Product Led Growth: What Is It & Why it’s the Future of SaaS
Just a few years back, a seismic shift was witnessed in the technology landscape. Pioneering brands such as Atlassian and Dropbox flipped the conventional marketing playbook, adopting a product-first approach and positioning themselves as customer experience-centric enterprises. Their innovative strategies quickly outperformed traditional high-touch, friction-heavy sales models prevalent among other software companies.
In the midst of this evolution, David Barron, Global Director of Sales at HubSpot, recognized the winds of change. Determined to ride the wave, he steered HubSpot’s transformation from a sales-led archetype to a model of product-led growth. The outcome? A dramatic surge in HubSpot’s conversion rates!
So, how did HubSpot break the mold? What strategic reorientation did it embark upon?
Embracing a revolutionary business blueprint, HubSpot pivoted away from an over-reliance on sales personnel to persuade leads. Instead, they made it effortlessly simple for potential customers to trial their freemium products. Upgrading to premium features was made equally seamless. In this new framework, the sales and customer success teams played a pivotal role, closely collaborating with top-tier clients in need of more advanced features, thus necessitating more comprehensive evaluation and understanding.
“The future of growth belongs to product-led companies. At HubSpot, we realized this a few years ago, which is why we disrupted our own business model before anyone else could.”
Kieran Flanagan, VP of Marketing, HubSpot
Taking a page from HubSpot’s book, if you’re considering adopting a product-led growth model, or contemplating the shift from a sales-led or marketing-led approach to a product-first strategy, this post is expressly for you. I’ve gathered all the insights you need, enriched with a ready-to-implement product-led growth strategy formula from industry-leading experts!
What is Product-Led Growth?
Product-led growth is a dynamic paradigm where the product itself becomes the powerhouse driving customer acquisition, retention, and expansion throughout the user journey.
Instead of blindly reaching out to prospects, teams embracing product-led growth leverage data on product usage to identify potential customers. The product team employs strategic in-product prompts and targeted emails to convert free or trial users into paid customers. Suppose a user is an individual from a large organization, like a Fortune 500 company. In that case, your sales team can use their email address to pinpoint them and initiate a conversation about team or enterprise plans.
In the product-led growth model, you incrementally enhance different segments of this sales funnel to boost your overall revenue. This approach contrasts with traditional sales and marketing methods, which often involve extensive interpersonal interaction and guidance. A product-led growth model offers a more self-directed experience and possesses the scalability to effectively cater to millions of customers.
The Evolution of Product-Led Growth
The On-Premise Era (1980s-1990s): In this era, software was physically installed from a box. It was expensive to develop and purchase. Sales were driven by field sales representatives who interacted directly with the CIO, with the key decision-making factor being IT compatibility.
The Cloud Era (2000s): This era was initiated by companies like Salesforce that shifted software from on-premise to cloud-based solutions, significantly reducing development costs. The target buyer became the non-technical executive who considered KPIs and ROI in decision-making. The era brought “marketing-led growth,” focusing on leads and sales development.
The End User Era (2010s): With more scalable infrastructure and modular tools, developers no longer needed to hard-code every program. The cost of trying out new products decreased, allowing end users to make purchasing decisions based on their personal needs. This era saw the emergence of “product-led growth,” coined by Blake Bartlett in 2016, with successful companies like Atlassian, Dropbox, and Slack exemplifying this approach.
The Age of Connected Work (2020s): This era is marked by integrated workflows powered by automation, AI, and APIs. Users are more reliant on their software services, and tools are interconnected. The users of a product are increasingly other products rather than people, with rising industry stars leveraging the product as a growth engine, incorporating product-led growth principles into their businesses.
There are three trends that have emerged in the new era of software development and usage:
- Software as Core Infrastructure: With an increasing number of business interactions happening digitally, businesses are relying heavily on software for all operational aspects. The text suggests businesses are seeking software services that can leverage the benefits of universal cloud adoption, such as real-time interconnectivity and the free flow of data.
- Work Happens Everywhere: Modern hardware and software have made it possible for work to be conducted from anywhere with an internet connection. Users’ expectations have risen; they want to be able to work flexibly without having to adapt their workflows to specific products. Even product-led growth (PLG) software designed for end users is being tested by the ever-changing demands of the modern workforce.
- Engagement with Software Sets the Tone: Users are becoming more involved with software through condition-setting interfaces, smart forms, and API-based connections. No-code/low-code technology is enabling even non-technical users to become developers. As more employees within a company become technologically empowered, they are likely to build their own personal tech stack of preferred products, which they will likely introduce to new companies as they advance in their careers.
