Product led growth (PLG) is when a SaaS company uses the product itself as the primary driver of activation, user acquisition, and customer retention.
A PLG model allows users to actively experience what your services offer, bypassing expensive sales and marketing efforts.
In this guide, we’ll explain how a PLG model works, how to calculate it, and how it compares to marketing and sales led growth models.
We’ll also look at PLG benefits, how to grow your SaaS company, examples of successful PLG companies, and important metrics to keep track of.
This Article Contains
- What Is Product-Led Growth?
- How to Calculate Product Led Growth
- Sales-Led vs. Marketing-Led vs. Product-Led Models
- Why Does a Product Led Growth Model Matter?
- How to Improve Your Product Led Growth Strategy
- 4 Examples of Successful Product Led Companies
- 10 Dynamic Metrics to Track Product Led Growth
Let’s get started!
What Is Product-Led Growth?
A product led growth model uses the product as the backbone for lead qualification, user acquisition, and customer retention.
Product led companies implement a ‘try before you buy’ approach with freemium plans (forever free access to the basic features) or free trials (full access to your offering for a limited period).
Here’s why this is important:
You don’t have to depend on the sales team to sell your SaaS product.
Product development is what drives sales.
The product team must create something so well-designed and intuitive that it can resolve the pain points of new users with minimal hand-holding.
This way, the product led approach provides several benefits, such as:
- Positive user feedback
- Faster product adoption
- Increased user engagement
- Higher customer acquisition
- Increased product led sales
- Faster revenue growth
By giving new users a firsthand product experience, PLG companies also gain insights from in-app product usage data to explore scalability and conversion opportunities.
But how do you assess if the product led approach is growing your business?
Let’s explore how to calculate this PLG tactic.
How to Calculate Product Led Growth
To compute your PLG success, first, you must understand your Natural Rate of Growth (NRG).
NRG helps you to measure recurring revenue from organic sources. This refers to the revenue generated through organic signups without the involvement of your customer success team or sales team.
In other words, this is how fast you’re growing without even trying.
Your NRG formula is:
NRG=(AGR * organic signups * ARR from product) * 100
Where:
- AGR = Annual Growth Rate
- Organic signups = New users who come from organic searches or referrals
- ARR = Annual Recurring Revenue
Suppose your ARR grows at an annual rate of 100% in a given year, and 40% of your ARR can be attributed purely to the SaaS product.
Then, if your AGR is 20% and you organically acquired 30% of your signups, your NRG calculation is:
NRG = ( 20% * 30% * 40% ) * 100 = 2.4%
With this, you can reliably predict your future revenue generated solely by your offering and see how effective your PLG model is.
That said, a PLG tactic isn’t the only methodology out there.
You have other models as well, each different from the other:
Sales-Led vs. Marketing-Led vs. Product-Led Models
Since a PLG approach focuses on the product, it has some key differences from traditional models.
A. What’s the Difference between Product-Led and Marketing Led Growth?
Product-led growth allows the product experience to drive conversion and revenue growth. Marketing led growth (MLG) focuses on lead nurturing through marketing efforts.
While the end goal is to move leads down the pipeline, conversion isn’t the primary focus of marketing led growth. It’s about getting people interested in what you have to offer.
To attract leads, the marketing team will:
- Research prospective customers.
- Appeal to the needs of prospective customers.
- Convince a potential customer of your product’s value.
If a prospective customer displays enough interest in the company’s marketing material, the marketing team can classify them as a high-intent, sales-ready lead.
Alternatively, a PLG company depends less on product marketing efforts and more on product data because the user experience is the primary form of advertising appeal.
B. What’s the Difference between Product-Led and Sales-Led Growth?
Sales led growth (SLG) uses the sales team to drive business.
Both models focus on transforming leads with buying intent into paying customers, but here’s the key difference:
SLG companies target sales qualified leads (SQLs) instead of product qualified leads.
Classing leads as ‘sales qualified’ requires a lead scoring system wherein you assign value to certain attributes or actions the user takes to see if they’re ready to buy.
Attributes may include job title, industry type, and location, and actions may consist of signing up for free trials, demo requests, or submitting contact forms.
Such leads usually interact with the product only after talking to a sales rep.
On the other hand, product led sales come from product qualified leads who use your offering and discover its value by themselves before spending money.
So, what makes this growth strategy better than MLG and SLG combined?
Why Does Product Led Growth Model Matter?
A product-led growth model has several benefits over traditional models, such as:
- Lowering customer acquisition costs: Instead of investing in expensive marketing, sales, and customer success efforts, the product experience does most of the work in driving user acquisition organically.
- Shortening the sales cycle: Because product led sales requires less hand-holding, you remove unnecessary steps from the sales process and allow prospects to derive value from your services early in their customer journey.
- Increasing conversion rates: A sales rep can exclusively focus on product qualified leads as these have shown high purchase intent, so the chances of making a sale are higher.
- Netting more prospects: ‘Try before you buy’ is an alluring offer for a potential customer, opening the funnel to a larger audience. It also boosts your product’s viral circulation through positive customer stories.
- Helping you scale more efficiently: As your SaaS company expands, an SLG model won’t support sustainable growth since you’ll need a bigger team to handle the growing leads. A product-led growth model automates this sales process and removes the dependence on one-to-one communication, making smaller teams more efficient.
Remember, PLG isn’t a replacement for product marketing and sales tactics. You can still leverage other teams in your product led growth strategy. The product simply remains the focus here.
Creating great features or services during product development allows you to see faster, sustainable growth and gain a competitive advantage in the market.
Wondering how to pull it off?
