What is Product-led Growth (PLG)?
Product-led Growth is a go-to-market (GTM) strategy that focuses on product as the primary driver of user acquisition, retention, and expansion. Product-led companies instill a hyper-focus on core product value and user experience. They do so by lowering barriers to entry for users to try the product, delivering value as quickly and as often as possible, and creating incentives for users to collaborate and introduce the product to new customers. Chamath Palihapitiya, one of the godfathers of Growth and a well-known internet personality, laid out the fundamental principles of PLG beautifully in a 2013 talk he gave at Facebook:
Product-led Growth Principles:
- Get users to try the product
- Get users to an "a ha!" moment as quickly as possible
- Deliver more "a ha!" moments as quickly and as often as possible
- Create "a ha!" moments users can share with others
Notice how the steps above inherently create a "flywheel"? If a single users completes all the steps, there's a good chance they'll bring at least one other user to the product, and the cycle starts again.
At the end of the day, the whole point of delivering core value to users is to eventually monetize them. Product-led companies need to find the right balance between delivering enough value to make the product indispensable to free users while withholding enough additional value and features behind a paywall such that it becomes a no-brainer for users to convert from non-paid to paid. This concept of converting prospects to customers may seem like a fifth principle, but I chose to omit it because there are some types of Product-led companies for whom it is irrelevant. Social media networks and marketplaces are examples of products where revenue is generated through ads, so the challenge of converting customers from free to paid versions may never enter the equation.
You're probably now wondering, "ok, simple enough. But how are these principles applied in practice?". Excellent question! Let's examine Calendly as an example.
PLG in Practice: Calendly
You've likely used Calendly to schedule a meeting before but just in case you haven't heard of it, Calendly is an appointment scheduling tool that allows users to send a single link that recipients can use to schedule a meeting with the sender. It's a fantastic product that has grown exponentially over the past few years and has achieved unicorn status largely in part to a phenomenally executed PLG strategy.
Let's walk through how Calendly applies the PLG Principles flywheel
Step 1: Get users to try the product
Calendly uses a freemium model that allows users to access a limited version of their product for free and without a trial period. They effectively remove all friction from the onboarding process to get new users in the door fast. Freemium is an extremely common tactic among Product-led companies because of just how effective it is at getting new users in the door and using the product. When you sign up for Calendly, you don't need to provide any payment details or schedule a call with a customer success person. Within a couple of clicks Calendly is synced with your calendar and you're immediately taken to the following page:
Step 2: Get users to an "a ha!" moment as quickly as possible
Have a look at Figure 1. You’ll notice the immediate and substantial access to Calendly’s core feature. From this page, the user is literally a click or two away from getting their first dose of real value – all they need to do is click “Copy link”, paste it into whatever message they are sending, and the hook is in. In contrast to what users had to do prior to Calendly, which was to send the age-old “I’m available to meet at XYZ times, what about you?” message followed by tiresome a back and forth, it’s clear the “a ha!” moment will arrive here for many users. This is an example of a Product-led company optimizing an onboarding flow that has the user up and running with their most valuable core feature in mere minutes.
The other essential point demonstrated in in Figure 1 is a thoughtful balance of value available to freemium users and value that requires payment to access. Calendly makes the three most common meeting types available to all users, but freemium users can only use one at a time (note the “Turn On” buttons in greyed out boxes). The ability to create custom meetings, such as those that are 20min long, is accessed by the “New Event Type” button in the upper right, which is also paid-only. Calendly has created a user experience that allows users to freely and fully realize the value of their core feature while subtly pointing out the additional value and features that come with the paid version. The clear hypothesis of the Product-led Growth Team at Calendly is that flexibility in using their product, rather than access to it, is a more efficient driver of paid conversions.
Step 3: Deliver more "a ha!" moments as quickly as possible
The beauty of Calendly is that when the recipient schedules a meeting time (seen in Figure 2 below), value is delivered to both users – the sender has the appointment automatically added to their calendar with no further effort, and the recipient can easily see what times are available and book at their leisure. Two “a ha!” moments, delivered with minimal time and effort, and the recipient may not even be a customer.
