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Touchpoints 04.07.2022

Product-Led Growth: What It Is And Why It’s The Future of SaaS

Are you ready to dominate the SaaS seascape? Jump on board and set sail towards the PLG (product-led growth) age.

product-led growth graphic

Why should you consider a product-led growth strategy?

Well

That said, not everyone should switch or use a PLG model.

In this guide, I'll navigate you through a comparison between PLG and other growth strategies, the core business benefits, the key components of a successful PLG strategy, and the nuances in metrics.

By the time you're done, you'll have a clear idea of whether PLG is the right strategy to follow and how to implement it in your business.

What is product-led growth?

Product-led growth (PLG) is a GTM strategy that relies on your product to acquire leads, convert users into customers and retain their business.

PLG was officially coined in 2016 by Blake Bartlett, VC at OpenView, but many tools (like Podio)  were using a self-service model as far back as 2010. Over the next couple of years, the concept made waves in the SaaS world, quickly becoming one of the biggest trends in software.

What does a product-led model look like in practice?

Instead of trying to get a prospect to jump straight to a paid subscription, PLG focuses on offering a free trial, freemium, or demo model.

Removing friction like discovery calls, demos, and hidden fees empowers users to start using your product immediately and become "sticky" by demonstrating your value.

With all the typical sales hurdles out of the way, it's plain sailing for users to self-convert and become loyal, paying customers.

Why is PLG the future of SaaS?

In the early days of the product-led growth model, all you had to do was whip out your credit card after the end of the trial period and select the plan or features you liked.

But over the years, the product-led growth model has developed with a single goal: to put the customer first.

The outcome?

We have more companies allowing the customer to pay for usage rather than features, offering Beta testing to power users to convert on release, and using tools to identify leads based on user behavior.

"As more and more companies deploy this style of selling, it's the companies who truly understand what the customer wants, what the customer is doing, and why they're doing it, that will win the most," says Ryan Nutley, Director of Sales Engineering at Datadog.

There will be a huge emphasis on behavioral analysis as this develops. We'll see AI being layered on top of those datasets. As more companies shift towards predicting customer actions, the ones that will win big will provide the best experience along the conversion funnel.

Ryan Nutley, Director of Sales Engineering at Datadog.

Ryan predicts a much more holistic product-led strategy approach will be the norm in the next 10 years.

"Smart scoring algorithms will consider every customer touchpoint; support tickets, visiting documentation pages, webinar attendance, chatbot interactions, product feature usage, etc., and auto-convert customers through conversion funnels. Only the most qualified leads will be brought back to revenue-focused teams."

How does PLG compare to other SaaS growth models?

Not sure the product-led growth model is right for your SaaS company? Here's a quick overview of the pros and cons of using one over the other.

PLG vs. SLG

In a traditional sales model, the process revolves around the salesperson.

It's all about the "push."

Your team needs to find leads, pitch your product or service, book demo calls, deliver contracts, and onboard the customer.

PLG, on the other hand, is a "pull" tactic.

It relies on your software product to attract users, the buyer to self-educate, and ultimately sign up for the plan that best suits their needs.

That being said, a PLG isn't a one-size-fits-all approach.

"You need to consider your buyer personas," says Christian Blomberg, ​​B2B SaaS Go-to-Market Advisor and Board Member.

If you're targeting a customer support persona for example, those users prefer to be led. Whereas if you've made a product for developers, those users are naturally more curious and want to get in there and figure it out for themselves.

Christian Sjøvold Blomberg, B2B SaaS Go-to-Market Advisor and Board Member

Another thing to keep in mind is the complexity of your product. If it's not possible for users to self-educate or see value immediately, an SLG strategy is the better fit.

PLG vs. CLG

In the customer-led growth model, it doesn’t assume what sales or product experience you should offer. Instead, it leverages customer preferences and insights to optimize the end-to-end customer experience.

Its success relies on extensive customer feedback and research from all departments to deliver value at each touchpoint.

The only downside?

It's not cheap.

