“History tells us that “how” you sell is just as important as “what” you sell.” – Wes Bush, The Definitive Guide On Product-Led Growth.
Slack’s revenue has grown 52 x since its launch in 2014: The channel-based messaging platform reported that revenue went from $12 million in 2014 to $630 million in 2020.
Their secret? …. Product-led growth.
Product-led growth (PLG), otherwise known as the “try before you buy” approach has helped companies like Dropbox, Netflix, Hubspot, and of course Slack go from Startup to scale up in record time.
But, the product-led growth approach isn’t just about trying before buying. There’s more to it than that. In fact, to truly be product-led you’ll need to choose between a free trial or freemium model; determine if you’ll be targeting the makers or the shakers of an organization; decide which sea you wish to sail when following the Blue Ocean Strategy; and, choose whether your strategy wants to focus on the bottom-up or the top-down.
Feeling confused? Don’t worry, this post will help clear things up. I’ll go over what product-led growth actually is and help you decide if the approach is right for you. I’ll also take a look at Slack and Hubspot, the poster children of the PLG approach to show what it looks like in practice.
To jump to a specific section click on the appropriate link below.
- Product-led growth in a nutshell
- Product-led growth as a go-to-market strategy
- Is the product-led growth approach for you?
- Key metrics for measuring product-led growth
- Product-led growth in practice: Slack
- Product-led growth in practice: Hubspot
- Product-led growth: Key takeaways
Let’s get sailing…
Product-led growth in a nutshell
“Product led growth (PLG) is an end user-focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion and expansion.” – Openview Partners, What is Product-Led Growth?
Product-led growth is about building a product that is so good that opting to pay for it after a free trial period is over/ upgrading from freemium to a premium model is a no-brainer.
The product-led growth approach switches up the traditional sales cycle. In sales-led companies, the sales cycle focuses on holding the customer’s hand and taking them from Point A to Point B. Whereas, in the product-led growth cycle the potential customer gets given the keys to the product so that they can try before they buy.
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With the definition of product-led growth covered, let’s take a look at some of the key components of the product-led growth approach.
Key components of PLG 1: Focus on communicating and delivering value
There is nothing worse than ordering something based on its description or its perceived value and then finding out on arrival that the product isn’t what you’d hoped for.
On starting my studies I moved into a room in a shared apartment. I decided to use the few remaining pennies in my student overdraft to spruce up my single-bed cupboard of a room (Harry Potter, eat your heart out, your cupboard was a palace in comparison).
So, I looked online and found this beautiful Persianesque rug, for $3.50 … Unfortunately, when the rug actually arrived it wasn’t a rug at all. It was a bath mat and an ugly one at that! There I was expecting woolly coziness to add a bit of a class to le cupboard and instead I received a plastic mat with a sticker of a rug on it.
Perhaps I was so excited by the bargain that I missed the fine print description of the rug-like-bath-mat. Or, perhaps the bath mat’s value wasn’t made clear in the product’s description.
The key is to communicate the value of your product to your customers in a way that is relevant to them. Then, you need to make sure you deliver on that value.
When it comes to software this goes a little deeper. Why? Because customers will be using your product for different reasons so you need to ensure that your product is delivering value to each of those use cases. Most companies end up letting customers down by overpromising and under-delivering. To mitigate this prioritize getting to know your userbase.
Fortunately, the next component of PLG makes getting to know your customers simple (spoiler: while they’re trialing your product you’re using their user data to get to know them).
Key components of PLG 2: Give your product away for free
“Freemium is like a Samurai sword: unless you’re a master at using it, you can cut your arm off.” – Serial Entrepreneur Rob Walling , Free trial or freemium? Decide your go-to-market strategy first
Whether it be a new pair of shoes or the latest mindfulness app, trying a product is an essential part of the buying process. This is particularly true when it comes to software. Users want to try before they buy. Thus, it’s essential that you not only offer a service that accommodates this, but that you also make that service so good that it converts users into paying customers.
With the freemium model, this conversion consists of users opting for more features/increased access by paying for the premium version of the product. One important aspect of the freemium model is that it is not time-bound. Should users wish to, they can continue to use the freemium version without upgrading. At Process Street we offer a freemium model.
The free trial model, on the other hand, offers access to your product, whether it be full or limited access, for a given period of time. Once users have completed the trial period they can either opt to pay to continue using your product or stop using it entirely.
On a side note: Active users who continue to use the freemium version and do not convert to paying customers are still valuable. Why? Because, providing they like your product, freemium users will spread the good word about it, which in turn can multiply your user base.
Choosing which model is right for you depends on your business’s individual requirements. Fortunately, for those of you trying to choose between freemium and free trial models, Wes Bush, bestselling author of “Product-Led Growth: How To Build a Product That Sells Itself” has formulated a quiz to help you determine which is likely to perform best for your business.
