The Ultimate Guide to Product-Led Growth for SaaS in 2022

The Ultimate Guide to Product-Led Growth for SaaS in 2021

It might seem ludicrous how many SaaS apps you can try for free these days. But it’s part of a new business model that previously sales-led companies are using to achieve rapid growth and higher customer satisfaction ratings at a lower customer acquisition cost. It’s called product-led growth.

The key is helping users realize the ongoing value of a product as quickly as possible. This is done by delaying the buying process-something that usually causes a lot of friction. Product-led growth helps users experience the product for free first and then upgrade to a paid plan.

And basic economics dictates: when something is free, more people will try it. Genius!

TL;DR

  • Product-led growth is a popular SaaS go-to-market strategy that uses the product itself to drive customer acquisition, activation, conversion, and retention.
  • A product-led growth strategy is important for SaaS because it lets you get more out of every new user and increase your customer lifetime value.
  • The evolution of product-led growth is the result of the democratization of software that has shifted the buying power from the Chief Information Officer to the actual end-users of the software.
  • The benefits of product-led growth include turning your product into a marketing flywheel that allows you to increase your word-of-mouth growth while keeping CAC low and ACV high.
  • A good go-to-market strategy answers the four questions of who will buy the product, why they’ll buy the product, where they’ll find the product, and how they’ll buy the product.
  • The two pricing models for product-led growth are a free trial or freemium.
  • Product-led growth metrics include expansion revenue, average revenue per user (ARPU), customer lifetime value (CLV), product-qualified leads (PQLs), net churn, virality, and the network effect.
  • The pirate metrics model created by Dave McClure groups key SaaS metrics by the six stages of the customer lifecycle: awareness, activation, retention, referral, and revenue.
  • Ways to make your SaaS product-led in 2022 include minimizing friction in your signups, reducing time-to-value by removing empty states, and using interactive sets on your website.
  • There are many ways of achieving product-led growth including making your marketing more product-led, creating interactive user onboarding, using secondary and tertiary onboarding, having an account expansion strategy, and implementing a referral program.
  • The first product growth tool we recommend is Userpilot, which specializes in contextual onboarding.
  • The second product growth tool we recommend is Appcues, which revolutionized the SaaS world with easily configurable onboarding software.
  • Slack routinely achieves product-led growth with a great freemium model by nudging users to upgrade to a paid plan once they’ve adopted it into their regular workflow.
  • Autopilot achieved product-led growth in 2021 by replacing a white canvas faced by users with customer journey templates.
  • Kontentino increased its new user adoption by 10% by implementing a micro survey to segment users and interactive walkthroughs to lead users to key activation points.

What is product-led growth?

Product-led growth is a popular go-to-market strategy that uses the product itself to drive acquisition, activation, conversion, and retention. Customers don’t have to book demos, download whitepapers, or speak with sales reps. They can just try the product for free.

Once users get value from the product through a free trial or freemium model, it’s a lot easier for them to decide whether to upgrade to a paid plan.

The term product-led growth was originally referred to self-service SaaS businesses in the 2010s. It was then hugely popularized by Wes Bush in his book Product-Led Growth. Soon after, Bush founded ProductLed Institute, an organization that trains companies in product-led growth.

Get a free downloadable copy of the Product-led growth book here.

Product-led growth book cover
Product-Led Growth by Wes Bush

Both B2B and B2C buyers increasingly want to self-serve. The modern buyer does not want to learn about a product from a salesperson. In fact, only 3% of consumers trust salespeople and marketers.

So why should you care about product-led growth in SaaS? Let’s find out!

Why is a product-led growth strategy important for SaaS?

A product-led growth strategy allows SaaS companies to get more out of every product iteration by making it easier for users to discover product features and their use cases. This increases the usage and revenue you get out of each user, lowering your relative growth per $1 invested into the product.

But it doesn’t mean your product is your *only* growth channel. Even if you’re using product-led growth tactics, you still need sales and marketing. A product-led strategy simply works in tandem with your sales and marketing efforts. It helps you get more engagement, activation, and retention from every new user by helping them discover and get value out of the product more easily.

