Your Guide To The Fundamentals Of Product-Led Growth
I am pretty sure that many of you have taken advantage of Free trials to get people to use your product before buying it. Others are actively encouraging their users to build habits using their products.
But did you know that these two seemingly unrelated activities are actually part of a single strategy? Well, let me introduce you to product-led growth— one of the most prominent ways of building products today.
What Is Product-Led Growth (PLG)?
Product-led growth is a strategy where your product acts as your primary tool for marketing and selling itself to your potential customers.
The best characteristic of PLG is its ability to enable self-serve growth, which can be visualized using the product-led growth flywheel. The majority of benefits that you can experience from this strategy come as consequences of its self-serve nature.
What Are The Benefits Of Product-Led Growth?
In no particular order:
Superior acquisition cost management: Unlike other business strategies, PLG requires minimal unit costs to bring in a new paying user. This is because the variable costs of customer acquisition are quite small (e.g. paid 3rd party services, infrastructure, etc.), and the majority of the money you spend is on fixed costs (development of PLG features).
It means that the more people you acquire, the smaller your costs get per paying user.
Enterprise sales, on the other hand, has a significant variable cost component as you will end up paying salaries for your salesperson, including a percentage commission from the ARR they have brought you.
So, increasing the number of paying customers will not decrease your costs in this case.
Ease of Scaling: You do not need to hire more sales reps or significantly ramp up your customer success team if your user base starts growing rapidly.
This is because people will use the integrated self-service features in your app to pay for your services. Moreover, if they need customer support, they can enter your help center and find articles covering their question or communicate with your AI-driven chatbots instead of connecting to a customer support representative.
Easier Global Reach: You don’t need to hire specialized marketing or sales teams or partner up with marketing agencies in each country that you want your product to enter. Instead, you can simply translate your products (including your payment and upgrade features) into different languages and make them available worldwide.
There are many other benefits to adopting a PLG strategy, but these three are the most impactful ones among the bunch. So, let’s leave the rest for another day and move on to understanding the difference between PLG and its more traditional counterpart that relies on sales instead of product experience and features.
The Difference Between Sales-Led And Product-Led Companies
In Sales-led companies, as the name suggests, it is the sales and marketing teams that the company relies on to generate revenue and grow.
Product teams, in this case, are not involved in acquisition-related activities and do not build any features that support or drive it. Instead, they take a back seat and focus on implementing the core product features.
The key characteristics of sales-led (SLG) or marketing-led products are the following:
- High-friction acquisition: You will usually need dedicated sales and marketing teams that spend a lot of time and effort on the sales process - nurturing your qualified leads and converting them into paying customers.
- Long time-to-convert: Sometimes, it will take your teams a couple of months between exposing the user to your brand/product and getting them to sign a contract with you.
- Strong customization: You are usually selling your products to a few customers (as it is hard for you to scale without PLG), so you are able to take your time and customize your solution to fit their specific needs.
If you compare product-led growth vs sales-led growth, the two approaches are polar opposites in terms of these characteristics. Product-led growth, for example, will earn you:
- Very low acquisition friction: People will use your product for some time. Then, if they like it, they will go to your checkout page, fill in their credit card data, and buy it.
- Short sales cycles: It will take your end users days or a couple of weeks instead of months to decide that they want to buy your product.
- Little to no customization: If your product is designed to serve the masses, then you have no time and resources to offer customized experiences to your users. Instead, you will end up standardizing your functionality and UX.
Looking at the comparison above, we might get the impression that PLG is the right way to go, and everyone should ditch using the sales-driven approach. But is that really the case?
Is Sales-Led Growth (SLG) Outdated?
Absolutely not.
Although it is the more traditional approach compared to PLG, it is definitely not something to ignore automatically. Instead, you should look at the nature of your product and understand if PLG or a sales-led strategy fits your product best.
One of the tools that you can use for this is the so-called ARPU (Average Revenue Per User) <>CAC (Customer Acquisition Cost) Spectrum.
It is a single horizontal line. On the right end of it, you have the products with high-revenue customers that cost you a lot to acquire (high ARPU and high CAC). Examples of such products are Oracle Databases, AWS, and others.
On the left end of this line, you have the products with low revenue per paying user, but they are also quite cheap to acquire (low ARPU and low CAC). Here, we have MailChimp, Google Drive, etc.
Here’s what the spectrum looks like:
As we can see here, depending on where your product stands on this spectrum, it is better for you to choose either PLG or SLG.
There is a good reason why you would not want PLG for a high CAC product. In PLG, only a fraction of your users convert to paying customers. So, your CAC (which is already high) will skyrocket.
Similarly, there is a good reason why you would not do SLG for low ARPU products. In this case, your sales costs would be much higher than the revenue you are getting from your customers.
