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What is product-led growth?

Last updated

1 May 2023

Reviewed by

Jen Lee

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Product-led growth (PLG) is a growth model business strategy that's gained popularity since OpenView Venture Partners created the term in 2016. 

Some of today's most successful SaaS companies use this model, including Calendly, Dropbox, and Slack. 

PLG uses the platform as the driver to increase the number of users through acquisition, activation, and retention. Most importantly, it advocates the solution and refers the platform to other potential users within their network.  

With success, the user will reach the referral stage and recommend the product to others, creating a reliable pipeline of new users and more revenue. 

Using the strategy correctly leads to impressive results: Slack is a product-led company valued at $27.7 billion. It's one of many billion-dollar companies that started by offering its product for free. 

Let's explore the principles of product-led growth and how a company can implement PLG to encourage sustainable, long-term growth. 

How product-led growth works

To understand product-led growth, consider how a business purchased software 20 years ago. 

Typically, a salesperson would make an outbound call and pitch the software to a company. They’d convince the business that their software solved their problems, sealing the deal. 

After the transaction, the salesperson would train the office to use the software.

The standard sales-led business strategy puts a salesperson at the heart of the business. This means they’re largely responsible for monthly revenue growth and quarterly targets. 

Product-led growth takes a significantly different approach. This growth model removes the salesperson, centering the platform as the driving force.

When potential users visit the platform's website, they will likely purchase a premium version or add-ons.  

Instead of having a funnel with leads, a flywheel leads sales through happy customer referrals. Business growth happens more efficiently through word-of-mouth and organic referrals. 

In other words, instead of paying a business developer to identify and close leads, the user base can do it for you for free. The platform becomes the new driver for customer engagement, acquisition, retention, revenue, and referral. 

Several product-led companies offer a free product version to increase their customer base. 

One of these is Calendly, a scheduling software. It offers a free plan, allowing users to schedule meetings with limited features. They can create a single event type and share it with anyone who wants to book a timeslot. 

It automates the process of blocking time off in your calendar and simplifying the workflow for client-facing users. If you connect more than one calendar event type, you must upgrade to a paid plan.

As Calendly offers the basic features for free, users get to discover how helpful it is. This pushes them toward paying for more features and recommending the platform to others.

Today, the company is valued at over $3 billion thanks to product-led growth. 

How does PLG differ from sales-led growth?

Product-led growth puts the platform at the center of the business strategy. 

Sales-led growth is a more traditional business strategy that uses the sales and marketing teams as the main growth drivers. They use outbound marketing strategies such as advertising, cold-calling, and digital marketing campaigns to attract potential customers.

While effective, this business strategy requires a lot of upfront capital, a longer sales cycle, and interaction with the customer before they make a purchase. It’s a more expensive and time-consuming approach to increase revenue.

How does PLG differ from user-led growth?

Product-led and user-led growth (ULG) are customer-focused growth models to increase the revenue of a business. There’s a significant amount of overlap between the two models. 

Both rely on word-of-mouth organic sales and referrals to drive growth and revenue. How they achieve it is slightly different. 

PLG focuses on building a platform that's so effective at solving a problem that users recommend it to others. ULG focuses on creating an incredible user experience

ULG companies spend a lot of money on user research and champion user success as the main driver of growth and revenue. 

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What are the benefits of product-led growth?

Many companies adopt product-led growth methodology because it's powerful, efficient, and works well under the right conditions. 

Here are some of the benefits PLG companies enjoy: 

Lower customer acquisition costs

PLG companies focus on solving the problem better instead of heavily investing in paid acquisition methods. The user does your marketing for you, so you gain new users through word-of-mouth.  

Better user experience

PLG has an incredible solution at its core: Developers create the product with the end user in mind to deliver the best user experience possible. 

When that happens, you increase user satisfaction, make it more shareable, and boost user retention rates.

Accelerated scaling

Companies that follow a PLG growth model can scale much faster than sales-led companies. Growth happens more quickly because your platform solves a problem well and beats the competition, making users more likely to recommend your service. 

You can also scale globally because users can onboard anytime, anywhere, without waiting for a call back from a salesperson. 

The users are essentially your sales team, pitching, sharing, and guiding new users through onboarding and demonstrating how it can solve their problems. 

What is an example of product-led development?

Companies often achieve product-led development when they’ve surpassed product market fit and have an active user base and healthy revenues. They can predict their sales and offer new services or platforms to their customers by modifying their latest products. 

A prime example is new product models or paid upgrades through phones, laptops, or cars. When new iPhone or Tesla models come out, excitement often causes hefty wait times and down payments. 

These new features seem too good to miss, even if the consumer has only had their phone for eight months. This highlights an important point about being responsible with recycling devices and considering our environmental impact with product-led development.

Still, new and innovative technology solutions lead to exciting solutions, from bionic arms and legs to less life-changing things, like keyless car entry. 

What are some other examples of product-led companies?

Along with Calendly, Slack, and Dropbox, there are many other successful product-led companies, including: 

  • Datadog: A cloud monitoring company

  • Zapier: Users can connect apps to automate workflows

  • Airtable: A database platform allowing users to build applications

  • Zoom: Video conferencing software

  • Atlassian: The creators of collaboration software such as Trello, Confluence, and Jira

How do you measure product-led growth?

When a business adopts a product-led growth approach, a free plan can change how it measures success. 

