What is product-led growth?
It is the so-called "fuel" behind some of the most successful technology companies. It is a growth strategy that promises lower acquisition costs, shorter sales cycles, and more happy customers. And although some product leaders celebrate it as something new, those who have worked in software for many years will recognize the tried and true tactics that make it so powerful.
Product-led growth (PLG) is a business strategy that relies on product usage as the main way to acquire, engage, and retain customers. PLG upends traditional high-touch sales models and instead empowers users to experience and purchase your product. The product is highlighted at every stage of the buyer journey, with the goal being that users can self-educate their way to paying customers with little interference from the company.
This guide tackles some of the most common questions about PLG and provides high-level guidance on how you can implement a PLG strategy at your company. Your approach will reflect the unique factors that make your product special. However, there are some general concepts that underpin PLG which can be applied to any company.
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What is the history of product-led growth?
Product development is the engine that drives most businesses forward. Taking a concept from idea through to market launch is a massive effort that consumes significant company resources and requires broad cross-functional collaboration. For decades go-to-market activities were siloed by function: product management, engineering, marketing, sales, and support. Most technology companies were organized around two tracks with hard lines separating the functions.
Marketing generated interest and sales closed the deal. Sourcing leads (the process of generating interest in the hopes of making a sale) was the norm. Prospective customers would submit an online form or book a demo with a sales rep to find out information critical to the evaluation process — everything from what the product actually looked like in practice to pricing and policies that could impact decision-making.
This sales-led growth model created a variety of challenges. Marketing was often evaluated against the number of “marketing qualified” leads (MQL) that the team generated. Hitting MQL goals led many marketing groups to focus on finding ways to capture more and more leads — such as creating (and gating) content with the sole intention of harvesting as many contacts as possible to hand off to the sales team.
Sales then tackled outreach to those MQLs, many of whom were more interested in the content that marketing had developed than the product itself. Early-awareness folks may not have even realized that they had a problem that could be solved by software. Sifting through and following up with all of the different leads created long and expensive sales cycles. Commissioned salespeople could become motivated to close bigger deals to justify the effort involved in all the outreach. And in the end, customers paid for the inflated cost of a bloated process.
With the rise of subscription-based software-as-a-service (SaaS) came a new way of thinking. Startups could conceive of and launch a product relatively quickly, but certainly could not afford the expensive infrastructure associated with a sales-led growth model. In highly competitive categories, time to market was essential — teams pushed to get an early version of the product out there for users to try. Many of these product builders were themselves weary of high-touch and high-pressure sales tactics and eager to ditch the old way.
To reduce friction and gain immediate feedback about the product, SaaS companies embraced a “try before you buy” approach. This could be in the form of a free trial period or a freemium (no charge to start, but with a cost to use advanced functionality) offering. The more value that users found in their early experience with the product, the more likely they were to convert from a trial or freemium account to a paid account. (And to tell their friends and colleagues about the cool new tool they discovered.) The more that people used the product and found value in it, the more the product development team was able to quickly incorporate learnings to iteratively improve and refine it.
Sales-led vs. product-led growth
We will go into more detail on the differences between sales-led and product-led growth throughout this guide. But to get us started, here is a quick overview of the main differences between the two:
Focused on senior decision-makers
Puts a barrier between users and the product
Requires contact with a sales professional
Can lead to longer sales cycles
May increase to cost to acquire customers
Might hinge upon professional setup and configuration
Focused on product users
Empowers prospective customers to explore the product
Enables marketing to focus on educational content
Can reduce sales cycles as users find value
May decrease the cost to acquire customers
Usage rarely hinges upon professional rollouts
Examples of product-led technology companies
Whether or not they actually claim the mantle of PLG, many of today’s most successful SaaS companies grew quickly by focusing on a frictionless buying process and investing heavily in product experience. The list of 10 PLG companies below is by no means exhaustive, but instead illustrates a wide range of categories.
10 product-led software companies:
Aha! — product development
Calendly — online scheduling
Dropbox — file hosting
Pinterest — image sharing
Shopify — e-commerce
Slack — instant messaging
Stripe — payments
SurveyMonkey — surveys
Zendesk — customer support
Zoom — video meetings
What does it mean to be “product led”?