Product-led growth as a go-to-market strategy
PLG is first and foremost a go-to-market strategy (GTM). This strategy is a company-wide action plan that determines the way in which a product is brought to the market. A go-to-market strategy generally includes a business plan that outlines how marketing, sales, customer success, product engineering, and product teams intend to work together to ensure growth and measure the success of your product.
Typically, a GTM strategy asks a handful of questions; these questions are then answered differently depending on the growth tactic your business is implementing (sales, market, product). So, in a product-led growth, GTM strategy, the questions might be answered like this:
- Who is buying your product? With PLG you focus on selling to your users, not buyers. That’s to say, you focus your attention on providing the best user experience for the users of the freemium or free trial version of your product so they convert into paying customers.
- Where will they find out about your product? The primary driver for user acquisition is the product itself. With PLG you say goodbye to the sales reps. PLG gives customers the keys to your product and allows users to explore the product themselves. PLG ensures that users are supported throughout the exploration process via in-app messaging, and a steadfast, built-in, user onboarding experience. The hope here is that happy users will then share your product and it will grow through virality, rather than traditional marketing strategies.
- Why are they buying your product? The main focus with PLG is on delivering value to users. How? By having a simple revenue model, a trustworthy pricing plan (that passes the 5-second test), and a better user experience than your competitors. In an ideal world, your product would be consistently providing value to your customers. This is good for your business because by continuously delivering value, you are increasing the lifetime value (LTV, I’ll elaborate on this shortly) of each customer as they’ll stay loyal to your product.
- How are they buying your product? Simply put, users buy your product because they have tried it and they like it. So, after using a freemium or free trial version of your product they go premium. Those buying your product should have experienced the product first-hand—rather than via a sales rep.
Perhaps you’ve read this far and thought to yourself, this sounds like something that could work for my product. If this is the case you’re likely wondering how to begin implementing the PLG approach.
Is the product-led growth approach for you?
The first step in deciding whether to embody the PLG is to choose which go-to-market approach your product follows. I’ve focused on the dominant, differentiated, and disruptive growth strategies in this post as they work best in the SaaS arena. However, for a more detailed list of growth strategies check out this post: The Jobs-to-be-Done Growth Strategy Matrix by Tony Ulwick (founder of Strategyn).
Simply put, the dominant growth strategy works best if you’re able to dominate the market by having the best product and can charge significantly less than your competitors.
Questions to ask yourself when deciding if a dominant growth strategy is right for you:
- Is your total addressable market (TAM) big enough to support a freemium model?
- Does your product solve a specific job significantly better and at a lower cost than anyone else in the market?
- Can your user realize significant ongoing value quickly with little-to-no help from company personnel?
- Do you want to be the undisputed market leader in your category?
The freemium model works perfectly with a dominant growth strategy and can help you take a sizable chunk out of a market. However, when determining if this is the product-led growth strategy for you, ensure that your TAM is big enough for you to give your product away for free. To give you an idea of what I mean by big … Zoom employs a dominant growth strategy and in April 2020 they recorded 300 million daily meeting attendants.
Be different. Differentiated growth involves finding an underserved niche product within a market that is better than the competition – and then charging significantly more for it.
Questions to ask yourself when deciding if a differentiated growth strategy is right for you:
- Is your market composed of underserved customers (I’ll cover this in more detail shortly)?
- What is your total addressable market (TAM)?
- Is your annual contract value (ACV) high enough to support a low- or high-touch sales team?
- Could your prospects experience an “Aha!” moment, otherwise known as a moment of sudden insight during a free trial?
The differentiated approach works well with free trials. This is because it’s difficult to create a freemium experience with an “Aha!” moment due to the specialization and complexity of differentiated products.
Is your product a scaled-down version of an existing solution? If so, then it’s time to be disruptive. The disruptive growth approach requires you to charge less for what may be considered an “inferior product”. However, this is also where your value lies. You charge less but provide value through your product’s simplicity and ease of use (think Google Docs).
Questions to ask yourself when deciding if a disruptive growth strategy is right for you:
- Is your market full of over-served customers?
- Is your market large enough to support a freemium model? (Check out your competitors to gauge the market size.)
- Do you have the resources to support a freemium model?
- Can your user onboarding process run solely through self-service?
The disruptive approach pairs well with a freemium model because it draws in customers who are using existing, more pricey alternatives. Remember your product’s value is its simplicity. Your product is a scaled-down version of an existing solution.
Determining your go-to-market strategy allows you to decide between a freemium or free trial or your business.
The Blue Ocean Strategy: Are you capturing demand or creating it?
The next step in deciding whether the product-led growth model is for you involves determining which sea your business sails in; red or blue? For those of you who are unfamiliar with the Blue Ocean Strategy, here is a quick overview:
“Red Ocean companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth reduce. Products become commodities and cut-throat competition turns the ocean bloody red.
