Product-Led Growth: The Ultimate Guide for Software Companies
Product-led growth is one of the big SaaS buzzwords.
Our ultimate guide explores what PLG is, how it differs from different growth strategies, and why product-led growth matters for SaaS businesses.
It also looks at different PLG models, how to implement them, and important metrics to track. Finally, we look at a few examples of successful product-led businesses.
Without further ado, let’s get to it!
- Product-led growth (PLG) is a business strategy that relies on the product itself to acquire, activate, and retain customers.
- PLG differs from the sales-led and marketing-led models in that it’s less dependent on traditional promotion and sales tactics. It hinges on the idea that a good product promotes itself.
- PLG caters to the needs of modern customers who want functional and attractive products and prefer self-serve solutions to explore and purchase them.
- The strategy allows companies to reduce customer acquisition costs and skyrocket growth in a sustainable way.
- To activate and convert new customers, it uses a combination of freemium or free trials and self-service onboarding and support.
- In the freemium model, the users get access to limited functionality for free while in the free trial – full functionality but for a limited period.
- It’s also possible to mix the two approaches, for example, by offering a reverse trial.
- To become product-led, all teams across the organization need to embrace the PLG culture.
- Personalized onboarding experiences enable users to experience the product value in less time.
- Contextual upsell messages highlight the benefits of the premium plan when users need them most.
- Product analytics are essential to identify friction that slows down user progress through the funnel.
- Customer feedback is key to identifying the areas for improvement.
- At each stage of the funnel, there are relevant metrics to track. Make it clear which team is responsible for each of them to increase accountability and ownership.
- If you want to see how Userpilot can help your company become more product-led, book the demo!
What is product-led growth?
The approach is based on the idea that if the product satisfies user needs and offers a great user experience, it requires fewer sales and marketing efforts to attract customers and grow. That’s because satisfied users promote the product for you through word-of-mouth marketing and referral schemes.
New users then experience the product value through free plans or free trials with little assistance from the customer support or sales teams and convert into paying customers. That’s what we call product-led sales.
As they fully adopt the product, they gradually become product advocates themselves. They also upgrade to higher plans and purchase additional products, which further drives product growth.
Product-led growth vs. sales-led growth vs. marketing-led growth
Product-led, sales-led, and marketing-led growth are three different approaches to business growth, each focusing on different strategies and methods for customer acquisition and retention.
The product-led strategy is all about building intuitive and extremely valuable products that users can discover and adopt themselves. In other words, user-friendly products that help users achieve their goals and address their pain points drive customer acquisition, retention, and account expansion.
In contrast, sales-led growth relies on the sales team to reach out to potential customers and sell the product. To do so, sales-led companies use traditional sales processes like cold calling or organizing industry events.
Finally, marketing-led growth hinges on traditional marketing tactics to acquire and engage new customers. To attract new customers, it uses such promotional processes as SEO content marketing or email campaigns.
Which of the companies are you?
The odds are that you’re probably a mix of all of them. Even the most successful PLG companies rely on marketing to acquire new customers and sales reps to nurture and assist some leads before they convert to paying customers.
Why is there a need for product-led growth?
Over recent years, we have seen changes in customer expectations towards software.
First, customers don’t only expect powerful functionality that enables them to achieve their goals but also want the products to be intuitive and visually appealing and offer personalized user experiences.
What’s more, studies show that modern customers prefer self-service when buying and exploring products.
Over 53% prefer to make purchase decisions without any interactions with the sales team, and 20% of B2B customers are happy to do so for single purchases between $500k and $5 million, according to a 2021 McKinsey study.
As per another study, 42% of your users would rather clean the toilet than talk to support!
What are the benefits of following a product-led growth strategy?
PLG initiatives offer a number of advantages for SaaS businesses.
Lower customer acquisition cost
In the PLG approach, existing customers drive customer acquisition. Through a combination of WOM and referral schemes, they promote the product in their professional and social circles. This reduces the cost involved in running the marketing departments (but doesn’t eliminate it completely).
