Product-Led Growth
Part 1: Design Your Strategy
Why is Product-Led Growth of Rising Importance
Product-led growth (PLG) is a go-to-market strategy that relies on using your product as the main vehicle to acquire, activate, and retain customers. There are three industry changes happening that are driving companies towards PLG:
- Startups are more expensive to grow: customer acquisition costs (CAC) have gone up (for things like CPM) while willingness to pay has gone down
- Buyers now prefer to self-educate; and
- Product experiences have become an essential part of the buying process.
The following summarizes the pros and cons when compared to a sales-led model:
Free Trial, Freemium, or Demo -> MOAT Framework
The typical PLG strategy include choosing between free-trial, freemium, or demo GTM. You can use the MOAT framework to help you decide which to use:
- Market Strategy: is your GTM dominant, disruptive, or differential?
- Ocean Conditions: are you in a red or blue ocean business?
- Audience: Do you have top-down or bottom-up marketing strategy?
- Time-to-value: how fast can you showcase value?
Marketing Strategy: Is your growth strategy dominant, disruptive, or differentiated?
Your positioning in the market can help you determine your GTM strategy. Below is a summary of three growth strategies from Tony Ulwick's jobs-to-be-done matrix. Each suggests whether you should pursue demo, free-trial, or freemium. After you make a decision on which strategy you're pursuing, you can narrow down your GTM approach.
Ocean: Red or Blue Ocean Business
Your ocean strategy also plays a role in determining whether you should be sales or product led. For blue-ocean strategy businesses, you should start with sales-led (particularly for complex products) and then as the category matures you can transition to product-led. For red-ocean businesses, your only choice is product-led. Here's a summary:
Audience: Top-Down or Bottom-Up Selling Strategy
Your selling strategy also impacts what approach you take. If you're trying to sell top-down (which is often the case in blue-ocean businesses or large enterprise software), you're best off taking a sales-led approach. Generally, freemium and free-trials pair well with bottom-up selling and are unsuccessful (and incompatible) with a top-down approach.
Time-to-Value: How Quickly Can You Showcase Value
Product-led businesses need to demonstrate a quick time-to-value to be successful. The more difficult it is for your product to generate a key outcome for users, the less likely they are to stick with it and convert. The below table outlines the four types of users you'll have. Your goal is to move all of them to being "spoiled". If their motivation is low, improve your communication. If things are hard-to-do, eliminate steps in onboarding and decrease time-to-value.
Part 2: Build Your Foundation
The book outlines a three step process to get started with product-led growth: 1) Understand your value, 2) Communicate the perceived value of your product, 3) Deliver on what you promise. Each step builds on the last.
Step 1. Understand Your Value
Businesses don't pay for software, they pay for outcomes. That's what we're really selling and as such it's important to understand what outcome and value we're providing. Many businesses don't know what this is and as a result have poor positioning and messaging. There are three reasons that people buy a product:
- Functional Outcome: the core tasks that customers want to get done
- Emotional Outcome: how customers want to feel or avoid feeling as a result of executing the core functional outcome.
- Social Outcome: how customers want to be perceived by others by using your product
You should be able to monitor the usage of your product and to what extent users are achieving the outcomes by tracking value metrics. A value metric is the way you measure value exchange in a product. It will play an important role in how you price, how you drive product decisions, and how you build and manage your team. There are three criteria for value metrics:
- It's easy for the customer to understand (e.g. when they see it on a pricing page).
- It's aligned with the value that the customer receives in the product (i.e. components that lead someone to experience a meaningful outcome).
- Grows with your customer's usage of that value (i.e. more value should lead to charging them more).
The best way to choose a good value metric is via data. Look at what your best customers (the ones that don't churn) do compared to your worst customers. You can take this a step further and even ask those customers to stack rank your hypotheses just to confirm.
