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What is product-led growth?

From productled.org
We are in the middle of a massive shift in the way people use and buy software.



It’s been well over a decade since Salesforce brought software to the cloud. Apple put digital experiences in people’s pockets back in 2009 with the first iPhone. And in the years since, the market has been flooded with consumer and B2B products that promise to meet just about every need under the sun. Yesterday’s most exceptional product experiences are no longer exciting—they’re expected.

That’s what makes this shift bigger than any of the ones we’ve seen before—it’s a shift in both consumer demand and market supply. The transition toward consumer-grade UX in B2B SaaS products—often called consumerization—is being driven by tech-savvy users who are now demanding software that is more beautiful, more intuitive, more powerful, and more affordable than the tools they used before.



Buyers want to self-educate—a 2015 Forrester report found that nearly 75% of B2B buyers now say they’d rather buy through an app or website, rather than a salesperson. And personalization is expected—not only are 80% of people more likely to do business with a company that offers personalization, but Salesforce’s 2017 State of Marketing report found that 52% of B2C customers would actually switch brands if they weren’t getting a personalized experience. On top of all that, people now want immediate gratification and quickly give up on products that don’t provide it—for instance, 21% of folks open up a mobile app once and then abandon it completely; by the 90-day benchmark, 71% of app users will have churned completely.



And by and large, the market is rising to meet these consumer demands. It’s easier than ever to start a company—and more companies means more competition. Consumers now have access to an ever-growing list of products that can deliver on their expectations. The result is an erosion of any remaining user patience for clunky legacy software—people are more willing than ever to ditch products that aren’t meeting their expectations. For instance, in their 2019 SaaS Trends report, Blissfully found that the average mid-sized company saw a 39% turnover in their SaaS stack last year.



So what does this mean for the future of product?



The fact is, an outstanding customer experience has always been key to success. Once that experience was owned by sales. If you wanted to buy a new product, you talked to a salesperson. If you were lucky, they were knowledgeable and empathetic and helped you buy the best product for your needs. With the internet came a growing ability for early digital marketers to measure results and to own growth metrics like engagement and acquisition.



But people don’t want to interact with salespeople or marketing campaigns anymore—not at the expense of actually getting to experience the product they’re buying. To keep up with the market and get ahead of the curve, businesses must reshape their marketing, sales, and service strategies and fundamentally rethink the roles of their customer-facing teams.



Sales-led and marketing-led growth had their time. The future is product-led growth.



Product-led growth (PLG) is a business methodology in which user acquisition, expansion, conversion, and retention are all driven primarily by the product itself. It creates company-wide alignment across teams—from engineering to sales and marketing—around the product as the largest source of sustainable, scalable business growth.

To help you better picture how a product-led strategy works, we came up with a little something we’re calling the product-led prism:

When light passes through a prism, the different colors that make up white light become separated and create a rainbow effect. This happens because each color has a particular wavelength and refracts at a different angle.



The product-led prism does the same thing, only in reverse. The different colors are all different teams—marketing, sales, CS, design, engineering—that normally operate on different wavelengths. Instead of separating them, the product-led prism brings these teams together. Their combined wavelengths form the bright, focused light of the user’s experience.



Pretty cool, huh?



Now, we should also make something clear: Product-led growth does not mean PM-led growth.

PLG is all about harnessing the contributions of your whole company to build better, stickier products—it is not about creating an autocracy.



Think of it as the democratization of product: Like any effective democracy, product-led growth requires traditional decision-makers to open up the decision-making process to a larger, more diverse group of stakeholders. Does this create more difficult, complex discussions? Yes. Do difficult, complex discussions lead to better, more innovative business decisions? Absolutely.



The alternative is to continue scaling through hiring. Doing so will almost guarantee that your company will move slow, be unable to respond at the speed needed to win, become bloated trying to meet customer expectations with humans, and have higher costs and lower profit margins.



If you’re not actively thinking about how to minimize friction at every customer interaction and how to drive customer loyalty and advocacy, it’s time to be highly concerned about your product-led competitors.



Of course, companies don’t become product-led overnight. Becoming product-led is a process and journey that requires a mindset shift at both the individual and company level. It takes time, effort, and commitment. But as the companies below illustrate, when done right it can be very very much worth it.



Product-led growth as a go-to-market strategy Product-led growth impacts your company’s go-to-market strategy by placing your product at the helm. Like other go-to-market strategies, product-led growth is a company-wide action plan that informs how sales, marketing, CS, engineering, and product teams measure success and contribute to growth.



Good go-to-market strategies answer the following questions:

Who is buying your product?

Where will they find out about your product?

Why are they buying your product?

How are they buying your product? Let’s take a look at how PLG answers those go-to-market questions:

Who is buying your product?

In a product-led approach, you should be selling to users not buyers.

Where will they find out about your product?

‍ PLG relies on virality and word of mouth, rather than traditional promotion strategies. More specifically, happy users will share your product with friends and coworkers.