Herein lies the power of a PLG strategy – for Calendly, the product IS the marketing. Customer usage drives growth by exposing the product to new customers, who then in turn get their own “a ha!” moment even if they have never seen or heard of Calendly.
Step 4: Create "a ha!" moments users can share with others
Calendly is a tool that is exists to facilitate collaboration, so it’s fairly self-explanatory how this principle is applied. However, without beating a dead horse, it’s worth reiterating that brand new users – people seeing a Calendly link for the first time – have literally zero barriers to entry. They can experience the product without even having signed up for a free or paid account.
Advantages of PLG over Sales-led and Marketing-led Growth
Product-led companies have many advantages over companies who take Sales-led or Marketing-led approaches to growth which I will discuss in-depth in a future post. Here I want to provide a brief summary to tie everything together.
Sales and Marketing-led approaches have two fundamental issues in common:
- They are expensive to execute
- They are vulnerable to saturation (i.e. they become less effective and more expensive as more companies adopt the same strategies)
Sales and marketing (we’ll focus on digital marketing here) costs grow with scale, and often grow faster than revenue. Therefore, in many cases, Customer Acquisition Cost (CAC) also rises with scale. Sales-led companies must recruit, train, and support the substantial salary and costs of high-quality salespeople who are both scarce and highly sought after. Then to grow, they have recruit and retain new salespeople over and over again. Marketing is similar. Many companies will achieve their initial spurt of growth by shoveling money into Google and Facebook ads, which then settle into a baseline conversion rate that is modestly profitable. Absent a genius marketing ploy, as the company grows, the marketing budget will grow in lockstep, and in some cases will grow faster because conversion rates regularly decline with market share.
Saturation is an issue for both approaches because there are always more and more companies employing these growth strategies. How many salespeople sent you a LinkedIn Inmail last week? How many ads do you skip on YouTube every day? Did you respond or click on anything? The answer is likely no. Traditional growth channels have become so noisy that differentiation is achieved more by omni-presence (having an ad everywhere you look) than differentiation. It’s no wonder then that 40% of VC dollars go towards Google and Facebook advertising – for these approaches, more growth = more spending.
How PLG Combats these two issues
They are expensive to execute:
PLG strategies are far less vulnerable to both risk factors. Product-led companies have a significant up-front cost in that they must internally form a team with the necessary PLG skills and expertise – i.e. hire a growth lead, engineer(s), designer(s), etc. – set up the tools and infrastructure needed – i.e. Customer Data Platform, Data Warehouse, etc. – to establish the operating system needed to execute the strategy. Shameless plug – Proxii makes this easy by providing SaaS companies everything they need to become Product-led in a fraction of the time and cost it takes to build in house. However, once these prerequisites are in place, additional costs are minimal.
PLG teams focus on optimizing for the four principles through experimentation. When these steps are adequately executed together they form a user acquisition flywheel: existing users attract new users to the product, who in turn attract additional users, and so on. This is an inherently viral process, something often associated with product-led growth companies and parabolic growth trajectories.
The key takeaway is that when your product incentivizes users to bring others into the fold, every additional user costs next to nothing to acquire. New salespeople or new marketing dollars aren’t needed to continue steepening the growth curve – the PLG team simply needs to continue optimizing the flywheel. Therefore, as the company scales, CAC should remain constant or even decline because the dollars they are spending to get new users (the PLG team’s salaries and associated costs) are minimally variable while the userbase and revenue continue to rise.
They are vulnerable to saturation:
Risks associated with market and user acquisition channel saturation are similarly mitigated by a Product-led approach. While you can’t altogether eliminate the effects of market saturation and general confusion caused by so many participants in seemingly every market, the user-oriented acquisition strategy of Product-led companies bypasses overly saturated channels. Because its either word of mouth or a low-friction experience with the product that brings new customers into the fold, product-led companies don’t need to join the cacophony of other voices advertising on Facebook and Google – their users do the talking for them.