Product-Led Growth is defined as a go-to-market strategy that relies on using your product as the main vehicle to acquire, activate, and retain customers. If you’ve used Slack or Dropbox, you’ve witnessed this first-hand-you didn’t read a lengthy whitepaper on the benefits of strong internal communication or cloud-based file sharing. You wanted to see the product in action!
What Makes Product-Led Growth Unique?
Unlike sales-led companies where the whole goal is to take a buyer from Point A to Point B in a sales cycle, product-led companies flip the traditional sales model on its head. Product-led companies make this possible by giving the buyer the “keys” to use the product and helping them experience a meaningful outcome while using the product. At this point, upgrading to a paid plan becomes a no-brainer.
If you’ve used Slack or Dropbox, you’ve witnessed the power of Product-Led Growth first-hand—you didn’t read a lengthy whitepaper on the benefits of strong internal communication or cloud-based file sharing. You wanted to see the product in action!
By the end of this article, you’ll discover why businesses are opting to be product-led, what it takes to become product-led and what the main benefits of product-led growth really are.
You can dive into the topic either by watching the video below or continuing to read.
Why Is Product-Led Growth Becoming Of Rising Importance?
On the surface-level, Product-Led Growth may look like a simple model for your buyer to try before they buy.
However, if we look deeper, Product-Led Growth is a completely new way of growing a SaaS business.
As Allan Wille, Co-Founder & CEO, Klipfolio puts it:
“Product-Led Growth means that every team in your business influences the product. Your marketing team will ask, “how can our product generate a demand flywheel.” Your sales team will ask, “how can we use the product to qualify our prospects for us?.” Your customer success team asks, “how can we create a product that helps customers become successful beyond our dreams?.” By having every team focused on the product, you create a culture that is built around enduring customer value.”
By leading with the product throughout an organization, product-led companies often benefit from shorter sales cycles, lower Customer Acquisition Costs (CAC) and a higher Revenue Per Employee (RPE).
Product-Led Growth isn’t just about disrupting “how” SaaS companies sell, it’s how you survive. Right now, a tsunami is coming to wipe out thousands of SaaS companies.
I’ll walk you through the three tidal waves coming ashore and show you how to avoid their potentially disastrous consequences.
The Three Tidal Waves Coming for Your SaaS Business
Tidal Wave 1: Startups are more expensive to grow.
In one sense, this is counterintuitive: It has never been cheaper to build a SaaS company. (HackerNoon even goes so far as to claim that you can now build a SaaS product with $0.)
However, because of this low barrier to entry, there’s no shortage of competition. As a result, argues Andrew Chen, it’s becoming more expensive to acquire customers. Just take a look at these three channels:
- Facebook: 171% Increase in Cost per Thousand Impressions, or CPM (2017);
- Twitter: 20% Increase in CPM (Q4 2017);
- LinkedIn: 44% Increase in CPM (Q2 2017).
There are other channels, of course, but these numbers hint that, well, marketing isn’t getting any cheaper. According to ProfitWell, CACs have increased by over 55% in the last five years. During that same period, customer willingness to pay for features has dropped by 30%.
So, on one hand, we have rising costs; on the other, we have a lower willingness to pay. You don’t have to be a financial whiz to understand that this means your expenses go up while your profitability goes down.
If you have high churn in your business, this tidal wave may be lethal. Wouldn’t you agree?
Tidal Wave 2: Buyers now prefer to self-educate.
This isn’t limited to the Business to Consumer (B2C) space. Three out of every four Business to Business (B2B) buyers would rather self-educate than learn about a product from a sales representative, according to Forrester.
Let me ask you two questions:
- Would you like to see and use a software product before buying it?
- Or would you prefer to go through a lengthy sales process to see if it’s a good fit?
If you’re like most people, you’ll opt for trying out the product on your own. This doesn’t apply just to small and mid-size businesses. As Gainsight notes, “Enterprise buyers also expect to try and evaluate software in an easy, frictionless way.”
Trying out a product through a free-trial or freemium model is less hassle and can help you decide quickly on a product.
Tidal Wave 3: Product experiences have become an essential part of the buying process.
