What Is Product-Led Growth & Why It's Taking Off?

Product-Led Growth is 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 damn 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.

How Does Product-Led Growth 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:

This is an infographic image of the Product-Led Growth flywheel. This image shows the three elements you need to master product-led growth. This image is from the Product-Led Institute.

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.

  1. Functional Outcome: the core tasks that customers want to get done
  2. Emotional Outcome: how customers want to feel or avoid feeling as a result of executing the core functional outcome
  3. 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.

This is an infographic image of what it takes to build a successful product-led business. This image shows that you how to deliver on your value as a product-led business. This image is from the Product-Led Institute.

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.

This is an infographic image of what goes wrong when you don't deliver on your value as a product-led business. This image shows that when you fail to deliver on the value you promised to your users, your company will experience a value gap. This image is from the Product-Led Institute.

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.

Minimizing Friction

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.

Driving Demand

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.

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.

Want to learn more about Product-Led Growth?

Get the book on 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.

Wes Bush
Wes Bush is the bestselling author of Product-Led Growth. He’s a renowned Product-Led Growth pioneer and has challenged an entire industry to find a better way to approach SaaS growth.
Share
closetwitterfacebookglobebarslinkedinangle-downinstagram