Product-Led growth (PLG) is a business strategy and method that makes the product the main driver of customer acquisition, activation, satisfaction, retention, and scalable growth. When all of a company’s digital-facing teams, like marketing, product, customer success, and others, work together to focus on product-Led growth, the business is able to give customers an innovative and personalized product experience that keeps them loyal and coming back.
At companies that aren’t led by their products, the sales team may be the main source of revenue. Sales and customer success are key to keeping customers. This is still important in product-led companies, but the key difference is that the product itself becomes a source of revenue and customer retention. This is because customers find the top product very valuable and keep coming back for more. Over time, the relationship with the customer gets stronger and deeper. This happens almost by itself, since the digital product experience makes customers loyal on its own, without any help from a person.
Here’s what you need to know about product-Led growth and why DevCRM and PLG companies are starting to take over the SaaS market.
What is Product-Led Growth?
Product-Led growth (PLG) is a go-to-market strategy that focuses on the product as the main way to attract, convert, and keep users.
Optimizing the user experience (UX)—making it easy for customers to sign up, quickly get value from the product, complete their jobs-to-be-done (JTBD), and share their positive product experiences (PX), which fuels word-of-mouth growth—is how Product-Led growth is achieved.
A Product-Led growth strategy isn’t done in a vacuum, and just because you use this method doesn’t mean you can’t use other ways to get customers, like direct sales or marketing campaigns. The “led” part of PLG just means that the product and how users interact with it drive growth more than anything else.
A Brief History of Product-Led Growth
It’s hard to imagine now, but there was a time when people took months, quarters, or even years to use new software.
Now, the software shows up in the office on its own, brought in by users who want it to be used by more people. People are finding products, downloading them, and using them without being told to do so by their bosses. In reality, it’s the end users who tell their bosses what software to buy.
We’re at a point of change. The software market is always changing, and we’re seeing the end user become more important. Here’s the hard truth: if software companies want to stay in business, they need to change and focus on the end user.
This change in the market may seem big, and it has big effects on how companies do business, but it’s not exactly a revolution. Since a long time ago, the software industry has been moving toward the end user, and smart companies are already changing to keep up.
Who can use Product-Led growth?
Most Product-Led growth happens in the digital or SaaS (software-as-a-service) space, but it won’t work for every online business or product. Mohannad Ali, the CEO of Hotjar, thinks there are four main things a company must do to do well with DevCRM:
- Market: Your product needs to be sold to a lot of people (i.e. not be enterprise-only).
- Model: Users must be able to sign up and pay online with credit cards, PayPal, etc. (self-service customer acquisition), and prices must be clear and not too expensive. You want to make it easy for people to try out your product for free, so you need either a freemium plan or a free trial.
- Channel: Focus on marketing methods that don’t cost much, such as word-of-mouth, content marketing, and PPC advertising.
- Product: You need a product with a wide range of uses and a short time to value (i.e. low product complexity).
Why is Product-Led Growth Important?
Product-Led growth is better for business than other growth strategies, like sales or marketing-led growth, in a number of ways, such as:
Lower customer acquisition costs (CAC): Most new customers come from word-of-mouth, so it’s easy and inexpensive to get new ones.
Higher retention and lower churn: Product-Led growth can lead to lower-than-average churn rates because products are made to give users value right away and over time.
Higher revenue per employee (RPE): A PLG company can get high recurring revenue with a small number of employees by focusing on self-service sales and support.
Higher Customer Satisfaction (CSAT) and Net Promoter Scores® (NPS): Product-led companies can achieve customer delight by spending more time looking at user data and improving product experience and UX. This turns users into fans and feeds back into word-of-mouth growth (known as the Product-Led growth flywheel).
Product-Led growth forces traditional decision-makers, like C-suite executives, to open up the decision-making process to a larger and more diverse group of stakeholders. This leads to more innovative ideas and business decisions that include product, engineering, and support teams.
Read our guide to Product-Led growth metrics for more ways to measure the benefits of Product-Led growth.
The Business Benefits of PLG
A growth model that focuses on end users is good not only for end users but also for business.
There are 21 big public companies with a PLG model right now, including all of 2019’s best IPOs. As more PLG companies go public each year, that number keeps going up.
Also, after going public, PLG companies do better than their peers. This is because businesses based on products grow faster as they get bigger.
Even though growth may be slow in the beginning, our data shows that once a PLG company hits $10M ARR, it tends to grow faster than its peers. Why? Product-Led growth companies aren’t held back by sales, customer success, and lead generation processes that take a lot of work. This means they can stay in hyper-growth mode at scale. They can also grow faster and more efficiently, and their CAC payback is lower than average.
So, it makes sense that the median enterprise value (EV) of PLG companies is 2 times higher than the public SaaS index as a whole. PLG has created more than $208B in market value so far, and the growth is still exponential.
PLG metrics
There’s a good chance you’re measuring Product-Led growth with the wrong metrics. Some of the metrics that are usually used to measure SaaS businesses don’t work well with this new way to go to market. For instance:
- Rates of growth. High growth is very important for most SaaS companies. But our data shows that until they reach $10M ARR, PLG businesses tend to grow more slowly than their peers. After that, the opposite is true. Metrics that put too much emphasis on growth rate too soon could actually take away from the high-growth engines that are at the heart of a PLG business and could be very promising.
- CAC Payback. Public PLG companies spend 44% more on research and development than their SaaS counterparts (product and engineering). Part of that is made up for less money spent on sales and marketing, but it’s almost impossible to figure out the return on money spent on the product itself.
- LTV/CAC. This classic SaaS metric doesn’t work for PLG companies, mostly because it doesn’t take into account some of the main things that make PLG businesses appealing: low churn and the chance for revenue growth from accounts.
- Logo Retention. How do you measure logo retention in an organization with dozens of different users, each with their own account, and a bottom-up adoption model?
How software was sold before PLG
Most SaaS companies use a very simple GTM funnel to run their business. All of the “users” are at the top. At the bottom are all the people who have paid.
In the 2000s, outbound cold calling was how SaaS companies found new customers. Teams of highly paid salespeople and business development reps would spend hours a day cold calling companies that might be interested in their product but probably didn’t need it and couldn’t trust it without paying tens of thousands of dollars to try it out. Most of the companies at the top of the funnel (ToFu) were in the Fortune 1000, and sales processes took several quarters, if not years. Doesn’t make sense? It wasn’t, you’re right.
As the 2010s started, Google and inbound marketing grew in popularity. The marketing teams at SaaS companies thought that they could pay search engines to send traffic their way based on the keywords and phrases that customers were already looking for. For example, if someone searched for a “help desk,” the Zendesk website would be suggested. Solves the problem (A) of bad intentions, but not the problems (B) of low trust and high entry barriers.
Conclusion
Product-Led growth is a business strategy and method that makes the product the main driver of customer acquisition, activation, satisfaction, retention, and scalable growth. When all of a company’s digital-facing teams work together to give customers an innovative and personalized experience, they keep them loyal.
SaaS companies operate on a very simple GTM funnel. On the top, are all the ‘users’. At the bottom are the ‘paying customers. In the 2000s, sales processes spanned several quarters and were often years long. Today’s SaaS marketing is driven by Google and inbound marketing.