Why are they buying your product?

‍ Your product should be more trustworthy, deliver more value, and have better UX than your competitors’.



How are they buying your product?

‍Users should become buyers within the product itself—or at least after experiencing the product first-hand—rather than via sales reps.

Product-led SaaS companies usually rely on a freemium or free trial revenue model that allows users to experience their product without going through a sales or marketing middleman. Or as OpenView puts it, in a product-led experience, “the product “paywalls” follow, rather than lead, the actual value that the user receives and pricing scales as usage increases and more value delivers.”



As you might imagine, this strategy opens up your top of funnel (or your flywheel, if you’ve already made the transition to this model, which we’ll cover in more depth below) to a huge number of potential customers much earlier in their journey. It also means that your product has to be valuable—and has to demonstrate that value effectively within a short period of time—in order for users to convert to paying customers.



In a freemium or free trial model, you’re effectively selling to users, not the buyers who may be high up in an organization or part of a procurement team far removed from the actual workflows that your product was built to optimize. Product-led growth is a bottom-up approach that speaks directly to the needs of your end users.



Freemium and free trial revenue models can take many forms. Free trials are the more straightforward of the 2 models. In a free trial, users get the full product experience for a limited period of time—usually 14 or 30 days—or, more rarely, up until a certain usage capacity.



With freemium, on the other hand, users can continue using the product indefinitely, with some restrictions.



The 3 main types of freemium are:

Reduced features

‍ Extra features or functionalities require upgrading to a paid plan—e.g. Extra features or functionalities require upgrading to a paid plan—e.g. Slack

Reduced capacity or usage

‍ Use of storage limits, data quotas, etc to restrict usage—e.g.

Use of storage limits, data quotas, etc to restrict usage—e.g. Dropbox

Reduced support

‍Access to support docs, CS, etc. offered on a tiered basis—e.g.

Access to support docs, CS, etc. offered on a tiered basis—e.g. Heap Analytics Many companies employ some combination of the 3—for instance Heap’s freemium plan offers reduced bandwidth and support.



Regardless of what form a free trial or freemium plan takes, the goal is the same: to get folks into your product as soon as possible and let them experience its value for themselves.



Becoming product-led Although it requires talented sales and marketing teams, product-led growth is inherently incompatible with sales-led and marketing-led strategies.



The decision to embrace product-led is a binary one—you either commit or go in a different direction. The process of becoming product-led, however, can be a long and circuitous journey that looks different from company to company.



So, once you decide to embrace product-led, how do you actually become a product-led company?



There are two critical transformations that need to take place: The first is in your product, the second is in your organization.



First and foremost, you need to have an incredible product that delivers on the value promised. If you’ve been thinking that product-led sounds similar to design-led, you’re right—the empathy and innovation inherent in design-led thinking is a crucial component to product-led growth.



That’s because a well-designed product is a requirement for PLG. Well-designed doesn’t just mean “pretty.” It means that your product is light and intuitive—with minimal friction, sticky features, and a short time to value.



To build a truly engaging product experience that is capable of demonstrating its own value, you need a deep understanding of your users’ journey and the problems that they’re trying to solve. Your entire product should be built around making it easier for users to solve their problems—and that means removing pain points wherever possible, offering effective user onboarding that is centered around user goals (not product features), and providing ongoing, contextual in-app communications for things like new features, upsell prompts, etc.



Successful products also make smart use of user data to iterate on their existing product, provide helpful (vs. vanity) personalization, and monitor for bottlenecks in the user journey. To gather this data, enable technologies like Fullstory, Mixpanel, or Heap in combination with qualitative feedback from your customer-facing teams.



Product-led growth demands sophisticated, personalized product experiences that ultimately help users become better versions of themselves. This doesn’t mean slapping a product tour bandaid on your existing product and calling it a day. It means designing products that—through a combination of user journey mapping, user testing, and intelligent data implementation—understand what unique users are trying to achieve with your product, and adapting the experience at the individual level, effectively allowing your product to serve as support, CS, sales, and marketing.



The good news is that products (and product people) are becoming smarter. We have the technology to build software that can react to what a person wants or needs at any given moment. We have the data—and storage is now cheap enough—for this to become a wide-spread reality.



The second and more difficult transformation needs to take place in your organization. Product-led organizations move fast, with a relentless focus on the needs and desires of their users, and culture of collecting and leveraging contextual feedback. Additionally, product-led companies are aligned—PLG is a far-reaching, company-wide methodology that requires coordination and collaboration across departments.



Cross-functional teams are both a requirement for and a benefit of product-led growth. Breaking down silos is an essential step on your company’s path to PLG, but it also has positive effects on your teams’ ability to communicate and coordinate, leading to more informed and aligned decision-making across your business.



Product-led growth can be an intimidating concept for old-school sales, marketing, and customer service folks. And yes, adopting a PLG approach will ultimately change what you look for in sales, CS, and support people. But that doesn’t mean scrapping your customer-facing teams—it means scaling these functions through your product, which takes the heavy lifting off your people and frees up their time, energy, and creativity for the high-value, strategic work.



