What is product-led growth?
According to many in product and marketing, the future is product-led. But what does it actually mean to be “product-led”?
VC firm Openview defines product-led growth (PLG) as “a go-to-market strategy that relies on product usage as the primary driver of acquisition, conversion, and expansion.”
Translation: Make a great product, let people try all (or part) of it before paying, watch it go viral — no whitepapers required.
Product-led growth is a go-to-market strategy that relies on product usage as the primary driver of acquisition, conversion, and expansion.
Speaking of whitepapers — the hallmarks of Sales-led and Marketing-led growth models — let’s take a second to look at the differences between product-led growth and Sales/Marketing-led growth.
Sales and Marketing-led models create a need for the product by focusing on the promise of what the product can deliver and generally making that promise to someone at the top of an organization. A potential business leader may have their curiosity piqued by opening and clicking on a series of emails that tell them how a product will increase their ROI. They go on to schedule a demo and talk to a sales guy (several times, even). This could really help us do X, they think. There is no one to convince because they are the decision maker. They sign a deal. The term is long. There’s a lot of onboarding. That’s a Sales/Marketing-led growth model.
Product-led growth flips the elements of Sales and Marketing-led growth models around. Start with the product. Give it to end users. When any given user sees how much it’s helped them, they will share it with their team. Have end users (not decision makers) fall in love with it. It will then receive buy-in from decision makers who want to invest in software their team is going to use.
If the product is good, then perhaps one or several users will share it with teams both in and outside their organization. And so the product spreads — all by itself.
Benefits of product-led growth
At the end of the day, product-led growth’s main benefit is faster, more efficient growth. You can see this at every phase of the customer journey.
Lower acquisition costs with product-led growth
Think of the big names in product-led growth: Slack, Dropbox, Calendly. How did you hear about them? How did you start using them? Chances are, you or your company didn’t adopt these products because of an ad or a whitepaper. In fact, you may have never even heard of them before you started using them.
Product-led growth relies on the idea that if a product is good, it’ll infiltrate the market and grow on its own. Maybe someone you knew used Dropbox or Calendly. They sent you a file or an invite. You opened it. Suddenly, you are a user. How much did it cost for product-led growth company X to acquire you specifically? That’s right — zero dollars.
Product-led growth relies on the idea that if a product is good, it’ll infiltrate the market and grow on its own.
This scenario is not an uncommon occurrence in a product-led growth model. When the product has built-in methods for driving customer acquisition, the cost of acquiring a customer is lower. You don’t need a Marketing team to buy ad space and you don’t need a huge Sales team to sell the product. All you need is a product that’s really, really great.
Speaking of your Sales team, a product-led growth model allows your salespeople to be far more efficient. Imagine a salesperson with 10,000 leads at the top of the funnel. Perhaps they whittle it down to 5,000 using firmographic criteria and traditional portrayals of interest. Let’s be optimistic and say they even get it down to 1,000 using stricter MQL requirements (multiple whitepaper downloads or email clicks). Even then, most of those leads aren’t going to convert to paid.
While these numbers are exaggerated, the underlying logic is there: One salesperson cannot handle such a large volume of leads, and without any further indication of who will convert, they are left to reach out in some random order.
Enter the Product Qualified Lead. These are leads that have used the product and loved it. They have tried either a freemium version or a free trial of the product, used the features, and found value from the features. What if your Sales team only called leads like this? The list would certainly be a lot shorter, but the conversions would be the same. That’s what Product Qualified Leads do. They give your Sales team a way to look at how users engage with the product during a free period and then use that information to pick out users that are actually interested. Who is more interested in your product than someone who has used it and loved it?
Increase retention and upsells with product-led growth
Or the reverse: Reduce churn with product-led growth.
