It’s been hailed as the ‘modern GTM’ and the ‘future of growth,’ but why are so many SaaS companies betting on product-led growth?
Well, most SaaS companies dream of a huge IPO and guess what? In 2019 all of the top SaaS IPOs were PLG businesses. On average, PLG companies at IPO have higher revenue growth, gross margin, net dollar retention and implied ARR than non-PLG companies. On top of that, Openview research showed that PLG companies tend to perform better post-IPO too.
But, to get themselves in the position to launch an IPO in the first place, SaaS companies need to perform well and that’s where the benefits of a PLG strategy really kick in.
1. Shorter sales cycles
The PLG approach consigns the traditional slow-moving sales model to the rubbish heap. No more stakeholder lists. No more targeted approaches. No more demos and onboarding. As such, PLG speeds up the sales cycle in three main ways:
- Wider top-of-funnel: PLG removes the barriers to entry for your product. Instead of offering demos to select decision-makers, freemium or free trial options allow more end-users to sample the software and appreciate its value.
- Self-onboarding: With PLG, customers learn how to use the product from the product. Meanwhile, a simple sign-up and onboarding process reduces the time-to-value, speeding up the time taken for users to upgrade and convert into a paying customer.
- Rapid scaling: Traditionally, global expansion required hiring and training sales reps in every region. With PLG, it’s simply a case of regionalizing the onboarding process - with different languages and currencies, for example - then you’re good to go.
2. Lower customer acquisition costs
“Many SaaS businesses strive for $0 customer acquisition cost (CAC) and yet most still end up spending a small fortune acquiring each new customer. If you want to get to $0 CAC, product-led growth is the only way you're going to make it happen”.
MixMax CEO Olof Mathé is certainly convinced. Why? Well, focusing on the product cuts overhead costs elsewhere. Instead of ploughing funds into your marketing or sales team, you’re establishing the product as the main customer magnet. That involves engineering spend, but considerably less on sales team salaries, for example. (Remember, Twilio only had 12 sales persons at the time of its $1.2 billion IPO).
You can also do more with a less numerous and more diversified team. For instance, if you take budget away from hiring SDRs, you could invest in roles aimed at boosting customer experience.
3. Higher revenue per employee (RPE)
With PLG, the product is doing the legwork. It distributes itself (think the viral nature of receiving a Zoom invitation), gives users the keys to try the product (freemium or free trial), enables customers to upgrade when they want (self-onboarding) and then distributes itself again (positive word-of-mouth). It almost makes human intervention redundant. Almost.
In fact, with the product doing the heavy-lifting, each employee can focus on specific roles that help drive company growth. Be it a customer success executive proactively gathering consumer insights for a more customer-centric approach, or a marketing rep analyzing the data to focus efforts in areas of high interest. In short, it makes employees and departments more efficient, boosting a company’s revenue-per-employee (RPE). That means smaller teams and higher margins. Just look at Ahrefs, who achieved $40 million ARR with under 50 employees ($800k RPE).
4. Better user experience
To adopt a PLG model, SaaS companies have to focus on user experience. Their product must solve end-users’ pain points and make a tangible difference to their day. Their product must be easy-to-understand and enjoyable-to-use. Their product must deliver meaningful value in the short-term and long-term.
According to Kyle Poyar, “allowing customers to ‘try before they buy’ is the new norm” and this suits companies with a stand-out user experience. As the product is so focused on delivering value in a product-led strategy, customers are not only more likely to renew, but also more likely to have positive feedback, which is just as well given PLG is largely based on word of mouth sales. What’s more, a great user experience encourages free-to-paid conversion (they know what service to expect) and makes the time-to-value (TTV) journey smoother.
5. Enhanced analytics
The more smart data = the more smart decisions. From customer KPIs to business metrics, data enables SaaS leaders to better manage their trajectory and a product-centric model is a data machine. For example:
- Customer upsells: By analyzing how individual users use your product, you can track their engagement and target them with upsells they’ll find useful. You’re effectively building a base of product-qualified leads - customers you know already like the product who’d be more likely to try additional services.
- Customer enhancements: No customer success department can ever match the feedback you receive from tracking customer engagement with your product. You can then take these learnings to enhance the product in relation to customers’ preferences, boosting customer experience and retention.
In effect, in-product analytics helps you validate new innovations and optimize your business processes.