Move over sales and marketing, there’s a new cool kid on the block.
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.
This Article Contains
- What Is Product-Led Growth?
- How to Measure Your 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
- 5 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.
For example, offering freemium plans (forever free access to the basic features) or free trials (full access to your offering for a limited period) to potential customers.
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:
- Faster product adoption
- Increased user engagement
- More affordable customer acquisition
- 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 measure this PLG tactic.
How to Measure Your Product Led Growth
To compute your PLG success, first, you must understand your Natural Rate of Growth (NRG).
- What is Natural Rate of Growth?
NRG helps you measure your recurring revenue. 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.
- What type of company is NRG applicable for?
NRG is ideal for a PLG SaaS company during the growth stage, not just after you’ve launched a product. You can calculate NRG if you’ve built a sizable user or customer base to compare it to.
- Why is NRG important?
With this metric, you can reliably predict your future revenue generated solely by your offering. You can also identify whether your PLG model can drive efficient growth through your product.
- How to measure NRG:
The NRG formula is:
|NRG = (AGR% of organic signups * % ARR from product) * 100|
- AGR = Annual Growth Rate
- Percentage of organic signups = Share of new users who come from organic searches or referrals
- Percentage ARR from product = Share of Annual Recurring Revenue earned purely from product
Suppose 80% of your ARR can be attributed purely to the SaaS product, your AGR is 70%, and you organically acquired 90% of your signups.
Your NRG calculation is: 70%90%80%100=50.4%
When tracking this metric, monitor whether your NRG is trending up, down, or remaining steady. If NRG is trending down over a few months, your team can identify and fix the issue with A/B testing.
A/B testing (AKA split testing) is where you split your audience and test campaign variations to determine which performs better.
Trial run different widgets, images, and copy to discover which drives more conversions. Based on your results, tweak your campaign as desired.
- How often should you measure NRG?
As a SaaS business owner, you’ll only need to check your NRG every quarter.
Your team, however, can continue tracking NRG on a monthly or even weekly basis. If they flag any worrying trends, it’s worth keeping an eye on NRG more often to check if there are any improvements.
- NRG benchmark:
Per ARR stage:
- <$10M ARR stage: 150% NRG or more
- $10-50M ARR stage: 100% NRG or more
- >$50M ARR: 50% NRG
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.
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 user experience is the primary form of advertising appeal.
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.
- Higher 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 your onboarding journey as easy as possible 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:
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.
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 had less than a million Daily Active Users, that grew to 12 million in 2022.
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.
HubSpot is a software company that offers customer relationship management (CRM) features. 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 along with NGR.
5 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 convert and help you classify them as PQLs.
To see if your PQL closing techniques are working, you can calculate the PQL-to-customer conversion rate. This refers to the percentage of product qualified leads who become paying customers.
- Formula: (No. of PQLs that converted / Total no. of PQLs) * 100
- How often to calculate: You can calculate your PQL-to-customer conversion rate at least quarterly. However, since PQLs tend to convert fast, you may want to check conversion rates monthly.
- Benchmark: The average PQL-to-customer conversion rate for SaaS companies is around 25%.
- Application: A higher PQL-to-customer conversion rate usually means faster revenue growth and lower CAC. A lower rate can indicate bottlenecks preventing leads from becoming customers. It could be your pricing, onboarding, product-market fit, etc.
- 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.
- Formula: (No. of users that reach the activation milestone / Total number of users) * 100
- How often to calculate: You can measure activation rate at least monthly. But if your SaaS company chooses a milestone that users can reach quickly, you can measure activation weekly or bi-weekly.
- Benchmark: The average activation rate for SaaS companies is 36%. A ‘good’ activation rate is anywhere between 25%-30%.
- Application: Low activation rates usually suggest that customers aren’t finding enough value in your SaaS product, which can negatively impact your bottom line.
- 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.
- Formula: Total amount spent on acquiring new customers during a period of time / No. of new customers acquired in the given period
- How often to calculate: You can measure CAC monthly or quarterly.
- Benchmark: There’s no standard benchmark for CAC. However, the CLTV (Customer Lifetime Value) to CAC ratio for SaaS companies is 3:1 or greater.
- Application: Lower CAC typically means you’re spending money efficiently and that you’ll see higher returns.
- 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.
- Formula: Total yearly subscription revenue / Duration of contract in years * (Number of customers)
- How often to calculate: You can calculate ARR monthly, quarterly, or annually.
- Benchmark: A good benchmark for early-stage startups is around $1M ARR. For mid-stage subscription businesses, it’s typically at least $5M.
- Application: Low ARR usually indicates that many customers are leaving or downgrading, which can negatively impact revenue growth.
- AGR (Annual Growth Rate): AGR is the annual average return from a portfolio, investment, asset, or cash flow. Besides using this metric for NRG calculations, it helps you determine long-term trends so you can showcase the year-over-year progress of your growth strategy to investors.
- Formula: (Current ARR – ARR from the previous year) / ARR from the previous year * 100
- How often to calculate: You can measure AGR monthly, quarterly, or yearly. Just ensure you pick a duration of time and stick to it for maximum consistency.
- Benchmark: The average annual growth rate for SaaS companies with less than $1M ARR is 100%. For startups with $5M or more, the AGR tends to drop to under 40%.
- Application: Growth tends to be much faster for smaller, early-stage companies. So if startups see a slower-than-expected growth rate, this indicates low customer satisfaction.
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.