Lessons of Product-Led Growth (for non PLG companies)
Ed Arnold is a Senior Advisor at Ibbaka. See his Skill Profile on Ibbaka Talent.
Indeed it was a privilege to present at the first ProductCamp>ONLINE™ event recently. This event was hosted by a consortium of ProductCamp cities (including mine in Boston) and attended by folks across North America and beyond. It exceeded expectations and I look forward to it becoming our new annual tradition in the wider product community.
I was even more delighted to learn that many attendees thought my session What You Need to Know about Product Led Growth was worthy of their attention. So, for them and anyone else, here is the CliffNotes version of my presentation.
What is Product-Led Growth (PLG)?
Quoting from Blake Bartlett, the individual who first coined the term “product-led growth, it is:
an end user focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion and expansion source: OpenView Partners
How to tell if your company truly has PLG?
From my own deep-dive into the blogs and reports of OpenView and others, I created a checklist list of key PLG-like attributes
Pure-play SaaS products (primarily B2B market)
Sell exclusively to end-user (not other buyer stakeholders)
Low pricing, usually supported by freemium and/or low entry price
Low Average Contract Value (ACV)
No Touch/Self Service model for sales and customer success
Spends more on R&D than Sales & Marketing
So if your company checks all/most of these boxes, congratulations! You are among the hottest, fastest growth companies. High-fives for you and your team. For the rest of us, please read on.
Why is PLG Suddenly So Popular?
You can find many many blogs covering the topic of PLG from VC firms like OpenView. The reason is self-evident -- it’s been a very successful business and investment strategy. There are multiple and notable success stories including products we use every day like: Zendesk, Hubspot, Slack, Zoom, etc., etc. Revenue growth has been strong even during the pandemic - averaging almost 30% - and for companies like Zoom, several times that. Also, they have eye-popping valuation multiples of 20X revenue. Who wouldn’t want to know more about that business playbook?
Particularly when you compare those spectacular business results to what other companies experienced in 2020. Ibbaka recently conducted its own survey among digital products companies that did not check all the PLG boxes described above, by that I mean the “two-tail dog” businesses I wrote about previously. Among the findings:
Over 60% had 2020 revenue growth rates below the PLG average
Over 40% stated their 2020 growth was “below expectations” with the pandemic being a major contributing factor
In response, many of these companies were intending to invest more time and money on sales and marketing activities.
So why do PLG Companies Grow So Fast?
Again, lots have been written about that topic, but my own perspective is that PLG is simply a new twist on a classic business strategy, namely Economies of Scale. Recalling my college introductory econ course, firms that produce the highest volume of output have lower average costs than their competitors and therefore price lower, which in turn drives more volume. In other words: GROWTH!.
At the risk of dating myself, PLG reminds me of McDonalds in the early days of the fast-food industry. Back in the day, they sold 15 cent hamburgers and proudly displayed “millions sold”' on their signs. McDonald's success was fueled by their investments and focus on store operations, food supply chain, and advertising - all aimed to keep costs/prices down and create a predictable, satisfying experience so that customers return again and again.
Likewise, PLG companies invest and focus on creating instant “aha” moments in the product for end users and making their self-service model frictionless so that customers increase usage, renew and expand.
Will the Growth Last Forever?
No. All markets mature eventually. Think about how far the fast-food industry has evolved since the days of the 15 cent hamburger. What does the future hold for today’s high-flying PLG companies? Again, my perspectives are:
Business models will evolve - actually this is already happening among larger PLG companies. As they expand their end user footprint into large enterprise accounts, they inevitably need to add human sales and service touch points to keep these demanding clients satisfied. With higher ACV comes higher CAC (customer acquisition cost) and CTS (cost to serve).
Competition will intensify - high market growth always attracts new entrants. Consider the fact that in 2020 the marketing technology competitive map has over 8,000 offerings, up from 6,829 two years earlier and just 150 in 2011.
Growth rates will slow - as the technology becomes established and the majority of end users have adopted it into their workflow. Fewer “net new” end users means that growth must come either from adding new functionality or stealing end users from competitors
Valuations will decline - as markets mature, VC growth expectations for PLG will fade and then shift onto the next big thing. Already, some PLG companies have begun to lose their luster. A recent New York Times column, Silicon Valley’s meh middle provided specific examples of this happening now.
What Can We Learn from PLG Companies?
Product-Led Growth is not an all or nothing proposition. It may not even be feasible for many companies to go all in on a PLG strategy even if they wanted to. However, there are PLG best practices that every digital product leader should seriously consider, especially if they are competing with pure-play PLG rivals. For me, the key lessons are:
Seek instant gratification for end-users: Most PLG companies have either a freemium or free trial offer for end users. But it’s not simply a matter of tossing them the keys to your entire existing platform and letting them figure it out for themselves. Instead the initial experience should be designed to easily complete an important end user task and create an early “aha” moment.
Listen to (and observe) users intently: Product leaders need to be the ultimate source of truth about all things related to their end users. Collect customer data from multiple sources: interviews, surveys, user groups, etc. And don’t ignore usage statistics - track them at least monthly, if not weekly or daily..
Find and remove friction everywhere: Map the entire customer journey from the earliest marketing and sales stage through conversion, adoption, growth and into renewal/expansion. In particular, find the human bottlenecks that delays or blocks end users and replace those with self-service options, for example recorded demos and onboarding training.
Get serious about product development. PLG companies continually invest in improving their digital product experience. It is their primary focus. Product leaders must make the business case to enhance their digital products to support better end user adoption and revenue growth. Only the most worthy of products can hope to become growth leaders.
Want to Learn More?
Check out my previous article, Why Usage-Based Pricing Works.