What do Stripe, Hey.com, and Guitar Pro have in common? Their phenomenal performance is down to product-led growth (PLG) — a set of go-to-market strategies centered around and driven by a company’s products. By embracing PLG, these and other businesses are outperforming even blue chip tech firms and attracting interest from — and the financial backing of — VC firms.
During MadKudu’s recent CMO Guide to PLG webinar, Sam Richard, director of growth at VC firm OpenView, shared her insights into why a PLG approach leads to strong long-term growth and scalability, how businesses can adopt PLG, and which metrics serve as beacons for PLG success.
Sam points out that product-led businesses spend and operate more effectively than traditional software as a service (SaaS) businesses in a number of key ways. Not only are their sales and marketing budgets a lower percentage of revenue, but they typically show higher customer retention rates and lower customer acquisition costs (CAC). Retention, in particular, is vital to the long-term success of a product — and the business.
PLG companies flip traditional metrics on their head, and few metrics demonstrate this better than customer lifetime value (LTV). For product-led companies, customer lifetime value is virtually infinite. Consider a subscription-based streaming service like Netflix. The cost of acquiring a customer is low and customer retention is high, simply because, for the customer, maintaining a monthly subscription is so low that they’re unlikely to cancel. So, with continual investments in the product, Netflix can potentially retain customers forever — resulting in a business model that is far more sustainable than a traditional SaaS model.
Customer lifetime value pays dividends particularly when product adoption grows virally. Once a user experiences your product’s value and continues using it, their peers begin to use it as well, driving further low-cost customer acquisition. This virality is led by product quality rather than an aggressive sales or marketing approach.
Some of the most successful PLG companies have leveraged their viral growth into enterprise pricing packages — and exponentially higher sales. For example, Zoom has strategically turned its customer-oriented product into an essential productivity and collaboration tool with enterprise-level features — and pricing packages to match. This growth strategy was product-driven and has generated significantly higher revenue for the business.
Because PLG is such a relatively new space, many companies are uncertain which metrics work best for measuring performance. Key growth metrics include annual growth rate, gross margin, and cash burn, while key operating metrics are logo retention, or the percentage of customers retained over a given period, and net dollar retention, or growth from existing customers.
Sam warns that no single metric tells a company’s entire story. A company may have poor logo retention but great net dollar retention and still be an exciting company for VCs because its product offers great value for customers.
Sam also urges PLG leaders to share all metrics, even the negative ones, with their boards. The more that analytics are shared and discussed, the more opportunity there is for improvement and aggregation of talent around solving a common problem.
Building a successful PLG company requires rethinking and reshaping your business around the drivers and the people that will put your products — and by extension, your customers — first. Sam identifies three types of team members for PLG success:
Recruiting and retaining talent to drive growth requires an investment, which can be a challenge for start-ups and VCs — but the return will be a sustainable future for project-led growth. By “moving fast and breaking things,” as Sam encourages companies to do, you can build a product and a high-growth company that are truly customer-centric.
Watch the full "CMO Guide to PLG" webinar for even more guidance on adopting product-led growth. In addition to Sam Richard’s wisdom on the financial growth aspects of PLG, the webinar includes insights from Wes Bush, founder and CEO of ProductLed Institute, and Francis Brero, CRO of MadKudu, who share their takes on this growth strate
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