The definition is easy enough to understand. You put the product at the center of the customer journey, making usage and experience the core way that you attract and convert. But what does it actually mean in practice? The reality of PLG is much more complex.
If we drop the “g” in PLG and think of the concept in context beyond growth strategies, then it is easier to parse what it actually means to be product led. Putting value at the center of product development is the core of product-led thinking. This means that there is value delivered and received by the business, the team, and the customer — with the product as the conduit. It also means that the product development team is responsible for estimating and measuring that value throughout the development process, including the realized value of what is delivered to end users.
Product-centric thinking is common in most startups. This is because when you are first starting out, the company is the product — everyone is focused on launching the offering in order for the business to grow. But for more established enterprises who are adapting to new ways of working, it can be more challenging to orient the organization around a product mindset. Yet the benefits of doing so, such as rapid innovation, faster time to market, increased revenue, is why so many large organizations are fundamentally transforming. More and more companies are establishing product development teams, hiring product managers, and investing in roadmapping software.
Why is product-led growth so popular?
There are a few reasons that PLG is so popular right now. Let’s get the most obvious one out of the way first — those of us in technology love to repackage existing concepts into buzzy new terms. (Even better if the term can be shortened into a snappy acronym.) Every business is looking for a way to grow fast, especially early-stage companies, and the promise of a paved path towards success is appealing.
There are other more practical reasons that PLG continues to gain popularity. The startup landscape has changed vastly since the early days of SaaS. It is now far more expensive and competitive to grow a business, regardless of how disruptive you believe your concept to be. Bootstrapped startups have more leeway to experiment and grow at a sustainable pace, but investor-backed startups have enormous pressure to grow exceptionally fast.
Product experience is now an imperative in the buying process. People prefer to self-educate before evaluating a product — customers have more knowledge about the solutions that are available and expect to find pertinent information without having to suffer through a sales pitch. Word-of-mouth referrals, including those from software review sites, carry equal (if not more) weight to a company’s paid marketing efforts. And most people evaluating a B2B software product on behalf of their own organization have to champion the offering to teammates and executives. In order to do so, these prospective users must be able to try and learn the software in advance so that they can "sell" internally.
But there is a more enduring reason that PLG is so popular. Aligning the entire organization around delivering and supporting the best possible experience for customers is simply good business. If you think about the most successful companies, the secret behind the lasting growth is a commitment to people, product, and profit. Get all three right and there is the opportunity for meaningful value exchange to occur.
What are the pros and cons of product-led growth?
Businesses are made up of people. There are the people who develop and maintain a product, and the people who use it. PLG posits that you can streamline product development and skyrocket growth by gathering and interpreting data about the product and its users. But trying to analyze your way to product success based on data alone ignores one glaring issue — people have biases and our behavior is not always rational.
Take for example, the metrics typically associated with PLG SaaS companies. The product teams who review, analyze, and take action based off of the usage data gathered all have implicit biases that affect how they view what they find. Sometimes it is as simple as unconsciously looking for an answer that will validate their own assumption.
You also have the unpredictability of the users themselves. With a free trial experience, there will be a certain level of inherent randomness in the data. There will be people who sign up and never use the product. There will be people who use it rigorously and never convert to a paid account. And there will be people who never trial the product at all yet sign up for a paid account seemingly without any interaction with your company.
You may have mounds of data, but is it the right data? Are you able to interpret it correctly? Do you deeply understand the problem you are trying to solve? PLG is only as successful as the people behind the strategy — the human elements of intelligence, experience, and behavior.
Problem-solving is at the heart of product development. Your product plans should be rooted in the strategy that leadership developed — not driven by data points from product usage. That is not to say that feedback should not be incorporated into your planning. But you want to be cautious of letting data overly steer your decision-making. The best product managers take a holistic and critical view that includes overall company strategy, customer feedback, and product analytics.
How to develop and implement a product-led growth strategy?
