When is a User a Customer?

At first glance, this might seem like a silly question—aren’t all users of your product considered customers? In a Product-Led Growth (PLG) model, the answer is a resounding “no!” Understanding this distinction is crucial for one major reason: churn. Let’s explore why this matters.

The core idea behind PLG is to allow trial users (prospects) to experience value from your product with minimal effort and cost. The goal is for these trial users to quickly recognize the product’s value and eventually become paying customers. Simple, right? Not quite.

Let’s look at the simple example of a PLG-driven product for roadmapping. Imagine this product allows trial users to create roadmaps for a single product at no cost. Now, suppose there is a Tier 1 plan that allows a user, for $19/month, to create unlimited roadmaps. Would you consider a user a customer the moment they start paying $19? Are they only a customer after paying for three months and creating at least three roadmaps? How does the time they've spent paying impact their status as a customer?

Enter Cohort Analysis

Cohort analysis groups users based on certain attributes to understand their behaviors. When analyzing churn, behavioral cohorting can be particularly useful—it allows you to segment users based on specific attributes, identifying which groups are more likely to churn and which are not.

For example, consider the following cohort table for a roadmapping tool. The table summarizes various user cohort groups in terms of retention, ARR, and non-ARR for a one year period for the given cohort. ARR Multiple and Enterprise Value (EV) columns were added to represent market-like ARR multiples and enterprise values at various levels of retention and ARR.?

This data shows that as cohort retention improves, ARR tends to decline, but enterprise value (EV) increases due to higher ARR multiples. In the bolded row, for example, the retention rate of users who create three roadmaps after three months is 90%, which gives the highest ARR multiple and EV.

The Financial Impact

From a financial perspective, any revenue from trial users who aren’t considered customers is non-ARR revenue, while only revenue from true customers counts as ARR. This distinction significantly impacts your ARR and, by extension, your company’s valuation. The better your retention rates, the higher your enterprise value, as shown in the table.

So, what’s the key takeaway? The bolded cohort—the users retained for 3+ months and who create at least three roadmaps—maximizes enterprise value. This suggests that your Ideal Customer Profile (ICP) should be defined around this group, as they produce the best retention ARR outcomes.

Defining the Customer

In this example, it’s clear that your ICP should be framed around the cohort that maximizes enterprise value (assuming the ICP represents a significant addressable market). The goal is to identify the customer behaviors (e.g., value produced, product usage, duration) that drive high retention and ARR. Then, align your customer success strategy to help more trial users reach those key ICP characteristics.

So, ask yourself: Does your company have a clear definition of when a user becomes a customer? Is it informed by retention analysis and the impact on enterprise value?

Thanks to Dan Busichio for his assistance on this post.