Product-led growth, explained
Companies with a PLG strategy—think Slack, Calendly, and Dropbox—are able to grow faster and more efficiently by leveraging their products to create a pipeline of active users who are then converted into paying customers.
Although it’s rightfully associated with viral, freemium, bottom-up distribution, product-led growth is more than a simple go-to-market formula. Any company—even those selling to large enterprises or operating in niche vertical markets—can adopt PLG principles to improve user experiences and increase go-to-market efficiency.
And they should: Product-led growth isn’t going away any time soon.
The center of power has shifted from the buyer to the end user. And the consumerization of software means that end users now demand better experiences from the tools they use.
In order to succeed in the current End User Era (more on that below), software companies must rise to meet the demands of the market—and that means building a product for end users and then distributing that product directly to those same end users.
A brief history of product-led growth
It’s hard to fathom now, but there was a time when adopting new software could take months, quarters, or even years.
Now, software shows up to the office all on its own, introduced by individual users who champion its wider use. People are finding, downloading, and adopting products without any directive from their bosses. In fact, end users are the ones telling their bosses which software to buy.
We’re at an inflection point. The software market is continually evolving, and we’re witnessing the rise of the end user. Here’s the harsh truth: Software companies must adapt and embrace the end user if they want to remain relevant.
This market shift may feel huge—and it certainly has huge implications for the way companies do business—but it’s not exactly revolutionary. The software industry has been moving toward the end user for some time, and smart companies are already adapting to keep up.
So, how did we get here?
The CIO Era: 1980s – 1990s
Back in the 80s and 90s, software was something you installed from an actual, physical box. Massive, monolithic on-premise software programs were expensive to build and buy—think 6- to 7-figure CAPEX purchases.
“Sales-led growth” was driven by field sales reps who schmoozed with the buyer (the CIO) over dinner and on the golf course. The key decision-making criteria of this era was simple IT compatibility.
The Exec Era: 2000s
In the early 2000s, Salesforce and others disrupted the old way of doing things and drove software out of the data center and into the cloud. On-prem became on-demand, and development costs plummeted.
Outbound sales in the early 2000s and marketing-led sales in the late 2000s targeted a new buyer: the non-technical executive. Execs looked at criteria like key performance indicators (KPIs) and return on investment (ROI) to evaluate how well a given piece of software would help their team achieve its goals.
This era brought us “marketing-led growth” as a distribution model, along with fun new terms like marketing qualified lead (MQL) and sales development representative (SDR). Inbound marketing fueled high-velocity inside sales, and we all jumped on the treadmill of chasing demo after demo, gong after gong.
The Exec Era should feel familiar. This is what the VCs and SaaS talking heads are still droning on about online, on stage and in the boardroom, even though it’s rapidly declining in relevance as software evolution continues at a breakneck pace.
The End User Era: 2010s and beyond
We now find ourselves in the End User Era.
Infrastructure is far more elastic and scalable than ever before. And APIs and modular tools mean that developers no longer need to hard-code every program from scratch.
The efficiency gains passed along to customers mean that it’s cheaper than ever (usually free) to try out a new product. Thousands of shiny new products are just a few clicks or taps away. The affordability and accessibility of software has fully democratized purchasing down to the end user.
For these users, the primary decision-making criteria is not “how will this product help the business’s bottom line?” but “how will this product help me in my day-to-day?”
Attracting and converting a large number of individual end users requires a scalable, bottom-up distribution model—one that leverages the user experience to empower end users to find, evaluate, and adopt the product on their own.
This is what OpenView’s Blake Bartlett first termed “product-led growth” in 2016—and it’s the secret behind the success of End User Era companies like Atlassian, LogMeIn, Wix, Zendesk, and Slack.
As Blake explains in no uncertain terms:
“There is an inexorable march toward the End User Era that simply can’t be stopped. As a software company, you can’t opt out of this secular shift. It’s pretty damn obvious that you wouldn’t build an on-prem product geared for the CIO Era. While you can still get away with building your business for the Exec Era, that wave has already crested and its days are numbered.
The End User Era is here. Product-led growth is how you thrive in it.”