You need to invest in a large sales team to see results.

Whereas PLG doesn't need a fully-fledged enterprise sales team to kick off rapid growth. Twilio, a SaaS start-up, grew to $250M ARR with a PLG strategy and 12 full-time salespeople.

But after its IPO, the product-led company switched to a CLG approach and increased its sales team to 800 people.

If you're a fledgling start-up, the product-led approach frees you from the initial cost of investing in a large sales team and gives you room to redirect funds towards marketing and product development.

If and when you're ready to take the financial hit, you can blend the best of SLG and PLG by investing in CLG.

4 Benefits of a PLG strategy

In 2019, the top SaaS IPOs used a PLG approach.

...But what's the allure? What's causing these companies to report higher revenue growth, gross margin, and net dollar retention?

It’s all a result of the main benefits from following a product-led approach.

Lower CAC (customer acquisition cost)

Dreaming of $0 CAC?

PLG is your ticket to making it happen.

"For me, the biggest challenge with a sales-led strategy has to be the cost of customer acquisition," says Ryan Nutley.

Considering a sales-led environment requires a skilled sales team, if you factor in the hiring, onboarding, and enabling of a new team member, and add that to the fact that it can take a few months for a salesperson to build a strong pipeline and convert an opportunity, you're looking at quite the investment.

Ryan Nutley, Director of Sales Engineering at Datadog.

When your product is the main customer magnet, you can run a tight ship with only a handful of employees (like Twilio).

It gives you space in your budget to reinvest your profit to boost customer experience and strengthen your product magnet.

Shorter sales cycles

By the time you've scheduled a discovery call, a demo, and eventually given access to your product, you've lost several leads who have already decided another tool is solving their problem

Christian Sjøvold Blomberg, B2B SaaS Go-to-Market Advisor and Board Member

The PLG strategy helps you avoid lost deals by removing hurdles like onboarding, demos, and discovery calls.

What you're left with is a lean sales machine that is:

  • Self-onboarding: Speeding up customer stickiness and reducing time-to-value.
  • Removes entry barriers: A freemium version or free trial options allow more end-users to see the value of your product instead of a select group of decision-makers.
  • Easily scalable: Want more users? Globalize your product to include different languages and currencies or promote different use cases of your product that can attract new audiences.

Better user experience

Want to know how to make a successful product-led business?

Follow this simple recipe:

  • 1/2 cup of solving the end-users pain points.
  • 2 tablespoons of user-friendly UX.
  • 1 giant cup of meaningful value.

Mix it all together to make a tangible difference in the end-users life.

It's a much easier upsell to a paid product when you can make someone more productive, streamline tasks, and hit their goals.

Your customers already know, like, and trust you, making the time-to-value (TTV) user journey smooth sailing.

"We've found a PLG strategy has been crucial for the adoption of our product after purchase," explains Ryan Nutley.

If a large company purchased a group-wide license, our PLG mechanics naturally convert them into exploring new products, using more of certain areas of the platform than anticipated, and ultimately increasing the likelihood of renewal and expansion down the line.

Ryan Nutley, Director of Sales Engineering at Datadog.

Key components and tactics of the PLG approach

If you're thinking, "So PLG means building a good product, that seems simple enough."

You're right.

However, if you don't want to waste time, here are some PLG key components and tactics to accelerate your growth.

Get rid of friction

What's the most annoying thing about renewing your driver’s license?

I bet you find it tedious, inefficient, and, let's face it, soul-draining.

Imagine if you could remove all the friction with renewing your driver’s license.

You would have a delightful time, your cortisol levels would be much lower, and your life expectancy would probably go up.

Your experience might even drive you to leave a 5-star Yelp review, generating powerful social proof.

If you want your end-users to feel the same way about your product, you need to make the entire process as pain-free as possible.

Remember, people are lazy, and time is our most valuable resource.

  • Ditch a complex sign-up process: Ask for a name and email address. Take out as many steps as possible and streamline the process with single sign-on (SSO) functionality.
  • Make onboarding/training easy: You want your users to use your product as quickly as possible.
  • Keep it simple: Eliminate any unnecessary features or steps.