The Need to Switch to a Product-Led Growth Approach
Traditional sales-led growth strategies, while effective in the past, now grapple with significant challenges, such as:
Exorbitant Customer Acquisition Cost and Prolonged Sales Cycle: This typically means that your product is sold at a premium price. To achieve a desirable customer lifetime value (CLV), you might be levying a steep fee on your customers, even if your product doesn’t necessarily command such high value.
A Permeable Sales Funnel: One prominent issue in a sales-led model is a “leaky” customer acquisition process. Even with a stream of marketing-qualified leads, sealing the deal can be elusive. The pressure to meet MQL targets often leads to gated content and a process riddled with friction, causing a rift between the sales and marketing teams and undermining the effectiveness of the marketing funnel.
Gartner Research reveals that B2B buyers now lean heavily on digital channels, social networks, and virtual experiences throughout their purchasing journey. They spend a mere 17% of their buying time in direct interactions with sales personnel.
Further compounding the issue is a generational shift in skepticism toward sales representatives. Gartner’s research indicates that millennial business customers are twice as skeptical as their baby boomer counterparts, with 44% of millennials favoring zero sales rep interaction in a B2B buying scenario for a digital product.
In this day and age, customers are drawn to a seamless experience, from a free trial to the purchase of a subscription. The thought of interacting with a salesperson is off-putting, as it introduces unnecessary friction into their buying journey.
Transitioning to a product-led growth model can effectively surmount these hurdles. It puts the reins in your prospects’ hands, enabling them to navigate their purchasing journey more efficiently and swiftly.
Benefits of Product-Led Growth
Reduced Customer Acquisition Cost
In a product-led model, the sales team steps in only for high-value deals or when there’s potential for a customer upgrade to a more substantial subscription package. If your product truly stands out, its inherent virality and word-of-mouth recommendations will fuel your growth!
Accelerated Growth
Product-led businesses consistently outpace their non-product-led counterparts. Offering a freemium experience expands the top of your marketing funnel, capturing prospects’ attention well before they’re ready to make a purchase. The freemium model serves as a powerful customer acquisition tool that can either replace or supplement your paid acquisition strategies.
Swift Time to Value
Companies adopting a product-led growth strategy deliver instant value to users. Prospects can explore features and start using your software just minutes after landing on your webpage. This rapid time-to-value aligns perfectly with the brisk tempo of contemporary software sales.
Prospects today have little patience for multiple sales calls and lengthy onboarding processes before they see any real value. Demonstrating the benefits of your product sooner lets users quickly appreciate what you offer, making them more inclined to invest.
Moreover, sales personnel can inadvertently slow down the process with delayed follow-ups. If it takes weeks for prospects to experience the “aha” moment that triggers a purchase, some might fail to perceive the true value of your product.
Other Advantages of Product-Led Growth:
This strategy also yields benefits such as a shortened sales cycle and enhanced user engagement.
How Product-Led Growth is Different from Other Growth Models
The SaaS landscape is vast, with companies operating at various points along its spectrum. Brands like Slack and Asana, for instance, have embraced a product-led growth (PLG) strategy, while others, such as SAP, navigate a complex purchasing process with a sales-led growth approach. Then there are brands like Drift and Ahrefs, who persist with a marketing-led growth model.
There’s nothing inherently wrong with any of these methodologies. The choice of which to adopt depends largely on your business’s nature, your offerings, and your target audience. Here’s a breakdown of these growth models, offering insights into their unique aspects and differences:
Product-Led Growth Vs. Sales-Led Growth
As I’ve already mentioned, product-led companies offer a self-service model, allowing users to achieve their desired outcomes without a salesperson’s involvement.
For instance, you could establish your first user base channel and start collaborating with your teammates (Slack), or register and design your first task list (Asana). PLG companies simplify the journey from point A to point B, with little to no human intervention.
Contrastingly, sales-led growth necessitates interaction with a salesperson to accomplish your goals. This is often due to the complexity of the software, the user’s lack of experience, or the market’s unreadiness for the product. In these situations, human assistance becomes crucial.
Product-led growth offers cost-efficiency by significantly reducing Customer Acquisition Cost (CAC) through fewer headcounts and a shortened sales cycle. You witness higher revenue per employee and lower service costs while providing an improved user experience with minimal human assistance.
Nevertheless, you can achieve similar results with a sales-led approach, especially when you blend it with product-led methods. For example, offering interactive demos for certain plans can still significantly minimize your CAC.
Product-led companies prioritize Product Qualified Leads (PQLs) over Sales Qualified Leads (SQLs), and for good reason. Assessing PQLs in a PLG company is key to measuring growth. A sales-led approach measures SQLs, which are dependent not on user experience but on prospect qualification factors like budget, authority, time, and need. A major downside to this method is it only uncovers half the truth. Thus, you might identify a user who needs a solution but can’t confirm whether your product can solve their problem. This can create a disconnect with product managers, as SQLs can’t measure product growth.
đź’ˇ Did You Know?