Blue Ocean companies, in contrast, access untapped market space and create demand, and so they have the opportunity for highly profitable growth. In Blue Oceans, competition is irrelevant. Yes, imitators arise, but experience shows there is a wide window of opportunity to stay ahead of imitators.” – W Chan Kin & Renée Mauborgne: What Characterises Red Ocean Dwelling vs Blue Ocean Creating Organisations?
In other words, if you’re in a red ocean you’re fighting to capture existing demand. If you’re in a blue ocean you’re working to create demand.There are a few things to bear in mind here. If you are in a blue ocean then you will have to dedicate time to educating your market about your product.
On the other hand, in a red ocean, a self-service approach – which involves the customer being given the keys to your product – would work well. According to Wes Bush, a self-service approach in a red ocean company can “decrease your CAC, and help you expand globally in a fraction of the time.”
- Blue ocean businesses lead with a sales- or marketing-led go-to-market strategy
- Red ocean businesses lead with a product-led go-to-market strategy
It’s worth noting that you can transition from a blue ocean to a red ocean. If you are currently in a blue ocean this doesn’t mean that you should rule out the self-service model. The question is about when you employ a self-service model, not if you should employ it.
The key is to ensure that your market is ready for a self-service model. Ask yourself if the market will see the value in your product, and perhaps more importantly – will it understand your product? Once the market has matured enough to fully grasp the value of your product and consumers want/need it, a self-service model would prove beneficial.
If we had launched self-serve back then, we would’ve failed. In my opinion, self-serve is the only distribution worth undertaking once the market is mature. – Pankaj Prasaad, CEO of Talkable
Are your users makers or shakers?
Makers are doers. They are the people who want to try before they buy. Makers strive to understand what a product is really about. They want to get a taste of a product to see if it can solve their problems. Makers tend to be the cogs of a business, the workers, the people who will actually be using your product. By targeting makers you are employing a bottom-up marketing approach.
Shakers are the people who have the power to shake things up (so to speak). Shakers are members of high-level management and have the right to make decisions on behalf of the team, such as whether or not to adopt a new product. The majority of companies target shakers because they’re the decision-makers. This is known as a top-down marketing approach.
Why is this relevant?
A successful product-led growth strategy relies on one thing: Makers
From a product-led growth perspective, targeting shakers may not be the best move. Why? Because shakers are unlikely to be the ones actually using the product and thus are unlikely to reap the benefits of the freemium or free trial offered with PLG.
On the other hand, by taking a bottom-up marketing approach and targeting makers your product’s free trial or freemium offer will be of value and be taken advantage of. The makers are the end-users and they can then make a case for your product to the shakers in their team.
Key metrics for measuring product-led growth
Product-led growth metrics are to be used alongside traditional success metrics, like lifetime value (LTV) and Net Promoter Score (NPS). They are meant to enhance your existing measurement method by providing quantifiable, common goals. These goals can then help to drive and educate your team while optimizing the user journey as the driver of growth. Here are some PLG metrics that you can track alongside your existing success metrics:
- Time to value (TTV): This is the amount of time it takes a new customer to realize value from your product.
- Product-qualified leads (PQL): A product qualified lead is a free or trial account that has gotten to a point of initial value with your product.
- Expansion revenue: Indicates the rate at which a company’s expansion monthly recurring revenue (MRR) grows from month to month.
- Average revenue per user (ARPU): This is a company’s generated revenue that is averaged across all users and reported as a monthly or yearly value. For mobile apps where engagement is often higher, you might want to consider using ARPDAU as well.
- Lifetime value (LTV): Represents the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime.
- Net churn: The measure of lost revenue month over month (due to cancellations and account downgrades) after factoring in any revenue from existing customers (i.e. upgrades/expansion).
- Virality: The number of new users an existing user generates. The virality metric calculates the exponential referral cycle that accelerates company growth.
Product-led growth in practice: Slack
Slack is a channel-based messaging platform. Slack, the poster child of the product-led growth approach embodies the Blue Ocean Strategy, has a freemium business model, and targets makers, rather than shakers. Let’s take a peep at what this looks like in practice.
As I mentioned earlier, the Blue Ocean Strategy involves defining new free-market space and positioning your product as the leader in that space. When Slack launched in 2013 it was not the first workplace messaging app: HipChat, Skype, Campfire (now Basecamp), and Hangouts were already up and running. However, judging by Slack’s rapid growth (by 2014, just one year later, they had 73,000 Slack users paying for the premium service) the need for centralized team communication had not yet been satisfied.
