The best metric to track product-led growth
Metric Stack 13: Natural Rate of Growth and more!
This week's metric stack is going to feel new and refreshing. That's because we'll be exploring a relatively young metric that focuses purely on organic growth. It's a must have for any company that believes in or is looking to get started with product-led growth.
Welcome to Metric Stack. I’m Priyaanka Arora, your personal metric assistant and content researcher and writer at Klipfolio. In this edition of Metric Stack, let's look at Natural Rate of Growth.
What is Natural Rate of Growth?
Natural Rate of Growth (NRG) measures how fast your company is growing organically, through organic signups, incremental revenue achieved without sales involvement, and other organic sources of growth. Here's the formula:
Natural Rate of Growth = Annual ARR Growth Rate * Percentage Organic Signups * Percentage ARR from products
What are you really measuring with Natural Rate of Growth?
It's hard to measure SaaS with traditional financial metrics because cash flow ends up being a backwards-looking metric, with high acquisition costs and longer payback periods. That's when SaaS-specific metrics such as the Rule of 40 and LTV:CAC Ratio emerged, focused on sustainable growth.
At some point, SaaS leaders shifted focus from revenue to growth to the product-led growth (PLG) model, which measures business success through product performance and usage.
But what metrics should you use to measure product-led growth?
You can start with NRG, which essentially tracks annual growth rate achieved purely with your product as the cause of growth. Here’s how you would calculate it:
Say your annual ARR growth rate is 100%. Next, you determine that about 90% of your incremental revenue is achieved without any intervention from sales aka customers decide to upgrade solely based on their experience in the product. Finally, 90% of all signups to your product are organic, say through your website traffic or social media campaign. With a bit of calculation, you have an NRG of 100 * 0.9 * 0.9 or 81%. Is that good or bad? Well, you can find out by taking a look at some benchmarks!
What is a good Natural Rate of Growth Benchmark?
Based on this article from OpenView, the best Natural Rate of Growth can range between 50% to 150%, depending on your Annual Recurring Revenue (ARR) scale. Take a look at this table:
Let’s go back to the example we looked at before, where we calculated that your hypothetical company has an NRG of 81%. Assuming your company’s ARR falls between $1M and $10M, that’s considered a good NRG but as you can see, an NRG upwards of 100% is considered better, and >150% is the best NRG you can achieve for your ARR Scale.
Why you should track Natural Rate of Growth
Maybe it feels like NRG is just another fancy new metric to add to the extensive list of SaaS metrics to track. However, you should know that unlike traditional SaaS metrics, NRG measures product-led growth (PLG): the new revolution in growth models.
PLG emerged out of necessity to respond to changing customer behaviour. Especially if you're in software, customer buying patterns have changed. It is so much easier to access information. It takes much less time to review multiple products and isolate the product with the best features worth investing in. As a result of this, customer expectations have increased.
How do you adapt your business for today's informed customer? You place your budget, attention, and efforts into innovating and improving your product. The key benefit is that it’s likely your product will almost sell itself.
That’s exactly what NRG measures: does your product sell itself, based on its innovations, features, and the problem it solves?
If so, how fast? Through what percentage of organic new users and organic incremental revenue?
Literally all of these questions can be answered with this one powerful metric - Natural Rate of Growth. So if you haven’t already, start tracking the key metrics that indicate the strength of your product as a standalone solution to customers’ problems.
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Stay tuned for the next edition of Metric Stack Newsletter to get the latest scoop on all things metrics! Send feedback, comments, questions here: parora@klipfolio.com