Product-led Growth: How do you Know if your company needs it?
The world is changing. As product-centric, market-led companies feel the pressure to take a customer-centric approach as expeditiously as possible. It can be difficult to maintain – let alone devise – the strategies necessary to survive and thrive.
As customer demands continue to increase, companies need to adopt a customer-led growth approach to stay ahead of the curve and get the most out of their limited resources.
What exactly is product-led growth (PLG)? It is a sustainable, long-term growth strategy centered on creating a product that people want – rather than just a product. The optimal model for today’s end-user-focused market (more on that below), PLG depends on the product to acquire and convert customers.
Most companies don’t have the luxury of time to let their products mature naturally. They need to get results fast.
Product-led growth offers a way of working that leads to a more humane development process, yielding better results with less time and effort.
Anyone who wants improved growth results should consider this approach, so keep reading to find out more about how to get started.
It’s Time for a New Approach
The old development model is built with speed bumps. When companies follow the traditional approach – create and market a product, engage with early adopters, expand rapidly, and then slow down and scale more efficiently – many find themselves in a predicament: They have more customers than they know what to do with, but their growth trajectory hasn’t matched their expectations. Or, they see a massive increase in their go-to-market (GTM) expense to educate customers on the value proposition, leading to lower R&D investment and a declining product over time.
If you’re in this position, you’ve probably heard about product-led growth. It’s a new approach to growth that focuses on the product itself – not the business or marketing strategies that support it. This article will provide an overview of the product-led growth approach, including the benefits, who it’s best for, and the key pillars. In the next article, we will discuss how this impacts your GTM operations.
But first, let’s look at how times have changed and how your product approach needs to change with it.
The CIO era: 1980s
Sales-led growth in the 80s and 90s was aided by field salespeople, who met with a buyer (CIO) over dinner and on the golf course. The most important criteria were the compatibility of IT products.
The Exec Era: 2000s
The turn of the millennium brought a sea-change, as data centers faded away and cloud-based services took center stage. The advent of on-demand, onsite slashed development costs.
In the Exec Era, outbound salespeople and marketers were targeting a specific buyer: the non-technical executive. The execs purchased new technology based on their business goals, like key performance indicators (KPIs) or return on investment.
In this era of “marketing-led growth,” sales development representatives (SDR) hunted marketing qualified leads (MQL). Inbound marketing fueled high velocity inside sales, which is why all those who joined in followed it enthusiastically – until they hit the wall.
Although the Exec Era is a thing of the past, its memory is alive and well: VCs and SaaS pundits love to reminisce about these days gone by – even as its relevance declines with every passing day.
The End User Era: 2010s and beyond
Fast-forward to the present day, but rather than a quantum leap, we’ve advanced exactly as expected. Infrastructure is more elastic and scalable than it has ever been before. APIs and modular tools allow developers to not have to write everything themselves anymore, an efficiency gain for customers that results in better products (usually free).
Because everyone now has access to thousands of new products, discoverable with just a few clicks or taps on their phone screen, if you want to attract and convert individual end-users, you need a scalable, bottom-up distribution approach that empowers consumers to find, evaluate, and adopt the product on their own.
That’s where product-led growth comes in.
The Business Benefits of PLG
The end-user-focused growth model is a win-win. Today, there are 21 large public companies that use a PLG approach – including all of the top IPOs in 2019. As more PLG firms go public every year, this number continues to increase rapidly. Furthermore, post-IPO, product-led growth firms reach an average revenue run rate of $10M and begin to scale at a rapid speed because they’re not limited by labor-intensive lead generation or sales processes.
With a 2x median enterprise value (EV) of these companies compared to the other SaaS index as a whole, it’s no wonder that they have created over $208B of worth so far. We see this trend continuing into 2022, with much more added market value expected.
The Three Pillars of Product-led Growth
Pillar 1: Design for the end-user
End users are in command. They are individuals, not organizations, who think in terms of conventional return on investment. People want to address the problem they’re currently facing. “Designing for end-users is really understanding what they do—and it’s also truly understanding who you serve,” as Tope Awotona, CEO and Founder of Calendly, puts it. In other words, designing for end-users entails putting real people’s needs first.
Pillar 2: Deliver value before capturing value
Relationships require give and take. In order to get something in return, you have to give your users something of value first. This is why product-led companies prioritize short time to market (TTM), for example, by allowing users to access some (or all) of the features before they need to pay for it– through a self-serve free trial, freemium model or open-source model.
But delaying payment does not automatically provide value on its own. In the time between when a user signs up for a product and when they enter their credit card information, they need to realize how valuable the software really is. That’s the timeframe in which you must solve the user’s problem or help them reach the proverbial light bulb moment in which they understand how your software will improve their day-to-day life.
This involves creating features and functionality that symbolize your core value, as well as deleting anything that distracts from reaching it.
Whether your business model is low-touch or high-touch, a successful PLG company eliminates all obstacles for customers.
Pillar 3: Make an investment in the product with go-to-market goals.
It generally costs more to produce software than to deliver professional services to a first client. The marginal cost to provide the same value to a second customer is close to zero after that. This makes the upfront expenditure very lucrative in the long run.