Now, in case you have analyzed the nature of your product and concluded that PLG is the way to go, your next step would be to understand the components that you need to pay attention to in order to make your PLG strategy a success.
The 5 Key Components Of A Great Product-Led Growth Strategy
Some say that PLG is not a strategy itself, but an umbrella term for a group of interrelated strategies that help you achieve scalable and sustainable growth.
No matter if you agree with this statement or not, I think it is quite beneficial for you to learn about these components/strategies.
Component #1: Fantastic Onboarding and Activation
If you want your product itself to do your marketing for you, then you need to make sure that people are having an excellent customer experience using it. But before they start using it, they will first need to set your product up and understand how it works.
Getting these two right is critical, as they get you:
Better retention: If your users have had hiccups while setting up and learning to use your product, they will get a bad impression of you and will be more likely to part ways with you after some time of using your product.
Shorter time to value: People won't really think your product is all that great until the moment they personally experience how it solves their problems. The longer it takes for them to get their pains resolved, the more likely they are to ditch your product.
So, you need to ensure that your activation and onboarding are quick and smooth to avoid letting them get bored.
Better customer lifetime value (LTV): The logic here is simple. If you don’t do setup and onboarding right, then your users might not be able to use your product the way it was intended and fail at covering their pain points with it, leading to a higher chance that they will churn early (and give you a smaller LTV).
For instance, if Dropbox failed to explain to you that you can drag and drop any file into its folder in your computer, and it will automatically sync it with the cloud, then you would have to upload your files manually over the Dropbox web interface—leading to a subpar user experience.
Speaking of Dropbox, they are actually one of the few SaaS companies that have done a fantastic job at setup and onboarding (and they are among the best PLG examples out there).
When you install their desktop app, you will see this short message introducing you to their core feature—drag and drop files for auto sync.
When you click on finish, they will open the Dropbox folder on your computer’s file explorer to let you drag and drop something in it and instantly experience the value of using Dropbox.
Component #2: Sustainable Retention with Habit Loops
Let’s continue digging into the notion of “your product doing marketing for you.” The first part of that involves leaving a good first impression on your users and teaching them how to use your product.
Now, let’s look at the second part, in which you have already done a great job at implementing your onboarding and activation experiences, and your users have started using your product in their day-to-day.
Here, again, your product will be able to market itself only if you are able to leave a great impression on your users. And it’s not just about the “impression” in terms of them liking you in general. It’s about them liking your product so much that they use it all the time.
I mean, I absolutely admire the Mozilla Foundation for their work on making the internet a better place with their privacy-first products (Firefox specifically). However, I do not love Firefox so much that I would use it as my primary browser.
So, in order to understand if people love your product in a way that gets them to use it constantly, you will need to measure your product's retention.
Retention is one of the core metrics that you need to measure and improve if you are following the PLG philosophy. The reason is that a stable retention rate indicates that people have formed habits around your product and are:
- More likely to convert from Free to Paid tier to unlock new features.
- More likely to stay with you in the long run and significantly increase your LTV.
- Less likely to leave you for a competitor, as it would mean that they need to break their current habit and form a new one (which is really hard to do).
One of the best ways to help your users build habits around your products and improve your retention is the practice of habit loops.
A habit loop consists of three steps—cue, routine, and reward.
Here, the cue is the environmental condition that triggers and reminds you to take action. The action is whatever you do to cover your use case, and the reward is the fact that you have covered your use case.
Let me illustrate this with the example of Netflix. When you are bored (cue), you open Netflix and watch one of the shows that are suggested to you (action) which results in you getting entertained and relaxed (reward).
The logic here is that the more you get rewarded after opening Netflix, the more likely you are to open it next time you are bored.
Component #3: Flexible Acquisition with Self-Reinforcing Loops
For the two previous components, we have assumed that you have already successfully set up your acquisition and are getting a healthy amount of new sign-ups daily. Let's take a closer look at how PLG products create this healthy traffic of new users.
Unlike the sales-driven approach, PLG tries to make acquisition flexible to navigate the market with ever-changing user needs and competitors. This means that PLG companies usually rely on multiple acquisition channels at any given time. So, when one of these channels starts declining, the effect of it is minimal, and the company has enough time to look for another channel.
For instance, HubSpot relies on social media, paid ads, and its blog paired with SEO to acquire new customers. Recent trends show that HubSpot has become less active on social media and more on blog/SEO. It means that the first channel was underperforming for them, and they made a decision to shift their focus and resources towards a better-performing channel instead.
Another acquisition trick that many PLG companies use are growth loops.