60% of Asana’s customers come from self-service, and 40% from sales. This is trending to 50/50 now that Asana has crossed $400m in ARR, but still, a reminder a self-serve motion combined with sales jumping on the bigger deals can scale very, very far. Asana’s biggest growth is in its $50k+ deals, but its ACV is still just $3,600 … or $300 per month.
https://www.saastr.com/5-interesting-learnings-from-asana-at-250000000-in-arr/
Product-Led Growth Vs. Marketing-Led Growth
A marketing-led company concentrates more on acquisition than on activation and retention. This focus can lead to a significant issue—churn, particularly in early-stage companies. Therefore, balancing attention between activation, retention, and acquisition—something that happens in PLG—is crucial.
PLG is more cost-efficient than marketing-led growth because marketing-led companies, such as Oracle and Salesforce, spend up to 20-40% of their revenue on marketing initiatives. While these expenditures might not impact large enterprises like Oracle and Salesforce, for a SaaS startup seeking growth, such marketing spend is unaffordable.
A marketing-led company grows by focusing on a product’s perceived value, whereas a product-led company grows by focusing on its experienced value. The discrepancy between these two values is the value gap. To minimize this gap, you need to use perceived value for communication without overpromising and surprise and delight your customers.
Despite the pros and cons of each growth model, they don’t have to be mutually exclusive. All these models can coexist and add value to your brand and product.
Formulating a Product-Led Growth Strategy
Grasping Customer Insights
The cornerstone of product-led growth success is a thorough understanding of your customers. Companies must focus on customer feedback, data analytics, and user behavior insights to gain a holistic understanding of their target audience. Recognizing the ideal customer, their needs, pain points, and usage patterns is vital.
Innovations in Product-Led Growth Models
Adopting a self-service model is standard, but mastering this step is crucial for staying competitive. Companies will experiment with ‘reverse trials’ and other groundbreaking models to enhance user onboarding, activation, conversion, and retention.
Advancing Personalization and User Experience
Companies will harness AI and machine learning to deliver highly personalized product experiences that drive user behavior. To improve user engagement, companies will delve deeper into behavioral economics, gamification, priming, and other strategies.
Emphasis on Data Analytics
Product-led growth is synonymous with data-led growth. More companies will invest in data analytics platforms to derive insights into user behavior and usage patterns. This data-driven growth will aid companies in tracking product-led metrics, such as Time to Value (TTV), Average Revenue Per User (ARPU), Customer Lifetime Value (CLV), Product Qualified Leads (PQLs), and Net Revenue Retention (NRR).
Harnessing Product Virality
Product virality will become an increasingly important area, with more companies enlisting influencers to drive B2B product adoption. LinkedIn influencers, in particular, will be instrumental in promoting B2B products, much like Instagram influencers have been for B2C products.
Building a Valuable, User-Friendly Product
Craft a product that effectively addresses your customers’ issues and provides substantial value. It should be intuitive, user-friendly, and facilitate a seamless user experience.
Adopting a Data-Driven Approach
Employ a data-driven methodology to gauge user engagement and collect feedback. Utilize analytics tools to monitor user behavior and fine-tune the product based on user feedback.
Capitalizing on Product-Led Tactics
Use product-led strategies such as in-app messaging, product tours, and free trials to boost adoption and retention.
Iterating and Improving Continually
Continually iterate and enhance the product based on user feedback and market trends.
By embracing a product-led approach, B2B companies can establish a sustainable, scalable growth engine that prioritizes the user.
Two key aspects I focused on are:
- Optimizing the signup flow: This is crucial for any Product-Led Growth (PLG) strategy because it’s the first significant interaction that users have with your product, thus setting the tone for their entire experience. A smooth, intuitive signup process reduces friction, increasing the likelihood of conversion and enhancing user satisfaction. Additionally, an optimized signup flow can capture vital user data, enabling better personalization, improved user engagement, and ultimately, higher retention rates.
- Assessment creation process: This is vital for any Product-Led Growth (PLG) strategy because it provides a mechanism to understand and measure user engagement, behavior, and success within your product. Well-crafted assessments help to identify the specific needs and pain points of users, facilitating the development of features and enhancements that drive user satisfaction and product adoption. Furthermore, these assessments can provide valuable data for personalized communication and support, leading to improved user retention and the growth of the customer base.
đź’ˇEliminate roadblocks to enhance the user onboarding experience continually. A prime example of this is Pipefy, an enterprise process management platform catering to large brands.
Pipefy navigates through the intricacy of their product by offering free users accessible process templates. These templates, designed around customers’ most common use cases, allow users to effortlessly understand and interact with the product.
By doing so, Pipefy empowers free users to envision the product’s potential value, even when their unique use case necessitates a more comprehensive implementation. This strategy seamlessly guides new users toward appreciating the product’s full capabilities, thereby fostering a smoother onboarding process.
