Four North Star Metrics to Scalable Product-Led Growth in K12 B2B
Growing evidence shows that the path to sustainable, scalable growth in K12 B2B is through product-led growth (PLG). While not for everyone (for example, enterprise systems with lots of configuration, implementation, and training required), PLG has emerged as a key strategy for companies to scale faster and more efficiently while keeping costs low. That’s why leading K12 B2B companies such as Pear Deck, Seesaw, Newsela, Mystery Science, Remind, Nearpod and more have adopted product-led growth.
A prerequisite to becoming a product-led company is internal alignment around the metrics that drive sustainable growth, such as customer lifetime value, engagement, and retention.
As Mark Roberge, Managing Director of Stage 2 Capital, points out, there are four sequential North Star metrics to align your team around. Mark beautifully lays out how to do this in the broader B2B context. The good news is that this is a playbook any K12 B2B team can follow to successfully implement PLG. The bad news is that it’s hard to do, is best done early in the lifecycle of a startup, and often requires some major organizational changes to do well. I’ll discuss this sequence of North Star Metrics in the context of K12 B2B startups and share my thoughts on readiness to raise capital and from whom at each stage of the process.
North Star Metric #1: Establish Flow of Free Users for Experimentation (i.e., new users per day)
In K12 education, a startup needs to have a large number (N) of potential users to establish this flow of free users, so it’s smart to focus on students (50M+ in K12 schools) and/or teachers (3.5M+ in K12 schools). Since there are relatively small numbers of administrators (e.g., ~150K Principals), it’s much more challenging to focus a free product on administrators with the expectation of acquiring a large number of free users. There’s no exact number a startup needs to hit to achieve this flow, but whether you measure it on a daily or a weekly basis, you’ll want enough flow to be able to perform a variety of experiments. Obviously, the more free users you attract the better, and startups in this phase often use viral and/or paid marketing tactics to accelerate user adoption in the earliest stages.
At this stage, startups are typically self-funded. Some fortunate founders can tap friends and family in a pre-seed round to raise the funds needed to reach metric #2. Individuals who invest at this stage will need to have a lot of conviction in you and your team and/or the market you’re addressing because it’s still too early to know if your product-led growth plans are going to be successful.
North Star Metric #2: Prove Retention of Free Users (i.e., new user → % Daily Active Users (DAU) or % Weekly Active Users (WAU))
Once you establish a free flow of free student and/or teacher users, you’ll need to prove you can retain them to show that the product consistently delivers on its value proposition. There are two approaches that are helpful here.
First, you can assess the usage retention of users using cohort analysis. Brian Balfour elegantly illustrates how to evaluate user retention. The process starts with a definition of usage retention such as Daily, Weekly, or Monthly Active Users (DAU/WAU/MAU), but other metrics tailored to the startup’s value proposition can be used. Essentially, you’re looking for “quality sign ups,” which are free users that correlate with long-term usage. This LinkedIn article sums up how to think about and determine quality sign-ups.
Once you have data on usage, Balfour suggests that you organize the data by cohorts where each color represents users acquired during a specific period of time (monthly in the examples below). The shape of the curve represents the percentage of those users that remain active over time. If the curve, flattens out like in the first illustration below, then free active users are going to zero over time and growth will flatten out. If the retention of free active users levels out at an acceptable rate, then free active users will continue to accumulate and growth will accelerate like in the second illustration below. This is the result that you want before moving on to metric #3.
Second, another great way to prove retention of free users is to measure the importance of your free product by user. This approach, which comes from Sean Ellis, involves asking users a simple question — “How would you feel if you could no longer use the product?” — and lists three possible responses, which are Not Disappointed, Somewhat Disappointed, or Very Disappointed. Ellis recommends focusing on improving the product until your survey results yield at least 40% of respondents would be very disappointed if they could no longer use the product.
As Mark Roberge points out, it’s important to note that customer user segmentation is vital. The goal isn’t necessarily to reach the point where 40% of all respondents would be disappointed if they could no longer use the product, but instead to achieve this with some sizable portion of the user base. For example, if the audience is K12 teachers, you could achieve this goal by getting 40% of some significant segment of teachers. Perhaps you reach 40% with math teachers or K3 teachers, which would enable you to move on to metric #3.
