What’s Next for Product-Led Growth? Customer-Led Growth
In the last decade, product-led growth (PLG) has proven its merits as a go-to-market model. Companies like Slack, Dropbox and Airtable have used PLG strategies to achieve record growth and traditional sales-led companies are rushing to adopt the customer-centric aspects of the PLG model. But as PLG-native companies mature, they are actively adopting the elements of traditional sales-led models too. As the lines blur, a new hybrid go-to-market strategy is forming that brings together the best of both worlds to meet buyers on their terms. We call this accommodative strategy “customer-led growth”.
The Rise of Product-led Growth
Product-led growth (PLG) is a business model that relies on the product as the primary means of acquiring customers. Great product experiences can create virality in any format, but unlike traditional direct sales models, which “push” products to customers via enterprise sales, PLG businesses use their product to “pull” users in via a low-friction, self-service model.
The origins of product-led growth as a business model have been well documented, but there are several macro drivers that are worth reiterating. First, software has never been cheaper to develop and distribute. This has invited the development of user-centric products as developers build for their own needs. Second, digital payments have become second-nature for almost all consumers, inviting self-service purchasing behavior into the enterprise. Lastly, successful consumer technology companies like Netflix and Spotify have proven that frictionless user adoption can be a winning revenue strategy in industries where scale begets success.
The broad adoption of PLG is closely tied to its track record of success. Only 6 publicly traded SaaS companies have taken less than 5 years since inception to reach $100m in ARR: Square, Dropbox, Slack, HortonWorks, Pivotal and Elastic. All except Square (a point-of-sale company) follow PLG models.
Given the success of these companies, the next question is: What makes the PLG model so effective for growth?
- Unparalleled scalability: PLG models are designed to unlock viral growth. They maximize their potential market exposure by removing barriers-to-adoption. Low, user-based prices invite individuals to buy for themselves, minimizing the sales cycle and inviting bottom-up adoption through word-of-mouth.
- Less fixed and more variable expenses: PLG products do not require full-fledged enterprise sales teams to kickoff growth. Twilio went public with ~$250M ARR and only 12 full-time sales people. Freed of the cost of investing in large sales teams, PLG companies can reallocate go-to-market expenditures towards marketing experimentation or product development.
- Accelerated time-to-value: PLG models minimize the barriers to product engagement. They leverage self-service distribution and focus on immediate value creation. A new customer can start using Zoom with 5 minutes and a credit card. By speeding client activation, PLG products invite users to “self-qualify”, weeding out unfit customers and empowering the rest.
So why isn’t every company a PLG company? While PLG has the spotlight, this model is not fit for every product nor every market. Finding the right growth model for your product is heavily dependent on product attributes and customer behavior, among other factors.
Enterprise Ain't Dead
There are three main reasons why a software business might forgo a PLG model:
- Better market and price alignment: PLG models typically are priced affordably and for individual use. However, some products should logically not be sold at low prices. Theoretically, optimal product pricing is where marginal revenue equals marginal costs. An optimal price could be high due to inelastic supply (e.g. the product is costly to produce) or inelastic demand (e.g., the product creates enough unique value to justify a high price). A good example would be an industrial automation platform. This type of product would require significant customization, but it would also create massive value and should be priced accordingly high.
- Product complexity and value alignment: PLG models typically price on a per user basis. However, some products require top-down, enterprise-wide adoption to create value. Consider an enterprise network cybersecurity platform or an ERP software system. In these cases, bottom-up, self-service models like PLG do not work well because individuals do not realize sufficient value from the product, and cannot implement the product themselves without buy-in from across the organization.
- Organizational barriers: Some customer organizations have rigid purchasing restrictions that limit PLG adoption. These companies must be met on their terms with traditional direct sales models. On the vendor side, some enterprises might be great fits to adopt PLG distribution, but they would have to revamp their organization. These companies might not be structurally equipped to restructure their salesforces to adopt PLG strategies.
Products that fall into one or multiple of the above categories typically employ an enterprise or sales-led growth model (SLG). While this more traditional model might seem in decline, it has plenty of its own merits.
First, SLG models are built on deep customer discovery. Enterprise salespeople hold open dialogue with customers about their processes and needs, inviting deeper alignment. Second, sale-led deals often target entire departments or companies at once. While this often coincides with lengthy sales cycles, it also includes large contracts with high price tags that meaningfully affect the growth curve. Lastly, enterprise models are often enhanced by white-glove support services, compliance services and performance guarantees, all of which reduce the risk of adoption for the customer and add stickiness to the relationship.
