First Principles of a Successful Product-Led Growth Strategy

Problem

I’m a huge fan of first principles thinking. I'm an even bigger fan when it's used to develop an effective product-led growth strategy. The philosophy of first principles thinking is simple. Aristotle put it best when he defined it as “the first basis from which a thing is known.” A first principle cannot be deduced any further. It is an indubitable truth from which you can build upon.

So, what has this got to do with creating a successful product-led growth strategy?

Well, it’s simple. First principle thinking forces you to put on your ‘science hat’ and resist the urge to make assumptions. You start with the facts. With what you know is true, and you go from there.

Recently, we wanted to deep dive into product-led growth and unravel what it takes to do it right. So, we carried out some investigative research on the companies that are leading the way when it comes to product-led growth. From our findings, we distilled four principles that have been key to their success. We realized that each of these principles can be applied by other companies. So, here I am, ready to share these insights with you so that you can start applying them to grow your product successfully, too.

Actions taken

A successful product-led growth strategy is a cross-functional effort that consists of four teams: engineering, consulting, marketing, and product. You’ll have to master each of these elements to give your product-led growth strategy the best chance to succeed. But first, let’s talk about these all-important first principles. What are they? And, why should you even care?

Elon Musk is a BIG believer of first principle thinking. He talks about it a lot and explains: “I think it’s important to reason from first principles rather than by analogy. You boil things down to the most fundamental truths…and then reason up from there.”

Yes, first principle thinking is a painful mental exercise that requires a lot of work, deep research, and even deeper thinking. But the benefits that follow makes all of that hard work more than worth it. Once you’ve grasped those fundamental principles, it’s embedded into your DNA and magic happens.

If you want to learn more about first principle thinking, here are two books to add to your must-read list: The Elon Musk Blog Series: Wait But Why by Tim Urban and Principles: Life and Work by Ray Dalio.

We have a saying at OutSystems that we basically live by: “Eat your broccoli.” If you’re not a fan of broccoli, you’re in luck. We’re not suggesting that you add more veg to your diet. Instead, it’s about going through the pain-staking task of collecting facts and data that allow you to create a strong set of principles that you’ll anchor your strategy on.

We looked carefully at relevant data and started by observing 100+ blog posts and research reports like the one you can see above from OpenView. From there, we kept an eye out for similarities between the different companies we looked at. Some of the companies stood out to us more than the others. So, we went deeper and did more research into product-led organizations such as Zoom, Slack, and HubSpot.

Lessons learned

• We learned a lot about product-led growth and B2B. Most of our findings are based on consumer or prosumer products. Prices ranged from around $20 to $30 per month. We found that most of the companies we looked at didn’t suffer from price friction, which is fairly common in B2B. After all, if you’re asking your customers to hand over thousands of dollars each year, you’ve got a lot more factors to consider. Procurement rules and processes must be followed, which can be a giant headache because of the complexity of the purchase processes.
• Set-up time is another factor to consider. How long does it take customers to set up your product or service? Calendly is a great example of a company that makes it super simple for people to get started. I mean, you can have yours up and running in less than 60 seconds. Plus, it comes with a seriously low price point. It’s no surprise that so many businesses and individuals rely on its free online appointment scheduling software! If you want to launch an effective product-led growth strategy, you need to reduce these possible frictions. Pricing and setup time aren’t the only things you need to think about, though.
• How is your support team? Will they be able to handle 10x the customers? Viral growth is hard. Simply adding the ‘invite’ link to the product isn’t enough to make you successful. You’ve got a lot of other important things to consider.
• Blue Pill or Red Pill? Let’s imagine that companies have two choices: the blue pill or the red pill. Choosing the blue pill puts companies at the lower end of the market first. This is their starting point. There is a high volume of customers ready for the taking. However, companies that take the blue pill will usually try to land bigger customers gradually, moving them towards the ‘sweet spot’ where they can reach more of their ideal customers. Companies that have chosen this ‘pill’ (or starting route) include Zoom and AirTable. Companies that choose the red pill, on the other hand, are doing the opposite. They tend to be stronger in the B2B world and therefore can afford to take the risk of going straight in and targeting their ideal customers straight away. I know what you’re thinking – can’t I just take both routes? You can…but it’s very difficult. Some might say that it’s impossible. But, if you want to take both routes, you’ve got to make sure you have a deep understanding of the principles that lead to success. Keep these principles in mind while you’re creating your strategies and while your team executes it.
• Important First Principles: Okay, now it’s time for the good stuff. What exactly did we learn from looking at all of these different companies? What are the key first principles when it comes to creating and executing a successful product-led growth strategy? Let’s find out… Here are the first principles we uncovered from our research: Lead time to first value in minutes, Adequate recurrence of value, Virality and High switching costs. As you can see, value is a common thread through each of these first principles.
• Deliver Value FAST: When we say value, we’re talking about business value. Customers must be content with the value they get from your product. It’s as simple as that. The path to the first instance of value needs to be friction FREE. Customers are impatient. They’re busy living their lives and they need to be able to get the value within minutes. Companies that prioritize delivering value within minutes are more likely to have success. *Recurrence of Value: Next, you need to transform the first value into recurring value. In other words, you need to keep retention levels high and get customers coming back for more. Retention is determined by identifying actions that provide value and develop habits. Top performers identify retention cycles and develop strategies to enforce them (e.g. Zoom calendar plug-ins).
• Virality: Mastering product virality can skyrocket your sales and put your product in front of millions of potential customers. But what does virality actually mean? Virality is the ability for customers to drive the continued adoption inside an organization, without seller intervention or sales involvement. The cost of acquiring new users should be as close to zero as possible. Many products rely on a decreasing marginal cost of adoption, such as Slack or Zoom.
• High Switching Costs: Finally, we’ve got high switching costs. If your product contains critical data for someone’s business, the effect is compounded. Think of it like this: as adoption spreads, the “stickiness” of the product increases. Products that hook into a company’s processes or data will increase the cost of switching. Companies that have low switching costs include GotoMeeting by Zoom while a great example of a product with high switching costs includes Salesforce from HubSpot.
• Internal Unit Economics to Consider: Each of these first principles shares underlying unit economics restraints you must consider, including: Cost of acquiring a customer, Cost of support customers, and Cost of goods sold. Now that you know what the four key first principles of a successful product-led growth strategy are, you can start to implement them into your own business and strategies. You can do the same with your own company, your competitors, and companies that inspire you. (FYI: Each of the principles are prioritized, beginning with Immediate LTFV as the most important, and ending with high switching costs)
• Now…go find your own first principles! The next step to help you put these four principles into action is to create a roadmap. How is your team going to help improve the success of your product-led growth strategy? Remember to focus on delivering high value to create adoption and usage. As long as you’re providing high value, you can keep your switching costs high and therefore retain customers more effectively. You might discover that other first principles work even better for your product-led growth strategy than those mentioned in this post, and that’s okay! Adapt whatever first principles work best for you!