These are only a few suggestions.

Comb through your product to weed out points of friction that stop usage and limit your growth potential.

Demonstrate value

Your competitors using a PLG strategy capture the demand and get users excited and further down their funnel

Christian Sjøvold Blomberg, B2B SaaS Go-to-Market Advisor and Board Member

In short, your competition is demonstrating value early on, removing usage friction, and creating a positive experience.

...All while you are still trying to book a demo call.

How do you help users find value in your product?

Let's use Tailwind, a Pinterest scheduling tool, as an example.

For users to see value in the tool, it has to help people set up and start scheduling Pins at optimum times.

The onboarding process needs to show users actions to achieve that goal and have easy-to-use functionality.

Tailwind checks all those boxes and, as a result, has grown to a user base of 1M.

Features drive product demand

Is your entry-level plan good enough for the customers you want to attract? There's a very real possibility that you're not giving enough away for free. It's time to stop gating the features that make your customers successful.

Kyle Poyar, Operating Partner at OpenView

For your PLG strategy to succeed, you must focus on delivering value before the paywall.

...But doesn't that mean you're not monetizing your business?

Nope.

By ungating your features, you're showing off the best of what you can offer. You're giving customers real hands-on experience with your product and a practical chance to see how you can change their lives.

You make your money by charging for product usage rather than access to features.

Let's look at a few examples:

  • Canva: The graphic design platform has a free edition that includes access to different templates, fonts, and free graphics. Canva's paywall is based on more advanced features for pro users like team collaboration, brand kits, cloud storage, and access to 100+ million stock photos, videos, and graphics.

  • Miro: Miro is a visual collaboration platform with a freemium offering. It includes unlimited users and integrations with other tools like Slack. The paywall kicks in if you want to use 3 or more editable boards.

  • Bonsai: A freelancer's all-in-one product suite that offers new users a 14-day free trial. During the two weeks, you'll have access to all of Bonsai's features, allowing you to experience the platform's full potential. After the trial, you can choose from 3 different pricing plans to continue using the product.

With features driving demand, you can attract PLG leads who will start using your product and monetize your high-value customers as they ramp up their usage.

"It's in your best interest to drive as much product engagement and collaboration as possible since it'll ultimately benefit you in the long run," says Kyle Poyar.

Go viral

What helped Slack become the go-to workplace messaging platform and the fastest-growing start-up in history?

It's freemium model.

Slack created viral marketing gold by allowing anyone to create an account and start using the software. Current users would invite new users to start collaborating, effectively spreading the word on the app's behalf.

And the result?

When Slack launched publicly in February 2014, it had 60,000 daily active users and 15,000 paid users 10 weeks after exiting its closed beta.

So before you launch your PLG strategy, think about how you can add a dose of virality to your product.

What can you do to encourage people to spread the word and expose your company to a larger audience?

Here’s some inspiration from other product-led growth companies:

  • Zoom lets you invite up to 100 participants on its free plan.
  • Google Drive shares links to files, exposing new people to the tool.
  • Notion gives you the ability to share boards with up to 5 guests.

Freemium plan vs. free trial

Which is the better strategy to accelerate your PLG strategy?

Let's dive into the data.

According to OpenView:

  • Freemium tools generate 33% more free accounts for every website visitor.
  • Activation rates for free trials are 40%, whereas freemium is 20%.
  • Free trials generate a free-to-paid conversion rate of 14%, while freemium lags behind at 7%.
  • A freemium product converts customers without sales 25% more than free trials.
freemium statistics graphics

So what does this tell us?

Suppose you want to open your TOFU as much as possible and reduce costs from a sales workforce standpoint. In that case, freemium is the way to go, especially if you have a product like Calendly or Slack that generates more value with more people using it.

But if you want to create a sense of urgency to purchase and focus on maximizing paid conversions and activation rates, a free trial is the best option.

