Chip Royce, Flywheel Advisors – May 24, 2023
There’s a sales and marketing concept for SaaS companies that might create a once-in-a-lifetime unicorn, but more likely, leaves (too) many dead companies in its wake.
It’s called “Product-Led” growth or PLG.
In this newsletter, I’ll cover:
- Everything you need to know about PLG
- Suggest an alternative (Customer-Led Growth) that’s better suited for today’s economy and may provide better outcomes for your SaaS company and your customers.
What Is Product-Led Growth?
Whew – that’s a pretty big word salad.
Let me try to break this down into simpler terms for you.
A PLG company utilizes the following business model:
- offers their SaaS product for free, initially
- the customer signs up online often without the assistance of a salesperson
- offered the services for a limited timeframe or with limited features
- customers must convert to the paid version for full access (this will be some %, let’s assume 1%)
- the remaining % (again, assuming 99%), the company will attempt to figure out why (was it marketing, sales, price, product, support, etc…)
- depending on the nature of the SaaS product, the company may have to also convert renewals at some % rate each renewal cycle
- the company continues to iterate, either increasing the volume of leads at the base conversion rate or finding ways to increase the conversion rate
I’ve oversimplified the process in order to provide a 5-minute newsletter for my readers, and will likely be flamed by detractors. Let’s assume this is sufficiently accurate for the time being.
When Is Product-Led Growth An Effective Strategy?
When does this work? There are likely many scenarios where PLG is justified:
- Working Capital To Outlast Your Competition: This playbook has worked for many of the largest and most successful companies that have raised hundreds of millions of dollars, generating billions of shareholder value. These companies have gained sufficient traction to justify follow-on capital raises to fund growth
- No-Cost / Low-Cost MVP: PLG has also been beneficial for bootstrapped startups with little actual expense, allowing founders to test and validate their concept and get traction without giving up equity.
Is Product-Led Growth Over-Simplified By Its Supporters?
There are many who promote business models that are advantageous to the venture capital industry but not necessarily beneficial to the average startup founder.
Take this LinkedIn post I came across just the other day.
Is Product-led growth truly this easy?
Here are some questions I had based on 30 years of business experience:
- Do products typically sell themselves?
- Can you operate a B2B company without interacting with the customer and gathering key insights during the marketing and sales path?
- Is any technology business model, even PLG really effortless?
Industry Concerns About Product-Led Growth
If PLG works, that’s great. But what happens if the growth engine fails at one or more steps? The issues many see with PLG are:
- PLG requires significant capital to buy time to iterate and validate a working business model
- Giving away a free product isn’t validation. Customers purchasing the product is validation.
- There’s a significant lack of customer focus, all emphasis is on the product.
- The sales process is transactional, not relationship in nature, and avoids the hard questions where value for the company is created.
- Hard to capture feedback from customers who don’t pay (and capturing usage patterns doesn’t speak to what you don’t capture)
There’s An Alternative – Customer-Driven Growth
Customer-Driven Growth returns to a more traditional business model for SaaS:
- The customer interacts with a salesperson to place an order
- No free ride, customer must pay to use the product (although the salesperson may conduct a pilot or test with the customer using the full features)
- As with PLG, customers will have to renew at some point in the future, with the benefit of an existing sales relationship in place
Customer-Driven Growth Works
In today’s capital-constrained environment, PLG companies may have to pivot to Customer-Driven growth.
However, if starting a new company, you may want to consider Customer-Driven Growth anyway. Here’s why:
- The friction of customers paying is healthy. Your company is gaining valuable information from the start and not pretending that you have traction based on the false hope gained by free signups.
- Relationship sales is a superpower. Your company’s ability to forge relationships with your customers, with help you gather important feedback that helps improve all facets of your company’s operations and should ensure strong license renewals.
- You can still scale fast. However, you will be more capital efficient and likely more responsible in how you use raise and use capital.
- Customer Aware. By looking at your business as a group of customers, not some amorphous funnel, you’ll be aware of customer needs and trends and better prepared to adapt to changing business conditions.
Sure, We’d All Like To Be Founders of a SaaS Unicorn
Few people on this earth would pass up the opportunity to launch, grow and exit a multi-billion dollar software company.
If we’re being pragmatic, we want to create the best odds for success.
The rational person would say that the Customer-Driven Growth model has better odds to delight the customer.
And after all, where does your company’s revenue come from? Investors? or the Customer?
See you again next week!
Whenever you’re ready, there are 3 ways I can help:
1) Schedule 15 minutes to chat about your business, challenges, and growth opportunities HERE.
2) Sign up (if you haven’t already) for this weekly newsletter HERE.
3) Read back issues of this newsletter for more insights into how to fix your tech business and (re)ignite growth HERE.