What’s more, self-service onboarding, training, and support resources enable users to explore the product at their own pace.
This reduces the burden on the customer support and customer success team. Self-serve purchases also free up the sales team so that they can focus on enterprise sales.
Sustainable and scalable SaaS growth
Reduced dependence on customer support, customer success, or sales teams enables SaaS organizations to grow in a sustainable way.
That’s because the number of customers that the company can support doesn’t depend on the number of employees and allows the company to scale up and down depending on the demand.
PLG business can focus the resources they save in this way on developing innovative features and products that even better address user needs and wants. This increases customer satisfaction and further drives organic customer acquisition.
Product-led growth model: 3 types to choose from
In the freemium model, users can use the product for free but with limited functionality or low usage limits.
This gives them a chance to experience the ‘Aha!’ moment but doesn’t satisfy all their needs, so they have the motivation to upgrade to a paid plan.
Freemium is an effective way to quickly build your customer base. It could be an advantage for businesses that are still looking for their PMF and need customer data to iterate on or depend on the network effect.
However, organizations need robust technical infrastructure and customer support to support it.
Free trial model
The free trial model offers users access to all features but for a limited time only. When the trial ends, they can no longer use the product.
The free trial is an opportunity to showcase the whole product functionality and evoke FOMO in users so that they upgrade when it ends.
This model generates fewer sign-ups but has a higher conversion rate than freemium. This is particularly the case when users are asked to submit their credit card details when they first sign up (this also causes extra friction, so some potential customers may drop out at this stage).
Many SaaS organizations combine the two approaches.
One way to do it is through reverse trials. When users sign up, they automatically gain access to full functionality. However, this is only for a limited period, after which they go back to the limited free plan – unless they upgrade.
Instead of offering the free trial at the beginning, you can also do it later on. Companies like LinkedIn or Strava offer users free 30-day trials so they can experience the premium features.
How to become a product-led company?
There are a few tactics that you can leverage to turn your company into a PLG machine.
Foster a product-led culture within your company
For your PLG motions to be successful, all the teams need to embrace and follow the product-led growth methodology.
Why does it matter?
Product-led growth is a team effort that requires the collaboration of teams from across the organization at all stages of the funnel.
For example, marketing teams are responsible for customer acquisition and work with sales teams to drive account expansion. Product teams and customer success teams work closely on user onboarding to drive activation and retention rates.
What’s more, all of the teams contribute their unique insights that guide product development.
Reduce time to value through a personalized onboarding process
To retain your newly signed-up customers, make sure that they experience the product value as quickly as possible.
One way to reduce time to value is by personalizing the onboarding process.
In this way, users discover the features that matter the most to their use cases.
What’s more, tailoring the onboarding flows to different user personas’ JTBDs reduces the information overload. Apart from causing fatigue, receiving lots of information about irrelevant features could lead the new user to the conclusion that the product is not suitable for them after all.
Pro tip: use welcome surveys to identify user needs as soon as they join and use the data to customize the onboarding flow.
Drive expansion revenue growth through contextual upsell messages
This is because users are much more likely to upgrade to a premium plan when they experience the need to do so first-hand.
For example, a user who has just used a template to streamline their workflow will see the benefit of upgrading to a paid plan that offers unlimited access to templates, so this is the moment to give them a nudge.
Remove friction by monitoring product usage analytics
Friction delays the moment users experience the product value and adopt it, so make sure to streamline the customer journey as much as you can.
Start by conducting a funnel analysis to assess the conversion rates and time to convert for each stage in the journey. Next, use heatmaps and session recordings to identify the specific issues that slow users down or cause their drop-offs.
Improve the product experience by acting on customer feedback
Apart from collecting feedback actively, provide users an opportunity to submit passive feedback and requests whenever they feel the need to do so. You can do it by adding a feedback widget to your resource center.
In your in-app surveys, make sure to include both closed-ended and open-ended questions so that you gather quantitative and qualitative data. It’s the latter that is the source of the most valuable insights.
As users submit their feedback, make sure to close the feedback loop by acknowledging it and acting on it.