If you’ve used Netflix, you’ve witnessed this first-hand—you didn’t need to reach out to a sales rep or book a demo before you were able to watch and eventually buy the service. The entire onboarding and upgrade experience was handled by the product.
No need for human intervention. Now, that’s not to say that product-led companies don’t need sales reps. But your product needs to do the heavy lifting when it comes to getting new users up to speed.
These tidal waves aren’t stopping anytime soon. They’re here to stay. Consumers (like us) demand it. Your SaaS business might be able to weather one of these tidal waves, but do you really want to take a chance on surviving all three?
To put your SaaS business in the best position to win, you need to pick a go-to-market strategy that will place your business on high ground.
How to Put Your Subscription Business on High Ground
Before we dive into which GTM strategies might work best for your business, you need to understand your market conditions, competitive positioning, ideal customer and product offering.
Knowing each of these elements will help you choose a GTM strategy that will acquire, retain, and grow your customer base in the most capital-efficient way. Other strategies, in contrast, are ripe for disruption and put you at risk.
Why the Sales-Led Go-to-Market Strategy Is at Risk
If the only way you can sell a product is if someone talks to you, you’re using a sales-led strategy. Even if you have a marketing engine that generates 1,000s of leads for your sales team, you’re not off the hook.
This is because relying on your sales team to make every sale prevents you from helping your users self-educate. Whether you know it or not, you are adding an incredible amount of friction to the entire buying process. It also keeps your CACs high— great sales teams aren’t cheap.
As you can see in the graph below, a sales-led GTM strategy puts you at risk for each tsunami wave.
1. The Sales-Led GTM Strategy
Even while being at risk of each tsunami wave, these are some reasons why you still might consider using a sales-led GTM:
Pros of a sales-led go-to-market strategy
1. Ability to close high Lifetime Value (LTV) customers.
A main lure of a sales-led GTM is that you can close customers with a high Annual Contract Value (ACV). This sounds great but can often lead to poor revenue diversity, with several customers making up a large percentage of your Annual Recurring Revenue (ARR).
If a single customer leaves, it could ruin your revenue projections and force you to unexpectedly lay off your employees. That said, if you’re tackling enterprise first and have a highly complex solution, you may need a high-touch sales model because of the complexities of their procurement process and implementation.
2. Perfect for hyper-niche solutions.
If you have a product with a small Total Addressable Market (TAM), it often makes sense to forgo a product-led model in favor of a sales-led model. One of the biggest reasons is because the quality of the relationships you have with your market will have an outsized impact on how you grow your business. In contrast, the product-led model is built for a large TAM where you can scale rapidly.
3. Perfect for new categories.
When you’re launching a new category, you have to change the way people approach problems. This not only takes time but requires you to educate people on how to do things differently.
As a result, it often makes sense to start with a sales-led approach to better understand the customer’s pain points, objections, and core problems implementing your solution. If you jump too quickly to a product-led model with a new category, you risk a high churn rate because you simply don’t understand what it takes for customers to succeed.
If you don’t have successful customers, a product-led model may amplify the problem. Before you go down the product-led route, make sure you know what goes into customer success.
Cons of a sales-led go-to-market strategy
1. High customer acquisition costs (CAC)
A big downside of the high-touch sales model is that the CAC is out of control, and the sales cycles are extremely long. As you might have guessed, high-touch sales is a leading indicator of CAC.
To make sure the high-touch sales model remains profitable, the LTV of a customer has to be high enough to recoup the investment in acquiring each new customer. To reach that LTV, most sales-led businesses charge their customers a hefty premium. That premium price isn’t because the solution is more valuable but because the customer acquisition model is more expensive.
As Paul Graham, founder of Y Combinator, states, “The more it costs you to sell something, the more it will cost others to buy it.” In short, a sales-led strategy passes costs to consumers that have no connection to product value.
If you currently use a sales-led GTM, you need to watch out for competitors with a more efficient customer acquisition model. They can steal your market share by offering a comparable product with a more affordable price tag.
2. The customer acquisition model is leaky.
In a sales-led organization, the customer acquisition model has a big leak. According to SiriusDecisions, 98% of marketing-qualified leads (MQLs) never result in closed business.