PLG is not no touch sales

A mistake SaaS companies make is working on the assumption that all you need to do is create a product, drive traffic to your website, and the product will sell itself.

If you follow that path, it will lead you to a subpar user-experience and a business model that relies on “hope”.

When you implement a PLG strategy the right way, you’re eliminating or reducing your sales team at the beginning of the sales cycle. You still need the human touch to step in and help you grow faster, sign bigger clients, and deliver a better user experience.

The low-touch approach only becomes a problem when you hit hundreds or thousands of sign-ups and users. It’s impossible to expect your reps to touch base with everyone which is why you need a frictionless experience that empowers users to go from sign-up to product without any help unless someone needs you.

You also need a CRM with flexible lead scoring that’ll help you prioritize the right leads (like enterprise accounts) that match the defining characteristics of PQLs: fit, value, and intent.

PLG metrics you need to measure

Are you measuring the wrong PLG metrics?

While there is some alignment around sales metrics, not everything compliments a PLG strategy.

Let's take LTV/CAC, for example.

This metric doesn't work for PLG companies because it doesn't consider the low churn rate and opportunity for revenue expansion from key accounts.

So how should you measure PLG instead? Here are some of the key metrics to keep an eye on.

Number of products

As you scale your PLG company, keep an eye on the number of products a customer uses.

Why?

It all comes back to stickiness.

The more features someone uses, the less likely they'll churn to a competitor.

"If a customer is adopting new products, alongside increasing spend, you're most likely to see a positive knock-on effect on all your other metrics," explains Ryan Nutley

We use a PLG strategy at Datadog, which impacts a large portion of our revenues. Our implementation makes it easy for users to sign up, use, and pay for what they need. Every new product release is available for them to trial and adopt, making it easy for the user to engage with the platform and use more without contacting a sales rep.

Ryan Nutley, Director of Sales Engineering at Datadog.

Activated sign-ups

One of the biggest mistakes PLG companies make is tracking sign-up growth.

While those new accounts look great on paper, it's all smoke and mirrors when you realize none of those sign-ups translated into revenue.

What's a more meaningful and realistic metric?

Activated sign-ups.

This metric helps you see how many users understand the value of your product, continue to use it, and aren't likely to abandon ship.

...But that's not all.

  • It weeds out the noise: Say goodbye to counting sign-ups from bots or competitors.
  • It gives you better predictions: It becomes much easier to predict outcomes like revenue and conversions when you focus on the users investing time into your product.
  • It helps you adjust your strategy quickly: You don't need to wait 6+ months for a user to convert to see if your strategy is working. Using activated sign-ups as a PLG metric means you can catch what to double down on or ditch within a much shorter time frame.

TTV (time-to-value)

"What are the things a user needs to do to see value?" asks Christian Blomberg. "You need to track that and make sure people get across that hurdle at a high enough rate."

That's where TTV comes into play.

The metric looks at the time it takes for a new user to have their "aha moment" or activation.

The faster you get a user to see meaningful value using your product, the more likely they'll stick around and become a PQL that'll convert to a paid plan.

How can you reduce your TTV?

By implementing a solid onboarding experience and having good UX.

"The only thing your user onboarding needs to focus on is helping new users experience what your product enables them to do," says Wes Bush, founder of Product Led.

Wes Bush, Founder of Product Led.

Set sail for PLG

"For the most part, any company looking to grow or expand will need to adjust their strategy to include a product-led GTM strategy or risk becoming irrelevant and stagnant," warns Ryan Nutley.

"They may not fail outright, but they certainly won't be considered market leaders and will likely be disrupted by more agile competitors who value their customers."

If you want to adopt a successful product-led growth strategy, keep this in mind: it's not easy.

The product-led business model completely disrupts how you market, sell, support, and operate your business. To make sure your entire organization is aligned around your product and a unified customer experience, you need data.

With the availability of advanced analytics from CRM data to heat maps, all you need to do is make sure you're using these valuable insights to help you reap the enormous benefits of a PLG strategy.

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