What is Product-Led Growth?
With all the resources and technology at our disposal, creating a new product has never been easier. However, successfully launching that product, acquiring new users, and keeping them around is a whole different story. To speed things up and keep the acquisition costs low, more and more software companies are opting for product-led growth – a relatively new GTM strategy.
If you’re a marketer, product manager, or any other key stakeholder in a SaaS business, keep reading. In this article, we’ll delve into the concept of product-led growth – what it is, where it came from, how it works, and why it’s all the rage these days. If you're looking to learn video, then watch below. Otherwise, skip ahead.
To top it off, we’ll finish with a few examples of companies that we all know and love who used the product-led growth approach to scale out.
Let’s jump right in.
What is Product-Led Growth (PLG)?
Product-led growth is a go-to-market strategy or methodology in which the product itself – the individual features and the value they provide – is the chief driver of growth. It is a “try it before you buy it” approach in which the customer doesn’t have to go through a traditional sales cycle to get some value out of the product.
Instead, it uses a self-serve model in which the end-user can just using the product (often without paying a dime – more on this later). Growth is dependent on word-of-mouth, referrals, and virality, all of which in turn depend on how big of a problem you solve and how well you solve it. In simple words, the easier it is to use your product, the better.
Take Slack as an example. You don’t have to go through a lengthy process that involves you speaking to one of their sales reps. Instead, you can simply sign up, create channels, and communicating with your team members. There aren’t any complicated steps or obstacles in between.
This reduced friction or less time to value results in higher customer acquisition, retention (provided that the perceived value overlaps with the experienced value), and engagement.
Features of a Product-Led Growth Strategy
Since product-led growth is a relatively new concept, with a rather loose definition, it may be difficult to wrap your head around it. Truth be told, there’s a lot to the approach than simply acquiring and onboarding the customers – that’s actually where the real work begins.
To get a deeper understanding of the product led growth model, let’s take a look at its different features:
1. It Focuses on Product Usage Early in the Cycle
The biggest point of differentiation between product-led growth and a traditional approach is that with PLG, the focus is to have the end-user try out the product early on in the cycle.
They don’t have to be a paying customer to get some tangible value out of the product. A lead can simply go to the company’s website or download the app, sign themselves up, and using the product.
They don’t have to necessarily speak to a sales rep to get started. Furthermore, the user onboarding (or customer onboarding – if they'd be willing to upgrade to a paid plan) has to be extremely simple. From there on, it’s all about delivering the promised value and upselling.
2. It Goes All -in on the End-User
Another key aspect of PLG is that it’s highly user-centric, rather than customer-centric.
But what’s the difference between the two?
A customer-centric focus in this context means that the product/ is designed to cater to the person paying for it. It’s not necessary that they themselves would be using that product (like an executive buying product for their team). Naturally, with this, they have to leverage traditional metrics to gauge customer success (like ROI).
A user-centric focus, on the other hand, means designing the product/ strictly based on the needs and requirements of the end-user. With this approach, you’re only interested in how you can solve a problem for the people who will actually be using your product, resulting in less churn.
This means that the product team, instead of being siloed, is closely involved with the engineering, sales, customer success, and marketing teams.
That being said, the goal of PLG isn’t to replace sales, marketing, and customer success. Rather, it is to align them.
The pain points of the end-user drive the key decisions of all departments.
3. It’s Meant for Self- and Transactional Products
PLG has a lot of advantages, however, it’s not meant for every SaaS business model.
It only works well for self-model, which usually has low price tags and is less complicated in terms of the sales process (example, Slack and Asana).
The model can also work for transactional products that have higher price tags but are still simple to get started with.
In other words, when the sales process is simple, PLG works best, regardless of the price. A more complex and pricier product – like an on-premise enterprise solution – warrants a longer sales cycle, which would naturally require interacting with a rep.
4. The Top of the Funnel is Much Wider
Last but not least, with product-led growth, the top of the funnel (TOFU) is wider than the average sales funnel’s.
Since there’s very little friction, a PLG gets new users/new customers much faster than a sales-led one.
However, keep in mind that a wider TOFU won’t help you scale. Sure, it will get new users faster, but if you fail to deliver a positive customer experience, you’re going to lose them just as faster.
Product-Led Growth vs. Sales-Led Growth
Before we dive any further into where the PLG methodology came from and how to create an effective GTM strategy based on it, let’s further discuss how it’s different from the traditional sales-led approach.
A sales led is one that uses traditional sales tactics to drive growth. With this approach, leads have to be informed, educated, and finally convinced with the help of marketing and sales.
