Product-led Growth: What it is & why you should be doing it
Jul 30, 2021
6 mins read
Slack, Zoom, Dropbox and Buffer - what do they all have in common?
While their product offerings vary widely, they all share the same growth strategies that took them from zero to multi-million dollar valuations, (seemingly) overnight.
Major software companies have been implementing a product-led marketing approach for the past decade. And after witnessing their success, SaaS companies are jumping on the bandwagon as they realise they can grow faster by ditching outdated user acquisition methods and embracing product-led marketing instead.
If you work for a software company and haven’t yet implemented product-led marketing, we recommend getting started now. Wondering why? Then you need to read our blog below - we’ve covered what product-led growth is, why it works and whether it’s right for your business.
Product-led growth is pretty much what it says on the tin. It’s the strategy used by major software companies that drive their user acquisition, conversion and business growth through their product. Rather than relying on a sales team to achieve growth, the product does all the work instead. Companies adopting a PLG method usually operate a freemium model, where users are able to try a version of the product before paying to upgrade. The shift to PLG has completely overhauled software product marketing in two major ways:
The power now lies with the end-user. Software sales used to be targeted to senior-level team members who would make the purchase before introducing it to their team. Now, the product is being adopted directly by the end-user. They seek out software that will help them in their day-to-day work and then introduce it to their manager/the company who will pay for it.
Software companies are able to scale much faster and at a lower cost. The end-user model has cut out the labour-intensive sales process i.e customer comms, the implementation, training and so forth. The product is adopted quickly by the end-user and then distributed rapidly throughout large organisations, driving significant business growth for PLG companies without the need for extra input.
So what defines a product-led business? Expansion-stage VC’s, OpenView Partners, have identified 3 ‘pillars’ for achieving product-led growth:
Design for the end-user
Deliver value before capturing value
Invest in the product with go-to-market intent
Design for the end-user - remember how we said the power now lies with the end-user? This has changed everything when it comes to software development, branding and marketing. You’re no longer targeting CEO’s and execs who are chasing ROI’s and KPI’s. You’re creating something for everyday employees who are looking to automate their workload. To achieve PLG, you need to design something that speaks to and solves the end user's pain. That means truly understanding their annoyances and needs, and aligning your distribution to make it as easy for consumers to find as possible.
Deliver value before capturing value - how many times have you tried a free online product only to quit because it didn’t deliver what you needed? Your product needs to provide the user with something valuable before they consider paying for your service. If you put up a paywall before you’ve shown your full potential, the user will end up bouncing. Show them what you can do for them and they’ll reward you by converting.
Invest in the product with go-to-market intent - this is where you need to alter your mindset from traditional product marketing methods. Rather than investing in a sales and marketing team to achieve your expansion, you need to invest in the product as the main driver of user acquisition and conversion. In the old world, you would rely on a team member to provide support, success, and sales. Now you need to invest in your product to ensure that it's delivering all of those things itself. Not only do the product team need to build something that’s extremely valuable, but it also needs to make distribution and adoption faster and easier too. By investing in a product that literally sells itself, you’re enhancing your ability to scale quickly.
If you’re excited by the sound of product-led marketing, we’re with you! But there are some aspects you need to consider before diving in.
Is your company in a good financial position to invest in product-led growth strategies? Although you’ll eventually save on user acquisition costs, you’ll still need to be able to invest in an efficient, high-quality product with strong viral potential.
What growth stage are you at? If you’re just getting started, then implementing PLG is going to be easier than if you’re in a company that’s been in business for the last 15 years. Getting the whole team to adapt to a new way of working (and altering your product) will take some time. It’s better to slowly introduce it to the team rather than changing everything at once.
Is your product suitable for PLG? Not all software is. It needs to offer an extremely valuable solution that customers can start using themselves without input from their seniors. And it needs to be able to function as a tool for reaching, acquiring and onboarding new customers. Is it simple enough for them to use without speaking to a salesperson? If so, they’ll be likely to share it with their team. If your product meets the 3 pillars needed for product-led growth, then it’s likely a good fit for your business.
Businesses that adopt PLG methods measure their success using a new SaaS metric - Natural Rate of Growth. Traditional SaaS metrics don’t work as well for PLG. For instance, the LTV/CAC measurement doesn’t take into account the chance for revenue growth from certain users and understanding the ROI is more difficult. Natural Rate of Growth allows businesses to pinpoint the percentage of recurring revenue that comes from the product, essentially showing how fast the company is growing without much input.
The Natural Rate of Growth formula:
Natural Rate of Growth = 100 x Annual Growth Rate x Organic Signups (%) x ARR from Products (%)
This is a formula that can be adopted by software companies at any stage. It can determine whether the business is able to drive growth through the product alone. At the time of publishing, OpenView stated that Zoom had an NRG of 89%, with Slack sitting at 55%. Here’s what they think businesses should aim for:
Most of the major SaaS companies have been using product-led marketing methods for years. Here are some of the most popular brands that can attribute PLG to their success:
Slack set the standard for PLG companies, achieving stratospheric growth with its freemium model. Customers are able to use a version of the messaging software for free but have to pay to enjoy benefits such as extra storage, team members, app integrations and more. Launched in 2009, the company reached a $7 billion valuation within 5 years of launching. Rather than targeting execs with cold calls, they reached employees with a well-designed, easy-to-use platform. If you look at the messaging they use, they put out clear and simple copy that talks directly to the end-users needs - ‘giving them the power they need to do their best work’.
Dropbox is another brilliant example of a sleek, accessible product that directly solves a consumer pain point. Between 2008-2010, Dropbox managed to double its user-base every three months. While having a great and in-demand product was the driving factor behind that growth, it was also largely due to the virality of the software. The company offered a two-way referral programme that rewarded new users and current users with extra storage space. Again, this was built into the product itself and was able to take a life of its own, enabling Dropbox to achieve 3900% growth in just 15 months.
Calendly was also able to scale quickly due to an in-demand service and its high potential for virality. It solves the universal challenge of scheduling a meeting time that works for everyone. Every time a user sends an invite via the platform, they’re sharing the tool with a new potential customer who sees how easy it is to use. Calendly is able to reach a wider audience without any extra input or cost from the team. At the start of 2021, the company was valued at £3bn.
To sum it up, product-led marketing is a highly effective growth strategy that should be adopted by software companies that are now existing in the ‘end-user era’. If you’re considering adopting PLG methods, keep in mind that it all boils down to your product; no amount of growth hacking will work if your software doesn’t truly solve your customer pain points.
Looking for help with your growth strategies? We can help! As London’s leading growth marketing agency, we’re experts in all aspects of business growth. We love combining innovative ad-tech with a thorough marketing strategy to create amazingly effective digital advertising campaigns. If you want to learn more about growing your business, get in touch.