The Hybrid Go-To-Market Model: Customer-Led Growth
We believe the most successful companies will adopt the best of both worlds. They will build multi-faceted models that meet all potential customers on their terms, by incorporating elements of both PLG and SLG into their go-to-market strategy. We call this accommodative strategy customer-led growth (CLG).
Consider some high-profile PLG-native examples who are adopting this CLG model. Twilio, which IPO’d in 2016 with 12 salespeople, now has over 800 salespeople. As a percentage of total employees, this figure has climbed from ~2% to 17%, and isn’t far from enterprise-first companies like Salesforce (22%). Another PLG company adopting CLG is Slack. In 2019, Slack’s massive user base was eclipsed in 2019 by Microsoft Teams--a product that launched 3 years later. In response, Slack grew its sales teams by 33%. This was 10% more than any other function (including customer support), suggesting a shift towards a more SLG model ahead of it’s ultimate sale to Salesforce.
The rationale for these changes is logical. Maturing PLG companies recognize two main challenges: (1) Self-service models depend on the natural “pull” of the market. As companies grow to large sizes (e.g. $50M+ in revenues), organic self-service growth is usually not large enough to sustain high growth expectations at massive scale. If horizontal growth cannot be achieved by product virality and low-touch efforts like marketing, organized inside sales teams are required to nudge product adoption and growth across enterprises. (2) Some customers simply do not buy in self-service formats. This might be due to an education gap, where customers require hand-holding and discovery to consider a purchase. But more likely, this is an intentional decision where companies restrict procurement to top-down decision makers in order to align with security, compliance or expense goals. To meet these challenges, PLG companies are following their customers and becoming CLG companies.
At the same time, enterprise-first or SLG companies are adopting lessons from their PLG-native competitors as they too become customer-led. SLG companies are taking advantage of the main merit of the PLG model--ease of adoption--to protect their market share. This shift has been exacerbated by macro changes introduced by the COVID-19 pandemic, which has decimated the opportunity for in-person selling.
The best example of sales-led companies becoming more customer-led is the broad implementation of bundled and freemium models. Freemium models allow SLG companies to grant free access to _limited versions _of their products in an attempt to boost customer acquisition and awareness ahead of an eventual upsell. The sheer number of SLG companies that have adopted a freemium model is staggering, but even more impressive is the diversity of the adopters. Last year, Appian Corporation, which routinely sells $100K+ enterprise deals for its low-code development platform, introduced an Appian free trial to combat PLG-native customers like Retool and Budibase. Nutanix, a pricey multi-cloud platform, launched the Nutanix Test Drive program to “build your clouds your way in a few clicks". Even Segment, which has always had a free tier and is more aptly described as a usage-based priced product, has created Segment for Startups, which offers certain qualified companies free Segment usage for up to two years!
To be clear, freemium models are not new (large SLG companies like Tableau and Domo have been utilizing this model to create product distribution and awareness for years), but the number of new adopters has proved that companies are laser focused on removing the barriers to product adoption.
Seizing the Customer-Led Opportunity: The CLG Tech Stack
The changing realities of the market have created a valuable forcing function for a new generation of go-to-market products. These products allow maturing PLG companies and adapting SLG companies to leverage the best of both models.
The CLG stack for native PLG companies
PLG-native companies need sales tools that incorporate their product-first mentality into all parts of the sales stack. The key questions for a PLG company are (1) “Who are our users?”, (2) “How can we keep more of them?” and (3) “How can we grow our user base most effectively?”
- Who are our users?: Knowing your customer is critical to building successful PLG-products. The actions of a user must be collected, interpreted and prioritized in order to drive product improvement and drive alignment between what a user does and what they would like to do. Traditional analytics tools have been excellent toolkits for deep analysis, but they often are overpriced and underused. A new category of product analytics platforms are taking the extra step to make insights automated and actionable. We refer to this category as last-mile-analytics because they minimize the expertise needed to inform product development and go-to-market decisions. Companies building the future of Well-Understood Users:Fullstory, June, PostHog, Snowplow
- How can we improve experiences and reduce churn?: Self-service is a big advantage for PLG businesses. While this model lowers the barriers to try products and acquire users, it also lowers the barrier to churn. In order for PLG companies to be successful, they need to retain their users long enough to make them meaningfully profitable. In this new world, metrics like Average Customer Lifetime and Net Revenue Retention become increasingly important to assess the health of PLG companies. A scalable method to reduce churn is better customer onboarding. The best products in this category take an active approach to guide users towards optimal outcomes without human interactions. These customer onboarding and product adoption platforms enable interactive product walkthroughs and create proactive assistance to ensure deeper customer success. Companies building the future of Stickier User Adoption: Appcues, Apty, Chameleon, Simpo, UserPilot, Userlane
- How can we upsell most effectively? Traditional sales products like customer relationship managers (CRMs) were designed for direct sales models. They focus on optimizing interactions with vetted marketing qualified leads (MQLs). In a product-first world, leads qualify themselves! Most PLG organizations are not focused on initial acquisition, but rather on horizontal expansion within organizations. Here product usage data (e.g. frequency of use or depth of use) reigns supreme, but most CRMs lack this functionality, leaving PLG companies to build their own tools. (I built one of these tools myself, and it was a painful undertaking.) A new group of products have risen to meet this growing need. These PLG-native CRMs sit atop data warehouses and leverage reverse ETL logic to access customer data. As customer-level expansion continues to signal success, this new product category could replace legacy CRM systems for PLG-first sales teams. Companies building the future of PLG-native CRMs: Correlated Labs, Endgame, HeadsUp (645 Investment). To read up more on the product-led growth CRM, check out this blog post on the topic.