Step 2. Communicate Your Value (Pricing)
In sales-led, you can hide your pricing. In product-led growth, your revenue and customer acquisition model are married together and so you need to clearly communicate your value and how it ties to pricing. There are several common pricing strategies, including cost-plus and basing it on your competitors, but the best approach is value-based. Using value-based pricing, you have two options for how to decide on the price.
Option 1: Pricing Economic Value Analysis
You calculate the value of the functional, emotional, and social outcomes the product provides. Functional is the easiest and usually involves the cost savings or revenue increases the product drives. Social and emotional outcomes are more difficult to estimate, but you can try to put a value on them. After you have all of them, a general rule could be that the value you provide should be at least 10x the price you charge for it. If you have no (or minimal) customer traction, this is the place to start. Once you have customers, you can move on to a customer research approach.
Option 2: Market and Customer Research
Instead of doing a bottom-up value estimate, you can instead just ask your customers a few questions to target your ideal price range using the Van Westendorp Price Sensitivity Meter, which helps you estimate elasticity of demand. You survey your customers with the following four questions:
- Too Expensive: At what price point would you consider our product to be so expensive that you would not consider buying it?
- Expensive: At what price point would you consider our product so expensive that, while not out of the question, you would give it some thought before buying?
- Bargain: At what price point would you consider our product to be a great deal for the money?
- Too Cheap: At what price point would you consider our product so inexpensive that you would feel the quality couldn't be excellent?
You can then plot the responses for each question. The intersection between these plots reveal two important boundaries:
- Point of Marginal Cheapness: the point beneath which prospects view our product as "too cheap"
- Point of Marginal Expensiveness: the point above which prospects view our product as "too expensive"
The area between these two points is our ideal price range with the intersection between "not a bargain" and "too expensive" showing us the optimal price point.
Part 2: Build Your Foundation
The book outlines a three step process to get started with product-led growth: 1) Understand your value, 2) Communicate the perceived value of your product, 3) Deliver on what you promise. Each step builds on the last.
Step 1. Understand Your Value
Businesses don't pay for software, they pay for outcomes. That's what we're really selling and as such it's important to understand what outcome and value we're providing. Many businesses don't know what this is and as a result have poor positioning and messaging. There are three reasons that people buy a product:
- Functional Outcome: the core tasks that customers want to get done
- Emotional Outcome: how customers want to feel or avoid feeling as a result of executing the core functional outcome.
- Social Outcome: how customers want to be perceived by others by using your product
You should be able to monitor the usage of your product and to what extent users are achieving the outcomes by tracking value metrics. A value metric is the way you measure value exchange in a product. It will play an important role in how you price, how you drive product decisions, and how you build and manage your team. There are three criteria for value metrics:
- It's easy for the customer to understand (e.g. when they see it on a pricing page).
- It's aligned with the value that the customer receives in the product (i.e. components that lead someone to experience a meaningful outcome).
- Grows with your customer's usage of that value (i.e. more value should lead to charging them more).
The best way to choose a good value metric is via data. Look at what your best customers (the ones that don't churn) do compared to your worst customers. You can take this a step further and even ask those customers to stack rank your hypotheses just to confirm.
Step 2. Communicate Your Value (Pricing)
In sales-led, you can hide your pricing. In product-led growth, your revenue and customer acquisition model are married together and so you need to clearly communicate your value and how it ties to pricing. There are several common pricing strategies, including cost-plus and basing it on your competitors, but the best approach is value-based. Using value-based pricing, you have two options for how to decide on the price.
Option 1: Pricing Economic Value Analysis
You calculate the value of the functional, emotional, and social outcomes the product provides. Functional is the easiest and usually involves the cost savings or revenue increases the product drives. Social and emotional outcomes are more difficult to estimate, but you can try to put a value on them. After you have all of them, a general rule could be that the value you provide should be at least 10x the price you charge for it. If you have no (or minimal) customer traction, this is the place to start. Once you have customers, you can move on to a customer research approach.
