Product vs Sales Led Growth: Assessing Your Growth Strategy
Building a high-quality software product is only one piece to the puzzle. Success is often measured through the number of users, the valuation and the growth of a product. After all, why build something if no one’s going to use it?
That is why it’s critical to align your product with your growth strategy. There are a number of different variations and lines of thought when it comes to growth strategies. We’re not a sales company and we won’t pretend to be thought leaders in the area. But it’s important to give thought to the strategy and feed that back into your software application.
Sales driven growth
Traditionally, many businesses succeeded through a sales driven growth strategy. Create a product that people needed and would pay for and let the sales team do the rest. Once a sale is made, the job is done. A sales driven approach relies heavily on outbound sales, personal relationships, one-to-one meetings, customised sales processes, and historically longer cycles. Think back to IBM in the late 90’s, early 00’s.
There is still plenty of merit in adopting a sales driven strategy. In some industries, it’s pivotal. If you do adopt a sales strategy then it is necessary to focus on metrics like number of sales, average sales cycle time and customer acquisition costs.
If your product is aimed at consumers or even small to medium sized businesses then a sales driven strategy may not be best suited. Because of the high-touch nature of one-to-one meetings and a custom sales process, the cost per sale can be quite significant. In order to justify that cost, you want a significant return on investment — a return that may not be feasible for SME’s and consumers. That’s why IBM, SAP and Oracle focus their efforts on enterprise sales. It may take 6-18 months to secure a sale, but that is justified by the millions of dollars in return.
Post GFC 2008/2009 saw software as a service (SaaS) starting to really have an impact. Bessemer popularised 5 metrics that cloud companies should monitor. Because SaaS was a fairly new model a lot of work was done in the VC space to determine the value of a SaaS company. Out of this came the Pirate metrics, the Rule of 40 and a number of others. Many to understand the balance of growth and profit to make sure both these normally opposing forces are balanced. In 2010 most companies had adopted a sales driven strategy. At that time the theory mentioned holding back sales hires before hitting KPI’s and the changing the roles of sales teams — for example hunters vs farmers. The last decade has seen the rise of Product Led Growth (PLG) - a move away from the traditional sales driven strategy.
Product led growth
What is it?
From the outside, product led growth can seem a bit like magic. Imagine you’re desperate for a video conferencing solution after buying a puppy and working from home for a few weeks.
So, you install Zoom and tell your team about it.
Your team installs it and realise that they love it.
Word spreads throughout the office — all of a sudden Zoom is the video conferencing tool of choice within the business.
From Zoom’s perspective, they haven’t had to invest any time or resources into making the sale. They might not even know how it happened. But because the product was so good, it spread far beyond its initial reach.
Product led growth is a strategy that is fuelled by user interaction with the product and is designed to drive rapid expansion as a company scales.
Does it work?
Developed and championed by the likes of Atlassian, it is now an essential part of the playbook of companies like Zoom, Slack and numerous other successful SaaS companies.
Product led businesses are performing well. The public companies that have embraced product led growth beat their peers across nearly every SaaS value driver. They’re growing faster, demonstrate better margins and trade at a 50% premium relative to forward revenue. The median public PLG company is worth 2x that of the broader SaaS index ($6.8B vs. $3.4B).
On the back of this success, sales led SaaS companies are now being pushed to adopt product led growth to reinvigorate their growth.
It’s worth taking a look at the growth rates of SaaS companies that have adopted product led growth versus those that haven’t. It stands to reason that at an early stage, when the user count is low, having a quality product won’t necessarily have the same level of impact.
Image 1: Growth rates for product companies vs sales driven companies
Even within a product led growth strategy there are different paths a business can take.
Approach 1: Manage product interactions
If using traditional sales and marketing, you can engage and guide customers through the product. Once you’ve successfully learned which interactions are needed to facilitate a high-quality user experience you can automate or build that into the product. This approach does create more flexibility at that early experimental stage.
Approach 2: Avoid sales and marketing
The other option is to take a hard-line stance. By avoiding any sales and marketing from the start, you can instead focus on building the best possible product. This can be a hard approach to persist with, especially when you’re struggling with growing your user base and revenue.
So then, sales or product?
I wish we could unequivocally say which approach would work for you. Unfortunately there’s no right answer and it may in fact be a combination of both.
There is still room for sales in a product led business, but sales should start to look more like customer success. It’s particularly urgent that all customer-facing employees become fluent in the product. Moreover, the sales team should prioritise their time based on an account’s activity in the product, leveraging a product qualified lead (PQL) methodology rather than just marketing qualification.
All of these initiatives require a rock-solid analytics foundation. You’ll want to capture product usage activity across features and user cohorts. Product data should then be connected with other systems of engagement (e.g. CRM or marketing automation). Most importantly, make sure that key employees have self-service access to this data in order to make data-driven decisions.
One thing we can say is that a product led growth strategy is tough to execute. The majority of times it comes down to having a well-defined problem that is applicable to a motivated user base.