Pro tip: follow up on customer responses to get to the root cause of the problem before acting on user feedback or accommodating their requests.
Product-led growth metrics to monitor
There are a number of metrics that teams should track at different stages of the customer journey.
It’s good practice to assign each metric to one specific team as you’re mapping out your funnel. In this way, you will avoid confusion and increase the ownership.
Acquisition stage metrics
The acquisition stage metrics that matter include:
- Customer acquisition cost (CAC) – the average cost of acquiring a customer
- Free trial sign-ups – it tells you how effective your acquisition efforts are
- Self-serve sign-ups – it’s an indication of the effectiveness of the self-serve channels
Activation stage metrics
The metrics to track at the activation rate include:
- Activation rate – the percentage of users reaching the activation stage
- Product-qualified leads (PQLs) – users who have experienced the product value and are likely to convert
- Time to Value (TTV) – how long it takes users to realize product value
Retention stage metrics
Relevant retention metrics include:
- Retention rate – the percentage of new users who are still using the product at the end of a period
- Churn rate – the percentage of new users who dropped out within a specific period
- User engagement – how active users are inside the product, for example, DAUs, WAUs, and MAUs
Referral stage metrics
You can measure the product performance at the referral stage by tracking:
- Net Promoter Score (NPS) – a measure of how likely users are to recommend the product to others
- Referral rate – the percentage of users who refer new users to the product
Revenue stage metrics
Important revenue stage metrics include:
- Monthly Recurring Revenue (MRR) – regular revenue generated by the product on a monthly basis
- Expansion revenue – revenue from upsells and cross-sells
- Customer Lifetime Value (CLV or CLTV) – the average revenue the customer brings during the duration of their relationship with the company
Examples of successful product-led companies
Now that we know how the product-led approach works, let’s check out a few companies that have successfully implemented product-led growth strategies.
Slack is one of the big PLG success stories.
When Slack launched in 2014, 8,000 users joined the platform on the first day, and 2 weeks later there were 15,000 of them. Currently, it’s estimated there are over 32 million daily active Slack users.
The company achieved this success through a range of PLG tactics.
New users had nothing to lose because Slack uses the freemium model. It allows users to explore the product and experience its value. To enable users to do so, Slack has created onboarding product tours and uses welcome surveys to customize the product experience.
However, the features in the free plan are limited, so it doesn’t satisfy all their needs. For example, the message history search is limited to 90 days. To drive upgrades, Slack uses subtle contextual in-app upsell prompts.
Canva is a graphic design app that uses PLG strategies to grow its customer base which currently sits at over 135 million users.
Just like Slack, Canva uses welcome surveys to personalize the product experience for its users.
By asking users about their roles, Canva is able to tailor the dashboard for the user so that they have easy access to relevant templates.
Canva offers a mixed product-led model. Its free functionality is pretty powerful and helps users achieve a lot of their objectives. However, to encourage upgrades, there are limitations on what users can do. For example, they can’t use all the templates or export files in higher resolutions.
Whenever a user tries to use one of the premium features, they’re prompted to upgrade to the paid plan. However, they don’t have to commit to the purchase just yet, as Canva offers a 30-day free trial period.
Grammarly is another ultra-successful PLG company with over 30 million daily users.
Most of the users are on the free plan.
To onboard new users, Grammarly provides demo content that’s riddled with errors that it can sort out. As users correct their mistakes, they learn how to use the product and experience its benefits firsthand.
Apart from grammar, punctuation, spelling, and stylistic mistakes, the demo text also contains issues that only the premium features can fix. This is the first attempt to convert new users into paying customers.
These efforts continue as users keep using the free product through contextual upsell prompts.
Product-led growth is a growth strategy that satisfies the needs of modern customers who demand functional and visually attractive software and are happy to purchase big-ticket items online without any contact with sales.
By reducing customer acquisition costs and dependencies on human personnel, it allows businesses to scale up in a more rapid yet sustainable way.
If you want to see how Userpilot can support your PLG efforts, book the demo!