Product-Led Growth and Why it Matters
The next evolution of software is already here
Despite its levels of awareness, software is still understood by only a small fraction of the globe.
According to estimates, there were roughly 23.9 million software developers in 2019. At first glance, this number seems relatively large, but when you remind yourself that there are 7.785 billion people in the world, you quickly understand that roughly 0.3% of the world is software literate.
Because of this distinction, organizations have historically made software decisions using a top-down approach. CIOs and executives ultimately decided what software applications their organizations would use because they were the ones that understood what was being sold.
Product functionality was rewarded, but little thought was given to the experience of the end user. Why spend resources to improve the user experience when the users are not the buyers?
Over the past 40 years, the software sales process has reversed course, and no longer are products sold down an organization. Employees now control the distribution of a given software product, and this new distribution model is very different from that of the previous era.
What is Product-Led Growth?
Product-led growth is a go-to-market strategy that uses the product as the main vehicle for adoption and retention.
If you have ever used Slack, Dropbox, Notion, GitHub, or LinkedIn, you have experienced product-led growth.
Each of these companies allow the user to form their own opinion on the product based on their own experiences with it. No whitepapers need to be read, no lengthy product demos are necessary, and users can play around with the product for themselves.
Product-led growth is a fundamental shift for business strategy. It creates company-wide alignment across teams, and all functions revolve around the product as the largest source of sustainable growth.
In order to have prospective users play around with the product, PLG companies have had to offer concessions and perks. Early movers demonstrated the value of offering a service at no cost, and now others are following in their footsteps.
Free trials and freemium versions have become standardized which has created an emphasis on products to provide instant gratification to the end users.
Why Offer a Free Product?
The development of open-source communities, low-code tools, and API infrastructures have made it easier than ever to start a business. Companies no longer need to make a massive capital commitment upfront in order to build a product from the ground up, and instead companies can rely on existing tools to go to market faster.
As the barriers to entry have been lifted, the competitive playing field has broadened, and software users have been flooded with options to choose from.
This has resulted consumer’s paradise where good products are rewarded, and subpar products are quickly abandoned. In order to justify a future purchase, users have pressured vendors to offer trials or freemium versions so that they can see and play with the product rather than be told the benefits.
Buyers prefer to self educate, and as stated before, the new era of buyers has been raised to expect more out of software products.
Demand aggregation is difficult for any type of business, but it becomes a much easier sell when you are not selling. Freemium versions are meant to better align incentives between software vendors and the users they serve. Users pay nothing until they extract enough value to warrant a conversion, and software vendors only make money if a conversion occurs.
Offering a free version of your software is no longer considered taboo, and organizations beginning to see the benefits of leveraging this go-to-market strategy. Servicing free users, however, is not a sustainable business model, so next you must consider how this strategy works at scale.
How is This Better Than a Top-Down Approach?
Implementing product-led growth is not as simple as offering your product for free; rather it requires an organizational shift. In order to understand this question, you must first understand why the traditional top-down method is broken.
Top-down approaches push software onto users without letting the actual users of the product give feedback. Even if there are systems in place to gather feedback, software vendors are not motivated to act on the feedback since they would be service requests for clients without a checkbook.
There is not a piece of software in the world that is better off without user feedback, and a top-down model seems naive to this.
Top-down approaches encourage growth, and in order to reach sales quotas, there becomes an organizational preference for hiring to fill sales positions.
This throws more bodies at the problem, and in the words of Paul Graham, “The more it costs you to sell something, the more it will cost others to buy it.”.
Top-down sales bypass costs to consumers in order to justify the rising costs of user acquisition due to an under-validated product and overly eager sales budget.
Product-led growth companies offer an improved sales process that reduces inefficiencies and unlocks growth opportunities.
By offering a free version of itself, PLG companies are able to expand top-of-funnel while limiting sales and marketing spend. This unlocks the ability to deploy resources towards onboarding and servicing customer requests.
In the process, PLG companies are able to lower their customer acquisition costs, increase their revenue per employee, service more client requests, and utilize a product feedback loop that makes the product sticker with time.
How Can Organizations Become Product-Led?
Implementing product-led growth is not as simple as offering your product for free; rather it requires an organizational shift.
Organizations must first specify what value they are providing to its clients. The value must be relevant to the clients being serviced, and this value proposition must be delivered before a paywall is introduced.
This type of pressure requires all subfields of the organization to be involved with the product, and each team must leverage the underlying product to hit their individual goals.
Marketing teams need to readjust their strategies to use the product as the primary lead magnet.
Sales teams need to readjust their frameworks to better qualify conversion opportunities. Outbound sales quotas become less relevant, and instead sales targets are attached to understanding user engagement in order to leverage that engagement to conversions.
Customer success teams need to find friction points and evaluate to eliminate them. These teams will need to determine what parts of the product are being used and avoided by the customer and then determine why. The end goal for customer success teams is to eliminate themselves from the user onboarding experience completely.
Engineering teams have the most difficult task of creating a product that users will see the value in quickly. The added challenge will be to only offer enough of that value so that users are motivated to upgrade to a paid account at a later date.
Executive teams will need to understand the inner workings of each of these teams and how they can be better supported in reaching their goals.
Many organizations claim to be product-led, but in order for this to be true, organizations must go through a rewiring. This again is easier said than done, and the best time to implement this strategy is at inception.
What Does All This Mean?
The distribution of software has been democratized.
Appealing to a new set of users comes with challenges, and presentation matters as much as functionality. The rise of freemium models have forced vendors to rethink their distribution strategy, and value must now be extracted before a purchase is ever made.
Users are the beneficiary of free exploration, and as more concessions become expected, more vendors will realize that they need to adopt a product-led strategy or risk becoming irrelevant.
This type of change requires a rewiring of the organization, and all team goals have to become centered on the product. Sales, engineering, and customer success each have different roles, but each prioritizes how to support the product as the most sustainable growth engine.
Top-down selling is effectively dead. The playbook for product-led growth has already been prepared, and I believe that most of the most successful software companies of the next decade will copy these playbooks.