With the basic definition out of the way, are some key points of differences between PLG and SLG:
1. PLG is Based on Self-Model
First and foremost (and as already discussed earlier), a key characteristic of the product-led growth methodology is that it’s based on the self-model.
The user doesn’t necessarily have to get in touch with someone in your (like a salesperson) to understand the benefits of the product and how to use it. They do all of that by themselves – trying out the product without having to go through a lengthy process.
Keep in mind that this is different than a mere demo. The user receives tangible value, or a meaningful outcome, if you will, by using the actual product.
Sales-led companies take the longer route, which involves marketing to the customers, informing and educating them about the value that their product offers through different mediums (such as whitepapers) in order to convince them, and finally converting them.
Remember that the sales-led approach isn’t necessarily a bad thing. Most software companies that operate on this methodology aren’t doing so just because they can, but because it is the most viable option for them based on their business model and the solution they’re offering.
2. CAC (Customer Acquisition Cost) is Higher for Sales Led
Another key point of differentiation between PLG and SLG is that with the latter, the customer acquisition cost (CAC) is almost always higher.
That’s because SLG requires a lot of elbow grease in taking a lead from the awareness stage to the conversion stage. It is only after the user gets from point A to point B that they actually get something out of the product. During that journey, a total of 98% of marketing qualified leads bail out and never convert.
On the other hand, with product-led growth, the CAC is low as the time to value is smaller and doesn’t require engaging with the user before they find some value in your product. If the user – who has already been onboarded without any barriers – finds value in your product, they’re highly likely to convert into paying customers. That's why any product professional in the PMHQ community would tell you.
3. PLG Focuses More on PQL (Product Qualified Leads)
Another major difference between the product-led and sales-led methodologies is that the former relies on the product qualified leads (PQL) metric to gauge product growth, whereas the latter looks at MQLs and SQLs.
A “product qualified lead” is someone who, after actually using your product for free to solve a real problem, found some value in it. It’s different from an MQL or an SQL, that don’t really tie back to actual growth.
An SQL, after converting and trying out your product (and that’s saying something), may still not see any meaningful value in your product
In that sense, using PQLs as a KPI is far more meaningful as it tells you a lot about your product and how you can further improve it for the end-user to get more business.
4. PLG Targets Small Businesses
Finally, PLG usually targets small businesses that need lean solutions to day-to-day problems (Slack solves the problem of daily communication between team members).
You don’t need an entire sales team to pitch your solution in order to get new users. You’ll only need one to upsell and cross-sell.
Sales-led methodology, on the other hand, can be used to target businesses of all types.
The Rise of Product Led Growth Strategies
With the clear distinctions between product-led growth and sales-led growth out of the way, it’s time to discuss where the concept of PLG. More specifically, let’s talk about why SaaS companies started taking this approach.
Here is a complete breakdown of the timeline:
It All Goes Back to When CIOs/Executives Called All the Shots
Let’s go back to the 80’s and the 90’s, when the software industry was relatively young and not dominated by millions of other companies.
Enterprises back then were exploring ways to leverage the wonders of computer technology for increased productivity and reduced costs.
As long as the product helped hit the key performance indicators, they didn’t about how their workers – i.e. the end-users – felt about the solution. The decision to acquire a certain software was always made in the boardroom, with little or no input from people down the corporate chain.
Usually, a CIO, after evaluating all the options, selected new technologies that were:
- Helped hit the KPIs
- Integrated seamlessly with the existing technology
Naturally, software companies had to create and market their products accordingly – convincing them about their business value.
Today, it’s All About the End-Users
After a few years, when Salesforce launched and SaaS became a thing, a gradual shift happened.
With rising competition, software companies began to think differently and create products in ways that helped do more, in less time, and better.
Furthermore, with more players competing in the market, software companies are now under the pressure of not just coming up with the solution, but also innovative ways to add more value.
To that end, companies started thinking about the end-users and less about how the people purchasing the software (i.e. the executives) felt using the product.
That, in turn, gave birth to the concept of product-led growth that doesn’t require extensive, hands-on selling, but just a solution that drives growth by itself. And the rest is history.
How to Make a Product-Led Growth Strategy Work?
A product-led growth strategy sounds wonderful on paper and has even been proven to yield faster growth than a traditional SLG approach, it’s not exactly easy to create and successfully execute one.
If you have a potentially successful product idea brewing in your head, and you feel that PLG might be the best approach for it, now might be the perfect time to plan stuff out.
While there are no universal steps to follow, there are certain foundational principles and rules that are crucial for PLG.
Here’s everything you should do, in order, when going for the PLG methodology:
1. Truly Try to Understand the Value You Want to Deliver
Before anything else, you need to truly understand the exact value that you want to deliver.