Roughly 25% of Slack’s early users switched from another centralized messaging system like the ones mentioned above, yet 75% of those early users said that they were using nothing for internal communication. Interestingly, many of these users – the majority of whom would fall into the makers category – were in fact using emails, Skype, SMS, and so on, but they did not class these as software.
This lack of software, coupled with a target audience that wasn’t yet aware of their need for such a product, meant Slack had to be clear on what the value of their product was. Thus, they focused on selling “innovation” rather than the product itself. Slack delivers innovation by optimizing team communication. For instance, we at Process Street rely on Slack for everything: we launch our workflow templates within Slack channels thanks to an integration with Zapier; we check in with various departments, and we communicate asynchronously with our colleagues who are based around the world.
If you are unclear as to what we do at Process Street, visit our help page or check out this explainer video.
Slack operates on a freemium model and their freemium model allows the product to spread thanks to happy users, word of mouth, and virality. In their first year of running any increase in their user base was solely due to word of mouth. In fact, in their first year, Slack didn’t even have a marketing team! Well actually… they didn’t have a single marketing employee. Yet, by 2014 they had acquired 73,000 paying users. Fast track to today and 43% of the Fortune 100 pay for Slack and they, much like the early users, are happy customers. But, don’t just take my word for it, check out the Slack Love Twitter channel for yourselves.
On a side note: it’s not just Slack that has hit the jackpot by embodying the product-led growth approach. In 2018, Airtable (another PLG poster child) reported $20 million in revenue and optimized its product-led game by launching Airtable Universe. Then there is Figma, which, thanks to its product-led approach, closed $40 million worth of Series C funding in 2019.
To finish things off let’s briefly take a look at what Hubspot did to ensure that their product allowed them to grow (and grow fast).
Product-led growth in practice: Hubspot
In his post “From Startup to Scale-up” Brian Halligan, CEO of Hubspot, explains how companies go through four stages of an S-Curve:
- Getting Product Market Fit — Can you build something useful that can pull in some money in some way?
- Getting the Math to Work — Can you acquire customers for X and get at least 3X in return?
- Getting the Math to Scale — Can you pour lots more money into the top of your machine and keep that at least 3x ratio?
- Getting Saturated — You are running out of potential customers in your market or being disrupted.
According to Brian, a company is in the scaling-up phase when they are in stage 3. In his article, he explains how Hubspot got through each of these stages. However, it is the three decisions that pushed Hubspot into phase 3 that are of real value to this article. Why? Because each of these decisions highlights the power of the product-led growth approach.
The first decision: The Mary Decision, highlights the importance of knowing, communicating, and delivering on the value of your product. In 2012, HubSpot realized they needed to commit to a single persona in order to deliver proper value to their target customer. Pre-Mary there were two market personas. By trying to deliver value to both of these personas Hubspot was falling short on both.
The second decision: The MOFU decision, or, in other words, “the middle-of-the-funnel decision” involved withdrawing their attention from TOFU (you guessed it … top-of-the-funnel) tools and directing their resources at MOFU tools. Why?
It’s simple, MOFO tools had better retention rates. Remember the “makers” and “shakers” point I made previously? In this case, Hubspot pre-2011 (when they made the MOFU decision) was focused on making high-end tools to meet the needs of the shakers. In 2011, they realized that in actual fact, focusing on the makers is where the real growth was at.
The third and final decision: The Monetization Decision was inspired by Sequoia’s Pat Grady. Pat helped Hubspot realize the flaws in their pricing model, which relied on only one pricing axis. He enlightened them to the fact that most software companies had two, three, or four pricing axes – rather just the than one. Having multiple axes means that you provide your product with more than one way to monetize successful customers.
The Mary-MOFU-Monetization trio worked wonders for Hubspot and its goal to scale up. I’ll let the figures prove my point:
Product-led approach: Key takeaways
To recap, let’s briefly touch base with the gibberish I wrote in the intro to this post…
- Choose between a free trial or freemium model : The freemium model is not time capped and doesn’t tend to include premium features. The free trial model is time capped and often includes access to most features. Choose the model that works best for your individual needs.
- Determine if you’ll be targeting the makers or the shakers of an organization : A successful product-led growth strategy relies on one thing: Makers (the doers of an organization).
- Decide which sea you wish to sail when following the Blue Ocean Strategy : If you’re in a red ocean, you’re fighting to capture existing demand. If you’re in a blue ocean, you’re working to create demand. Red ocean businesses lead with a product-led go-to-market strategy. You can transition between the two, providing you focus on the maturity of your market.
- Choose whether your strategy wants to focus on the bottom-up or the top-down : Remember the Drake song that goes something like “we started from the bottom now we here” the same can be said for the PLG approach. Start at the bottom (and take a bottom-up approach) to get to where you want to be.
Hopefully, this post has cleared things up for you. If you found this content useful and interesting, sign up (it’s free) for access to our future content and to learn more about what Process Street does.
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