Product-led growth versus sales-led growth

Growth strategy is an evergreen topic in sales, but what’s emerged more recently – particularly in the enterprise software market – is a debate pitting the merits of product-led growth (PLG) against sales-led growth (SLG). While it may seem like a binary choice, though, we find that the reality is more nuanced.

Understanding the key differences between PLG and SLG

Product-led growth (PLG)

An organisation that opts for PLG relies on its products to create a sales pipeline. For example, PLG strategies use free trials and end-user experiences to capture the market and deliver value – all before capturing value for itself. PLG is sometimes perceived as cheaper than SLG – at least until marketing spend is factored in. Examples of PLG growth: Slack, Dropbox, Mongo, Splunk, and Databricks.

Sales-led growth (SLG)

SLG, on the other hand, emphasises person-to-person interaction to create pipeline. In SLG strategies, the salesperson plays a crucial role in explaining and demonstrating the value of the product to the potential buyer. In these strategies, salespeople are problem-solvers, helping customers tackle complex challenges. Sales-led growth is widely associated with the way that many well-known software companies became household names. Examples of SLG growth: Oracle, SAP, and Cobalt.

When to use product-led growth strategies

PLG is a hot topic in the enterprise software market because many companies – especially those that have seen growth drop off – are attracted by the supposedly lower costs when directly compared with SLG. However, a PLG or self-serve approach to selling software only works well if customers have a solid understanding of their problem, how to solve it, and why the product can help:

• They’re in the market actively looking.
• They’re educating themselves on the merits of different software.
• They’re moving themselves towards an investment decision.

When to use sales-led growth strategies

SLG should be the go-to strategy for targeting the – not insignificant – segment of the market that PLG fails to capture: customers who are not actively looking. It could be that they don’t realise the problem they have. Or that they don’t know there’s a way to fix it. Or they know both of these things but aren’t treating it as a high enough priority. SLG is also a better play for high-value, complex sales motions. The size of the total addressable market (TAM) and serviceable available market (SAM) hasn’t shrunk. However, without a sales rep to educate prospects or to bring them on a journey, the serviceable obtainable market, or share of market (SOM), will shrink under a pure PLG strategy. And remember, even the number of prospects who are looking is shrinking:

• There are fewer active buyers in the current economic conditions, with budgets slashed and headcounts frozen.
• Competition in the technology space is heating up too. Every vendor is trying to grow their slice of the pie but winning less with the same (or even greater) levels of spend.

This environment is precisely where businesses need to rely on a strong sales development function, aligned with marketing, to cut through the noise and create real growth. And according to our own research, the average win-rate when a salesperson shifts a prospect into the ‘looking’ zone is 1:3. This is particularly significant when you consider that the win-rate when a prospect is already looking to buy is 1:20.

The growth-strategy spectrum

When it comes to product-led growth and sales-led growth, there may be merits to both strategies, but they are not the only two approaches available to enterprise software companies. In fact, both SLG and PLG actually exist on a spectrum of growth strategies, and very rarely should a company rely on just one. PLG or low-touch sales strategies work well if you have a mid-market or mature business play and you’re focused on volume over value, while SLG is more relevant for high-touch and complex sales into named accounts and large enterprises. But some of the most successful enterprise software companies have employed different elements of the spectrum at different times:

“The most successful PLG companies – Mongo, Splunk, Databricks, Snowflake, etc. – all had to combine a PLG strategy with an SLG strategy. It’s two gears, not one.”

Colin Ferguson, former sales leader at Splunk, DataStax, and OutSystems

The hidden cost of PLG

When considering the merits of pure PLG, it’s important to consider what’s often referred to as the hidden cost of product-led growth: marketing spend. In the PLG model, marketing plays a critical role in several key areas:

• Managing distribution channels
• Driving product awareness and traffic to websites
• Designing and operating the customer buying journey
• Customer user experience (UX)
• Driving conversion through the right calls to action (CTAs)
• Expanding awareness and ensuring retention

With everyone fighting over the ‘looking’ segment of the market, the potential for growth is greater in the ‘not looking’ segment. But if you slash your sales team, how do you achieve this growth when focusing solely on the product experience? And how much do you need to increase your marketing spend to fill the gap? Closing deals with buyers who are not actively looking – among them senior executives responsible for signing off on enterprise-wide contracts – is not only harder but it also requires highly skilled business development representatives (BDRs) and a different attitude towards salespeople.

The role of salespeople

Commentary in some quarters suggests enterprise software companies have to make a straight choice: SLG or PLG. The implication is that by opting for PLG, the salesperson’s role becomes defunct, and marketing dollars will drive growth. Yet our experience at Clarify shows that both strategies are valid and appropriate when applied correctly in the right circumstances. While some products are more suited to an overall PLG strategy, selling into enterprises still requires some level of sales involvement – especially when selling to the C-suite level – so a wholesale shift from SLG to PLG is unwise because it can be harder for customers to recognise its full value without the guidance of an experienced salesperson. Sales teams also play an important role in building customer loyalty. In fact, we would argue that salespeople are the face of an organisation and pivotal in determining a customer’s experience with a product. If customers believe in the value they receive, from a product or service, then they will become its strongest advocates – and it can be difficult to cultivate this level of customer loyalty with a PLG strategy without additional consideration and investment.

Where to invest?

In a tight market with challenging economic conditions, companies experiencing growth pain will want a quick fix and may see PLG as a silver bullet. But as we’ve noted, PLG still depends on demand generation, and if marketing and sales are not fully aligned then there’s no guarantee that the interest generated will result in a deal. In fact, SiriusDecisions (now Forrester) suggests that 98% of marketing-qualified leads (MQLs) never result in closed business. We also know that only 40% of sales and marketing teams have agreed on the definition of a qualified lead, and that 80% of MQLs generated are not pursued by sales. That’s not to say that marketing doesn’t work – far from it – but it needs to be synced with sales development to ensure there’s a robust qualification process in place. At Clarify, we’ve spent the past 20 years helping companies – and ourselves – get past this problem. We’ve moved beyond the idea of MQLs as a favourable measure of business outcomes, and this has driven us to achieve an average opportunity to revenue conversion rate of 60%, and an average ROI of 20:1 for our clients. We also have a Sales Development Innovation Council that’s constantly seeking to make efficiency gains through data, analytics and AI, and a Marketing Practice that is always looking for new ways to engage and challenge prospects. Both functions are directly connected and this overarching approach has a clear impact: for one global blue chip, we drove a 37% increase in speed to revenue and a 23% decrease in the cost of sales. For another, we increased annual contract value (ACV) six-fold. So while the decision between PLG and SLG may not be black and white, with the right expertise and approach, you can navigate the nuances and find your path to sustainable growth for your business. If you’d like to explore the spectrum of growth strategies for your enterprise software, get in touch with our Managing Director, David Meyer (DMeyer@clarifyb2b.com).