The product-led movement is just getting started. There are still so many workflows and processes that smart product-led entrepreneurs can reinvent. Outdated software is being cast aside for customer-centric SaaS. And even SaaS categories that were disrupted in the early 2000s are now being overshadowed by next-generation SaaS companies.
But what is product-led growth and how can you build a new SaaS product that maximizes this strategy and profit potential?
What is product-led growth?
Product-led growth is a strategy that has your SaaS product doing the heavy lifting when it comes to marketing and sales. Say goodby to old-school buying processes. Rather than having a sales team reach out to a qualified lead and offer a demo, a potential end-user can sign up for your product, test it out, and then decide for themselves if they want to upgrade.
Caption: Source: Product Led
This puts the end-user in the driver’s seat. They discover the tool, achieve value from it, and determine if it fits their needs and if it is worth the price.
In practice, these are the top product-led growth models:
- Freemium (free forever plan): Most product-led growth success stories rely on a freemium model to bring a high amount of new users each and every day. The company might convert 1 – 10% of these free users into paying customers. The rest will stay on the free plan, but will continue to share the product via word-of-mouth or shareable links (such as a document, design, or appointment scheduling link). So even if these users don’t convert to paying customers, they still hold value for the business because they’re part of an ever-growing base for referral marketing.
- Free trial of a paid plan: Most product-led companies also offer a free trial of a paid plan, whether or not they have a free forever plan. By allowing end-users to test the product for 7 to 30 days, the company can avoid expensive and time-consuming sales processes. Instead, the user can try the product and enter their credit card information themselves. Or, only once they’ve interacted with the product extensively (and become a product-qualified lead), will the sales team follow up to encourage them to convert to a customer.
The history of product-led growth
Product-led growth is a trend that can’t be separated from the increasing consumerization of business software or the rise in internet connectivity and device ownership. Decades ago, software was purchased for the organization by the Chief Information Officer or the Chief Technology Officer. This IT leader would select software and roll it out to employees. But now, employees have access to the internet everywhere they go. They research their own problems and find their own solutions.
- Selling to the CIO / CTO: In the 80s and 90s, the start of the software industry, products were licensed by the head of IT and then distributed to users throughout the company.
- Selling to the department leader: In the 2000s, virtualization caused the decentralization of data. Data was no longer stored in on-premise data centers, but rather in the cloud. It because easier for executives to choose, purchase, and roll-out cloud-based SaaS products all on their own, with no help from IT.
- Selling to the end-user: The shift to the end-user has been caused by increasingly easier sign-up and buying processes, as well as the massive growth of content marketing which has allowed users to discover solutions on their own. This is a natural progression of selling to executives. Now, end-users pick their favorite tools, and executives and IT leaders have to make sure that the company isn’t paying for overlapping functionality and that all data sources are integrated. Rather than choosing software, leaders now have to control end-user choices.
Why product-led growth is on the rise
Product-led growth is all about getting to the end-user. Once the end-user is a champion of the product, they can convince budget owners to buy it, and the sales team doesn’t have to do that work.
Software sales and marketing is incredibly expensive. Google Ads PPC can be $20 – $80 per click for software-related keyphrases. The best marketers and sales representatives expect salaries of $100,000 and above.
Product-led growth allows SaaS companies to get to $1 million to $5 million in annual recurring revenue (ARR) before hiring large teams. This allows tech companies to have a high revenue-per-employee (RPE), with some product-led growth success stories boasting an RPE of $150,000 to $500,000.
Here’s what James Gross of Variance has to say about the different forms of selling:
- Founder-led ($0 – $5M): In the early days, founders have to sell their products through cold email and demos, because they don’t have enough brand awareness for meaningful product-led growth.
- Product-led ($1M – $40M): Through marketing, word-of-mouth, and a great product with product-market fit, SaaS founders can start to get recurring leads through free trials and freemium signups.
- Enterprise sales ($5M – $1B+): With product-led growth offering a steady stream of SMB leads, it’s now time for enterprise sales teams to use account-based marketing and go after bigger clients.
- Customer success sales ($100M – $1B+): Now, customer success teams can increase the revenue of each customer by exposing them to additional products and services that fit their needs.
The business benefits of product-led growth
Why should your SaaS company adopt a product-led growth strategy? These key benefits are reason enough.
1. Creates a flywheel where the product does most of the marketing and sales
When you have excellent product-market fit, your product will sell itself. Of course, you’ll still need to do content marketing, PR, and paid advertising, but you’ll be able to create a flywheel of referral marketing as more and more people use your product (either for free or paid) and tell others about it. Because you offer a free trial or free access, users can hop in and become a lead without having to interact with anyone on your team.