With product-led growth, you’re focusing on showing potential buyers how your product can solve specific problems they may have. Examples of product-led growth tactics include:

  • Painpoint SEO
  • Product-focused sales enablement docs
  • Pushing for more product use at the right time
  • Pushing upsells and cross-sells at the right time

With product-led growth, the product is basically the main driver of growth. For instance, your user onboarding is basically a product adoption flywheel that constantly pushes users to discover more and more value from the product. As your users get more value, you can capitalize on more upselling opportunities and increase your Annual Contract Value (ACV.)

User adoption flywheel
User Adoption Flywheel

So how do you use product-led growth as a go-to-market strategy for your SaaS product?

The evolution of product-led growth

Product-led growth is the result of the growing democratization of the software industry.

With software becoming cheaper and easier to produce, a lot of SaaS businesses have emerged to compete with traditional on-premise software that’s expensive and clunky. This has led to the end-user replacing the Chief Information Officer (CIO) in the decision-making process for purchasing software.

It’s also become a lot easier to switch software tools with the subscription model. Instead of paying expensive annual contracts, users can subscribe to a software product on a month-to-month basis and cancel at any point. This has increased competition among SaaS companies tremendously.

The winner of this competition is always the company that can best satisfy the needs of the end-user.

History of software in three eras
The three eras of software

Let’s take an extensive look at the numerous benefits of product-led growth.

Benefits of product-led growth

Product-led growth is extremely powerful because it allows you to turn your product into a marketing flywheel.

It also:

  • helps you drive product growth through word of mouth-one of the most reliable and scalable growth engines.
  • affects all metrics positively without you having to implement a strategy for each one.
  • reduces your customer acquisition costs (CAC).
  • improves your annual contract value (ACV).
  • reduces your costs for sales, customer support, and customer success.

Now, let’s take a look at how we can use product-led growth as a go-to-market strategy.

Product-led growth as a go-to-market strategy for SaaS

Similar to any other go-to-market strategy, product-led growth is a company-wide initiative. It determines how sales, marketing, customer success, engineering, and product teams measure product success and drive growth.

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

#1 – Who will buy the product?

In a product-led approach, you are selling your product to users, not buyers, since they experience the product directly.

#2 – Why will they buy the product?

Product-led growth involves solving the exact pain points of your users, delivering more value, and having a better user experience than your competitors’ products.

#3 – Where will they find out about the product?

Product-led growth relies on users discovering your product through virality and word-of-mouth, as opposed to having a traditional sales model. More specifically, users will be more inclined to recommend your product to friends and coworkers.

#4 – How will they buy the product?

With product-led growth, users should become buyers inside the product rather than via sales reps. For example, users can upgrade to a paid plan via self-service after experiencing the product through a free trial or freemium account.

Now let’s take a look at the pricing strategies available in the product-led growth model.

Pricing models for customer success

There are two types of pricing models:

  1. Free trial: Users can experience the entire product or part of the product for a set period of time (e.g. 14 or 30 days) or up to a certain level of usage (e.g. create 10 videos for free.)
  2. Freemium: Users can use a certain feature set of the product indefinitely (e.g. save unlimited articles without the ability to tag them for organization)

Freemium is a slightly more complicated model than free trial and comes in three forms:

  1. Reduced features: Users need to upgrade to a paid plan to use certain features or functionality (e.g. Slack.)
  2. Reduced capacity or usage: Users have access to limited storage or are subject to data quotas to restrict usage (e.g. Dropbox.)
  3. Reduced support: Users are limited in how much support they have access to, such as customer support or documentation (e.g. Heap Analytics.)

Some software companies use a combination of the three. For example, Heap’s freemium plan limits product usage and customer support.

No matter what free trial or freemium approach you use, the goal is the same: to get end-users to experience the product as quickly as possible and upgrade to a paid plan.

Product-led growth metrics

When implementing product-led growth tactics, there are six major metrics you should track for product adoption. These are:

Expansion revenue

Expansion revenue, also referred to as expansion MRR or upsell revenue, is revenue generated from upsells, add-ons, and cross-sells for existing customers. Despite the fact that most software companies prioritize net new acquisition, expansion revenue remains a critical metric to track for SaaS business growth.

According to ProfitWell, 30% of your revenue should come from expansion revenue. While taking note of your net new acquisition is great, more customers do not necessarily mean more revenue. This is because new customer acquisition takes a lot of time and resources. It’s at least four times as expensive as upsells and renewals.

Profitwell illustration of acquisition via upsells
Acquisition is 4X more expensive than upsells

Average Revenue per User (ARPU)

ARPU is calculated as total Marginal Recurring Revenue (MRR) divided by the number of paying users.