In PLG, success totally depends on the actual solution you can provide for the end-users.
It wouldn’t matter if your product:
- Doesn’t solve an annoyance for the end-user
- Doesn’t solve that annoyance better than everyone else
In simple words, your vision should be to create a product that your users, after trying it out, just can’t live without it.
Once you’ve identified the value that you’re about to deliver, formally write it down and make it an overall part of your GTM strategy.
2. Go All-in On Communicating the Value
A common misconception about the product-led growth methodology is that it doesn’t involve marketing.
This wrong conception stems from the idea that in PLG the product sells itself. While that’s not completely untrue, both sales and marketing are still vital parts of the GTM strategy.
Initially, you’ll have to do some extensive marketing to get people to try out your product in the first place. That entails communicating the value you have to offer to your user base using different tactics.
Furthermore, make sure that you’re distributing the product in places where your user exists.
Once you get the user to try out your product, from there it’s all about convincing them to join your customer base.
3. Justify Your Pricing
Another key aspect of product-led growth is that the value of your product should totally justify the price you’re charging.
I know – that applies to literally everything, but hear me out.
Software companies can’t make grand claims about what their products can do and get away with it. They need to truly share the details – the different modules, the individual features, and the specific things that the users can accomplish using those features.
Here is an example:
These are the up-to-date pricing plans of Slack. As you can see, each plan has a list of top features, along with clear-cut pricing (as in what they would have to pay per user).
With clear pricing, your customers will know exactly where their money is being spent on.
4. Remove All Barriers for the End-User
As discussed earlier, a key aspect of a product-led growth strategy is having a funnel that’s free from friction.
These points of friction could be:
- A paywall (that prevents the user from even trying out the product)
- Gated content
- Annoying sales reps
Instead, you need to allow your users to sign up and instantly using your product in a self-serve environment. It should only be a matter of going to your website and/or downloading your app.
In addition to not having any mandatory human element at the beginning of the funnel, you should also opt for an appropriate pricing model.
Here are two ways you can offer value with product-led growth:
With the free trial approach, you offer your product (with limited features) to new users.
They can sign up (usually with their credit card information), using the product, try it first-hand, and if they like it, they can proceed to pick a paid plan.
That’s where sales/customer success reps come into the picture.
In the freemium model – which most modern SaaS companies use – you give all of the basic features for free, forever. You can reserve certain features that your users can acquire by paying up.
For instance, you can create channels and communicate with your team members on Slack for free, without any time limit. From there, if you feel that your team could use some extra features to further improve your day-to-day communication, you can always opt for one of their paid plans.
Why Product Led Growth is All the Rage Among SaaS Companies
Product-led growth – although not meant for every SaaS product – is a sought-after strategy.
That’s because it allows them to get their product out there and scale faster.
To specific, here are two main reasons why PLG works:
It’s Easier to Scale and Acquire More Customers
As mentioned above, with PLG, it’s easier to acquire new users faster, since the TOFU is much wider than a traditional sales funnel.
When more people try out your product, and the time to value for those people is lower, the overall buying process is faster.
This, in turn, results in a higher conversion rate (and lower churn, if you successfully deliver on what you promised).
Customer Acquisition Costs (CAC) is Lower
In addition to a faster time to value and higher conversions, with PLG, you can also enjoy lower customer acquisition costs.
With no sales reps to convince and help the leads set up the product, you can acquire new users (and hopefully, paying customers) much faster than you would if you took the sales-led approach.
Examples of PLG Companies That Kick Ass
There are a ton of examples when it comes to product-led growth done right. However, if we had to pick 2 examples of companies that went all in on creating a phenomenal product experience, it would be the following:
This doesn’t come as a surprise.
Slack has been at the forefront of PLG, setting positive examples for companies in other industries.
Slack’s approach is simple – when someone introduces Slack in there after seeing some value in it, their peers and superiors using it as well, who in turn would also see and experience that value.
Dropbox makes it easy to store and share files with your friends and co-workers.
What makes it special is that when a user (let’s call them X) uploads and shares a file with someone else (let’s call them Y), Y doesn’t necessarily need to sign up and become a user to view and download that file.
However, Y witnessed the wonders of Dropbox firsthand, and the next time they want to share a large file, what would they think of it? That’s right – Dropbox.
A product-led growth strategy – when executed properly – will scale the customer base of your new product in a matter of days.
With users having all the information at their fingertips, they don’t need to rely on the executives or anyone else to make decisions for them. To make a decision, they’ll simply try out the products and try out their company.