We already covered how using a product-led growth model in Sales helps salespeople find better leads because they know who is engaging with the product and who is getting value out of it. Similarly, Customer Success teams need to know who is not finding value in the product and what features they might be missing out on. Because the focus in a product-led growth model is on how users are interacting with the product, CS teams will have data on user engagement readily available to them. This gives them singular insight into who is engaging and who is not so they can better tailor their upsell and churn reduction activities.
Give users a better experience with product-led growth
It’s simple: Product-led growth improves the user experience. Users find value before paying; user onboarding is more straightforward; users can pay when they feel it’s warranted. There’s no promise of value. There’s just value for the user.
Additionally, when your product is everything, your focus is 100% on making it the best it can be. User feedback is at the center of everything you do and you are truly doing everything you can to create the best experience first and foremost for the user.
A few product-led growth metrics
What are you really measuring in a product-led growth model?
Trial-to-paid conversion rate
(n.) The percent of users that go from a free trial to a paying customer. This also applies to freemium.
Conversion rate is an important KPI for any business.
How many people go from X activity to being a paying customer?
No business is a stranger to that question. Trial-to-paid conversion rate puts a product-led growth spin on it. By focusing on the number of trial and/or freemium customers that are converting to paid, you have a much better sense of:
- Whether or not your Marketing and Sales outreach efforts are targeting the right people
- Whether or not your onboarding is pushing users to first value
- The overall value users are getting from your product
In short, if your trial-to-paid conversion rate is high, you’re doing great. Keep it going, but consider making some tweaks if you want to optimize. If it’s not so high, you might need to look at places you can make substantial changes so users find enough value during their trial period.
(n.) A measurement of how far along a user or account is in their journey toward “first value” or the “aha” moment where they realize how great your product is.
Start with a list of actions a user would need to take to get set up and get value out of your product. It’ll vary based on your product. You should try to stick to 5-10. This is your Activation checklist.
Activation rate is just the percent of those checklist steps that are completed. You can measure it by user, by account, or for your product as a whole.
Activation rate works in conjunction with other product-led growth metrics. When paired with trial-to-paid conversion rate it can tell you how well you know and understand what it means to find value in your product. When paired with engagement and leads, it can tell you who is and who is not a Product Qualified Lead for your product-led business.
(n.) The percentage of your customers who cancel or don’t renew their subscriptions during a given time period
Overall, these metrics measure how happy users are with your product in the long term. While hitting first value early is a great indicator of how likely customers are to stick around, nothing says staying power like a customer that actually stays.
The emphasis placed on churn and retention rates is just one more way in which product-led growth puts the product front and center. You have to work to win over your customers every term or they’ll go to the competitors. That means focusing on new features, bettering the features you already have, or increasing engagement with the product. Since customers aren’t signing long-term deals, their choice to stick around shows your product is still delivering value in the long term.
(n.) A measurement of how much a user or account is using your product
A unifying element among all product-led growth metrics, engagement score tells you how engaged users and accounts are with your product.
If you look at engagement score at the user-level, you can see which users on an account will be internal champions when the time comes. If you look at the account-level, you can see which accounts are at risk, ready for an upsell, or need to adopt a new feature. If you look at the product-level, you can use the engagement score trends to see how your business is doing overall.
DAU, WAU, MAU (daily, weekly, monthly active users)
(n.) the number of users that are active in the product for any given time period
If you follow the best practices of product-led growth, you’ve designed your product to benefit the end user. You’ve made it your primary growth channel. Understanding how many users are using the product actively for any given set of time is key to understanding if you’ve been successful in your mission to keep the focus in the right place and nail the user experience.
Product-led growth is the future
The product-led growth model shifts the way you think about your product, your users, and the relationship between the two.
Modern business buyers want to buy software their teams will use and product-led growth puts the emphasis on the teams, not the leaders. Modern business buyers want to see value in a product, not just trust value exists. Product-led growth allows them to do that. Modern business buyers have many software options that can perform any given job. Product-led growth allows you to show (not tell) them that your product is the best solution.
It’s not hard to see why product-led businesses are valued more than 30% higher than the public-market SaaS index fund.
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