Average revenue per user calculation
Average Revenue Per User (ARPU) formula

Although it’s sometimes considered to be a vanity metric, ARPU can be a good indicator of a company’s growth at the per-customer level.

Customer Lifetime Value (CLV)

CLV is the total revenue a business will generate from a single customer over the course of the business relationship. This metric can be used to pinpoint high-value customer groups and to come up with more cost-effective acquisition and retention strategies.

Customer lifetime value calculation
Customer Lifetime Value (LTV) calculation

It’s important to measure CLV in light of the Cost to Acquire a Customer or Customer Acquisition Cost (CAC). Your CAC must always be lower than CLV for your SaaS business to be profitable.

Product-Qualified Leads (PQLs)

Bye, MQLs! Welcome, PQLs.

Product-qualified leads (PQLs) are leads who have already gotten value from a product through a free trial or freemium account. They’ve reached the Aha! moment by performing a key action in your product. PQLs are a better metric to measure than MQLs because they are activated users and are much more likely to become paying customers than any other leads.

Net churn

Compared to customer church, revenue churn is typically a more useful metric to track for SaaS business growth. However, net revenue churn is an even more useful metric because it reflects your current customer base than gross churn, which does not account for expansion or upsell revenue.

Revenue churn calculation
Revenue churn calculation

Virality and the Network Effect

Although these terms are often used interchangeably, they’re actually different. They do go hand in hand, though.

Virality is when every additional user for a product brings in even more users by spreading the word about the product. A viral product is one whose adoption rate increases as more people use it. The pace at which each user spreads the usage of the product to other users is referred to as the viral coefficient (or K-Factor.)

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. —Eric Jorgenson on Medium

A network effect, on the other hand, is when a product becomes more valuable as its end users increase. The network effect is obvious in two-sided marketplaces like Airbnb or social platforms like Facebook.

Here’s how the network effect works. As the number of users for the product increases, there is higher user engagement and satisfaction (and higher LTV). More end-users mean more organic search and referrals, which lower CAC. This, in turn, leads to even more end-users.

Network effects flywheel
Network Effect Flywheel

Now that we’ve covered the six main metrics for product-led growth, let’s take a look at how you can group these metrics together to measure and improve different aspects of your SaaS business.

The Pirate Metrics – What is AARRR and why is it called Pirate Metrics?

Image of Dave McClure's pirate metrics model
Five stages of Pirate Metrics

The Pirate Metrics model was originally created by Dave McClure (no, he’s not a pirate). The model covers five stages of the customer lifecycle:

  1. Acquisition — when a lead is captured and can be identified and tracked as an individual user. In this stage, users come to the product from multiple channels.
  2. Activation — from sign-up to paying or non-paying customer, which is user onboarding. In this stage, the lead enjoys their first foray into your product and has a happy user experience.
  3. Retention — In this stage, users return to your product repeatedly (existing customers.)
  4. Referral — In this stage, your users like your product enough to recommend them to their friends and coworkers.
  5. Revenue — In this stage, users pay for your product.

AARRR!

Congratulations, you’re a pirate.

GIF of pirate

How to make your SaaS Product-Led in 2022

Being a product-led software company is all about making it easier for end-users to experience the value of your product as quickly as possible. You need to grab their attention straight after user acquisition and keep it with a strong user experience.

Minimize friction in your signups

Reducing the friction involves in signing up for your product can make it easy for users to use and love your product.

For example, you should only include fields you absolutely need in order to collect information in your sign-up flow. There’s a tradeoff here—less information about your users but more users overall. Once they’re activated, you can collect that additional information.

Userpilot sign-up page with extra fields crossed out
Improved sign-up flow for Userpilot

Reduce time-to-value by removing empty states

The bane of user engagement is confusion. And the best way to confuse users is to serve them up blank screens where the next step is not clear. That’s why it’s important to remove empty states in your SaaS.

There are four types of empty states:

  1. First use — When new users try a product for the first time and there’s no data to show.
  2. User cleared — When end users complete an action in the product that clears the data and results in an empty screen (e.g. clearing an inbox or a task list).
  3. Errors — When something goes wrong and the user’s intended action cannot be completed (e.g. connectivity issues, bugs).
  4. No results/data — When a user’s search or use of a filter returns no data.

