What is Product Led Growth (PLG)?
The simplest definition of product-led growth (PLG) is the explosive growth that a software product experiences when it removes all friction from the process of a user signing up, using the product, gaining value, sharing it with friends, and ultimately paying for a premium plan. The reason PLG has everyone excited is due to its pivotal role in the success stories of some of the most successful SaaS products of recent times - think Canva, Figma, Notion, Slack, Calendly, and Dropbox.
However, a deeper look into PLG highlights a fundamentally radical product-building philosophy. One that casts the product itself as the protagonist in each part of the user's journey. Whether it be creating top-of-the-funnel demand through user-driven virality, guiding users through their activation and engagement journeys, or taking the first steps in an assisted sale, the product is the lead actor, and salespeople, marketers, and engineers are the supporting cast.
How software was sold before PLG
SaaS companies by and large operate on a very simple GTM funnel. On the top, are all the ‘users’. On the bottom, are all the ‘paying customers’.
The 2000s saw SaaS companies use outbound cold calling as their means of lead generation. Teams of highly paid salespeople and business development representatives would spend hours a day cold calling potential prospects in companies who (A) probably didn’t need their product and (B) had no way to build trust in the product without paying 100s of thousands of dollars to try it. The top of the funnel (ToFu) was largely limited to the Fortune-1000 companies and sales processes spanned several quarters if not years. Doesn’t sound optimal? You’re right, it wasn’t.
In come the 2010s bringing with them the rise of Google and inbound marketing. Marketing teams at SaaS companies figured that they could pay search engines to redirect traffic their way based on keywords and phrases customers were already searching for. For example, a user searching for the phrase ‘helpdesk’ would be suggested the Zendesk website. Solves for the problem (A) of intent, but not really for (B) low trust and high barrier of entry.
The rise of PLG and the freemium business model
Enter product-led growth, which is ushering in the roaring 20s of SaaS! The cost of delivering software has reduced to such an extent that companies can very profitably provide millions of users free access to their products. The user base for SaaS companies has exploded and the likes of Zoom, Github, and Postman have 10s of millions of users - comparable if not more than most consumer products like Doordash and Airbnb.
So how do these companies make money giving away products for free? The answer is ingenious in its elegance:
Not only do you get your product and customer base to create ToFu for you, but your potential customers are already active users of your product. They not only trust you but already rely on you for a significant part of their day - ask any free user of Notion, Figma, or Productboard.
Is there a why now?
The short answer - yes! There are three primary forces driving the explosion in PLG today:
- The distance between the buyer and user of the software is reducing 👩🏻💼↔👩🏻💻
- Marketing and sales are more expensive than ever before 💰
- Last but definitely not least, Covid-19 fundamentally changed how software is accessed and sold 🦠
#1: The distance between the buyer and user of the software is reducing 👩🏻💼↔👩🏻💻
Over the last 2 decades, we've seen a secular trend where the distance between the buyer and user of the software has been steadily decreasing. A decade ago, most software purchase decisions were made by CXOs.
The problem companies ran into with CXO-led purchasing was that of low adoption. A problem that sounds benign until you account for the six or seven-figure price tag for software destined to gather dust on a shelf 😰
That brings us to today. CXOs are faced with a two-pronged decision:
- telling their teams what software to use, versus
- letting teams choose their own software.
And their decisions are increasingly biasing towards the latter!
#2: Marketing and sales are more expensive than ever before 💰
The previous generation of SaaS companies was built on search engine marketing (SEM). That is, paying Google or Facebook to show your ads to relevant customer segments.
If a Google user is looking for a helpdesk software, show them Zendesk! If they’re looking for a CRM, show them Salesforce!
However, as Google and Facebook have grown from friendly neighborhood tech companies to the near oligopolistic giants they are today, so has the price they charge for their ads. Lead generation CPCs & CPMs on Facebook have increased by a mind-blowing 200-250% in the last 1 year! 🤯
These costs are running amok and aren't something young startups can build a robust and scalable business on anymore. The youngest and brightest companies of today have shunned these channels as primary channels of business. Instead, they rely on a simple to use, self serve product built-in with viral network effects to ensure that their user base and businesses grow - think Canva, Notion, Calendly, and Figma.
#3: Covid-19 fundamentally changed how software is accessed and sold 🦠
In our opinion, one of the biggest reasons for the explosion in PLG companies. 2020 started with one of the most disruptive events most businesses had seen. And for the world of SaaS that was no different. The disruption was twofold:
- Larger-than-ever demand for software, as companies of all sizes hustled to transition to a world of remote work and collaboration. Nothing summarizes this better than the following quote from Satya Nadella - "We have seen two years' worth of digital transformation in two months"
- Inability to service this demand, as a majority of SaaS companies relied on in-person sales and implementation. Covid challenged these operational assumptions. Traditional SaaS businesses had to quickly turnaround their products to being self-serve and new SaaS businesses had to ensure they were self-serve from Day 0.
A self-serve product was no longer a nice to have. It was an existential need!
PLG is here, but where is it going?
While we're convinced PLG is here to stay - its not all sunshine and daisies. Most PLG companies must go through a discovery process of the myths they were sold and the realities of the market. The most dangerous myth?
❌ Myth: PLG doesn't need sales! The product sells itself.
✅ Fact: We analyzed all PLG companies on the Cloud 100 list and 80-90% have dedicated sales teams! SMB, Mid-market, Enterprise, Strategic sales... the whole 9-yards!
It's not that these companies have turned to the dark side (sales only) and shunned product-led growth! 😅 It's just that they recognize PLG for what it is - one of the most effective levers for top-of-funnel growth but not necessarily the best lever to convert users at the bottom-of-funnel to paying customers.
The challenges going forward are plentiful. What part of the user buying journey does the product team control? What is the role of sales? When does marketing step in? And most importantly who is the arbiter between these go-to-market functions? At Toplyne, we're super excited to partner with the best PLG companies like Canva, Gather.town, InVideo and others as they take on these challenges. And we can't wait to tell you more about what we learn!