As the Managing Partner of MGV, Marc Schröder is focused on working with world-class tech entrepreneurs and establishing the MGV legacy.
When it comes to scaling a startup, founders have to make many decisions about how to allocate resources, and one of the key decisions they have to make is between product-led growth and sales-led growth. But before choosing one, it’s vital to take into account a number of considerations since both strategies have their advantages and disadvantages.
Product-Led Versus Sales-Led Growth
Product-led growth is a strategy that focuses on creating something that is so good, simple to use and easy to sell that it drives growth through word-of-mouth marketing and viral adoption. This approach requires the product to have a strong value proposition and to be able to deliver on its promises.
It also requires a high degree of customer satisfaction and loyalty, for satisfied customers are more likely to recommend the product to others. Product-led growth is often associated with freemium models, where a free version of the product is used to entice users to upgrade to a paid version.
I’ve seen that this approach tends to be favored by technical founders, but it comes with inherent risks. This path can be more difficult for early-stage startups with high annual recurring revenue (ARR) expectations from investors. Investors may have to carry a startup for seven or more years before there’s enough product moment to lead with this growth strategy.
On the other hand, I’ve noticed that many non-technical founders tend to favor sales-led growth, a strategy that focuses on sales and marketing efforts to drive growth. This approach requires a strong founder who can lead and train a scalable sales team that can effectively sell the product to potential customers.
It also requires a professional sales funnel and a scalable process aimed at a well-defined target market with a clear understanding of the customer’s pain points and needs so that the product becomes “must have” instead of “nice to have.” Sales-led growth is often associated with enterprise software companies where a high-touch sales process is required to close deals.
Factors In Choosing
Here are some factors that founders should consider when choosing between product-led growth and sales-led growth.
1. Type Of Product Or Service
The type of product or service that a startup offers can heavily influence which growth strategy is best suited for its success. For example, products that have a high potential for word-of-mouth marketing, such as social media apps or consumer products, may be better suited for product-led growth.
Meanwhile, complex enterprise software products or B2B services that require a lot of education and hand-holding may require a sales-led growth approach. There are exceptions to this rule, but I find that there are not many.
2. Customer Acquisition Cost
One of the biggest differences between product-led growth and sales-led growth is the cost of customer acquisition. Product-led growth can be cheaper in the long run as it relies on free, paid and viral marketing to drive growth.
On the other hand, sales-led growth requires a significant investment in sales and marketing efforts, which can be expensive. Founders should consider their budget and how much they can afford to spend on customer acquisition when choosing between these two strategies.
3. Customer Lifetime Value
Customer lifetime value (CLV) is the amount of revenue that a customer is expected to generate over the course of their relationship with the company. If a product has a low CLV, it may not be worth investing in a sales-led growth strategy as the cost of customer acquisition may outweigh the potential revenue.
On the other hand, if a product has a high CLV, it may be worth investing in a sales-led growth strategy, as the potential revenue can justify the investment.
4. Time To Market
Time to market is another important factor to consider when deciding between product-led growth and sales-led growth. Product-led growth can take longer to gain traction as it relies on viral marketing and word-of-mouth, which can be unpredictable.
Sales-led growth, on the other hand, can produce faster results as it relies on a well-defined sales process to close deals. Founders should consider their timeline for growth and whether they need to see results quickly when choosing between these two strategies.
5. Competition
The level of competition in the market can heavily influence which growth strategy is best suited for a startup’s success. If there is a lot of competition, a sales-led growth strategy may be necessary to gain market share quickly.
On the other hand, if there is little competition, a product-led growth strategy may be more effective as the product can stand out and gain traction through word-of-mouth.
In conclusion, choosing between product-led and sales-led growth comes down to the key consideration of whether enough product market fit has been found for you to dedicate resources away from continued product development in favor of marketing and sales.
If moderate traction has been found, then it may make sense to continue product development using the knowledge earned in the market to create something that has better go-to-market potential and would derive more value from later marketing and sales pushes.
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