What is product-led growth?
“Going product-led” has emerged as a super popular growth strategy across many industries. Despite its booming popularity, the principles of product-led growth (PLG) often get lost in the rush to implement the strategy. Here is a quick overview of what product-led growth is and what tools and metrics you need to make the strategy work.
How does product-led growth work?
From a business perspective, product-led growth is an easy concept to understand: Your product drives the business forward. The product’s inherent qualities become the sources of user acquisition, conversion, and retention. As consumers use the product, they will quickly find value, return to access more features, and possibly tell their friends about how great the experience was.
Of course, every company strives to have a good product. So how does this strategy differ from the norm? For years, companies have worked from a sales or marketing-led growth model typified by:
- Promising what a product can do through messaging and communication
- Heavy investment in a lengthy sales process
- Significant ad spending
That’s not to say sales or marketing-led growth doesn’t work—traditional car dealerships wouldn’t exist without them—but these strategies tend to create a different product-customer relationship, and they require time and resources that some companies just don’t have.
Product-led growth works best for industries that require everyday use, involve social interaction, and have simple goals. These factors make it an appealing strategy for SaaS companies—even more than for selling B2C products or vegetables at a farmers market. (Though, sure, PLG could probably work there, too!).
A good example of product-led growth is the messaging app Slack. Rather than invest in a large ad blitz or selling an enterprise product to companies, Slack built a great messaging app that had immediate impact for anyone who used it. More specifically, the app took off because of how quickly users could get started, for free, and begin experiencing its fun messaging features. And after it caught on, Slack invested more resources into the product to add functionalities according to user feedback that continued to provide tangible value.
The advantages of product-led growth
Product-led growth can be more efficient and effective for certain companies. By using a product-led growth strategy, companies can invest all of their energy into creating a great product rather than working on disparate long-term projects. Marketing and sales teams can sell a product that immediately brings value rather than highlighting some value down the road.
The tangible benefits of product-led growth include:
- Faster growth: The sales cycle is drastically shortened during product-led growth. Ideally, the product will be largely self-serve so customers can onboard as quickly as possible.
- Scalability: Companies that embrace product-led growth scale up faster because of faster adoption and the ability to direct resources to a superior customer experience.
- Acquisition costs: As customer acquisition channels are built into the product (freemium models, referrals, etc.), the cost to acquire customers decreases substantially.
- Higher retention rates: Product-led growth enables users to quickly understand the value in your product, ensuring that user expectations are aligned with your product’s capabilities. This creates a better user fit and increases user retention in the long run.
Where metrics assist in product-led growth
Accurate product analytics are key to jumpstarting and refining your product-led growth plan. For many companies, product-led growth simply isn’t feasible without product analytics. That’s because the strategy relies on creating the best user experience possible and truly understanding how consumers are using your product. You can’t design these products without concrete user data.
Here are some examples of metrics you can track:
- Free trial/Freemium-to-paid account conversion rate: This is a measure of how many of the users who tried your product decided to buy it. In other words, it tells you whether or not the majority of users find additive value in your premium features.
- Activation rate: While there are different ways to define and analyze your activation rate, it’s commonly a measure of the percentage of new users who have experienced a value moment (or “aha” moment). Depending on your product and industry, activation could be defined as making a first purchase or viewing five videos.
- Churn rate: This is a measure of how many people are discontinuing use of your product. Churn rate can give at least some hint of how often customers are failing to find value in your product.
- Engagement: Broadly speaking, metrics that help measure engagement should be tracked for a holistic product strategy. Understanding how customers use your product can also be used to create an engagement score.
Remember, these are just some of the metrics to track when you’re implementing a product-led growth strategy (take a look at our Guide to Product Metrics for a more comprehensive overview). Based on what you find, you may need to change your product to boost conversion rates and increase retention in the product-led growth cycle.