The business benefits of PLG
An end-user focused growth model isn’t just good for end users; it’s also good for business.
Today, there are 21 large public companies with a PLG model—including all of the top IPOs in 2019. That number continues to rise as more PLG companies IPO each year.
What’s more, PLG companies perform better than their peers post-IPO. That’s because product-led businesses grow faster at scale.
While growth may be comparatively slow in the early days, our data suggests that once PLG companies hit the $10M ARR mark, they tend to scale faster than their peers. Why? Product-led growth companies aren’t artificially constrained by labor-intensive lead generation, sales, and customer success processes—meaning they can stay in hyper-growth mode at scale. They can grow more efficiently as well, boasting a lower-than-average CAC payback.
No wonder, then, that the median enterprise value (EV) of PLG companies is 2X higher than the public SaaS index as a whole.
To date, PLG has created more than $208B of market value—and we’re still seeing exponential growth.
The 3 pillars of product-led growth
Pillar 1: Design for the end user
End users are now in the driver’s seat. Unlike organizations that think in terms of formal ROI, end users are people. And people want to solve the problem they have right now. As Tope Awotona, CEO and Founder of scheduling tool Calendly put it: “Designing for end users is really understanding what they do—and it’s also truly understanding who you serve.” In other words, designing for end users means putting the needs of real people first, listening to their problems—and committing to make consistent improvements to your product to solve those problems more effectively.
Pillar 2: Deliver value before capturing value
Good relationships involve give and take. You need to give your users something of value before you can expect value in return. This is why product-led companies prioritize a short time to value (TTV). A common application of this concept is to allow users to access some or all of the product before they need to pay, often through a self-serve free trial, freemium model, or open-source model. But a delayed paywall does not inherently deliver value.
Something else needs to happen between when a user signs up for your product and when they enter their credit card information. Namely, users must realize your product’s value for themselves.
In order for that to happen, you need to either solve the user’s problem in that short space of time, or get them to the critical “aha” moment wherein the proverbial light bulb goes off and the user understands exactly how your software will improve their day-to-day life.
This involves not only creating features and functionality that embody that value, but also removing things that distract from or create barriers to reaching the core value.
- For products that can be adopted through a purely self-serve experience, that means keeping the initial product experience simple.
- For products that require human touchpoints, the way to deliver value before capturing it is to put customer success before sales in the user journey.
- For products where the creation of value for the end user requires upfront investment of that user’s time—such as in infrastructure software and API-driven developer tools—investing in rich documentation and enabling technologies can help customer success scale to meet the demands of being at the front of the funnel.
Whether you have a low-touch or high-touch business model, the principle of reducing all potential barriers to users solving an immediate problem is a cornerstone of building a successful PLG business.
Pillar 3: Invest in the product with go-to-market intent
The upfront costs of creating software is typically higher than the costs of delivering professional services—to a first customer, that is.
After that, the marginal cost to deliver the same value to a second customer is near zero. That can make the upfront investment highly profitable in the long term.
The same is true for bringing a product to market. The marginal cost of distributing software, enabling users and customers, and capturing value using software is dramatically less than doing the same with professional services.
PLG companies apply this insight to their go-to-market strategy by investing in the product with the intent of driving acquisition, conversion, and expansion. They do this by:
- Investing in robust product data that allows teams to track, measure, and analyze user behavior.
- Building out a growth function that is responsible for ensuring the product enhances its own distribution, enablement and ability to capture value.
- Running go-to-market experiments that lead to incremental improvements to the user journey.
Examples of PLG companies
So, what does a PLG company look like, exactly? There’s no cookie cutter answer. The four companies below are all decidedly product led—but each one has grown and flourished in its own way.
Datadog is a monitoring platform for cloud-scale applications, and is beloved by the developers they serve.When we led their Series B back in 2014, we did so for a few key reasons:
- They solved a pain point nearly universal among developers.
- They delivered value to customers without any friction.
- They grew rapidly inside an account after the initial adoption.
We’ve been fortunate to be Datadog’s partners as they’ve rapidly scaled, launched major new product lines, went public in 2019, hit a $25 billion market cap and continue to exceed expectations as a public company. Today they’re worth more than Slack.