Remind, an education communication platform, is an exemplar in K12. The team focused their energy in the early stages on retaining customers who used the product for the first time. Through a continuous process of experimentation with their users and diligent cohort analysis, they’ve grown to serve tens of millions of repeat users of their messaging platform. Impressively, they still retain a large percentage of users from their early cohorts shortly after they launched the business in 2011.
With retention working and an increased number of free users who get value from your product, it’s at the metric #2 level that some K12 founders can test the waters in raising a pre-seed round outside of friends and family. Founders with a successful track record and investor relationships are likely to have more success at this early stage than those who are working in their first startup and/or don’t have an investor network.
North Star Metric #3: Prove Acquisition of Quality Users at Scale (i.e., Low Cost per Quality User)
This is a critical metric. Once you demonstrate that you can acquire users freely and retain them, now you want to prove that you can acquire more at a low cost. So, we have a product that 100 teachers love. How do we reach 500, 1,000, 10,000 and more? You’ll want to develop at least one scalable user acquisition channel that acquires more teachers that love the product at a reasonable Cost of Acquisition per Customer (CAC). Because low-cost channels are needed, many of the most successful K12-focused firms have used virality or word of mouth (e.g., Remind, Kahoot!, Blooket, Zoom) or content marketing (Pear Deck, Nearpod, Khan Academy) to achieve this metric. Other channels such as paid marketing and cold outreach are rarely used because they’re more expensive.
As the COVID pandemic began, Zoom saw an unprecedented increase in the number of quality users, all without any meaningful marketing spend. After reporting 10 million users in December 2019, the company reported 200 million users in May 2020 and 300 million users the following month. This growth was achieved without the need for paid marketing or cold outreach. Virality powered this amazing, low-cost user growth. As one user created a Zoom meeting and invited others to attend, those meeting attendees learned about Zoom and, in turn, started their own accounts and hosted meetings for other attendees. This viral process spread Zoom’s usage throughout education institutions, startups, corporates, government organizations, and even families and friend groups.
Pear Deck also benefited from viral word-of-mouth for their free teacher product; however, they added a second low-cost customer acquisition channel to accelerate user acquisition — clever content marketing. Through successful initiatives including the Pear Deck Inspearational Educator Program, Share the Pear, and Coaching Programs, Pear Deck used and continues to use the power of community + content marketing to build a larger and larger base of quality teacher users.
From a fundraising standpoint, it’s at metric #3 that teams often raise pre-seed and/or seed rounds from early-stage investors including angels, family offices, and some institutional investors. Investors are attracted to startups that have demonstrated the ability to sign up quality free users in a scalable way at a low cost with a large segment(s) of users. One final metric remains — monetization.
North Star Metric #4: Prove Monetization (i.e., Quality User → % Paid or ACV)
In K12 B2B, it’s common that early monetization efforts focus on signing up teachers with low-cost licenses on a monthly (<$15) or annual basis (<$150). Companies such as Pear Deck, Kahoot! and Blooket followed this path. Despite their early success, many companies find that scaling and retaining paid teachers is very challenging and they pivot to offering licenses to schools and districts to increase ACV, reduce churn, and create opportunities for expansion revenue. Companies like Pear Deck, Seesaw, and Newsela are successful at both acquiring and retaining free, quality users and selling to schools and districts. This is their formula for rapid growth. It’s difficult to do because it requires the willingness and capability to build both an excellent free user product and a paid, organizational product with a high-performing sales organization behind it.
With early, promising data on monetization, startups are in a strong position to raise a seed round or Series A round from institutional investors. In my experience, product-led growth companies can raise capital at higher valuations relative to their MRR or ARR than traditional top-down sales organizations. That’s because the PLG model is more efficient and productive at generating quality leads and turning them into revenue as the organization scales. The benefits really kick in for PLG at greater than $10M in ARR as illustrated by the chart courtesy of Open View Partners.
In conclusion, product-led growth is difficult to get right, but it’s not a black box. When committing to product-led growth, it’s important to do so while the organization is still relatively young in order to align teams around the four north star metrics described by Mark Roberge. The earlier your teams align around this playbook (right from the start is optimal), the better. I have yet to meet a K12 team that’s successfully implemented PLG after they’ve exceeded $5M in ARR, but it’s not impossible if the team commits to the organizational changes needed to execute. By implementing this playbook, you can put your startup on a path to an efficient, high-growth sustainable business.
