As I wrote before, the idea and mechanics of product-led growth (PLG) are not new, however, thanks to a rise in successful PLG companies, PLG seems to be gaining steam as investors look to put their dollars to work.
So why are these product-led companies becoming fashionable again and why are investors looking to capitalize on these efficient money-making machines? Let’s break down three reasons:
The “Consumerization” of SaaS
Recently, the Product-led Growth Collective published a report on the State of Product-led Growth. In that report, they cited 75% of B2B buyers would rather buy through an app or a website vs a traditional salesperson. There is a myriad of reasons behind this, but one of the main reasons is that consumer habits are changing. If you think about how many digital subscriptions buyers have, from Hulu to Spotify to even the way they buy clothes via services like Trunk Club, people are becoming more adept at online purchasing. B2B SaaS companies were built with the idea that they could build a half-baked product, sell it to the enterprise, lock them into a long contract, and build on-demand. However, as the tides have turned to really great consumer experiences, we, as B2B buyers, have started to expect the same elegance in our business apps. SaaS companies are realizing that you don’t only need enterprise functionality, you need an app that works and feels like Uber. Users are consistently demanding that software works, has an easy implementation processes, and can be used by the most non-technical users in an organization.
One of the key tenets of PLG companies is that they have an inherent bias towards viral growth. What we normally think about from a B2C perspective as it relates to viral growth does not mean the same thing in B2B. This doesn’t mean that B2B companies should go hire $50,000 Instagram influencers. What we are talking about in terms of virality in B2B, is the idea that your product can be shared around your organization easily. The product should be so needed, that large swaths of your org can adopt it.
There are a number of ways to do this. Slack, is obviously the poster-child for this. A dev team may have started using it, then suddenly marketing caught on and wanted to use it, and then design saw it…etc. This is the most fundamental way, but other companies like the PLG stalwart Mailchimp used this strategy to grow to be a $600+ Million email behemoth. They include a nice little Mailchimp logo at the bottom of their free emails that prompt users to explore how they too could create lovely looking emails. The viral effect of people sending 100’s or 1,000’s of emails to their customers was an obvious viral component to their growth. While “viral” does not always mean “free”, PLG companies have realized that their costs to acquire new users drastically reduce when they are able to share the product with other people.
Great Unit Economics
The same report put out by the PLG Collective, noted that Customer Acquisition Costs (CAC) for PLG companies was in the range of 6-12 months payback. Consider that to their other B2B counterparts, which is in the range of 12-18 months or longer! Why is that? Well, virality is a big component, however, it’s not the only reason. With traditional sales-led SaaS, you are often hunting larger “whales” that require some heavy lifting.
Typically you will have demand gen team that is responsible for creating marketing collateral, an SDR team that is used to “qualify” leads, then BDR’s that are demoing your product, taking clients to dinners, hopping on planes to meet with teams of decision-makers all hoping that a deal can close in 6-12 months. In PLG companies, you can often cut out a lot of the traditional sales process, by creating software that makes it easy for customers to onboard, trial and potentially convert with a swipe of their credit card. PLG does not equal no sales, however, the long sales process, the staffed-up SDR and BDR teams are not required to close deals. With PLG you can better utilize a narrowly-focused sales team to close larger deals while still closing a large volume of smaller deals with fewer people and in less time.
While growing a PLG company takes a lot of focus, intentional, customer-focused research, and a lot of grit, these companies can be scaleable, profitable, and long-standing, making them very interesting to investors.
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