They are also a shining example of how product led adoption can scale to the enterprise.
In an episode of OpenView’s BUILD podcast, Datadog’s longtime VP of Marketing Alex Rosemblat shared that the company’s high revenue comes from a two-pronged approach to distribution:
“We sell to the executive buyer level. At some point, they’re going to have to approve the purchase of a large contract. But at our roots, we’ve always tried to go in at the grassroots.”
Calendly is a meeting scheduling tool that makes it easy for people across and within organizations to find mutually agreeable meeting times.
Calendly is a truly viral product. Every time someone sends an invite via the app, they are also automatically promoting the product and starting a viral loop. There are almost no barriers to entry and—here’s the key—because the product solves a nearly universal problem, it gets adopted quickly among invitees.
According to their VP of Product and Design Oji Udezue:
“There may be all kinds of complex strategies and tactics rolled up under PLG: good product-market fit, viral loops and more; but at the end of the day it all boils down to one simple core idea: Solve your customer’s problems.”
Founded in 2012, Airtable is currently worth more than $1 billion, with customers up and down the Fortune 1000 list.
The spreadsheet-database hybrid is now found in offices worldwide. But in the beginning, many of Airtable’s customers were individuals looking for a better way to organize personal projects—everything from wedding plans to wine collections.
That trajectory was intentional: Airtable was built as a self-serve product that could be adopted from the bottom up. According to the company’s founder and CEO Howie Liu:
“It was table stakes for us to make this product actually good enough and easy enough to use—yet powerful enough to convince end users themselves to invest not just the money but, more importantly, the time and behavioral change effort to go and build on Airtable.”
That philosophy is reflected in Airtable’s current go-to-market approach, which puts customer success before (consultative) sales in the buyer journey. Liat Bycel, VP of Customer Engagement explains:
“It’s about making sure that we’re decreasing the time to value that customers get when experiencing the product for the first time.”
Of course, no list of product-led growth companies would be complete without the paragon of PLG, Slack.
Founded in 2009, the team collaboration platform is now a true household name boasting over 10 million daily users. And who can forget Slack’s eye-watering $23 billion valuation when they IPO-ed in 2019?
As Slack stated in their S-1 filing: “Many organizations adopt Slack initially as part of our self-service go-to-market approach. Organic growth is generated as users realize the benefits of Slack.”
The secret to Slack’s success lies in their thoughtful understanding of those benefits. The company understands they aren’t just selling software—they’re selling a more productive, streamlined way for team members to communicate with one another.
As OpenView’s Entrepreneur in Residence, Natalie Diggins, explains:
The mechanism for delivering value may involve starting off by romancing users with a free trial. It may upsell existing users by promoting a version with more robust features. Or it may automate elements of the customer success function. But at its core, Slack is about delivering a positive user experience, and that is the foundation on which all of its PLG capabilities are built.
There’s a good chance you’re using the wrong metrics to measure product-led growth. That’s because some of the metrics typically used to measure SaaS businesses just aren’t well-suited to this new go-to-market motion. For example:
- Growth Rates. For typical SaaS companies, high growth is key. But our data suggests that PLG businesses often have lower growth rates than their peers until they reach the $10M ARR mark—after which the inverse is true. Metrics that emphasize growth rate too early could actually detract from the promising high-growth engines at the heart of a PLG business.
- CAC Payback. Public PLG businesses spend 44% more than their SaaS peers on R&D costs (product and engineering). That is partially offset by lower sales and marketing spend, but it’s nearly impossible to understand the ROI of spend on the product itself.
- LTV/CAC. This classic SaaS metric doesn’t work for PLG companies, mainly because it doesn’t take into account some of the core pillars that make PLG businesses attractive: low churn and the chance for revenue expansion from accounts.
- Logo Retention. How do you measure logo retention in a bottom-up adoption model in which you may have there are dozens of individual users from an organization, each with their own account?
How to measure product-led growth
The Natural Rate of Growth (NRG) succeeds where traditional SaaS metrics fall short. It allows PLG companies to pinpoint the percentage of their recurring revenue that comes from organic channels and starts with the product.