Metrics to Determine the Success of a Product-Led Growth Strategy
Product Qualified Leads (PQL): These leads have found value in your product, typically through a freemium model or trial version. With a high likelihood of becoming paid customers, PQLs are crucial in any product-led growth strategy.
Time to Value (TTV): This metric, vital for product-led SaaS growth, measures the time a customer takes to reach their ‘AHA’ moment when they start realizing the product’s expected value.
Feature Adoption Rate: This refers to the time it takes for a customer to experience and adopt a feature they find valuable.
Feature Adoption Rate = (number of ‘must-have’ feature Monthly Active Users/number of users logging in during a given period) X 100
Customer Lifetime Value (CLV): This is the total revenue you anticipate earning from a customer throughout their relationship with your product.
Customer Lifetime Value = average revenue per account/customer churn rate
Average Revenue Per User (ARPU): This is the average monthly revenue earned from each paying customer. Given that revenue in a SaaS business is largely subscription-based, ARPU is a crucial metric to track.
Average Revenue Per User = Monthly Recurring Revenue (MRR) / number of paying users
Product-Led Growth Benchmarks for 2023
Monitoring product-led growth metrics is a vital practice for any SaaS company, enabling the assessment of alignment with organizational goals and progress tracking. If you’re operating a product-led growth SaaS enterprise, it’s crucial to familiarize yourself with the following benchmarks:
Average Contract Value (ACV)
With a predicted rise in 2023 indicating an increasing demand for integrated solutions, ACV is an essential metric. The median ACV stands at USD 25,000, establishing a competitive pricing range for benchmarking.
Customer Acquisition Cost (CAC)
CAC remains a critical metric for SaaS companies, with the average CAC in 2023 being USD 8,000. Amid escalating competition, it’s vital to maintain a low CAC while simultaneously enhancing your Customer Lifetime Value (CLTV). To achieve this, consider implementing data-driven sales techniques and nurturing high-value leads.
Revenue Growth Rate
The average revenue growth rate for B2B SaaS companies in 2023 is projected to be 30%. Actions such as acquiring new customers, expanding market presence, and upselling can contribute to achieving a similar growth rate.
Churn Rate
With an average churn rate of 12% in 2023, keeping this metric low is essential for profitability. Factors contributing to a low churn rate can include exceptional customer support, a seamless onboarding process, a comprehensive product playbook, robust customer engagement, an enhanced customer experience, and a product that’s hard to resist.
Net Promoter Score (NPS)
NPS serves as a barometer of customer satisfaction. An impressive NPS signals that your company is on the correct growth path. The average NPS in 2023 is 40. To boost your NPS, consider strategies such as pinpointing and addressing actual customer pain points, prioritizing customer needs, streamlining the onboarding process, delivering exceptional service, scheduling time for customer feedback, and incorporating this feedback into product improvement.
In conclusion, the concept of Product-Led Growth (PLG) represents a radical shift in the way businesses approach growth and customer acquisition. It signifies a holistic transformation, one that places the product and its users at the heart of a business’s growth strategy. This innovative approach is swiftly gaining traction across the SaaS landscape, and it’s easy to see why.
PLG promises a more sustainable and scalable path to growth. It emphasizes the importance of delivering value to customers from their first interaction with a product. By enabling users to derive value even before they make a purchase, businesses can turn their products into powerful customer acquisition tools. This way, the product itself becomes the primary driver of customer acquisition, expansion, and retention.
In a PLG model, the success of your business is directly tied to the success of your users. Every aspect of your business, from product development to marketing to sales, needs to revolve around the user. This requires a deep understanding of your users’ needs, pain points, and behaviors. It necessitates continuous experimentation and improvement, and a constant focus on delivering an exceptional user experience.
Moreover, PLG isn’t just about building a better product. It’s about building a better business. PLG companies tend to have lower customer acquisition costs, higher customer retention rates, and faster growth rates compared to their sales-led counterparts. They are more resilient, more customer-centric, and more adaptable.
That being said, the transition to a PLG strategy isn’t without its challenges. It requires a cultural shift, a rethinking of traditional roles and processes, and a commitment to data-driven decision-making. But the rewards, as evidenced by the success of PLG pioneers like Slack, Zoom, and Pipefy, are well worth the effort.
However, it’s important to remember that there is no one-size-fits-all approach to PLG. Each business has its unique strengths, challenges, and customer dynamics. The key to success lies in adapting the principles of PLG to your unique context, continuously testing and learning, and always staying focused on delivering value to your users.
In the end, Product-Led Growth is more than just a strategy; it’s a philosophy. It’s about believing in the power of your product to drive growth and putting your users at the heart of everything you do. It’s about building products that are not just easy to sell, but hard to let go of.