A PLG growth strategy puts the product at the center of the overall business model and plan. You position the product as your main channel for and driver of customer acquisition and scalable market expansion. Once you capture your vision, target customers, market opportunity, organization strengths and challenges, essential elements of the product, and how it will be sold, you can dive into the tactics and tools you will need to achieve the goals you set.
B2B SaaS funnels for product-led growth
There are four basic funnels for product-led growth: self-serve, sales-assisted, bottom-up, and top-down. The funnels map to how an organization operates, to whom it sells, and the specifics of the product itself. Notice how three of the four funnels rely on salespeople or targeted marketing to facilitate conversions. No such thing as a product that sells itself, right?
Sales: “No touch,” meaning customers purchase subscriptions directly
Goal: Self-serve annual-recurring revenue
Customer: Individual users
Sales: Transactional, meaning a salesperson closes each deal
Goal: New opportunity pipeline
Customer: Individual users, SMB buyers
Sales: Land and expand, meaning salespeople focus on growing each account
Goal: Add-on opportunity pipeline
Customer: SMB and enterprise buyers
Sales: Outbound and account-based marketing, meaning salespeople proactively contact prospective accounts
Goal: Sales enablement
Customer: Enterprise buyers
Tactics for product-led growth
Going from a siloed to product-oriented organization is no small feat. It often requires reorienting teams, reimagining workflows, cultivating skills, and hiring new talent. With the right structure and people in place, you can begin to implement some of the common tactics for product-led growth (PLG).
Best practices for PLG:
Orient the organization around a product development mindset
Align product development teams against a clear strategy
Minimize friction during the sign-up process (transparent pricing, free trial, etc.)
Weave the product into marketing efforts (topical guides,
Build an interactive and personalized user onboarding experience
Incorporate virality into the product (user referrals, free invites, social sharing etc.)
Develop an account expansion strategy (customer marketing, plan upgrades, product add-ons, etc.)
Estimate the value of functionality and measure the worth of the what was delivered
Continually improve based on customer feedback and long-term business goals
Tools for product-led growth
Every organization needs basic B2B tooling for communication and asset storage. Beyond that individual functions will require specialized software to best complete their work. Just as finance needs tools to manage payments, payroll, and accounting, product development teams need purpose-built software to manage all aspects of building and managing a product.
A robust product development software suite should include some or all of the functionality needed for:
Strategy and positioning
Ideation and whiteboarding
Design and development
How to measure product-led growth?
Access to analytics is critical to PLG. You need to capture and analyze a wide breadth of data to understand the value that customers are getting from using your product and the value that the product brings to the business. In isolation these measurements do not tell much of a story. But taken as a whole and viewed through the lens of customer feedback, market shifts, and overall business goals, PLG metrics can provide a sort of health check for the product and the company.
Product-led growth metrics for SaaS companies
Most of the metrics that are associated with PLG are commonplace in SaaS companies. The focus is on profitability and measuring the company’s return on investment. A few the metrics below are specific to PLG, though. Engagement scores, time-to-value, and virality measures are hallmarks of a product-centered growth strategy.
Common PLG metrics:
Active users: Number of people who actually use your product — typically broken out by daily active users (DAU), weekly active users (WAU), and monthly active users (MAU)
Average revenue per user (ARPU): Total revenue divided by the number of users
Average revenue per account (ARPA): Total revenue divided by the number of accounts or subscriptions
Customer acquisition cost (CAC): Total cost to acquire a new customer, including marketing spend, sales efforts, and staff salaries
Customer lifetime value (LTV): Average net profit a business can expect from a customer
Engagement score: Users who meet a threshold for finding value in a product, such as time spent or
Expansion: Rate at which existing customers upgrade or expand paid accounts
Gross churn: Rate at which customers cancel, fail to renew, or downgrade
Trial to paid conversion: Rate at which trial (or freemium) accounts convert to a paid account
Product-qualified lead (PQL): Prospective customer who has found value in using your product and reached defined milestones that indicate intent to buy
Net churn: Lost revenue from cancellations and downgrades calculated after new revenue from upgrades or expansions by existing customers
Retention: Rate at which the business retains customers
Time to value (TTV): How long it takes a user to find realize the value expected from using the product
Virality: Number of new users generated by referrals from existing customers
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