Crayond Blog

What is Product-Led Growth?

product led growth

The future of growth belongs to product-led companies. At HubSpot, we realized this a few years ago, which is why we disrupted our own business model before anyone else could.”

– Kieran Flanagan, VP of Marketing, HubSpot

Product led growth is allowing the product to speak for itself. Earlier businesses had to hard-sell their product to other companies. Today, an employee finds a great product, their team tries it and then in no time, the word spreads and the whole team is on it.

product-led growth

This is every company’s dream. It might look like magic from the outside but, it takes a lot of thinking and work that needs to be done in the early stages. 

This process is the new future of SaaS-based business. So many public based companies are adopting Product led Growth. 

product-led growth
Source: Openviewpartners

Product-led growth combines user acquisition, expansion, conversion, and retention is driven directly by the product, It creates alignment across the different teams in the company.

All of these teams in unison focus on one thing – user experience. Generally, the teams work at a different wavelength, but when the focus is put together, they yield a better result in terms of user experience.

product-led growth

Is Product-Led Growth a new technique?

No, if you take a closer look at the definitions, you will understand that Product led growth is a pseudo name for a strong product based company.  Its growth totally relies on the product and it’s features to attract the crowd (marketing), convince them to purchase (sales) and ensure that they continue using it (retention).

A product that isn’t good enough would attain growth, leave alone rapid growth. This is where your customers or users fall apart. All the advertising schemes and referrals that you put forward might help you initially. But, that is not real growth. Over time, if your product doesn’t deem fit or isn’t upto the customer’s expectations, there will be a huge impact. 

Focusing on the product helps you get more leads across your sales funnel. It also decreases the budget and effort that goes into sales and marketing. 

This brings us to the next and very important question: If Product led growth is nothing but developing a strong product, what are the components that you need to succeed?

Reducing Friction

Friction is anything that becomes a hindrance to your product growth. It can be something as small as a mistake in the CTA of your landing page or something big like promoting to the wrong audience.

A few things that you need to look into are:

  • Sign up process. Make sure that it is easy and does not involve more than 1-2 steps. 
  • Have an effective onboarding campaign in place. 
  • Give them the time to understand your product.

These are just a few frictions that affect marketing. Implement tools to identify the friction in the different process that could limit your product growth.

Proving value upfront

Providing value upfront helps in conversion as well as increases leads through word of mouth. You need to craft your content in such a way that you are offering value to your customers and also enhancing the chances of conversion by proposing the value that your product can give. 

Understanding features that would sell

This might sound easy, like you are going to sell your product. You obviously should know the features that your users might want. But, here is the catch – different users need different features. You need to understand the workflows of different use cases and build features that simplifies the whole process for them. Simplification is the key to sell features. 

Single version of truth

Most often what happens is the different teams in an organization work individually. In most cases, you will notice that the marketing, sales and product team will have a different approach. You might be looking for a shampoo that contains has the benefits of lemon, which is what the marketing team tells you. The sales team will lure you with the option of conditioning along with it. When you finally use the product, you will find out that it is nothing but a shampoo with a citrus smell. 

Your other teams should be trained by the product team and at any given point, they should speak the same version, the version that is available in the product.

PLG -Metrics you need to know

Metrics define the success and failure of any approach. In the light of that, there are a few metrics that you need to effectively track as a part of the Product Led Growth approach.

1. Time to value

Time to value is the average time it takes for a user to realize the value of your product. You should make sure that this is extremely low. The sooner your users reach this moment, the higher the business opportunity.

In order to achieve this metric, onboarding should be made easy. It should be easy for the user to collaborate and integrate with other tools

2. Product-qualified leads

Product-qualified leads (PQLs) are your current users who have passed through the funnel. You need to identify the pattern and segment your potential users accordingly. This will help in increasing the conversion rate.