You can divert more of your budget towards building a great product and less on marketing and sales. This will put you in a stronger position against your competitors.
2. Higher revenue per employee
Adopting a PLG strategy also gives you the chance to experience higher revenue per employee. That’s because you’ll have a massive base of free and paid users who can refer your product to others. With smaller sales and marketing teams come higher RPE rates.
3. Increased customer satisfaction and retention
PLG companies invest the most amount of money into their product as possible. A great product comes above all else. That’s very different from companies that build a so-so product and then rely on great salespeople to drive revenue. When sales is doing the heavy lifting but your product isn’t great, you’ll have people cancelling as soon as their contract expires. You won’t have the opportunity to increase your customer lifetime value (CLV).
But with an amazing product, you’ll experience higher rates of customer satisfaction and retention.
4. Customer-centric relationships that are hard for competitors to replicate
What’s more, a customer-centric organization can build a very deep bond with its customers that will be hard for competitors to follow, even if they build the same features as you do. Because you’re listening to your customers and implementing their feedback, customers will feel a stronger pull to your brand and will want to continue the relationship. User behavior should be the primary driver of innovation and success.
DesignFiles does this well. They regularly take product feedback from their customers and do a great job of announcing and explaining their new features.
Competitors might copy those features, but they can never copy the relationship that the CEO of DesignFiles has with their customer base of solo interior designers and small firms.
How to build a new SaaS product that guarantees product-led growth
So how do you capitalize on the opportunity that comes with PLG? Although this strategy is incredibly effective, that doesn’t mean it is easy.
You need to make sure that you have a strong handle on all of the following:
1. Solve a real pain point
Firstly, your product needs to solve an important pain point. One that is time-consuming, or expensive, or difficult to solve. One whose solution is worth paying for.
Without a product that is 5X to 10X better than direct competitors (other SaaS) or indirect competitors (manual work or unoptimized processes and tools), you will not be able to create a flywheel of hungry users for your product.
2. Offer a free plan or free trial
You also need to offer a free plan or a free trial of a paid plan. You can also offer both. If your product is costly and complex, you’ll likely need enterprise sales. However, you can still offer a free trial or a very simple free plan so that users can sign up and explore your product. With the current environment of user-led sales, you will suffer if you only offer a demo request. By allowing the user to play with the product, you’ll increase the likelihood of them wanting to sit through a demo to learn more about the advanced features and calculate their potential ROI.
3. Make it easy for people to sign up
It’s so important to make it easy for people to sign up, whether that is for your free plan or your free trial. Continually test your sign-up flow to remove as much friction as possible. For example, with Weet, you can use your credentials for Google, Microsoft, or Apple to start a new account.
To get inspiration, check out the sign-up flows of the product-led growth examples in the section below. Even if it seems like your process is easy, remember that it can always get easier.
4. Ensure users see value before being asked to pay
Before being asked to pay (or being asked to hop on a live demo), your users should be able to experience some value. The moment that they first achieve value is referred to as the “Aha moment.” For the companies with the greatest success from PLG, this moment is quick and easy to achieve. For example, when you create a screensharing video with Loom and send it to a colleague, that only takes a couple of minutes to get to the Aha moment.
For more complex products that require integration with your existing tech stack or multiple users to be onboarded, it can take much longer to achieve value. You will likely still need to sell from a demo, but you might be able to showcase some of the value they will receive before asking them to chat with you. For example, you could show a mock analytics report or achieve value for the main user role only.
5. Hire sales after product validation
With all of the above well underway, it’s then time to hire a sales team that can help scale your reach and take your company upmarket. You might create a larger plan or custom plans to help you sell to larger enterprises and organizations.
Popular examples of product-led companies
When you study product-led companies, you can learn a lot about their user sign-up flow, how they prompt free users to upgrade, and how they use product marketing to clarify their features.
Check out the popular examples:
Loom is a tool for sending audio and video recordings with an easy-to-share unique link. Amidst a landscape of on-premise screensharing software that required uploading and downloading, the tool grew extremely quickly the past couple of years. Because the recordings are shareable, the company not only had product-led growth on its side but also the power of virality.
Slack is known for replacing email with chat-style channels. With its popular free plan, it allowed small businesses and teams to try it out before upgrading. The company is one of the most successful B2B SaaS applications in the world.
As one of the most popular appointment booking tools, Calendly is another great example of product-led growth done right. Like Loom, it also has built-in virality because when paying users send it to their colleagues and clients to book an appointment, that person is also exposed to the tool and might decide to use it in their professional life as well.
