite situation: charge less for less direct value, e.g. inactive users.
Bearing these criteria in mind, the right value metric can be put into action. Product-Led Growth details a 3-step process: the subjective analysis, brainstorming a possible value metric; a data-driven approach, incorporating highly targeted audience questions to define the “best” and “worst” customer; and a preference analysis, stress-testing the proposed metric with a simple questionnaire.
To dive into more detail about the process and get an overview of questions for customer research and more, 👀 have a look at our slides on value metrics for PLG.👀
While the above examples reference established SaaS companies, what might the process of establishing value metrics using PLG look like for startups still in their earliest stage? To shed some light on the real-world use of PLG concepts, let’s now bridge the gap from theory to practice. Our portfolio company Meisterwerk shares their experiences with value metrics and UCD implementation below.
3. Towards a Product-Market Fit: Putting Assumptions to the Test at Meisterwerk
Meisterwerk, a signals portfolio company, provides a powerful resource and job planning automation solution for craftspeople and construction SMEs. With Meisterwerk, this as yet under-digitized industry has a powerful tool to automate tedious tasks such as manual shift planning, appointment coordination, or communication between back office and field workers.
For Meisterwerk’s CEO Bertram Wildenauer, the main customer pitch was clear from the start:
“When we talked to craftspeople, we built our central sales message around the efficiency gains in scheduling workers and coordinating jobs. From our view, the time and money savings realized with Meisterwerk were exactly the solution they were waiting for.”
This clear value proposition worked out well for quickly acquiring a noteworthy number of first licensed customers and trial users. But soon, Bertram and his team observed rising churn rates.
After first experimentation with other product-led concepts, Meisterwerk decided to get to the bottom of churn causes with a holistic PLG approach. At first, they crunched user data. The team identified churn patterns between different sub-categories of craftspeople and company sizes:
“We observed huge differences in the retention rates of different types of craftspeople. Even more surprising for us was that they dropped out at different stages of Meisterwerk usage. Some did not manage to plan even one appointment, while others logged in every hour.”
It was clear that only a deep understanding of these churn patterns would help Meisterwerk iterate towards a product-market fit. Bertram stresses that these insights also impacted their tech and product strategy:
“With limited product resources, we needed to establish clear priorities on features and drop the ones our customer base didn’t expect from our solution.”
Bertram and his team then kicked off the foundation of their PLG strategy. They started refining their value hypotheses with UCD. Specifically, their focus was to “Understand” and establish value metrics for future PLG implementation. Mapping out each stage of the customer journey and identifying specific pain points for different steps resulted in their subjective analysis.
“We asked: What are the main friction points that annoy users to the extent that they might drop out? Where does actual value kick in for them? This reverse engineering of the customer journey together with our churn analysis laid the basis to run customer interviews. We got a better picture of our power users, churned users, and possible drop out points.”
Still, as they saw efficiency as the main customer outcome from Meisterwerk, they assumed the number of jobs started was their key value metric.
Subsequently, this allowed them to look for patterns among best and worst customers using the data-driven approach and collect customer feedback with user interviews. The difference between power and churned users revealed surprising insights:
“Churned users were stressing that while they expected everything to be faster, they were actually overwhelmed with the tool setup. Planning jobs in fact took even longer compared to their accustomed WhatsApp ping pong and phone calls.”
While Meisterwerk did not live up to the promised value for these customers, the power users saw much greater value in other outcomes with Meisterwerk:
“Our best customers had multiple sessions per day, even though for them the job planning took initially longer than before, too. Yet, they were thrilled about the structure and transparency Meisterwerk provided them from one day to another. Having a single overview of current data for all current projects really solved a big pain for them.”
Armed with this fresh take on their product value, Meisterwerk used stress testing in order to find out if the features that provided transparency and overview were more important than the ones that helped users to save time. Contrary to their initial belief, the features for time efficiency were not the ones seen as the most crucial. Again, Bertram and his team uncovered that the exchange of job information really made a difference for their customers. And this value grows even more, the more information is shared through the tool. So, Meisterwerk established a new value metric, the number of sessions.
After this iterative process, Meisterwerk had a much better understanding of how they could align customer expectations with their communicated value proposition:
“It allowed us to take much more qualified management decisions, streamline the sales process and re-prioritize our feature roadmap. We act faster, more agile and more efficient with our own team resources.”
Going forward, Meisterwerk is excited to continue incorporating product-led tactics along their journey, such as time-to-value optimization or value-based pricing. Yet, Bertram stresses that PLG frameworks neither present a holy grail nor is their experience directly transferable to other startups:
“There is no one-size-fits-all approach. PLG provides great frameworks, yet it must be seen as only one possible way to solve your individual problem. There are still millions of management decisions in an early-stage startup where PLG does not help.”
In conclusion, it’s crucial to always keep the individual startup’s case in mind before blindly implementing PLG frameworks: Do I already have enough customer data to make data-driven product decisions? Is pricing or hiring more important at this stage? Does PLG suit my enterprise audience? Product-Led Growth emphasizes that considerations such as these are part of the journey towards a product-led company itself.
After this first showcase of how value metrics lay the foundation for a broader PLG strategy, we will discuss other PLG concepts in future blog posts. Until then, don’t forget to check out our summary of the value metrics chapter of Product Led Growth. Stay tuned!
About signals Pre-Seed
signals is your trusted business partner, mentor, and investor in one. We support founders with more than money.
The signals Pre-Seed Program invests in B2B software-based solutions for small and medium-sized businesses as well as in category-defining solutions for enterprises in the DACH region. We invest up to €250k to provide early-stage founders with an adequate runway. In addition to this, we provide founders with individualized mentoring and office space where and when needed so they can concentrate on what matters most — working on their product and gaining customers.
signals Pre-Seed is a joint investment program of signals and signals Venture Capital. signals Venture Capital deploys a €100 million venture capital fund, focusing on Seed and Series A stage startups with software-centric B2B business models across all enterprise segments. The portfolio companies benefit not only from classic venture capital support, but also from the extensive signals ecosystem, comprising renowned German and European partners, industry experts, and diverse distribution channels.
