Decoding sales-led growth vs. product-led growth

What drives the growth of your business ? Is it Product or Sales ? Without Product what is that you are going to sell and without a Sales team the product won’t sell for itself ? Who is ultimately the “Supreme” ? This debate is evergreen and likely never going to lose its steam. 

Clearly, it’s a bit of a moot point and to run a business you need both. But the bigger question is how to build and structure your organization – is it around Sales or Product. And is sales going to drive your GTM (Go-To-market) or its Product.

Answer is it depends. Here is a broader framework that you can leverage as you build fundamental ingredients for your business.

Product-led Growth Sales-Led Growth
What it is? Customers are on-boarded and acquired through offering free trials and/or freemium plans. Approach here is that letting customers try a product is an essential part of the buying process.

 

Basically, a self on-boarding process wherein you let customers “try before they buy”.

Customers are acquired either through Sales 1.0 methodology which is primarily feet on street oriented sales model or through Sales 2.0 methodology wherein you leverage strong inside sales wherein you generate leads through inbound and outbound efforts, qualify them and convert them through online demos etc. Here you may not have to visit the customer, but the sales team operates ‘inside’ your office which runs email campaigns etc. to identify prospects and convert them through online product demos etc.
For what kind of markets ? The thesis works well when the product proposition is well established in the market and is probably a competitive space. As customers are self on-boarded they don’t need to be educated on the value of the product in general. If you are building a new category or customers require certain ‘educating’ about the value proposition, this model works better. This is when you need to engage with customers – share white papers, run online demos, work with the decision makers and influencers within the organization to get a buy-in.
For what kind of businesses? SMEs and Mid-markets.

 

Smaller organizations have faster decision making, less number of influencers to deal with and product integration efforts are minimum. Self on-boarding is ideal for them. They are also price sensitive and you can achieve that by your reduced Cost of Acquisition (CAC).

Mid-market and Enterprises.

 

Large organizations are a maze. You have influencers, decision makers and users to deal with. They also have complex tech infrastructure and standard products may not work for them, for which you might have to offer customization and integration to make the product work. High touch sales is a way to get inroads with them.

Annual Contract Values (ACV) Here you are not limited by ACV, the model works well on very low ACV (as low as $100!) but also would not have any problem serving high ACV contracts. As far as you have healthy product gross margins, low CAC will play to your advantage.

 

But you need to look at the cost of serving free and trial customers and a high % of such customers would impact the economics.

You obviously need to have a high ACV to justify building a strong sales team and engaging in long sales cycle efforts to convert clients. As per one Survey conducted by David Skok, 60% of SaaS businesses have a Cost of Acquisition (CAC) payback period of less than 18 months. If the payback period is extending beyond you need either work on your costs or ACV.
Global Success Stories Slack, Dropbox, Hubspot, Zoom SAP, Salesforce, Oracle
Pros: 1.      Shorter sales cycles.

2.      Lower customer acquisition costs (CAC) as limited human intervention required to convert clients.

3.      Low CAC can be leveraged to keep pricing low compared to competition and capture market share.

4.      Potential for rapid scale and disrupt competition.

5.      Wider sales funnel through free and trial users.

1.      Could work well in a small Total Addressable Markets (TAM).

2.      In initial phases, when your product is not fully established, hand holding customers becomes important. High touch engagement also ensures huge amounts of learning which creates a path for relevant features for customers.

3.      Proven and tested model to acquire enterprise customers.

Cons: 1.      Significant cost and resources deployed in serving free customers. And a very low % of paying customers.

2.      Strategy can only work in large TAM (Total Addressable Market)

3.      “Distance” from customers could lead to low “real” relationships with customers. It’s easy to lose control of changing and evolving customer needs.

1.      High CAC as a high touch sales model is required. And to justify high CAC, one needs high LTV and high ACV.

2.      Very low conversion in sales process.

3.      Customers don’t have the ability to try the product before buying and can lead to misaligned expectations in terms of expected outcomes.

Books to Read Product-Led Growth: How to Build a Product That Sells Itself by Wes Bush Predictable Revenue by Aaron Ross and Marylou Tyler

World is definitely heading towards Product Led Growth because of its inherent advantages of rapid scale, low CAC, customer self on-boarding process – above all “try before you buy” as a strong attraction for customers. With free softwares in the market, customers willing to pay for features have dropped significantly. Customers prefer to self educate and free trials or freemium offerings are the best way to let users experience the product before they make purchase decisions.

Said that,  it’s not a one size fits all strategy. If you are selling to enterprises and / or selling a complex solution, you are bound to have a high touch sales model. There is also a factor of mind set of customers. Some customers just would like to “see your face” before they buy. This is more rampant with Indian businesses, but this is changing particularly in context of Covid-19. If you have a high Annual Contract Value (ACV) you could justify a high touch sales model and develop deeper relationships with your customers.

There is another aspect that the Product Led growth model is not easy to execute. As it’s being said in the book (Product Led Growth)  “Freemium is like a samurai sword: unless you are a master at using it, you can cut your arm off.” 

You have to pay strong attention to the free / trial user conversion funnel. What features to be included under freemium vs. in paid is an important consideration. If freemium has most of the important features, that users would not have any motivation to convert to the paid plan. Said that, if certain critical features are not there in the free plan, users will not get to experience the product fully and would not value or use the product at all. You also need to have the financial resources to embark into such a model as you will have to service a significant number of free users. So, when you are bootstrapping, your financial plan needs to justify such a model. Potential investors would also look skeptical if you have a large base of free users with very low conversion.

Design and product experience becomes super critical as well. Any friction in the on-boarding process and if UX is not intuitive enough, you will have a very high dropout rate even before customers try your product.

Lastly, it’s very important to note that these are not mutually exclusive models. That is, you could very well build an organization around product-led growth and still be leveraging inside sales to generate, qualify and close on opportunities. It could also be the case that you sell to different client segments and require different approaches for each segment. 

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