Passion for Product-Led Growth in B2B Software Companies Is Justified
Part Two of Three
This subject has generated some additional questions that will be addressed in Part Three.
In part one, we introduced the sales-led, marketing-led and product-led growth eras graphically and via a timeline, addressed end-user demands feeding the PLG dynamic, and offered twelve keys to PLG success. In this post, we deal with the benefits of PLG, provide three examples of companies using a PLG strategy, and discuss ways to measure PLG.
The passion for product-led growth (PLG) can be traced to both the success of high-profile businesses that adopted it and to the benefits inured. It is important to understand that growth may be comparatively slow in the early days of PLG adoption. However, for companies that have the requisite patience, the prominent benefits they can expect from PLG include the following:
Product sales with less friction – During the sales-led and marketing-led eras, enterprise sales required a demo and proof-of-concept (POC) which was often customized, as well as lengthy and complex technical and business due diligence exercises. PLG results in products that sell themselves into enterprises. That’s because end users were involved in specifying its requirements, design, and testing, as well as in applying the product in various use cases. By way of their prior and ongoing involvement, end users are essentially transformed into product users, advocates, influencers, financial sponsors and upgraders down the line. “Lumpiness” is significantly reduced as software vendors’ reps play more of a sales facilitator role versus “hard-nosed” salesperson.
Fast time to value (TTV) – PLG prioritizes end users’ functional requirements. The model also involves giving users access to some or all of the product’s features and functions before requiring them to pay via a self-serve free trial, a freemium or open-source software offering. This engagement model translates into value for end users in very short order and well before the software developer/vendor can expect value in return. This also means that “the power of land and expand” strategies work in this scenario more efficiently and economically.
Lower cost of customer acquisition (CAC) and higher Lifetime Value (LTV) – The costs related to the acquisition of customers will be lower under PLG because of its streamlined marketing and shortened sales cycle. There is also a “network effect” associated with the best PLG products. This means that lower marketing and sales costs are required thanks to ‘buzz’ of word-of-mouth endorsements. Adding to this momentum is the community of end users contributing to the product features, functionality and go-to-market. All these people talking about the product contribute to its overall success.
Here are three examples of – a small subset of all – companies that have successfully adopted a PLG strategy:
Airtable is a Cloud-first spreadsheet and database (aka ”spreadbase”) for personal projects and small business applications. Airtable was built as a self-serve product with a target audience of people who do not want the complexity and rigid approach of Microsoft Excel or Google-Docs/Sheets. Airtable has met with considerable customer success assigning TTV as its most important metric.
Calendly is a viral app because every time someone sends an invite via the app, they are also automatically promoting the product and starting a viral loop. The product solves a nearly universal problem: The need for an online scheduling assistant that effortlessly connects to your calendar and allows others to make appointments with you, cutting out the human in the loop (i.e., executive assistants). As a result, it is adopted quickly by new users who want to be more productive. Once the value is demonstrated by an end users’ successful trial, subsequent adoption, expansive use and evangelism, the end user is billed.
Datadog is an example of how PLG works in enterprise sales. Datadog sells to the executive buyer level but the end users are involved in product design and development, product enhancements and rollout.
Product-led growth requires some new KPIs. While some PLG metrics are borrowed directly from the SaaS business model, many are geared to end-user involvement and leveraging the data that the PLG model produces in abundance, as you will see in the following.
TTV. The duration of time between when the product trial is activated and the “Aha! moment” or activation of the subscription.
Product-Qualified Leads (PQL). Leads related to the free trial, freemium or open source software trial.
Feature Adoption Rate. The number of end-users adopting or using a feature.
Expansion Revenue. (SaaS Metric). This measures the revenue generated from existing customers through upsells, add-ons, cross-sales, etc.
Average Revenue Per User – better known as ARPU.
CAC
LTV
Customer “Logo” Retention
Natural Rate of Growth (NRG) represents the percentage of recurring revenue that comes from self-service signups and product sales. NRG = 100 x Annual Growth Rate x Organic Signups (%) x ARR from Products (%).
In the next and final part of this 3-part series on PLG, we’ll share our thoughts and recommendations on ways in which software, SaaS, and AI-led companies as well as other types of firms can adopt a PLG strategy for their organizations.