One reason this conversion rate is famously awful is that the MQL model has a few hidden flaws:
- It encourages marketers to gate content to hit their MQL goals.
- It focuses on content consumption as a leading indicator of intent.
- The entire process rewards creating friction in the buying process.
As a result, there is often a disconnect between marketing and sales. Should we really be surprised? Does downloading a whitepaper mean you’re ready to buy? Absolutely not.
3. The organizational structure hinders great product development.
According to Elie Khoury, CEO of Woopra, the typical sales-led business structures their team like the graph below:
On the left side, you have your profit centre, which handles your sales, marketing, and customer success teams. On the right, you have your cost centre, which creates the product.
The problem with this organizational structure is that the product is often an afterthought. If the sales team closes a really big customer on the condition of a few product tweaks, well, the engineering and product team have a new project to do.
When your organization leads with sales and follows with product, you’re forced to move upmarket and get on the elephant-hunting treadmill. And it’s not just my opinion.
His words reinforced something I have long believed: Truly great SaaS companies are built to be product-led.
Why SaaS businesses are opting to be product-led
“The future of growth belongs to product-led companies. At HubSpot, we realized this a few years ago, which is why we disrupted our own business model before anyone else could.
At the time, HubSpot was still growing 30%-40% per year on the shoulders of our original marketing and sales driven inbound marketing model. Despite the success, we consciously chose to upend what had been working by launching our first freemium products.
Market dynamics and consumer behavior have changed – increasingly consumers expect to use software and extract value from it before buying. To stay relevant over the long term we needed to adapt, or risk “getting our lunch eaten.”
– Kieran Flanagan, VP of Marketing, HubSpot
Over the years, countless SaaS businesses have opted to switch from a sales-led GTM to a product-led GTM strategy to create a moat around their business. This is the same strategy that many respected software companies have adopted, including Grammarly, Slack, and Dropbox.
What makes product-led organizations unique is that they lead with the product across every department, according to Woopra’s Khoury.
Having the product team involved throughout the business allows for product-led businesses to create a seamless customer experience across every department. What makes a product-led business unique is that all teams leverage the product to hit their goals.
- A product-led marketing team asks, “How can we use our product as the #1 lead magnet?”
- A product-led sales team asks, “How can we use the product to qualify our prospects for us?” That way, we have conversations with people that already understand our value.
- The product-led customer success team asks, “How can we create a product that helps customers become successful without our help?”
- While the product-led engineering team asks, “How can we create a product with a quick time-to-value?”
As you can see in the graph below, a product-led GTM strategy puts you in the safety zone for each tsunami.
Even though the product-led approach can put your business in a great position to dominate your market, it isn’t without its risks. Implementing a successful Product-Led Growth strategy is difficult.
This is one of the main reasons I wrote the book on Product-Led Growth. Implementing a successful product-led go-to-market strategy is not as simple as giving people the option to try your product before they buy. Your entire approach as an organization needs to shift. Instead of leading with sales and following with product, you need to make sure that every team has a hand in helping each user become successful.
If you can put together a successful Product-Led Growth strategy, you’ll reap some incredible rewards.
The Two Main Benefits of Product-Led Growth
Product-led businesses have an unfair advantage and enjoy access to a dominant growth engine and significantly lower Customer Acquisition Costs (CACs).
1. Dominant Growth Engine
Product-led businesses tend to scale faster than their competitors in two powerful ways:
Wider top-of-funnel. A free trial or freemium model opens up your funnel to people earlier in the customer journey. This is powerful because, instead of prospects filling out your competitor’s demo requests, they’re evaluating your product.
Rapid global scale. While your competitors are busy hiring new sales reps for each region under the sun, you can focus on improving your onboarding process to service more customers around the world in a fraction of the time.
2. Significantly Lower Customer Acquisition Costs
Free software also builds a moat around your business in three powerful ways:
Faster sales cycles: By having your prospects onboard themselves, you can significantly reduce your prospect’s time-to-value and sales cycle. Once people experience the value of your product, the next logical thing to do is upgrade. The quicker your users can accomplish a key outcome in your product, the quicker you can convert your free users into paying customers. The conversion rate is important to your growth strategy.