Shopify is another stand-out success. Unlike many product-led companies, Shopify doesn’t offer a free plan. But with their free trial, users can see just how easy it is to setup an ecommerce store. Without Shopify, they’ll have to do a lot of custom coding and plugin wrangling. If your product is more complex, Shopify’s free trial conversion workflow would be a smart example for you to study. You can see how they encourage users to do some initial setup, even if they don’t build out their entire store in the 14-day window.
Lesser known-examples of product-led companies
Of course, there are hundreds of product-led companies that aren’t famous. Check out these other examples of less popular companies.
SafeBase is a platform that helps sales representatives, security engineers, and buyers save time during the buying process. When it’s time to vet a SaaS product’s security features, a buyer can visit their portal, sign the NDA, and see the security details. SabeBase’s website offers a user-driven buying experience, where users can sign up and explore the product for free. Then, when they’re ready, they can book a demo.
Frase offers its trial for just $1. You might test this strategy for yourself if you have great testimonials and case studies. While not completely free, this method is close to free and also allows you to capture credit card information up front. This strategy is best for professional users, but not for very small business and solopreneur use cases.
HoneyBook is a platform that photographers, designers, and other freelancers use to send invoices, sign contracts, collect payments, and manage projects and tasks. The company offers a free trial so people can see how easy it is to use and how the monthly fee easily pays for itself with the time-savings that users will achieve.
Not every free trial is time-based. Some of them are activity-based. DesignFiles is a great example of this. The free plan can be used for up to one client project at a time. When they’re ready to manage more client projects, then the interior designer needs to upgrade. This free trial allows the designer to use all of the design, business management, and project management features before signing up as a paying user.
How to measure product-led growth
The best product-led companies are bullish on metrics. They continually measure, test, and optimize. Here are the top metrics for understanding and improving your product-led growth strategy.
1. Conversion rate for free trials
You should know your conversion rate for free trials. You can measure this conversion rate for every page and blog post on your website. You’ll also want to measure this for various channels, such as direct traffic, SEO, and PPC.
2. Conversion rate for free plan sign-ups
If freemium is your main PLG strategy, then you need to measure the conversion rate for your free plan sign-ups from various channels.
3. Funnel drop-off
What is your funnel drop-off? You can use a product analytics tool like Mixpanel to measure every stage of your conversion funnel and the drop-off rates.
4. Product qualified leads (PQL)
For product-led companies, product qualified leads are a better north star than marketing qualified leads or sales qualified leads. A product qualified lead is someone who has interacted with your product enough as a free user to show that they have interest in converting.
5. Cost per sign-up
You need to measure your cost per sign-up for every channel. For organic marketing, this can be difficult to measure, while for paid advertising it is more cut and dry.
6. Cost per PQL
Of course, sign-ups aren’t everything. That’s why you also need to measure how much you are paying for each product qualified lead. This can help you optimize the various marketing channels that you use. This metric also provides data for optimizing your onboarding tours and emails.
7. Cost per customer (CPC)
Cost per customer is a very important metric for ensuring that you can sustain your growth and achieve profitability, or remain profitable. You’ll want your customer lifetime value to be 3X to 5X your customer acquisition cost.
8. Net dollar retention (NDR)
Net dollar retention is another popular SaaS metric. It measures how much your revenue is growing, regardless of how many new customers you get, and it reflects the ability to grow through customer success sales and upgrades.
Here’s an example calculation:
($500,000 in recurring revenue + $100,000 in upgrades from existing customers – $30,000 in downgrades – $10,000 in cancellations) / $500,000 x 100 = 112% NDR
Most successful SaaS companies should have an NDR between 105 and 120%.
9. Revenue per employee (RPE)
SaaS companies also enjoy a higher revenue per employee compared to other industries, and PLG companies tend to be at the top. Your revenue per employee should be at least $100,000, with some companies experiencing $500,000 or more RPE.
10. Customer lifetime value (CLV)
Customer lifetime value allows you to measure the average amount that your customers spend with you. To calculate this, most companies average the amount spent over a period of 5 years.
Why having a product manager is essential at any stage of business
When building a product-led company, you can wait to hire marketers and salespeople. However, you can’t wait to hire a product manager.
Product managers interact with users and customers on a weekly basis through research interviews, surveys, and user testing. They use this information to guide the development of the product. Without a great product manager on your product team, it will be extremely difficult to build a product so good that it practically sells itself.
How to outsource product-led development
When outsourcing development for a new SaaS product, you need to ensure that the software development agency understands product-led growth strategy. Most importantly, the agency should include a product manager who will interface with users and customers. Otherwise, you might not build a product that people actually need.
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