Let’s examine how to optimize your product led strategy.
How to Improve Your Product Led Growth Strategy
If you want to execute a flawless product led strategy, follow these tips:
- Simplify the onboarding process: Onboarding, when done right, allows you to foster independence, ensure a frictionless customer journey, and provide a positive user experience. To ensure this happens, make sure your onboarding journey is as easy as it can be to minimize hand holding.
- Make your product shareable: Shareability encourages word-of-mouth, positive customer stories and builds momentum. For example, Dropbox offers users more storage space when their friends sign up.
- Track product data: Activation events — such as regular log-ins or viewing the pricing page — are a helpful form of user feedback for product management. You can better understand users, personalize the product experience, and catch any bugs.
- Establish your North Star Metric (NSM): This metric captures your product’s core value and serves as a predictive measurement of your company’s long-term success. For example, Slack’s NSM is messages sent within the app, and Greenhouse’s is the number of Monthly Active Users.
Speaking of Slack, it might be helpful to look at how a product led approach has paid off for other companies.
4 Examples of Successful Product Led Companies
Some of the top companies that have thrived with a PLG strategy include:
1. Zoom
Zoom is a virtual communication software company that lets users have meetings, webinars, and live chats. Zoom’s freemium model provides the following:
- Integrations with other software (e.g. Slack)
- Calls for up to 40 minutes
- 100 attendees per meeting
This smooth entry point has delivered monumental success for Zoom.
In 2014, 10 million people used Zoom. In 2022, that number hit 1.3 billion — a 12900% increase.
2. Slack
Slack is a B2B messaging app. Slack’s freemium model provides the following:
- 90 days of message history
- File storage and sharing
- Integrations with 10 apps (e.g. Google Drive, Twitter, or Onedrive)
Without paying, users can still get a lot of value out of these features before they upgrade to a paid subscription and unlock an even better customer experience.
In 2014, Slack only had less than a million Daily Active Users, which grew to 12 million in 2022.
3. Dropbox
Dropbox is a product led company that provides file hosting. Dropbox’s freemium model offers the following:
- 2 GB of free space
- Usage on three different devices
- An extra 500 MB of space for each person you invite
Because Dropbox encourages sharing, this increases its virality and attracts new users.
For instance, Dropbox had 300 million registered users in 2014. In 2022, they hit 700 million users — a 133% increase.
4. HubSpot
HubSpot is a software company that offers a customer relationship management (CRM) service. Hubspot’s freemium model provides the following:
- 100 contacts
- Customizable web themes and apps
- Slack integration
Even though the non-paid plan gates off more advanced services — like a dedicated customer success team, lead scoring, and forms — these features give users a tempting glimpse into a fantastic customer experience.
In 2014, Hubspot had about 14,000 existing customers. In 2022, this skyrocketed to around 135,000 in over 120 countries — an 860% increase.
Now you know how successful product led companies can be, but one question remains:
How do you keep track of your SaaS growth?
Let’s explore the most crucial metrics to measure your PLG momentum.
10 Dynamic Metrics to Track Product Led Growth
To assess your growth strategy, your product management, marketing, and sales team must all align to track key metrics that reflect product usage, such as:
- PQL (Product Qualified Lead): A PQL is a potential customer who has used and derived value from product usage. Behavioral product analytics indicate a lead’s openness to spending money and helps you classify them as PQLs.
- CAC (Customer Acquisition Costs): CAC is how much you spend to gain new customers. You can see how PLG results in a lower customer acquisition cost and shorter sales process.
- Activation Rate: This measures the number of users reaching milestones, like hitting a messaging limit. Seeing which users ‘activate’ is essential for determining whether they’re product-qualified.
- Monthly and Daily Active Users (MAU/DAU): These metrics show the total number of users interacting with your services daily or monthly. Frequent engagement is another factor to consider when qualifying leads.
- ARPU (Average Revenue Per User): This demonstrates how much money existing customers generate for your PLG company (month or annually) and whether your PQL pipeline results in customer success.
- Revenue Churn: This records lost revenue from downgrades and cancellations. Tracking churn keeps your calculations accurate and shows a product manager if there’s any room for improvement.
- MRR (Monthly Recurring Revenue): This is your monthly earnings from subscriptions, which helps you assess the efficiency of your product led strategy throughout the year.
- ARR (Annual Recurring Revenue): ARR is your yearly subscription earnings. This metric helps you assess development on a macro-scale and forecast the long-term progress of your product led company.
- CLTV (Customer Lifetime Value): This measures the predictable revenue from each customer throughout the entire business relationship. CLTV provides insight into customer retention and how to achieve a lower customer acquisition cost.
- AGR (Annual Growth Rate): AGR is the annual average return from a portfolio, investment, asset, or cash flow. This metric allows you to showcase the year-over-year progress of your growth strategy to investors.
- Net Promoter Score (NPS): This metric measures satisfaction through customer feedback forms. Collecting valuable product feedback will show you ways to improve the customer experience.
- Virality Coefficient: This tracks product adoption rates after existing customers recommend your offering to users. It can help you spot ideal opportunities for using word-of-mouth product marketing.
- Network Effects: This metric relates to your product’s virality but measures how the value of your offering increases as more people use it.
Kickstart Your SaaS Growth with a Powerful PLG Strategy
PLG is a user centric growth strategy that highlights the product and user experience. When product management concentrates on delivering value through airtight product development, your PLG company can experience faster, sustainable growth.
If you follow the steps we’ve laid out, you’ll soon gain a competitive edge in the market.
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We can help you craft effective, conversion-driven content to attract more visitors and aid your product-led SaaS growth.