High revenue-per-employee (RPE): Software was always built to scale well, but with a product-led approach, you’re able to do more with fewer people on your team. Less hand-holding means higher profit margins per customer. Just take a look at Ahrefs in 2019. They have a $40 million ARR business with 40 employees.
Better user experience: Since your product is built for people to onboard themselves, people can experience meaningful value in your product without any hand-holding.
The benefits of a product-led GTM strategy don’t stop there. According to OpenView, product-led businesses are valued more than 30% higher than the public-market SaaS Index Fund.
How Does The Product-Led Growth Model Work?
Product-Led Growth is a life raft that will save you from the flood of rising customer acquisition costs and decreasing willingness to pay for your product. In order to build a successful product-led business, you need to understand what value you bring to the table for your customers. Then you need to make sure you communicate that value to your customer in a way that is relevant to them. Once you communicate your value, you need to make sure you deliver on that value.
As you can see in the graph, each step builds on the other:
The Three Elements You Need To Master Product-Led Growth
In order to build a strong product-led foundation, you need these three elements.
Step 1: Understand Your Value
Most technology companies get caught up in the features and don’t really know why people buy their product. So, they create bland headlines that read, “We sell live-chat software for website and mobile support.” From the copy, we know what this business sells, but why choose one option over another? The copy assumes we know the outcome that live chat software solves for.
To build a successful product-led business, you need to understand the three main outcomes that motivate the purchase of your product.
- Functional Outcome: the core tasks that customers want to get done
- Emotional Outcome: how customers want to feel or avoid feeling as a result of executing the core functional outcome
- Social Outcome: how customers want to be perceived by others by using your product
The more in tune you are with what your customer wants, the easier it is going to be for you to communicate the value to your buyer and eventually deliver on your promise.
In our experience consulting for SaaS clients, we find that most companies breeze by this one step, but we encourage you not to do the same as it’s arguably the most important step.
Step 2: Communicate the Perceived Value of Your Product
Communicating your value is at the crux of a Product-Led Growth strategy. Sales-led companies love to hide their pricing behind closed doors, asking potential buyers to request the price. Product-led companies eliminate this unnecessary friction with up-front pricing for most starter plans.
As a result, one of the most common “side projects” when launching a free trial or freemium model is rehauling the pricing page. Why?
For companies transitioning from a sales-led to product-led business, most previously hid their pricing. Others required businesses to pay for specific features that are now given away for free as an incentive to encourage signups for free accounts.
In a product-led business, your revenue and customer acquisition model are married together. (It’s an arranged marriage, but a marriage nonetheless.) In a sales-led business, the revenue and customer acquisition models are separated.
A sales-led business can bank on relationships to sell large contracts. In a product-led company, your customer acquisition model is built around your product. If your product sucks, you’re not making payroll this month.
If your revenue model is confusing, the number of people signing up for your free trial or freemium model will take a hit. This is why you need to dial in your acquisition and revenue models.
Lastly, we need to make sure we deliver on our promise.
Step 3: Deliver on What You Promise
Do you have a friend or family member who exaggerates their experiences? I know I do. After listening to them for a while, do you find it hard to trust what they say? I can hear you say “yes” from a mile away.
The same thing applies when selling software. What we promise in our marketing and sales is the perceived value. What we deliver in our product is the experienced value. Ideally, the perceived value aligns with the experienced value.
Everyone is happy in this scenario – what we signed up for does exactly what we envisioned. But this is rarely the case. Most companies struggle with overpromising and under-delivering.
It’s one reason why product-led businesses are booming. People want to “try before they buy” and experience your value proposition. If you keep your word, it’s a great way to build trust and sell your product. If you fail to deliver, your user experiences a nasty value gap.
The bigger your value gap, the leakier your funnel. You’ll see users sign up but never return to your product. In our experience, the tally could be as high as 40-60% of users who sign up for your product and never come back after the first visit.
In a product-led business, tackling your value gap can be the single, most profitable lever you can pull. It will help you launch and build a free trial or freemium model that (actually) turns users into customers.
If you can understand, communicate, and deliver on your value quickly, you’ll be able to build a strong foundation for your product-led business.
