Product-Led growth by Wes Bush

Product-Led Growth

By John Mathews
Category: Learning
December 2020

My notes on “Product-Led Growth” by Wes Bush

Part 1: Design your strategy

Chapter 1: Why is product-led growth of rising importance?

  1. Product-Led Growth is a go-to-market (GTM) strategy that relies on using your product as the main vehicle to acquire, activate and retain customers.
  2. Product-Led Growth (PLG) means that every team influences the product:
    • Marketing - how can our products generate a demand fly-wheel?
    • Sales - how can we use the product to qualify our prospects for us?
    • Customer Success - how can we create a product that helps customers become successful beyond our dreams?
  3. By having every team focussed on the product, you create a culture that is built around enduring customer value
  4. By leading with the product throughout the org, PL companies get
    • shorter sales cycles
    • lower Customer Acquisition Costs (CACs)
    • higher Revenue Per Employee (RPE)
  5. A GTM strategy is an action plan that specifies how a company will reach target customers and achieve a competitive advantage
  6. In order to select a GTM, you first need to understand:
    • market conditions
    • competitive positioning
    • ideal customer
    • product offering
  7. Knowing these elements will help you choose the correct GTM that will acquire, retain and grow you customer base in the most capital-efficient way

Sales-Led Go-To-Market Strategies

Profit Centers: Sales, Marketing, Customer Success

Cost Centers: Engineering, Product

Advantages:

  • Annual Contract Value (ACV) can be very high
  • Enterprise first solutions that are very complex and therefore need a high-touch sales model
  • If the Total Addressable Market (TAM) is very small, because your market is super niche, you can quite easily talk to almost all market participants. (PLG is built for large TAMs)
  • It’s great for new categories of product where education is required, because you need to change how people approach a problem. This takes time and requires education. This is turn requires that you understand your customers pain points, objections, core problems. If you jump to quickly a PLG GTM strategy then you risk a high church rate because you haven’t understood or educated your customers well enough.

Disadvantages:

  • Sales cycles are very long
  • The Life Time Value (LTV) must be high enough to recoup the investment in CAC. This often requires charging the customer a premium. This premium price isn’t because the product is amazing, or more valuable to the customer, but because the customer acquisition model is more expensive.
  • If you use a Sales-Led GTM, you need to watch out for competitors who can sell more efficiently, or have a more efficient Customer Acquisition Model. They can steal your market share by offering the same product with at a lower price.
  • Customer Acquisition methods are super leaky. Most marketing-qualified leads (MQLs) never result in a closed deal, this is partly because:
    • it encourages markets to gate content in order to hit their MQL goals
    • it focusses on content consumption as a leading indicator of intent. (but reading a white-paper or brochure doesn’t mean im going to buy the thing).
    • the entire process rewards creating friction in the buying process
  • Consequently, there is often a disconnect between marketing and sales

Product-Led Go-To-Market Strategies

  • Switching from Sales-Led GTM to Product-Led GTM creates a defensive moat
  • A product led marketing team asks “How can we use the product to qualify our prospects for us?”
  • A product led customer success team asks “How can we create a product that helps customers be successful without our help?”
  • A product-led engineering team asks “How can we create a product with a quick time-to-value?”
  • Growth is much faster, because:
    • you need fewer resources to scale,
    • the top of the customer funnel is much wider.
    • CAC is much lower
    • Higher RPE (revenue per employee)
    • User experience is better

Chapter 2 - Free, Freemium or Demo

  1. Use the MOAT framework to pick the right GTM strategy:

    • Market Strategy - Dominant? Disruptive? Differentiated?
    • Ocean Conditions - Blue or Red?
    • Audience - Do you have a top-down or bottom-up marketing strategy?
    • Time to Value - How much time do you need for a customer to experience the value?
  2. Dominant - Do it better than the competition and charge a lower price

    • Is your TAM big enough?
    • Does your product solve a specific job significantly better and at lower cost than anyone else on the market?
    • Can the user realize significant ongoing value quickly with little or no help?
    • Do you want to be the undisputed market leader?
  3. Differentiated - Pick and win a fight against an industry giant
    • Main line of defense against the giant is specialization
    • Focus on an underserved niche
    • Do a specific job better than the competition but charge significantly more
    • This is not a one-size-fits-all model.
    • Free trials and demos work well here.
    • Because its specialized, combining freemium with quick time-to-value is difficult
    • Main competitive advantage is how you solve your customers problems
    • Does your market have underserved customers?
    • Is the TAM big enough?
    • is the ACV high enough?
    • Could prospects experience a Magic Moment during a free trial?
  4. Disruptive - Charge less for an inferior product (e.g. Canva, Google docs)
    • Build a simpler product that solves a specific pain point, and because its simpler, its faster, you can charge less, and its more appropriate to some over-served or priced-out customers
    • It’s a scaled-down product
    • Costs must be low
    • Product must be easy to use
    • Is TAM large enough?
    • Can on-boarding be completely self-service?
    • Freemium model thrives

Chapter 3 - Red-Ocean or Blue-Ocean markets?

Red-ocean companies try to outperform their rivals in order to grab a larger share of the existing market. As the market gets crowded, opportunity for profit and growth reduces. Products become commodities. Cut-throat competition turns the waters red.