3. Expansion MRR

Expansion MRR is the additional monthly recurring revenue generated for the month in comparison with the previous month, excluding the amount contributed by new users. It is established by various surveys and top products that it is easier to retain a customer than to acquire a new one. It is 2x easier and cheaper to upsell a new product or feature to an existing customer than to see it to a new one. 

You can calculate the expansion MRR: 

[(Expansion MRR at the end of the month – Expansion MRR at the beginning of the month) / Expansion MRR at the beginning of the month] x 100 = Expansion MMR percentage rate

4. Average revenue per user

Average revenue per user (ARPU) is the revenue generated per user or unit. This measure allows the management to analyze the revenue generation and growth at the customer level.

Average revenue per user is calculated by dividing the total users by the average users during a period. 

ARPU = Total Revenue / # of Users

5. Customer lifetime value

CLV is the total revenue that is gained from one user. This gives the organization an idea on the cost that can be spent to acquire new customers. 

For example, if the customer lifetime value of an average customer is $1,000 and if it costs more than $1,000 to acquire a new customer (advertising, marketing, offers, etc.) then it means that the business is losing more money than it is gaining. 

Here is the formula to calculate Customer Life time value: (Annual revenue per customer * Customer relationship in years) – Customer acquisition cost

6. Net churn

Net revenue churn helps in identifying your business health. It is the percentage of revenue that is lost from your current paying customers over a period. It is calculated by dividing the net revenue lost from an existing customer in a period by the total revenue at the beginning of a period.

Net revenue churn can sometimes be confusing to understand. This is because, when it comes to this type of churn positive numbers indicate loss and negative numbers indicate gain. A strongly negative net revenue churn indicates that the company will remain healthy even if there are no new sales. If it is nearing zero, then it means that the company should have new customers to remain healthy. If it is positive then it means that there is a big hole in the budget and the health of the company is deteriorating. 

Here is the formula to calculate net churn:

[ ($) MRR Churn – ($) Expansion MRR ] / ($) Total MRR at the start of the Month X 100 = (%) Net MRR Churn Rate 

Benefits of Product-Led Growth

With this approach, businesses gain massive benefits which is almost every company’s dream. 

  1. Wide top Funnel: This means large number of leads. This is because, businesses offer a freemium model, thus opening up the funnel to a wider audience. This gives the users a great advantage of evaluating your product. Thereby enabling them to see how good your product is for themself.

  2. Rapid global scale: When most of your competitors are hiring sales agents to sell their product, you are focusing on improving on boarding and self serve. This allows you to serve more customers than what a sales agent will be able to do. Since your product is built having your users in mind, it enhances the user experience and provides a seamless onboarding experience.

  3. Faster sales cycles: By having a faster onboarding process and enhancing self serve your sales cycle shortens. The customers are able to try the product for themselves and make quick decisions regarding the purchase without much of intervention or convincing from your end.

  4. High revenue-per-employee (RPE): Because your product scales by itself, it requires less hand holding. This means you are able to do more with just a few members in your team. One such good example of this is Ahrefs, they made it possible to gain $40 million Average recurring revenue with just a 40 member team in 2019.

Bottom Line

Various top tier companies like Slack, Twilio, HubSpot, Intercom, Lucidchart, Mixmax, Typeform etc started without a sales team. They have come this far because of the approach that they took. They focused on improving the product and letting it sell itself. 

product-led growth
Source: Openviewpartners

Product led growth approach attract CEO’s as well as investors alike. This is because it jumpstarts at a low cost making its way through a wide variety of experiments that result in success. It helps in predicting the outcomes and revenue better that many traditional markets. It has proven to gain traction quickly in a competitive market. 

Another appealing point is, with this strategy you are selling the product directly to the end user. This helps you in understanding the problems of the user and how you can fix them using your product.

It is great, to consider this approach if you are an early stage company. Interestingly, this approach can also be implemented in companies that have considerably grown. Companies like Salesforce, HubSpot are moving towards PLg and implementing Self Serve experiments to their product. 

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