In this white paper you will learn:
Zoom. Slack. Shopify. Smartsheet. Atlassian, Wix, Zendesk, Dropbox. Every day another product-led growth company is launched.
Product-led growth companies have created hundreds of billions in market value, but what’s most interesting are their valuations. In a medium article, analyst Chris Gaertner notes that the median EV / forward Revenue multiple for PLG companies is 16.7x, as compared to a 9.0x median EV / forward Revenue multiple for all public B2B SaaS companies.
The term “product-led growth” was first coined by Blake Bartlett of OpenView Partners in 2016. Simply put, product-led growth focuses on the end-user product experience as the driver of growth all the way through the funnel. It relies on a powerful product that is no longer sold to traditional decision makers, but to the end-users themselves. These employees download free versions, test, and determine which products they want to use—senior executives are out of the loop. This freemium, bottom-up distribution is how decisions are made today. In fact, Productiv notes that only 45 percent of IT executives are confident they know how many SaaS applications are in use at their respective companies.
OpenView’s Bartlett puts it like this: “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.”
With stiff competition in PLG offerings, OpenView also believes it’s important 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. 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.”
That means users should almost instantly understand the value of your product. GC Lionetti at Accel says that this means “removing cost barriers and offering users a free tier or trial. While it comes with risks, allowing users to experience the value of your product before deciding to purchase is possibly the most powerful way to accelerate user growth and maximize the number of people who are willing to pay for your product. Dropbox is a well-established example of a company that uses its freemium model to convert paying customers from its base of hundreds of millions of free users to generate almost $2 billion in revenue annually. And regardless of whether you’re able to offer a free experience of your product, you should implement onboarding experiences that make it easy for new users to discover and engage with your most valuable features.”
So why is this so difficult for software companies? “The goal is to seek negative feedback as much as possible,” explains Alex Brodsky, Orchid Black Associate Operating Partner, “and companies aren’t always comfortable with that. Product people need to dig deep to find any friction points with the user. It must be ultra-easy to get to value.”
Equally important is simple pricing, packaging, and purchase paths. Lionetti notes “If you have a freemium or trial-based model, you’ll also have the opportunity to nudge users toward your paid offerings through paywalls and usage limits. It’s important to make sure that you aren’t preventing free users from having a positive experience on your product, but well-placed paywalls can be a massive source of upgrades. Just look at Zoom — its self-serve strategy and thoughtful enforcement of usage limits on free accounts have helped it reach over $2.6 billion in revenue in 2021 while consistently maintaining high Net Promoter scores.”
Clearly the power has shifted. End Users now have a plethora of products to choose from, so understanding value and simple pricing/packaging are essential—but it all starts with understanding exactly what the end user wants.
Tope Awotona, CEO and Founder of scheduling tool Calendly explains that “designing for end users is really understanding what they do. It definitely starts and ends with customer empathy and really understanding what your customers are looking to do.”
So how do you do that?
How to get there
Forrester analyst Alan Gonsenhauser says the first step is to prioritize buyer personas and develop a common understanding of their key pain points: “Product executives need to be confident that their products will still be positioned strongly to buyers, but framed more effectively by responding to their needs. Focusing on customer needs across product areas/business units enables more strategic thinking about emerging customer needs and growth opportunities.”
But this is not as simple as it sounds, says Lori D. Kendall, Orchid Black Operating Partner. To accomplish this, you must look at your company culture: “The problem for businesses is that we like things that reinforce our world view. Humans don’t like uncertainty. Yet, to really understand the customer desires, to build a product slightly ahead of the customer—you have to spend time in unpredictability.
“You need a culture, a growth-oriented mindset, that thrives on purpose, complexity and challenge. But we sit around in design meetings in fight/flight/freeze, trying to protect ourselves. These meetings are antagonistic, confrontational, zero sum win/lose, winner take all.
“I'm not talking about Barney,” Kendall continues, “I'm not talking some I love you and you love me kind of horseshit. I’m talking about being able to go into a room where people get me, where they understand what we’re trying to accomplish, where they listen and have the curiosity to ask more. Then I can be myself, and you can be yourself because we can let down our trash can lids and our wooden swords. Then we can get to ideas that make the customer say, this is exciting. This is new. This is cool. I want more of this. That is the prefrontal cortex, the rational brain—completely engaged with the amygdala. That’s where you have to live.”
Defensive, numbing cultures will never produce products people want. For your product to really meet the desires of the user, you have to be innovative, to get inside the user brain. It all starts there.
So traditional sales are dead?
The rise of the end user doesn’t mean the end of sales. Rather, the product teams and sales teams need to work hand in hand to craft new strategies.
In fact, the entire company needs to be involved, explains Sandhya Hegde, Unusual Ventures Partner: “The common factor, and the underlying definition, of product-led growth is a self-serve product experience. That is what helps you acquire and retain customers. Everything else is tactics that you can modify based on your customer needs. A misconception I see with product-led growth is that people think of it as something the product team needs to do. It's actually a whole company strategy. The goal is to get more hands on the product and leverage that amazing self-serve product experience.”
This is especially true when selling to enterprises, notes Stacey Epstein, Freshworks CMO: “A lot of companies are making this transition. They crack the code on small-medium businesses or a departmental sale, and now they want to go up the enterprise value chain. Selling these bigger corporate accounts is a top-down motion and what’s important is to think of it as something that you’re layering on, not something you’re doing differently.”
“In enterprises, these end users likely aren’t authorized to use a credit card,” Alex Brodsky points out, “They essentially become an influencer, making recommendations to the decision makers. One of the biggest changes we’ve seen is how open the buyers are to these recommendations.”
“So sales is not dead,” Brodsky continues, “In enterprise, you still need those closers to talk to these buyers. But they need to be armed with adoption from users within the organization—which means there can be no barrier to using. That’s how you gain credibility. That’s how you land an enterprise deal.”
How to measure success
The final ingredient is consistent measurement. Forrester’s Gonsenhauser suggests tying “KPIs (key performance indicators) and metrics measured to key transformation initiatives to drive continuous improvement. Together, the CMO and CPO should translate transformational goals and initiatives with metrics that demonstrate efficient, mutual progress toward meeting key corporate goals. Demonstrating interim wins to the organization and showing movement toward the transformation vision goes far in driving transformation progress and visibility.”
To measure your PLG effectiveness, you can leverage new metrics, including activation, which measures how quickly audiences find value in your product. OpenView partners says activation is a key metric: Your product should be:
“An equally important metric is your North Star,” says Alex Brodsky, “a lot of companies measure sign ups or revenue, but your North Star metric aligns with your specific product success—the number of times someone engages to leverage your product’s value, whatever that may be.”
Orchid Black’s conclusion
The focus on the end user offers additional benefits, as SEO, content, social, word of mouth, and referrals become much more effective. OpenView Partners notes that PLG companies acquire 50 percent of new users from organic efforts. That’s double the rate of non-PLG companies, who rely on more expensive channels such as outbound sales teams.
“Look, we don’t really have a choice,” says Lori Kendall. “Today, the end user is in charge. The careful selection of features that are mated to their needs is the difference between life and death. To get there, you have to become the end user.”
Orchid Black is a boutique advisory of former CEOs, CROs, CMOs, strategy execs, and board members. We are accomplished operators with an investor mindset and deep M&A experience.
Like an orchid, a company’s maximum value emerges from cultivating growth. Orchid Black’s unique business model not only accelerates value, but aligns our compensation with our partners’ success. We invest together, betting on a collective vision, using shared skills and expertise.
If you would like to learn more please visit Orchid.Black or contact: grow@orchid.black.