Blue-ocean companies access untapped market space and create demand. They have opportunity for highly profitable growth. Competition is irrelevant. Create and capture new demand.

Some markets will be red-ocean, but a particular niche within it will be blue ocean.

Blue Oceans require educating the customer to create the demand. This is high-touch, and often a PL GTM strategy isn’t going to work. It needs to be sales-led in order to educate the customer enough. But if Time-To-Value (TTV) is short then PLG could be great.

Red Oceans need big wide funnels in order to compete, and PL GTM strategies work great. They’re defensible, keep costs low and make sales cycles short.

Chapter 4 - Top-Down or Bottom-Up selling strategy?

  1. PLG works for bottom-up.
  2. High touch sales-led strategies work for Top-Down enterprise sales strategies, where the product is super complex and the sales cyccle is very long.

Top-Down (Sales team is the growth engine):

  • High ACV
  • Additional Services
  • Lower customer churn
  • Poor revenue distribution
  • High CAC
  • Long sales cycles
  • Free Trial sometimes works

Bottom-Up (Product is the growth engine):

  • Wider top-of-funnel
  • Low CAC
  • Predictable sales figures
  • Revenue diversity
  • Scalable fast
  • Small contracts only
  • non-paying customers
  • expertise shortage
  • upfront investment as non-paying customers drain resources
  • Freemium
  • Free-Trial

Chapter 5 - Time-to-Value

  1. How much time until you deliver on your promise to prospects?
  2. How much time until the product sells itself?
  3. PL GTM strategies require fast time-to-value.
  4. Rank your uses across 2 dimensions and group into 4 quadrants. The dimensions are Ability (low - high) and Motivation (low - high)
    1. Low Motivation - Low Ability = Mission Impossible
    2. High Motivation - Low Ability = Rookie
    3. Low Motivation - High Ability = Veteran
    4. High Motivation - High Ability = Spoiled
  5. Figure out your top two quadrants. Unless all your users are Spoiled, you need to decrease Time-To-Value.

Questions:

  • How motivated are your users?
  • Is your product easy for your target audience to use?
  • Can users experience the core value (magic moment?) without hand-holding?

Part 2 - Build Your Foundation

Chapter 7 - Build a product-led foundation

A positive feedback loop: 1. Understand your value 2. Communicate it 3. Deliver on your promise 4. Repeat

Chapter 8 - Understand your value

If you’re selling live-chat software, you’re not really selling live-chat software, you are selling a new and better way to acquire customers.

You are selling the outcome, the result, the why.

Pain makes us want to change so that we can avoid or prevent the pain altogether.

Pain is product agnostic.

There are three reasons why people buy a product:

  1. Functional Outcome - the core task that needs to get done.
  2. Emotional Outcome - how a customer wants to feel or avoid feeling as a result of the functional outcome.
  3. Social Outcome - how a customer wants to be perceived by others by using your product.

In every software, there are usage patterns that point towards to core outcomes that are most important to customers.

One of the biggest differences between sales-led and product-led companies is that SL companies monitor usage patters to see if users are accomplishing meaningful outcomes. These outcomes are referred to as value-metrics.

A value-metric is the way you measure value exchange in your product. They are the linchpin to successful execution of a product-led GTM strategy because you are aligning your revenue model directly with your customer acquisition model. Because your value metrics play a vital role in how you price your product, set up your monitoring, and build your team.

Value metrics could be:

  • for vimeo, number of videos uploaded by the user.
  • for slack, number of messages sent by the user
  • for paypal, amount of revenue generated by the user (processed?)

There are functional and outcome based value metrics. Functional value metrics are “per user” or “per 100 videos”. Pricing scales around functions of usage. Outcome based value metrics charge based on the outcome, e.g. how many views a video received, or how much money a customer made when using your payment process method.

Many SaaS companies rely on feature differentiation as a way to justify higher prices, but this produces higher churn.

Value metrics outperform feature differentiation with upto 75% less churn… Outcome based value metrics reduce church by an additional 40%. Apparently.

  1. A good value metric is easy for a customer to understand. They need to immediately understand what they’re paying for and where they fit in your packing/pricing structure. If you’re in an established market, it makes senses to look at what the competition charges.
  2. A good value metric is aligned with the value that the customer receives through the product. Consider the low-level components of your high-level outcome. E.g. what low level actions are necessary to get the end result? Sending lots of messages? Meeting lots of people? Finding lots of things?
  3. A good value metric grows with your customers usage of the valuable outcome. If customers get incredible value from the product, charge them more because the product is worth it. Also, if they aren’t getting much value from the product, charge them less.
  4. Don’t do user based pricing if you want to get lots of users - its a conflict of interests.
  5. If you’re small, you can try different pricing strategies and iterate to success.

Ask yourself:

  1. What do my best customers do?
  2. What do my best customers not do?
  3. What features did my best customers try first when they were on-boarding?
  4. What are the similarities along my best customers that led to success?
  5. For churned customers, what were the main differences between them and the best customers? Were they in the ideal audience? Why did they church? What did they do or not do that good customers didn’t?