You can think of this metric as a measurement of how fast a company grows without even trying—before layering on incremental investments in sales and marketing.
The formula looks like this:
Natural Rate of Growth = 100 x Annual Growth Rate x Organic Signups (%) x ARR from Products (%)
What’s great about the Natural Rate of Growth is that it:
- Provides companies with a strong indicator of future revenue.
- Can be tracked from the early days of monetization all the way through to IPO.
- Applies to all software companies, no matter where they are in PLG maturity.
- Is easily measurable without sophisticated processes or tooling.
- Can identify whether a business can drive efficient growth via the product itself.
Natural Rate of Growth benchmarks
Companies with an extremely strong product-led motion—such as Zoom, Slack, and Expensify—typically demonstrate a high Natural Rate of Growth. These PLG companies started out by optimizing their self-service motion and layered on incremental sales and marketing later on.
Other organizations like HubSpot have made a conscious effort to become less sales-led can expect to improve their NRG over time. In fact, HubSpot ditched their marketing funnel in 2020 and adopted a new concept called the Flywheel that helps customers get to that “aha” moment even earlier.
How to become product-led
Most companies—especially those with roots in the CIO and exec eras—are not product-led. Achieving product-led growth is a journey.
While companies founded on PLG principles certainly have an advantage, any software company can adopt the core tenets of product-led growth to improve user experiences and increase go-to-market efficiency.
It is indeed possible for non-PLG companies to become product-led, if certain conditions are met.
Is a PLG strategy right for your product?
We have identified eight primary characteristics of successful product-led growth companies. In order to make the transition to a PLG strategy, at least some of these things must be true:
1. The product-market conditions are right. Product-led growth strategies succeed when:
- The marginal costs per each user are low
- Users have direct buying power or have influence over buying decisions
- Existing solutions do not fully meet users’ needs.
2. Your product offers a uniquely valuable solution that can be personalized to the individual user to help them achieve their daily tasks more efficiently.
3. The user is able to realize significant, ongoing value quickly and easily with little to no help from company personnel. This is achieved by having a product that is easy to understand, evaluate, adopt, and integrate into existing workflows.
4. Your product delivers real value before the paywall (demo accounts and “dummy data” do not fulfill this criteria), and pricing scales in tandem with value delivered as usage gradually increases.
5. Your product has features and functionalities that allow it to serve as an acquisition channel for marketing, selling, and onboarding new users. This includes:
- A strong viral potential that incentivizes and makes it easy for a user to invite others.
- The ability to monitor and adapt to user behavior to provide additional value.
- Automatic, omnichannel communication through external channels like email, push, and SMS that bring users back into the product.
6. Your marketing funnels lead to product engagement, rather than engagement with a sales team.
7. Your product has a built-in network effect—the more people using the product in a network or company, the more valuable it becomes. If it’s a platform, the more services a user connects to it, the stronger your product’s value.
8. Within your customers’ companies, there are product champions who drive internal adoption of your product and facilitate expansion.
If your company checks off a plurality of these eight characteristics, you can and should be using a product-led growth strategy to grow product adoption. Yet even if all the criteria are met, the transition to PLG doesn’t happen overnight.
And, in fact, it shouldn’t. You have to create a space for product-led growth. Going all-in all at once just won’t work.
When we asked him what it takes for an organization to become product-led, HubSpot CMO Kipp Bodnar had this to say:
“[If you try to do everything all at once,] the antibodies are going to reject it. Everybody in your organization is used to doing things a different way. So you have to carve it out. Put dedicated people on it until it’s big enough that the antibodies can’t reject it and force it out, and it becomes your business. And then you merge everything back together.”
A New Era for PLG: Introducing the Age of Connected Work
As one of the founding members of the PLG community, we see it as our responsibility to share insights and lessons learned for PLG entrepreneurs all over the world. We’ve noticed a number of subtle, but crucial shifts in the way leading PLG entrepreneurs are building their businesses and today are summarizing those shifts in OpenView’s 11 Principles for PLG. Individually, each might not raise an eyebrow. Together, we believe these 11 principles constitute a new era for PLG: the Age of Connected Work.
Want to learn even more?
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