Product-led Growth

What is Product Led Growth (PLG)? Theory, Examples and Key Metrics

Ruben Vleurick
Ruben Vleurick
May 4, 2022
What is Product Led Growth (PLG)? Theory, Examples and Key Metrics

Product Led Growth (PLG) is a go-to-market strategy where the product is used to acquire, activate and retain customers. This strategy allows SaaS companies to create a pipeline of users that can be converted into paying clients without a human touch.

Get users to ‘aha’ faster

In its simplest form Product Led Growth allows companies to get users to their ‘aha’ moment without the interference of a human. Fast-growing saas companies like Slack, Figma, Airtable, and Hubspot already adopted this business strategy from the beginning to drive growth.

What you’ll learn

  • Why PLG is the future
  • From Sales-led to Product-led
  • Freemium vs Free Trial
  • Example sales models
  • Main benefits of a PLG strategy
  • Example Product Led Growth companies
  • Main metrics to track
  • How journy.io grows PLG saas companies

Here is how the Product Led Growth Framework looks like by Blackbird VC

PLG framework Blackbird VC. Product Led Growth.
Source: Blackbird VC

From Sales-led to Product-led Growth

It used to take a long time for companies to adopt new software solutions. Companies used an outbound sales team to target prospects and depending on the target audience it could easily take a couple of months to get the deal done.

We are now in the era of the end-user. Its now easier than ever to try out a new product, we are only a few clicks away. The market has become affordable and accessible for end-users to purchase new products.

This shift was made possible by companies adopting a Product Led Growth approach where they give value first and charge later. But PLG is not a one-size-fits-all, it heavily depends on the product and market.

Freemium vs Free Trial

Freemium customer acquisition models give users a part of the product for free without having a time limit. The limitation is primarily focused on features and usage. Hubspot is a good example of a PLG company with a freemium model. The goal is to give enough value so the customer continues to use the product for a long time.

Free Trials on the other hand provide access to a product for a limited amount of time. Sometimes limited on features and/or usage. The goal here is to give full value in a short amount of time before converting them into a paid account.

Either way, the customer will need to spend time learning how the product works while also trusting that it can handle particular tasks. So, if the product fails to perform as advertised, you will be wasting your time and energy on something that won't work for you.

Example models

No-touch model

A saas tool with an Annual Contract Value (ACV) or Annual Recurring Revenue (ARR) below 3.000 dollars tends to focus heavily on a self-service PLG motion. It's just near impossible to hire an outbound sales team at this price point and make it profitable.

The downside of a no-touch model is that it will be incredibly difficult to acquire enterprise clients or those accounts with a higher MRR than 500 dollars. Don’t expect them to just swipe the credit card for these pricing tiers.

The more you go up-market, the more human touches customers want.

Low-touch model

When your ACV is slightly higher it might be possible to start with a low-touch. The low-touch model depends on many things but just think about a strategy where accounts need a final push from a human to convert from a free to a paid account. Sometimes referred to as a hybrid model.

Or those cases where a minimal implementation is required.

High-touch model

This model requires many human touches from a dedicated sales rep or customer success manager. Best for high-value accounts that require complex assistance or implementation.

The market made a shift to self-serve and low-touch

Traditional sales models shifted a while back with pioneers like Hubspot using their product as the main catalysator to acquire and retain new customers, at scale. The product is used to give upfront value to users without going through a long sales process or human interference.

In 2022 more SaaS companies are using this go-to-market strategy for their growth without dependencies. Last year the market has grown to 911 billion dollars per year and is expected to break a trillion dollars in 2022.

Bessemer Venture Partners PLG companies overview
Source: Bessemer Venture Partners

Main benefits of a PLG strategy

The product is being put in front and center of all the go-to-market efforts. These are the main benefits:

Reduce Customer Acquisition Cost (CAC)

Because the burden is initially focused on the product and not the sales team, important saas metrics like Customer Acquisition Cost (CAC) improve dramatically. Users also upgrade on their own.

Shorter Sales Cycles

Because users onboard themselves SaaS companies can focus on getting them to ‘aha’ faster via the product instead of a sales team.

Scalability

Scalability is obvious while adopting a PLG approach. You’re not limited anymore to SDRs or BDRs contacting a certain amount of prospects per month. Companies tend to focus more on the marketing side.

Improved Conversion Rate

By minimizing friction it is critical to get users to the ‘aha’ moment fast and show upfront value. This will increase the overall conversion rate from trial to paid clients.

