Transcript: https://docs.google.com/document/d/1A3HHVeZjE3zIjUvqcDcOPSWmE0rmU5ZtFAlro2ydwrs/edit#heading=h.jco5qalut5ep

CHAPTER 2: The Crux Of The Product-Led Growth Strategy

Free the child’s potential, and you will transform him into the world.

-Dr. Maria Montessorri

The first few years of a child's life are crucial. They are the foundation that shapes children's future health, happiness, growth, development, and learning achievement. Children need proper nourishment, care, and love to blossom into their true potential. After all, these early years lay the foundation for future success and prepare them to become contributing members of society. 

This is what Dr. Maria Montessori discovered in 1907 when she opened a school in a slum-ridden district of Rome. Montessori’s “school” was just a few rooms in an apartment building intended for poor families. Her students were a group of three to six-year-old children who had never stepped foot inside a classroom before. Most expected her to fail.

Montessori got to work to implement the educational materials and methods she developed. She replaced the heavy furniture with child-sized tables and chairs light enough for the children to move. She brought in low shelves so the children could access educational materials on their own. Montessori also gave her students the freedom to choose and carry out their own activities at their own pace and following their own inclinations. 

Thanks to her methods, the children started showing extraordinary understanding, activity, and confidence. By working independently, her students became autonomous and self-motivated. 

News of these remarkable children began to spread. People around the world began to visit the classroom. No one could believe the children’s transformation until they saw it in person. Even Queen Margherita of Italy’s royal family made her way through the slums of San Lorenzo to see them! 

And it all started with Dr. Montessori’s belief that a child’s potential can be unlocked early on with the right methods and materials in place.

Much in the same way, the earliest stages of the customer journey are crucial in setting new users up for long-term success. By treating them with intentional care during the user onboarding, you lay the groundwork for everything to come. As discussed in the previous chapter, user onboarding directly impacts the future growth of a product, and it starts during the first steps in the Pirate Metrics Framework.

In this chapter, you’ll learn the three reasons why user onboarding is so important in a product-led growth (PLG) go-to-market approach and why it’s often overlooked and neglected by companies. We’ll also look at the five signs of bad user onboarding experiences.

Three Reasons Why User Onboarding Is Important 

Data doesn’t lie – user onboarding is the crux of the product-led growth strategy. It’s where it all starts. 

Here’s why. 

1. User onboarding is a retention lever

No matter what industry you’re in, the best customers don’t abandon you after their first purchase. They come back time and again for more. 

Though it’s an often overlooked metric, retention plays a significant role in boosting revenue. That’s because it increases the customers’ lifetime value (CLV). 

Retention starts with user onboarding – and the numbers prove it.

ProfitWell studied about 500 different software companies spread between business-to-business (B2B) and business-to-consumer (B2C) companies. They found that customers with a positive onboarding experience were more likely to stick around than those who weren’t happy with it. 

Hubspot saw this first-hand with Sidekick, an email tool for salespeople. After making positive changes to the way they nurtured new customers in Week One, they saw a 15% lift in retention during that week. This catapulted into a 50% increase in retained users after ten weeks. 

What happened at HubSpot Sidekick is not an outlier.

InnerTrends saw similar data points: users who completed the initial onboarding process were 38% more likely to return one week later. 

But it goes even further than that. The effects of user onboarding are even more pronounced once users hit Week 12. For those who completed InnerTrend’s onboarding process, the retention rate is almost three times higher. 

When someone first signs up for a product, they’ll either love it or leave it. Those that are successfully onboarded see the value from it and are more likely to stick around, even years later. 

This is especially true for SaaS companies: 

In working with a number of SaaS portfolio companies, I have found that there are two causes of churn that occur more frequently than any others. They are: failure to successfully onboard the customer and loss of the champion who drove the purchase.

- David Skok, General Partner at Matrix Partners

2. User onboarding is a revenue multiplier

A truly fabulous user onboarding experience converts to a revenue multiplier. This is a direct result of improving retention. 

We have the numbers to prove it (get ready for some math!). 

Let’s go back to the example from HubSpot, where they saw a 15% increase in retention across ten weeks as a direct result from improving user onboarding. 

How much did their revenue increase because of this change? 

Let’s say they started with 1,000 users and charged each user $5 per week without a free trial period.

Here’s how the original retained users and revenue would break down (assuming user retention is proportional to revenue retention): 

If you add up the revenue across all ten weeks, it adds up to $21,275. Assuming the revenue and retained users remain the same for the rest of the year at $750 each week after Week 10, the revenue totals $52,775 in 52 weeks.

Now let’s compare that to what happened when they nurtured new customers properly with an improved experience:

Revenue from Week 0 to Week 10 adds up to $26,425.

Even more remarkable is if the number of retained users and revenue remain the same for the remainder of the year after Week 10. That’s $78,925 in annual revenue, which is a striking 50% increase.

All thanks to a better onboarding experience!

Imagine this is for one cohort of 1,000 users. 

Let’s assume that they can consistently get 1,000 new users to sign up each week for the rest of the year. If we assume their new signup growth remains flat at 1,000 new customers per week for one year, the improved user onboarding experience would account for a massive increase of 49% to the monthly recurring revenue (MRR)! 

So you see, small improvements in treating new customers with care can result in enormous growth.

Plus, those who have a positive onboarding experience are more willing to pay.

The point? User onboarding really does set the stage for future success and has a huge impact on your revenue growth.

So it comes as no surprise the biggest weakness in growth stems from that initial first impression:

The real growth problems start when people land…and leave. They don’t stick. This is an onboarding problem, and it’s often the biggest weakness for startups.

- Casey Winters, Chief Product Officer at Eventbrite

3. Good User Onboarding Leads To Lower Customer Acquisition Costs

If having an incredible user onboarding experience is a retention lever and revenue multiplier, bad onboarding can lead to higher Customer Acquisition Costs, or CAC. 

The CAC is easy enough to calculate. Divide all the costs spent on acquiring customers (a.k.a. marketing expenses) by the number of customers acquired in the time period the money was spent. 

For example, let’s say a company spent $100 on marketing in one year and acquired 100 customers in the same year. Their CAC is $1.

Let’s revisit the previous example of Hubspot Sidekick. To recap, here’s what the number of retained users look like in the first 10 weeks for each experience:

Let's assume it costs $2,000 to acquire 1000 new users and, in this scenario, there's a seven-day trial.

After one week, they have 600 paying customers with the original onboarding or 750 customers thanks to the new onboarding. That amounts to a CAC of $3.33 for the original onboarding or $2.67 for the improved onboarding.

A 15% increase in retention means CAC went down by 20%.

Which one would you prefer to see in your company’s own metrics? 

Alright, let’s put this another way.

Perhaps you spend $1 to acquire new signups, converting at 1%. That CAC is $100. But, if you optimize onboarding and increase the percentage of active users who become paying customers from 1 to 2%, that CAC cuts in half to $50. 

Excellent onboarding has an abundance of payoffs: it leads to higher activation rates and, subsequently, a lower CAC. 

If you’re losing 60% of your new users after the first session, it doesn’t make sense to spend a ton on acquiring signups or your CAC will be high. The unit economics will not work out. 

- Francois Bondiguel, Growth Lead at Canva

The Ugly Duckling of Growth – User Onboarding

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