Removing these empty states helps create an opportunity to provide a positive and informative experience by nudging the user to perform an action that will allow them to experience the value of a product.

How to achieve more product-led growth in SaaS

When transitioning to a product-led growth strategy, here are five elements to consider to build more momentum for your product’s marketing flywheel.

1. Make sure your marketing is product-led

Did you know that only 3% of consumers trust salespeople and marketers? That’s why the best thing to do is let your product do the marketing by highlight the experience of real users with the product.

Use your content to specify exactly what type of customer can benefit from your product for which specific use case.

Instead of measuring the number of marketing qualified leads (MQLs), measure the happiness of your customers with metrics like:

  • Time to first response
  • Daily/weekly/monthly active users
  • Overall customer satisfaction
  • Net promoter score
Userpilot NPS survey
NPS survey created code-free in Userpilot

2. Create new user onboarding that is interactive, personalized, and leads the new user to activation in the shortest time possible

The first step to creating an interactive and personalized user onboarding is to greet your users with a welcome screen. On this welcome screen, you can add a micro survey (as seen below) through which you can segment your users and personalize their experience accordingly.

Sample micro survey from Userpilot
Sample micro survey on the welcome screen

When you have done this, you can pick two or three activation events for each user segment and build interactive walkthrough experiences to guide users to each activation event.

Userpilot interactive walkthroughs capability
Sample interactive walkthrough to an activation event

You can also create an onboarding checklist to group events together and improve user activation.

3. Use secondary and tertiary onboarding – make sure your onboarding never stops

The purpose of secondary onboarding and tertiary onboarding is to continue to push users to experience value in the product and adopt more features. The more features users adopt, the stickier your product becomes, which results in more user engagement.

The goal is to ensure that users have the motivation to keep using the product which increases user retention (and revenue, of course.) Essentially, you are creating a product adoption flywheel effect.

User adoption flywheel
The user adoption flywheel

4. Have an account expansion strategy

How are you going to push more upsells to your users?

The key to getting more upsells is to prompt the user in the right context — when the user has just experienced the action that is related to the upsell. This is effective because you’re targeting the upsell at the time the user is most likely to benefit from it.

You can use user analytics to see when users are performing that specific action and drive upsells at the right time.

For example, HubSpot prompts an upsell to users for templates when they notice them copying and pasting emails frequently.

Hubspot push for upsells to templates

5. Encourage user referrals

Referrals involve a user recommending your product to someone else that they know. This is also called word-of-mouth promotion, which is an important driver of growth for a product-led company. Because word-of-mouth promotion is very important, it makes a ton of sense to run a referral program for your product.

Below are five benefits of using a referral program for your SaaS.

  1. Faster and more reliable conversions — According to research, a high-impact recommendation from someone you know is up to 50 times more likely to trigger a purchase as opposed to a low-impact recommendation from a company.
  2. Increased brand awareness — Encouraging your users to talk about your product can help you build strong brand awareness and interest in your product.
  3. Lower customer acquisition costs (CAC) — With referral programs, you pay for rewards only when a referral actually becomes a customer. It’s also possible to pay users with a free one-month trial of your product or a limited-time upgrade.
  4. Increased conversion rates — Having your existing users refer your product to others increases the chances of attracting like-minded users. It also increases the chances the referral will convert since there’s a personal endorsement.
  5. Increased customer retention and lifetime value — Referral programs are particularly beneficial for SaaS companies that run a subscription model because referred users are 18% more likely to stay with a brand compared to those who weren’t referred.

Oftentimes, a good referral program can actually even lead to higher customer satisfaction ratings because your users feel appreciated for sharing your product with others.

Best product growth tools & software

To create a personalized user onboarding process for every customer segment and trigger product-led growth, you need to have efficient product growth tools and software.

Here are the two tools we recommend:

#1: Userpilot — How Userpilot helps SaaS businesses achieve product-led growth with contextual onboarding

Userpilot screenshot of tool
Userpilot product screenshot

Userpilot, a product-growth platform made for SaaS companies, lets you:

  • Target the right customer segments at the right time with user analytics.
  • Design a personalized onboarding experience for each user for more activation.
  • Push more upsells within your SaaS via slide-outs and modals.
  • Survey your users with in-app feedback tools like micro surveys and NPS so you can better segment them.