Land and Expand to better NRR

Many times overlooked is the importance of the land and expand benefit. Its easier to sell small features of a saas solution to someone who really needs it. When companies manage to solve a small problem more opportunities arise to expand seats, locations, usage, etc.

This will increase the lesser-known Net Revenue Retention (sometimes referred to as NDR or Net Dollar Retention). This saas metric tells you basically how a company grows without adding new revenue or client logo’s. Take current ARR - Churn + Expansion = Net Revenue Retention. NRR is one of those metrics that really defines growth in saas.

World-class PLG companies like Snowflake and Twilio are averaging an NRR of 150%

This basically means that if they don’t add new customers this year, they’ll still grow half their revenue in the next.

Openview Partners PLG funnel overview
Source: Openview Venture Partners

Example Product Led Growth companies

Dropbox

Dropbox is a perfect example of a successful product-led organization, and the company has a proven strategy of attracting more and more customers. In less than ten years, Dropbox has crossed $1 billion in sales. It has a product-led growth approach that is clear and that relies on virality and referral incentives.

Twilio

Twilio launched 13 years ago and now serves over 10m developers. They made it extremely easy for developers to get started with the platform. Pricing is also usage-based. There’s a no-touch approach for the easy accounts, if you are a bigger company the hybrid Account Executives guide you to the best solution and pricing tier.

Shopify

Shopify is built for digital entrepreneurs of all sizes. It is easy to get started and remains easy if you need a more scalable solution with their Shopify Plus app. A typical example of a no/low-touch Product Led Growth company.

HubSpot

HubSpot CRM uses a Freemium model to give the ‘keys’ to the customer. Users can try the product and features for as long as they like before making a buying decision. HubSpot tries to make users hooked to the product before they spend a dollar. The most powerful features are locked behind a paywall, making it easy to shift to a paid account when the customer grows.

HubSpot uses a freemium and no-touch PLG approach to make customers hooked.

Main metrics to track by Product Led Growth companies

Below are the most important metrics to keep an eye on. Growing and retaining a customer base is mainly focused on two things:

  1. Solving a real problem for real people and getting the solution in front of them
  2. Minimizing friction barriers throughout the customer journey

Funnel metrics

  • Acquisition: Lead signup and Product Qualified Leads
  • Activation: Activation Rates and Monthly Active Users
  • Retention: Customer Churn and Revenue Churn
  • Referral: Conversions through referrals and % of Customers who become referrers
  • Revenue: Annual/Monthly Recurring Revenue (ARR/MRR) and Average Revenue Per User/Customer (ARPU)

Overall metrics

  • Time-To-Value (TTV): Time it takes for new users to reach their ‘aha’ moment. Take the average number of hours or days to reach a key event. Key events can focus on the final value customers get out of the product or a certain feature set that they need to try out.
You can dive into the analytics to see what combination of features is needed to get users to an ‘aha’ moment.
  • Virality factor: Number of new users an existing client can successfully convert. Calculated by the number of invitations sent by each customer multiplied by the % conversion rate of each invite. The goal is to get a factor above 100%, that way virality is positive and keeps growing.
  • Product Qualified Leads (PQLs): Leads that already experienced some kind of value and are in the target audience. Usually calculated based on the engagement score and customer fit.
  • Free-to-Paid Conversion Rate: Percentage of users that convert into a paying account. Calculated by the number of customers who become paying customers/number of customers trialing or using the free version.
  • Expansion Revenue: Revenue from existing users being cross- or upsold. Calculated by MRR/ARR per customer plus the expansion.
  • Average Revenue Per User or Customer (ARPU): Revenue per individual user. Calculated by ARR/MRR divided by the number of customers.
  • Net Revenue (Dollar) Retention (NRR/NDR): Rate is the percentage of recurring revenue retained from existing customers in a defined time period. Calculated by ARR - churn + expansion revenue.
  • Growth rate: Overall growth of a company over a certain time period, measured in %.

Conclusion

Adopting a Product Led Growth strategy gives SaaS companies significant growth possibilities by using the product as the main driver for user acquisition, retention, and conversion instead of relying on traditional sales tactics.

However, by removing human touches other problems arise. It is necessary to track and understand everything a customer is doing in the product. Therefore many PLG companies expand their marketing/sales/customer tech stack to get a grip on:

  • How accounts use the product (feature adoption and engagement)
  • Where each account is in the customer journey
  • How to convert trial/demo users to paid accounts
  • How to keep paid accounts (reducing churn)
  • Discover expansion/upsell opportunities
  • The overall health of accounts (health scoring)

journy.io helps PLG SaaS businesses fight churn, increase user retention, and expansion revenue, at scale. Get a demo or start for free.

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