Product-led growth metrics and principles to understand It’s important that your team have a common language and reporting system to enable internal alignment. Selecting the right success metrics—and aligning your teams around them—is a crucial part of the process. That’s why the metrics outlined below should not be siloed. They should be reported on and affected by cross-functional teams who can leverage the data to make more informed decisions and enact coordinated changes across your business.



So how do you measure success in a product-led growth model? What are the PLG metrics?



Whether you realize it or not, you’re probably already tracking quite a few product-led growth metrics. Many key SaaS metrics are also essential to PLG, although some may be more or less important under a product-led approach than other business methodologies, or may be leveraged differently.



A short time to value (TTV), for instance, is a critical component of consumer-grade products. TTV is the time it takes new users to reach their first aha moment or activation event. The goal of any good user onboarding experience should be to reduce TTV as much as possible, helping new users realize your product’s value as soon as possible.



Time to value could also be looked at as the time it takes users to go from acquisition to activation—the first 2 steps in Dave McCLure’s pirate metrics model. At Appcues, we updated the traditional order of the pirate metrics—also called AARRR metrics—to reflect the path of users in a free-to-paid business model.



In our model, those metrics are:

Acquisition— the number of users who sign up for your free trial or freemium plan

Activation— activation rate is expressed as the percent of users who have achieved value, out of total acquired users



Revenue— can be measured by average contract value (ACV), monthly recurring revenue (MRR), average revenue per user (ARPU), etc.



Retention— measures the number of users who continue using or paying for your product (typically month over month, but can also be year over year or even day over day)



Referral—the percentage of current users who successfully recruit new users to your product

Other SaaS metrics that are useful for measuring product led growth include:

Expansion revenue

Also called expansion MRR or upsell revenue, measures the revenue generated from existing customers through upsells, add-ons, cross-sells, etc. Expansion revenue is often overlooked in favor of net new acquisition, but is actually one of the most important levers for SaaS growth. In fact, Also called expansion MRR or upsell revenue, measures the revenue generated from existing customers through upsells, add-ons, cross-sells, etc. Expansion revenue is often overlooked in favor of net new acquisition, but is actually one of the most important levers for SaaS growth. In fact, ProfitWell recommends that at least 30% of your revenue should be expansion revenue.

Average revenue per user (ARPU)

Calculated as total MRR divided by the number of customers. Sometimes considered a vanity metric,

Calculated as total MRR divided by the number of customers. Sometimes considered a vanity metric, ARPU can actually be a very good indicator of the overall health of your business.

Customer lifetime value (CLV)

A prediction of how much revenue your business will receive from a single customer over the duration of your relationship. CLV is used to identify highly valuable customer segments and gain a more thorough understanding of reasonable acquisition and retention costs.



Product-qualified leads (PQLs)

Bye, MQLs! Hello, leads who have already experienced value from your product through a free trial or freemium account! Product-qualified leads are essentially activated users—folks who have completed a key action within your product, had their aha moment, and have seen the value that your product can offer first-hand.



Net churn

Generally speaking, revenue churn is a more useful metric for SaaS growth than customer churn. Even more useful is net revenue churn, which can often give you a clearer picture of your current customer base than gross churn, which does not account for expansion or upsell revenue.



Virality and network effect

These terms are sometimes used interchangeably but are, in fact, very different. However, they do often occur hand in hand. “

These terms are sometimes used interchangeably but are, in fact, very different. However, they do often occur hand in hand. “ A viral product is one whose rate of adoption increases with each additional user. The more people join, the faster it grows — until a certain point. ” A product with a network effect, on the other hand, becomes more valuable for users as more people join, such as in the case of a 2-sided marketplace like Airbnb or a social platform like Facebook. As you map out your vision of success using the metrics above, you’ll want to think about how they impact your flywheel. That’s right—the funnel is dead. Long live the flywheel!



In case you missed it, in 2018 Hubspot shook up the SaaS community by revealing that they’d ditched their funnel in favor of a flywheel model:

“Today, customer referrals and word-of-mouth have become the largest influence on the purchase process, which means the funnel has one major flaw: It views customers as an afterthought, not a driving force. You see, funnels produce customers but don’t consider how those customers can help you grow. That’s where the flywheel comes into play…”

‍ A flywheel model encourages companies to consider the user experience in its entirety and understand its potential for compounding growth.



We interviewed over 50 companies to create a flywheel model that would resonate with product-led businesses.



The result—the Product-Led Growth Flywheel—is a framework for growing your business by investing in a product-led user experience. In this framework, the experience is designed to generate higher user satisfaction and increased advocacy, which in turn drives compounding growth of new user acquisition.

The transition from funnel to flywheel doesn’t happen overnight, but we firmly believe that embracing the principles behind the flywheel model is a critical step to becoming product-led.

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