For more information on Userpilot features and pricing, check out the Best product growth tools & software section in our post on Skyrocketing Your Product Growth in 2022: The Ultimate Guide.

#2 Appcues — For a wide range of onboarding elements

Screenshot of Appcues tool
Appcues product screenshot

Before Appcues, a SaaS company would have to use complex on-premise software like WalkMe to build basic in-app user experiences. Appcues revolutionized the SaaS world by introducing a wide range of onboarding elements like tooltips, checklists, and slide-outs to help with SaaS growth.

For more information on Appcues features and pricing, check out the Best product growth tools & software section in our post on Skyrocketing Your Product Growth in 2022: The Ultimate Guide.

Examples of SaaS companies fuelled by Product-Led Growth

Let’s take a look at three real-life examples of how product-led organizations have used their product as the primary driver for scalable business growth.

Slack achieved Product-Led Growth with a great freemium model

It’s possible to use Slack’s freemium plan for a while because there are enough features. Users are only nudged to purchase the paid plan once they adopt Slack into their regular workflow.

For example, users see this warning message telling them their team has sent 7,400 messages over the 10k message history limit.

Slack warning message for 10k message history limit
Slack 10k message history limit warning

The value proposition is clear: Upgrade to a paid plan so you can save all this valuable conversation history from a tool your team uses a lot.

How Autopilot achieved Product-Led Growth by filling their empty states with meaningful use-case templates

Autopilot, a marketing automation tool, had two problems:

  • Only 50% of users continued using the product after a 30-day free trial
  • Free trial users only reached their activation point toward the end of the 30 days

A closer look revealed users weren’t sure of their use case when signing up for the product. And when they finished the 8-step sign-up process, they reached an empty canvas where the next step wasn’t clear.

Autopilot white canvas screenshot
Autopilot blank canvas empty state

Scary, right?

The team realized that their ideal users needed to be:

  • Taught how to use the product
  • Shown the possibilities within the product before signing up

So Shiv’s team built customer journey templates segmented by industry and use cases and displayed them on their website. This is called “preboarding.”

Autopilot screenshot of customer journey templates
Autopilot customer journey templates

And once users finished the sign-up flow, they were greeted with the template they had selected during sign-up instead of an empty canvas. A much better empty state.

These changes doubled Autopilot’s leads and increased their activation rates dramatically—a prime example of product-led growth.

Kontentino achieves Product-Led Growth with interactive onboarding from Userpilot

Kontentino, a social media management tool, came to Userpilot for help with creating their first user onboarding experience. The two main activation points for Kontentino were:

  • User links social media accounts
  • User schedules their first post

To increase activation at these points, Kontentino first implemented a micro survey on the welcome screen for new users.

Kontentino micro survey
Kontentino micro survey

This enabled Kontentino to segment their users based on what they want to do in the app and then customize their experience to get them to activation faster.

If the user picked “scheduling” in the micro survey, they were taken through an interactive walkthrough that guided them to link their social media accounts.

Kontentino interactive walkthrough GIF
Kontentino interactive walkthrough

Once the social media accounts were linked, the user saw a funny GIF congratulating them. This encouraged the user to keep going.

Kontentino congratulations GIF in app for user
Kontentino user celebration GIF

The interactive walkthrough then nudged the user to schedule their first post.

Kontentino screenshot of scheduling new post
Kontentino interactive walkthrough

And just like that, the user reached both activation points.

Notice the walkthrough didn’t focus on any other features or activities within the app—just the two activation points. These simple changes to Kontentino’s onboarding led to a 10% increase in new user adoption. Success!

Wrapping up — Product-Led Growth

The best thing about a product-led growth methodology is that it lowers your acquisition costs. And the reason is simple: not being primarily sales-led means you don’t need to hire an expensive sales team to acquire new customers. Or a big customer success team to retain customers. All you need is a remarkable product that will do most of the selling and retaining.

For example, Slack was founded in 2009, but even as a $4 billion dollar company by 2016, it hadn’t hired a sales team. In fact, it didn’t even hire a CMO until it was a $1.1 billion-dollar company.

That’s not to say that you shouldn’t hire a sales team or marketing team if you’re trying to be product-led. It just means you can avoid high customer acquisition costs by creating a product adoption flywheel that does the selling for you.

Ready to move your company toward product-led growth? Get a Userpilot demo and start today!

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