When there is friction, there is limited use. This friction can then spill over into how it manifests in the product. The sign-up process may become overly complex, there may be a lack of onboarding experience or activation training to get new users up to speed more quickly, and you may be asking users to do too much too soon. Additionally, there could be too many unnecessary steps in the process, as well as other limitations.
To help identify all of the above points of friction, you need to build a good customer team and use analytics tools to help find these friction points within the usage patterns of the customers. If you do not identify these issues and you don’t address the user onboarding process, you can limit your product’s growth.
So how did companies like Slack and Dropbox drive customer acquisition, retention, and expansion? They relied on product features and usage and then used these two primary factors to grow faster with much less cash. However, having these great features isn’t going to be all you need. The customers need to know that you have them, and they need to be able to easily access them and use them effectively for this kind of demand-driven growth strategy to work.
Think about what features your customers need and find a way to fill those gaps in the market. Remember, different users will have different needs, and there are going to be several different workflows, so what customers and needs will the product support?
Sales and Marketing
Product-led growth has the ability to ultimately change marketing conversations. While sales and marketing may have been operating independently in the past and separate from customer groups and the product. However, this strategy doesn’t work. Instead, these two groups need to work together to leverage data produced by-products for better sales conversions.
What Experts Are Saying About Product-Led Growth
Here’s what they had to say:
“Product-Led Growth is about helping your customers experience the ongoing value your product provides. It is a critical step in successful product design.”
– Nir Eyal, Wall Street Journal Bestselling Author of “Hooked: How to Build Habit-Forming Products
“The future of growth is product-led. Data shows that companies leveraging a Product-Led Growth strategy perform better on average – faster growth, higher margins, lower burn and stronger valuation multiples. Product-Led Growth will soon become the norm, making it table stakes for SaaS companies that want to win in their markets. What is your company doing to adapt to the product led growth revolution?”
– Blake Bartlett, Partner, OpenView
“Product-Led Growth changes how companies grow because it brings a focus on how the product you’ve built can help you acquire more customers. Customer acquisition doesn’t just become something marketing is focused on, the responsibilities for acquiring great customers expands to the product team as well.”
– Hiten Shah, Co-Founder of FYI, Product Habits and Crazy Egg
“Product-Led Growth might be buzz-wordy right now but this is going to just be called “good business” very soon.”
– Val Geiser, Digital Strategist
“In a world where brands promise more than they can deliver, companies that embrace Product-Led Growth stand out from the pack. Promising a better life to our buyer is now table stakes. We need to deliver on that promise. Our customers deserve it. Instead of hiding our product behind closed doors – it’s time to lead with our product and let people see for themselves if we deliver on our promise.”
– Shobhit Chugh, Product Manager for Crashlytics, Google
“Product-Led Growth is about prioritizing the user experience in everything you do: your product, pricing, marketing, customer engagement and even buying experience. An incredible user experience inevitably leads to faster growth, greater customer expansion and best-in-class retention.”
– Kyle Poyar, VP of Market Strategy, Openview
“Organizations that adopt product-led strategies don’t just have higher customer satisfaction ratings, they scale faster all while spending a fraction on acquisition when compared to traditional sales-led organizations. Product is now the single biggest lever for growth – if you’re not already moving in this direction, watch out.”
– Jackson Noel, CEO, Appcues
“Product-Led Growth is the only distribution model worth undertaking once the market is mature.”
-Pankaj Prasad, Director of Product Management, Salesforce
“Many SaaS businesses strive for $0 customer acquisition cost (CAC) and yet most still end up spending a small fortune acquiring each new customer. If you want to get to $0 CAC, Product-Led Growth is the only way you’re going to make it happen.”
– Olof Mathé, CEO, MixMax
“Product-Led Growth is the multiplier on top of all the marketing every company is already doing. If you’re advertising without a product that naturally markets itself you might as well be lighting your cash on fire.”
– Amar Ghose, CEO, ZenMaid
“From a marketing and sales perspective, Product-Led Growth is a game-changer. It means you can deliver on your promise to prospects. It also means the product sells itself if you get in front of people at the right stage of the buying process. Rather than stuffing leads into a leaky funnel, you are retaining happy customers who spread the word to others.”