Option 2: Market and Customer Research
Instead of doing a bottom-up value estimate, you can instead just ask your customers a few questions to target your ideal price range using the Van Westendorp Price Sensitivity Meter, which helps you estimate elasticity of demand. You survey your customers with the following four questions:
- Too Expensive: At what price point would you consider our product to be so expensive that you would not consider buying it?
- Expensive: At what price point would you consider our product so expensive that, while not out of the question, you would give it some thought before buying?
- Bargain: At what price point would you consider our product to be a great deal for the money?
- Too Cheap: At what price point would you consider our product so inexpensive that you would feel the quality couldn't be excellent?
You can then plot the responses for each question. The intersection between these plots reveal two important boundaries:
- Point of Marginal Cheapness: the point beneath which prospects view our product as "too cheap"
- Point of Marginal Expensiveness: the point above which prospects view our product as "too expensive"
The area between these two points is our ideal price range with the intersection between "not a bargain" and "too expensive" showing us the optimal price point.
What Goes on Your Pricing Page?
You need four elements communicated on your pricing page:
- Value metric
- Willingness to pay for each package / bundle
- Valued features (what goes into each bundle)
- Demographic information (nickname of buyer that typically buys each bundle to help buyers self-segment quickly)
Step 3. Deliver on Your Value
The final step is delivering on the value you promised. There's the perceived value you set as expectations as the customer started using your app and then the experienced value. Ideally, these are perfectly aligned. But usually they are not and it's your job to understand why to increase conversion and prevent disappoint and churn. There are typically three reasons why there is misalignment:
Launching a Free Trial in 24 Hours
You don't have to spend months to run an experiment. Update your "Request a Demo" CTA to a "Request a Free Trial" CTA and then on the demo landing page, change "demo" to "free trial". When someone requests the free trial, book a meeting with them instead of just giving them access to the product. In that meeting, you should:
- Qualify them as you usually would
- Ask them about the primary outcome they want to achieve with the product.
- Watch the person try to achieve an outcome in the product (have them share their screen).
From these sessions, you'll learn the top outcomes people want from your product, where you need to offer help, and then be able to make changes to offer that help.
Ensure Clear Ownership
One of the most common mistakes companies make is not having a clear owner for the product-led model. It could be marketing, product, sales, or customer success. But someone has to be responsible. And those people don't always have to be hired from the outside. The best approach is to just train your folks to do it themselves, starting with a small tiger team that can lead the way for the rest of the organization.
Part 3: Ignite Your Growth Engine
With this strategy in mind, the book then switches to the tools and tactics you can use to implement and optimize the product-led approach over time. This includes many of the most common "growth hacks" to achieve activation and retention.
Optimization Process: Analyze, Ask, Act
As you're trying to deliver on the value you promised with the team you've put together, you'll need a process to continually optimize your go-to-market. You can follow a simple three step process on a regular cadence (e.g. monthly sprints) to do this.
Step 1: Analyze
Analyze the inputs and outputs of your business. This will help you identify which inputs are generating the results you want (e.g. did an investment in a trade show or email campaign return the results you wanted?). There are lots of metrics to track, but in product-led businesses, these are the macro outputs to track:
- number of signups
- number of upgrades
- ARPU
- ARR / MRR
Step 2: Ask
You should then ask what levers you can pull to drive growth. There are three things to focus on (in order of importance):
- Multiplier 1: Churn
- Multiplier 2: ARPU
- Multiplier 3: Number of customers
After choosing which to focus on, you'll then have to decide how to adjust your inputs for the next sprint. You can use the UCD framework (understand, communicate, deliver) to identify issues to focus on. You'll brainstorm potential inputs/strategies, rank them based on potential impact (relative to confidence and ease of implementation), and then run experiments.
Step 3: Act
You'll choose one or two ideas to act on each sprint. Aim for quick wins first to build trust with leadership and to get experience with the process. Move on to tackle more complex growth opportunities over time.