Rather than focusing on traditional metrics like revenue and sales, companies need to track these: 

  • Product qualified leads (PQLs): Potential customers who have signed up for the free version or are engaging with the platform somehow

  • Activation rate: Looks at the percentage of users who have moved beyond the onboarding process at a certain stage and are closer to adopting the platform

  • Net promoter score (NPS): Measures how likely your current users are to recommend your company

  • Retention rate: The percentage of users who continue using the product after a period 

  • Viral coefficient: How many existing users generate new users

  • Time-to-value: The time it takes users to realize your product's value in an ‘aha’ moment

  • Expansion revenue: Revenue from upsells and add-ons outside the initial pricing

  • Adoption rate: The percentage of new users versus the total existing user base

Focusing on these metrics allows businesses to better understand the user journey, identify opportunities to improve the product, and drive adoption.

The key components of a product-led growth approach

Let’s explore if product-led growth is the right strategy for your business. We’ll familiarize you with core components and how you can use them to foster a product-led growth approach. 

Design with your end user in mind

In PLG, your platform users are the core of your business and become your new sales team. 

For users to recommend your platform, it must meet user needs in a significant, compelling way. Knowing your target audience’s requirements is pivotal to developing a fantastic product.

This requires a lot of market research and usability testing to ensure a frictionless, user-friendly platform. Designing an easy-to-use solution for your audience will generate more efficient long-term, organic growth.

Minimize friction

The PLG strategy aims to build momentum by onboarding as many users as possible. To increase your user numbers, you must make it easy for them to get started. 

Remove barriers and minimize friction that could prevent them from adopting your product. 

This may look like: 

  • Making the sign-up process faster

  • Having less information to fill in 

  • Making the process feel natural and intuitive

Any friction in the onboarding process may send potential users running because they lost interest. This could push them toward alternative solutions that are more user-friendly and less time-consuming. 

Highlight the product benefits and make engagement as easy as possible to see momentum build. 

Demonstrate value early

Traditional businesses prioritize monetization right away and want people to make a purchase. On the other hand, PLG demonstrates value now to create bottom-line value later

Your primary goal should be to show your product's value to your end user as quickly as possible. You can measure this by tracking the time-to-value and several other PLG metrics shared above. 

Once you've shown your end user the value of your product and it becomes a new daily habit, you can start monetizing it. You can offer paid plans or sell add-ons to the core product. 

Use solutions to drive demand

PLG is all about momentum. The more people you can onboard, the more subscribers you'll capture, and the more they'll share the product with others. 

You can build momentum by building excellent and innovative solutions to user problems. 

Notable solutions and neat opportunities drive user engagement. This is part of locking in the flywheel to get people to return and tell others. You could include links to bring new users back to your product or offer bonus features to those who share it. 

While Dropbox was pre-launch, it offered additional storage space to existing users at no cost for every successful referral. With PLG, you layer sales and marketing into your product in an enticing, natural way for rapid growth. 

Acquisition is just the beginning

It’s important to focus beyond acquisition to create sustainable business growth. Retention and expansion are the end goals. 

You want to acquire as many new users as quickly as possible in an automated process. Increased retention means more revenue as users stay, repeat purchases, and tell others to join. 

Get your product out 

Focus on getting the product out on the market so users can engage. They can do the sales and marketing without any cost to the business. 

Sure, you'll need some marketing. But most of your investment must go toward product development, including refining the user experience and developing a go-to-market strategy. 

Replace the traditional business model with PLG for a better, faster, and more scalable approach. The sooner you can get a finished, tested product to market, the sooner you can build momentum and buzz. 

Is a PLG strategy right for your product?

PLG can work for a lot of companies. It's a business strategy embraced by most SaaS companies, but it doesn't only work for software. 

The shaving company Gillette used the strategy back in 1904. It gave away its new razor for free, allowing users to experience its superior shave. Once their users realized the product's value, they returned to the company to purchase the refills. 

Gillette created a customer base with built-in demand, established an empire in Procter and Gamble, and is still strong today.

Ask these questions to determine if PLG is right for your company before you commit: 

Is your product offering a valuable solution to a problem?

For example, Zoom allowed users to continue meeting with coworkers during the pandemic while streamlining workflow and integrating with other tools and platforms. It drove massive growth for the business, delivering a unique solution to a specific problem. 

Do users get value from your product before paying for it? 

You must demonstrate your product's value to the user before asking them for money. One approach is offering a free plan with limited features, enticing users to upgrade to a paid plan for more functions. 

Is it easy to sign up for and start using your product? 

You want to achieve the lowest barrier to entry possible. Ideally, users should be able to start engaging with your product in a few clicks, and it should be easy to use. If there’s a steep learning curve, it will be harder to retain users.

Is your target audience likely to share your product with others? 

Products that solve a big problem uniquely are more likely to receive user referrals. It often starts with someone using the product, loving it, and sharing it within their networks. This is why some businesses use influencers. 

You can make it easier for your user base to share your product by supplying links. 

How can my business become product-led if it isn't already?

If you've followed a traditional sales-led or marketing-led growth strategy, changing your focus to a PLG methodology is possible. 

However, it takes significant infrastructure and platform design changes within the company. You'll need to start investing in more audience research and usability testing. This immediately demonstrates value, identifies the big problem, and ensures users love it.  

User research gives you a better understanding of what your target user really wants from a product and what you need to adjust to deliver and give it to them. 

It may be challenging to make the change, but it could be worth it. 

Users naturally embrace a try-before-you-buy approach as it reduces the risk of losing their hard-earned money. If you can bring value during this stage, you can create sustainable revenue growth.

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