– Juliana Casale, Head of Marketing, CrazyEgg
“Product-Led Growth is about using your product and your product data to convert prospects, retain users and expand customers. In today’s highly competitive SaaS market, Product-Led Growth needs to be an essential component of your technology business.”
– Eric Boduch, Chief Evangelist, Pendo
“A strong brand and social proof are no longer enough to build trust with the modern buyer. You need to let people try before they buy. The Product-Led Growth model is how you make this whole approach to doing business a reality.”
– Karim Zuhri, Head of Product Marketing, SafetyCulture
“At heart, Product-Led Growth is incredibly intuitive. It’s understanding that no amount of flashy marketing or hard selling can replace the value a customer receives from a product built to fit their needs. Make something that consistently provides value and you can rely on your customers to come back again and again.”
– Kristen DeCosta, Growth Marketer, Churn Buster
“The sales-led way of buying software: Read about the software, create a list of features needed, let sales qualify you, do a demo, and twist their arm so they give you a trial.
The product-led way of buying software: Just start using the product. Ask for help if you get stuck. Based on your usage and profile, receive personalized recommendations.
Which sounds better to you as a buyer?”
– Peter Caputa IV, CEO, Databox
“Given the low-barrier to entry in SaaS, competition has never been more fierce. To stand out from the crowd, you need a competitive advantage. Product-Led Growth is the one way to build a sustainable business while lowering your customer acquisition costs and churn.”
– Anumita Bhargava, Digital Marketing Specialist, Altina
“Product Led Growth is a powerful framework, taking the best parts of product development and go to market expertise to build a customer-obsessed and fast-growing business. Putting your customer at the center of the experience helps you tap into their motivations and behaviors, building loyalty and driving revenue!”
– Francesca Krihely, Director of Growth Marketing, MongoDB
“Understanding Product-Led Growth is more than just understanding a new business philosophy…it’s about empowering yourself to craft a strategy that will result in a better ROI for you and your business. Because in a Product-Led Growth world, your product sells itself and has the self-service levers to make that happen without needing to invest a fortune in sales and marketing.”
– Matt Bilotti, Product Manager, Growth, Drift
Want to learn more about Product-Led Growth?
Product-Led Growth FAQ
What is a conversational bumper?
Bumpers are often used when onboarding users so they can reach their first meaningful outcome as soon as possible and then upgrade to a paid plan. A conversational bumper uses onboarding emails, in-app messages, sales outreach, customer success outreach, and direct mail.
What are the different bumpers that can be used?
In addition to conversational bumpers, there are also product bumpers. The bumper type you use in modern SaaS companies depends on the niche you are in, the audience, what is working for your competitors, and your own resources and capabilities. Only use the bumper that more closely resonates with your users instead of using a bumper that won’t contribute to your product growth and product experience.
What are the two types of product values?
There is perceived value and experienced value. Perceived value is the customer’s evaluation of the product and its ability to meet their needs and expectations. It is necessary to determine where the biggest value gaps are to get closer to the customers and design better user experiences.
What are the three drivers that get someone to buy your product?
The three drivers are functional outcome, emotional outcome, and social outcome. The functional outcome is the job that the user needs to be done. An emotional outcome is how the user feels once the task has been accomplished. The social outcome is how the user wants to be perceived by others when fulfilling the task.
How do you develop a straight line to allow users to reach a meaningful outcome faster?
The first thing you can do is take screenshots of every single step that the user has to take. This includes the steps from the home page to the next stage. You can then categorize all these steps based on how they contribute to reaching a meaningful outcome. To do this, you need to map each step as it should be taken.
You can then categorize them by assigning them a rank from green to red. Green meaning the step is absolutely necessary, yellow means it may be necessary but is better suited for more mature users, and red means that the step can be skipped. All of this helps you develop a better user experience.
Why is product management important?
A product manager helps guide the success of a product and leads the cross-functional team that is responsible for improving it. It is an important organizational role that sets the growth strategy, roadmap, and definition for a product line.
What is growth hacking?
This is an umbrella term used to describe strategies that are focused solely on growth. It started when early-stage startups needed growth in a short time while on a small budget. With growth hacking, the company experiments across different marketing channels and product development to find the most cost-effective and efficient ways to grow and scale their business.