This is a follow-up to a post we did for our friends over at Chameleon. In that post, we talked about how Product Qualified Leads (PQLs) can be used as a unifying metric for SaaS teams - especially product-led SaaS teams. In this post, we’ll dive deeper into how you can craft key metrics based on your Product Qualified Lead process.
Why is this important, you ask? Why should you even bother?
Well...because strong Product Qualified Lead metrics represent nothing short of validation of a product-led business model. Can you get a new account to go from sign-up to first value to a paid conversion effectively - and at scale? These PQL metrics will, in many ways, help you understand if you are executing well on your chosen go-to-market strategy. So...yeah...no big deal.
For those new to the game - let’s start out with the basics.
At a high-level, a Product Qualified Lead is:
A free or trial account that has gotten to a point of initial value with your product.
This is an essential classification for businesses that allow prospects to use the product before committing to a purchase (try-before-buy). These businesses require a way to qualify new trial (or free) accounts based on how they are (or are not) using the product. Prospects that have reached initial value are more “qualified” than those that haven’t because they are more likely to convert to a paid customer.
💡 It’s a pretty simple concept, but if you’d like to dive deeper, here are a few good resources:
The first step in using PQLs as the basis for higher-level KPIs is to define PQLs for your product. Every product is unique, so how you determine if an account is “product qualified” will be unique as well.
To define “product qualified”, first determine the 4, 5, 6+ things that a new account will need to do in order to reach a point of initial value—a point of Activation. For example, if you offer a project management tool, you might determine that initial value is achieved when an account completes these actions:
For this product, accounts that do all of these things would be considered Activated during their trial. These accounts have used the product’s core functionality and should, at this point, be able to properly assess its value.
You could determine that an account is “product qualified” after completing all of these actions or you could define “product qualified” as an account that completes 50% of these actions (we would refer to this as 50% Activated). It’s really up to you. But once you settle on a definition, then you can start measuring PQLs for your business.
Once you have defined PQLs for your business, there are four specific metrics that you should start to track:
The first (and easiest) thing to measure is raw PQLs. You are going to want this number in two contexts -
At any given time, you should know how many Product Qualified Leads exist in your current pipeline. Just like you would with MQLs and SQLs (in another life 😉). Knowing how many PQLs exist in your current pipeline is essential for understanding the volume of leads moving through your “sales” process and is key for generating short-term new revenue forecasts.
While measuring current PQLs is essential for short-term planning and forecasting, measuring PQLs over time helps you understand PQL trends - the directionality and rate of your growth (if any). Are we attracting more PQLs on a monthly basis? is a fundamental question you should be able to easily answer. It will help you understand if your overall operational volume is growing or shrinking and if you need to make staffing changes to accommodate.
Along with measuring the raw number of PQLs you are recording in a given period, it is equally important (I would argue MORE important) to measure a PQL rate.
A PQL rate is the percentage of new signups that reach PQL status in a given time period. This is an essential metric because it lives independent of the number of signups you are receiving. A PQL rate is a better measurement of your activation process than raw PQL numbers.
So, if you land 10 PQLs last week—is that good? Well…it depends, how many signups did you get?
If you had 10 signups and scored 10 PQLs…I’d say that’s very good. But if you got 1,000 signups and landed 10 PQLs. Hmmm... 😞
Look at the table above and think about which business you’d rather have.
High PQL rates speak volumes about your current Activation process. You could even be so bold and call it Product-Activation fit (yikes! no…let’s not do that). But it explains whether or not you have built a product that can deliver quick value to its users and built an onboarding/activation process that effectively ushers new accounts to that point. A high PQL Rate is a green light to invest more in top-of-funnel acquisition.
Low PQL rates mean…well, the opposite. It can mean there are issues with your Activation process—that could mean there are problems with your in-app onboarding, messaging, support, etc. It could also be a sign that your product isn’t built in a way that will easily allow users to find their way to first value easily, you want them to find their “aha moment” as soon as possible. It also might mean that your offering is simply not well suited for a product-led motion.
It’s not hyperbolic to say that this metric - the PQL rate - is a metric that speaks to how you are executing on your chosen business model. It’s really that important.
This is a measure of how long it takes a new account to reach PQL status. Obviously, it’s your goal to get new accounts activated as quickly as possible, so you should measure how long it takes. If you offer a 15-day free trial, you clearly want to have new accounts become activated during that period - ideally on the front half of that period. If accounts are reaching first value one day before a trial ends - it’s going to be difficult to drive strong conversion rates.
Which leads us to…
This is where the money’s at - literally.
A PQL to Paid conversion rate metric helps you understand if your offering is delivering enough value to convince people to actually pay for it. To calculate a PQL to Paid conversion rate, simply divide the number of accounts that went from PQL to Paid by the total number of PQLs in a period.
Converting PQLs into Paid customers at a high rate is a very promising sign. It means that it’s clear to your users the value they will gain when they start paying for your product. It means that your upgrade flow is working well (if you offer self-serve upgrades) and/or that your Sales team is clicking. With that said, if you are converting at too high of a rate, it may mean that you are pricing too low—leaving money on the table!
If your PQL conversion rate is too low it could mean a few things.
As mentioned in our Chameleon post, PQL-based metrics represent one of the few collaborative SaaS metrics. They can help unify the efforts of your entire go-to-market team. They help inform and validate the work of your product, marketing, sales, and customer success teams.
Because each of the above metrics tell a slightly different story, here is how each team should be thinking about them:
Obviously, the Product team sits at the center of any product-led operation, so these metrics should be core to their activity. If a product team can’t work to drive PQL-based metrics, it is failing in a large part of its job. Here is how the Product team should be using each metric:
Leads - of any kind - are generally under the purview of the Marketing team. PQL metrics are, therefore, right in their wheelhouse.
PQLs represent highly qualified leads for sales. They are the accounts that are the most likely to close, so the sales team should be rooting for as many of these puppies as possible (in the past, I was part of a team that actually referred to PQLs as "puppies").
I know we traditionally think of Customer Success as further “down the line” than the teams traditionally thinking about “lead” metrics, but that’s a mistake in SaaS. Customer Success teams need to be connected to PQL metrics because (a) they are often directly and indirectly involved with helping activate trial accounts; and (b) PQLs are more likely to become long-term, highly engaged customers. Brining in new, paid customers which have not reached first-value with the product is generally a big red-flag for the CS team.
And, of course, PQLs will resonate right up to the board level because more PQLs mean more closed deals. Higher PQL rates and PQL to Paid conversion means more efficient sales. Lower CAC. More top-line growth. More overall business value. Giddy-up!
As you can see, everyone on the go-to-market team has an interest in strong PQL metrics - making them a rare, truly collaborative metric.
All of the above are PQL-based metrics for you to be tracking. But every metric you track can’t become a company-wide KPIs. You should have a PQL-based metric as a KPI, but you will want to choose which metric to elevate to KPI status based on what is most important to your business at that time. For example:
You should be tracking all of these PQL-based metrics—but you can adjust your KPI focus over time based on which metric makes the most sense for your business at that time.
Phew…you still with us?!?! If so - we’re impressed!
You can use the below chart as a summary of the discussion in this post. How you find it helpful!
Did we miss anything here? Let us know - would love to keep the conversation going!