The CLG stack for native enterprise companies
Enterprise-first companies are hungry for products that can remove the friction associated with their direct SLG models. They want to drive customer-product alignment ahead of purchases. To meet these needs they need to answer key questions like: (1) “How can we create frictionless experiences?”, (2) “How can we improve our product-market fit ahead of the close?” and (3) “How can we shorten our sales cycles and boost conversions?”
- How can we create frictionless product experiences behind a paywall? Sitting behind a paywall, most enterprise-first companies rely on product demos to bring their products to life. These demos are typically generic and suck up a massive amount of sales engineering time. Customers expect better. PLG products have taught customers to expect hands-on access. A new generation of product demo software is enabling go-to-market teams to build high fidelity, scalable walkthroughs that can be personalized without engineering intervention. Used correctly, these platforms can deliver the frictionless experience that customers crave and can provide intelligence back to sales teams. Another innovative approach to reducing friction is creating test environments for all software vendors. These platforms are focusing on enabling quick comparisons across major vendors, lowering acquisition costs and improving the user experience. Companies building the future of Frictionless Buyer Experience: Demostack, Navattic (645 Investment), Reprise
- How can we reinforce our product-market fit? Top companies have impressive feedback loops to capture the needs of their customers and integrate them into product development. But for most companies, product feedback is hard to collect and rarely unlocked for product teams. A new set of platforms are finally rising to meet these challenges. These platforms are laser focused on capturing product gaps and showcasing insights to accelerate deeper product-market fit. Companies building the future of Customer-Product Alignment: Parlor, Pendo, Vivun
- How can we improve our existing sales teams?: Any enterprise sales veteran knows small, repeatable improvements to a sales motion can translate into exponential top-line returns. As companies scale their go-to-market organizations, one of the biggest challenges is driving efficiency across new hires to improve key metrics like Average Sales Cycles or Conversion Rates. But companies are using more platforms to run single workflows than ever before. And remote environments restrict on-the-job learning and mentorship. In response, a new wave of platforms are optimizing the performance of sales teams by disseminating best practices and automating repetitive tasks. These process intelligence platforms mostly attempt to upskill and improve junior staff like SDRs/BDRs, but they also create critical visibility for managers, allowing them to make data-driven decisions to reach their organizational goals. Companies building the future of Upskilling & Efficiency: Dooly, Gong, Recapped, Spekit, Tango
Our Predictions for Customer-Led Growth
As product-led and sales-led companies mature and adapt user-centric CLG models, the differences between them will continue to disappear. The go-to-market model of the future will be a hybrid model that is focused on maximizing the chances of success for any unique user. Each customer will be met on their terms, not force fed a one-size-fits-all model. The trailblazing companies of tomorrow will start to implement all available strategies as early as possible to meet these evolving needs. They will measure, track and adapt continuously, and as their customers evolve, so will they. In this new world, the products that enable this hybrid CLG model will thrive.
This journey is still unfolding, but we are excited to back new platforms that push this vision forward. If you are building, buying, investing, or even just pondering in these areas, please reach out to me at vgattani(at)645ventures.com. I look forward to learning from you.
Huge thank you to all the founders, customers and operators that have lent their time and expertise to this post. Special (alphabetical) shout out to: Alex Bilmes, Butler Raines, Chris Hoyle, Dylan Flye, Earl Lee, Enzo Avigo, Ken Babcock, Mark Fershteyn, Matt Volm, Max Altschuler, Momo Ong, Naz Irani, Neil McLean, Randy Frank, Sam Senior, Tim Geisenheimer for their insights. An additional thank you to the 645 Team for their proofreads and suggestions.