PLG organizations invest in the product with the goal of generating acquisition, conversion, and expansion. They accomplish this by:
- Investing in robust product data that allows teams to track, measure, and analyze user behavior
- Developing a growth function that is in charge of ensuring the product improves its distribution, enablement, and ability to capture value
- Optimizing the user experience while maintaining product quality.
- Experimenting with ways to improve the user journey in multiple dimensions and learn from those outcomes.
Examples of PLG Businesses
Slack
Founded in 2009, Slack is a team collaboration platform with universal name recognition.
Slack’s success is due to their understanding that they aren’t just selling software. Their value proposition is a more productive, streamlined way for team members to communicate. With user experience as their North Star, Slack is the epitome of a PLG business.
Calendar
A scheduling tool that makes it easy for people to find meeting times, Calendly is a highly viral product: Every time someone uses the app to send an invite, they are also advertising and starting a viral loop. There are few barriers to entry, and because the technology solves a nearly universal issue, it’s quickly picked up by users.
Airtable
Founded in 2012, Airtable is a spreadsheet database hybrid that helps people better organize their personal projects. Currently worth more than $1 billion, with customers up and down the Fortune 1000 list, Airtable is used world-wide.
Created as a self-serve product, Airtable prioritizes customer success over consultative sales as part of its bottom-up design.
PLG metrics
A new GTM approach to growth requires new metrics.
For example:
- Growth Rates. Although SaaS companies typically believe they need high growth is key, data suggests that PLG organizations will have slower growth rates until they reach $10 million ARR—at which point the inverse is true. Don’t get caught up on growth rate early on. A slower growth rate might be a sign you’re on the right path.
- CAC Payback. Public PLG businesses spend more on R&D costs (product and engineering) than their SaaS peers. The product’s sales and marketing expenses are lower, but it’s difficult to determine the return on investment of product-related expenditures.
- LTV/CAC. This classic SaaS metric doesn’t work for PLG companies, mainly because it doesn’t take into account some of the key pillars that make PLG businesses attractive: low churn and the chance for revenue expansion from accounts.
- Logo Retention. What is the best way to track logo retention in a bottom-up adoption scenario, when you may have hundreds of individuals from an organization, each with their own account? Net Retention is one of the few metrics that crossover.
How to Measure Product-led Growth
The Natural Rate of Growth (NRG) surpasses existing SaaS metrics. Beginning – as always – with the product, it allows PLG firms to determine the proportion of their recurring income generated through organic channels.
This is a one-point indicator of the rate at which a firm naturally expands — before adding on incremental expenditures in sales and marketing.
The formula looks like this:
Natural Rate of Growth = 100 x Annual Growth Rate x Organic Signups (%) x ARR from Products (%)
Advantages of the NRG are that it:
- Acts as a strong indicator of future revenue
- Is trackable from the early days of monetization to IPO
- Applies to all software companies, at every stage of maturity
- Requires no sophisticated processes or tooling
- Indicates whether a business can drive efficient growth via the product itself.
How to Become Product-led
The majority of companies – especially those with roots in the CIO and exec eras – are not product-led. Achieving product-led growth is a journey.
While there are many advantages to being founded on PLG principles, any software company can adopt the core tenets of product lead growth to improve user experiences and increase go-to-market efficiency.
It is possible for non-PLG companies to become product-led if certain conditions are met: they have strong leadership (or else it will be too difficult), they understand their customers” pains points, know how to transform problems into solutions that provide value, appreciate creativity above all else in their people (creatives make products out of nothing!), and they have the patience to let their product grow.
Is a PLG Strategy Right For Your Product?
We have identified eight primary characteristics of a successful product-led growth company – some of which must be true in order for you to make the transition.
1. The product-market conditions are favorable. This includes: low marginal costs per user; users have direct buying power; and no existing solution meets the users’ needs.
2. Your product provides a unique, customizable solution to assist individual users with their daily tasks.
3. Your product is easy to understand, evaluate, and adopt into the user’s daily workflow, such that they can recognize its value quickly and easily – without needing help from your employees.
4. You put your value before the paywall and offer tiered options for pricing that increase along with usage.
5. The features and functionalities of your product allow it to serve as an acquisition channel for marketing, selling, and onboarding new users.
6. You get product engagement from marketing funnels, not sales team contact.
7. The more people who use your product, the more valuable it becomes. If you’re building a platform, the more services a user connects to it, the greater its value.
8. There are product champions within your clients’ firms who promote usage of your solution and help it grow within the organization.
With a majority of these criteria satisfied, you’re in a good position to start a PLG transition. However, even if you have all eight, implementing PLG does not happen overnight, nor should it. It’s a process that should be gradual, strategic, and always intentional.
Stay tuned for the next article in which we will discuss the GTM implications, hybrid approaches for product development/GTM, and how to get started.
Ken Gavranovic, author of Business Breakthrough 3.0, is renowned for his hands-on approach in transforming complex operations and catalyzing revenue growth within private equity, venture capital, and high-stakes corporate environments.