Bowling Alley Framework
There are common "tools of the trade" that product-led growth teams use to help users achieve their desired outcomes in the product. You can think of their path as a bowling alley with gutters on the side. The goal in product-led businesses is to get customers from Point A to Point B in their lives (as opposed to Point A to Point B in a sales cycle). You can add two bumpers on the side to help ensure your users stay on track to meeting their desired outcome -- product bumpers and conversational bumpers. Product bumpers help users adopt the product within the application itself. Conversation bumpers, on the other hand, work to educate users, bring them back into the application, and eventually upgrade their account and take place outside the application.
You should map out the journey your user goes through to signing up for your product and trying to achieve an outcome. Every step they go through should be judged on how necessary it is. If it's not immediately necessary, it can be pushed to a later part of the customer journey when it's more relevant.
Product Bumpers
Product bumpers help users experience meaningful value in the product as quickly as possible.
Welcome Messages
Welcome messages are your opportunity to greet new users and make them feel invited. In addition to saying hello, use them as an opportunity to restate your value proposition and increase users' motivation before they use the product. They can also set expectations for what users will experience with your product.
Product Tours
Product tours should ask users what they're trying to accomplish in the product. They should cover important steps that set users up for success with the product. High performing product tours often use a "focus mode" that strips away unnecessary elements, like the navigation bar, until the user completes the product tour. Note that you do not have to take users of a tour of the entire product -- instead only show them what is needed to accomplish the goal they indicated earlier. Tours are typically between three and five steps.
Progress Bars
Progress bars indicate to users how far they've come and how far they need to go. Effective progress bars start with a substantial percentage of the bar already filled to help users feel like they're already underway instead of starting from scratch (increasing their desire to complete the task).
Onboarding Checklists
Checklists break down big tasks into smaller ones. They can motivate users to complete crucial set-up tasks. You can leverage the Endowed Progress Effect by having users start with the checklist partially completed. In addition, the Zeigarnik Effect makes users more likely to complete the list the further they are along in it.
Onboarding Tooltips
Onboarding tooltips help users learn how to use a product. They're a great way to guide new users to the parts of the product that are going to generate value for them.
Empty States
Empty states can show people what they need to do to set up their account and experience meaningful value. They should prompt users to take an action that will lead them closer to experiencing meaningful value in the product.
Conversational Bumpers
Conversational bumpers educate users, bring them back into the application, encourage them to upgrade their account, and notify users of new features. They help to educate users, set the right expectations, meet users where they are to pull them back into your app, and increase motivation to use and buy your product.
User Onboarding Emails
The primary function of onboarding emails is to meet users where they are and pull them back in. The below outlines the top user onboarding emails. The most important part is that the emails should be sent based on personalized trigger for each user. Sending emails that aren't relevant is a sure-fire way for them to stop opening your emails entirely.
Increase ARPU & Reduce Churn
Optimizing Average Revenue Per User (ARPU)
After going-to-market, you'll learn about how well your pricing model is received. You have a few options to adjust this to maximize ARPU:
- Use value metrics if you aren't already.
- Improve your pricing tiers (potentially getting rid of unnecessary tiers)
- Raise your prices if you're undervaluing the elasticity of demand.
- Treat your best users differently from other users (don't have them go through the same steps that everyone else does).
- Upsell and cross-sell via product add-ons and services.
Types of Churn and How to Measure
There are three types of churn in a business:
How to Take Action to Reduce Churn
There are many strategies you can use to manage and reduce churn in your product:
- Measure your churn metrics (as outlined above).
- Start customers off on the right foot with robust customer onboarding.
- Conquer your ability debt by making it easier to experience value in your product.
- Send usage-review emails to showcase the value users are getting with your product.
- Restate your value when invoicing (personalized based on value they've achieved)
- Create churn-prevention campaigns (customer success meetings, etc.)
- Have a robust cancellation process (that triggers actions based on reason for cancellation)
- Tackle delinquent churn when payment fails.
- Invest in customer success.
- Fix your pricing to more value based.
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