Growth or acquisition loops represent the situation when:
- Your existing users invite their friends or colleagues to sign up for your product (or do referrals). These newcomers, in their turn, are inviting their own friends, and so on. This process of delegating your marketing efforts to your users is known as a viral loop.
- Your existing users create content which is then posted online and ranked by search engines. Other people find this content using Google, visit your site, sign up, and start creating their own content. This workflow is what you call a user-generated content loop.
- Your company creates content and posts it online, which brings in readers who sign up and become paid users. You then reinvest this revenue to create more content. This is known as a company-generated content loop.
- You place ads, and people click on them, sign up, and become paid users. You reinvest the revenue to buy more ads. This is a paid loop.
As you can see, no matter the differences between the four loops above, all of them have one thing in common—their outputs (new users) serve as inputs for the next cycle.
It is this self-reinforcing nature of acquisition loops that significantly improves the growth rate of PLG companies by helping them bring in a lot more users than they would be able to do with traditional marketing channels.
Component #4: Freemium Pricing Models
So far, we've discussed how you can get people to love your product by using it in their everyday lives and experiencing its many benefits firthand. But you can also take advantage of people’s great impression of your product and convert them into paying users.
One of the main approaches that PLG teams take for monetization is the utilization of free tiers and free trials.
The reasoning behind this is that PLG works by letting your users try your product in real life and experience its value for themselves, prompting them to buy it. So, if you ask for payment upfront, the entire scheme collapses. I mean, why would they get up and look for their wallet if they're not even sure the product is any good?
Apart from this, freemium models come with other benefits too. One of them is improved virality. Your viral and other acquisition loops will perform much better if the invited people join as free users and don’t have to pay upfront for a product they know little about.
Regarding how you implement your freemium product-led growth model in terms of pricing, there are two common approaches.
Free Plan with Feature or Usage Limits
In this case, you give your users a 'free forever' plan and hope that they will upgrade to paid subscription plans when they go past your usage limits or start needing the restricted features. Google Workspace is one of the prominent products that uses this approach.
In fact, if we look closely at the pricing page of Google Workspace, we will see that they use a combination of both usage and feature limits.
Free Trial
In this case, you give full access to all of your product features for a limited time with the hope that people will buy it after the trial is over.
Product management teams usually pick free trials when they are not able to provide the core product value to their users with feature or usage limits.
Google Cloud, for instance, will give you $300 in free credits to use their cloud services. The reason behind opting in for the free trial business model is that engineering teams would need to access all of their advanced services and APIs and try the ones they need to understand the power of Google Cloud and sign up for it.
Component #5: Data-Driven Decision Making
Almost the entire process of your users taking a shine to your product (to the point of choosing to buy it) happens within the product itself.
With a traditional sales and marketing approach, your ability to track and analyze customer behavior is highly limited—ask anyone who has ever paid for a cable TV commercial. Unlike these traditional channels, you own the codebase and the infrastructure of your product, and in turn, your ability to monitor user activity in it is limitless.
PLG-driven products actively take advantage of this and keep track of user activity and product usage on all of the significant customer journeys, including activation rate, habit formation, conversion to paid users, etc. They are actively using all of this data at their disposal to:
Identify underperforming areas and work on fixing them.
For instance, if you were in charge of the Dropbox desktop app, you could use a product analytics tool to create a funnel chart for your activation and habit formation to see that you are getting a 75% drop on the setup step—prompting you to analyze and find the reason behind such a massive drop
Measure the effectiveness of new features in terms of their impact on acquisition, retention, or monetization.
Imagine that you are leading one of Uber’s teams, and you have just introduced the Fare share (when multiple people pay for the ride) feature, hoping it would improve your acquisition.
By looking at your acquisition data, you can see that, after releasing the feature, the number of new users has significantly increased.
Take an interest in learning about your customers
I remember an interesting case from one of the SaaS products I managed in the past. It had a document editor with sharing capabilities. The problem was that very few people were sharing the document with others ('Create' to 'Share' conversion rate was barely 2%). Instead, there was an abnormal amount of copy actions on the document text itself.
After seeing this pattern in our PLG tool, we arranged some user interviews to understand what was happening.
Apparently, people were mostly writing meeting minutes using our app and sending them out over email to the people they had met with. These people represented their customer base and did not want to make their customers sign up for our product.
So, instead of sharing the document, they were copying the text from it and pasting it into the email body. That was a huge 'lightbulb moment' for our team.
Product-Led Growth Is Taking Over the World
Product-led growth has become the primary strategy for building and managing software companies thanks to its scalability and sustainability. Despite these benefits, a product-led strategy heavily relies on exceptional user experience and product development.
So, if you decide to take this approach, make sure that you have the necessary talent in your team. If you liked this guide and want to continue exploring the best product strategies out there, make sure to subscribe to our newsletter!