Should SaaS companies contact as many of their users as they can in hopes of converting them from free to paid?
Best-in-class companies don’t, a new survey-based report found. According to OpenView’s third annual product benchmarks report, which the VC firm presented in a blog post, “standout PLG companies reach out to only 14% of signups on average.”
PLG stands for product-led growth, which has been exemplified by companies like Calendly and Netlify, and which OpenView defines as “a growth model where product usage drives customer acquisition, retention and expansion.” The VC firm views standout PLG companies as those that “consistently grow at or above 30% at scale, have surpassed $30 million in revenue and are household names.”
There seems to be a strong correlation between the use of the PLG model and raw growth, OpenView’s report found.
“Respondents at product-led companies, especially those with a freemium model, are over 2x more likely to be growing quickly (100%+ year-over-year revenue growth) than sales-led models.” The latter refers to the opposite of PLG, i.e., models in which new customers are brought in by sales teams.
That PLG drives growth can explain why the sales model became increasingly common among SaaS companies. That fact is reflected in OpenView’s survey sample but also more widely. Asked about Bessemer Venture Partners’ Cloud 100 index, partner Mary D’Onofrio told TechCrunch that “over the past few years, the proportion of product-led companies has increased in the Cloud 100, on both a cumulative valuation basis and count basis.”
This increase in PLG adoption happened at a time when the markets rewarded growth. But as we reported, public market data compiled by Battery Ventures shows that in the current downturn, investors have flipped their weighting of growth versus profitability. Is PLG a bad fit for these new times? Likely not, it turns out.
To understand how PLG can work out under changed market conditions, we talked to OpenView’s report authors, VP of growth Sam Richard and partner Kyle Poyar. We also collected notes from D’Onofrio and former TechCrunch editor Josh Constine, now a venture partner at SignalFire. The consensus is that now is a good time for the type of lean growth that PLG can achieve.
Growth or profit?
“Investors have forgotten all about the Rule of 40,” which states that growth rate plus profitability in percentage terms should equal 40, OpenView observed last November. How fast things change! We were reporting on the firm’s annual financial and operating benchmarks report, which showed that at the time, software companies were getting rewarded for 30% or greater top-line growth, with profitability taking a back seat.
In a matter of months, the SaaS sell-off started, multiples dropped and public market preference on profitability versus growth shifted. “Measured in revenue multiples terms, companies that meet the Rule of 40 even with modest growth are more valuable than startups that are growing quickly and fail the Rule of 40 test,” was The Exchange’s summary of a key finding from Battery Ventures’ new report, The Cloud Quarterly.
Investors have flipped their weighting of growth versus profitability
At first glance, this deprioritization of growth sounds like bad news for PLG. But it isn’t, Constine said: “In the current market, when funding is tougher to come by, VCs want to see the lean product-led growth that shows a startup doesn’t rely on burning tons of cash on a big sales team in order to grow.”
D’Onofrio concurred that PLG isn’t a bad tradeoff between growth and profitability. “A product-led strategy can also be very profitable since you can use the product itself to convert customers down a sales funnel,” she noted. Instead of spending time with users that will never convert, “your expensive sales resources are saved for product-qualified leads.”
PLG may have a significant downside, though. “It’s less predictable,” Constine said.
Facing uncertainty
OpenView’s Poyar is a firm believer in PLG. But he also knows that the model still has doubters, especially when tied to usage-based pricing. UBP is the increasingly common practice of charging for SaaS products based on actual usage by end users, rather than by seats or contracts.
“There have been some fears lately around usage-based pricing models or companies with land-and-expand motions,” Poyar told TechCrunch. The fear centers on whether these products could get cut in a downturn, as they may be “easier to turn off.”
Poyar acknowledged these concerns, but objected. First, because products that are actually being used have more value. Second, because buyers might fear commitment.
“I would turn that challenge on its head and say that customers are going to start preferring more flexible business models that allow them to manage their usage and their spend based on how their business is performing,” Poyar said, pointing to the pandemic as having already pushed in that direction.
Still, there’s an element of unpredictability from having customers able to take advantage of flexibility to reduce how much they pay, rather than being locked into contracts. And more generally, there’s less visibility regarding future expansion when the process is product-led, rather than sales-led.
“If product-led growth is an art, sales is a science,” Constine said. “Once you’ve got a sales strategy that works, you can just pour money in, grow your sales team and generate more revenue, whereas throwing more PMs or engineers at a product doesn’t necessarily make it grow faster.”
Experience helps, but it’s not always easy to find professionals who have implemented PLG before. OpenView’s Richard described this difficulty in finding talent, especially “very senior professionals well versed in building a freemium motion,” as the largest constraint for PLG.
Adopting PLG
If a company is interested in transitioning into PLG right now, Richard’s recommendation is to use internal staffers “who are putting up their hands and being interested in building a product-led motion, because it will really help people learn on the job.”
Turning inward is a common move during downturns, and companies tend to “cut anything seen as experimental or unproven,” which could affect PLG adoption, Poyar said. “For companies that haven’t had it before, it is going to be harder to make that case internally, as people are trying to just even protect their core business, which is under threat.”
Richard still has hopes that companies won’t give up on transitioning to PLG if they were already considering it. “In this year’s report, we’re seeing so much interest come from the C-suite, [more] than we ever have before.” The report, she and Poyar hope, will provide companies with benchmarks to guide them on their journey.
“Before OpenView, I was in growth myself, and I felt very lonely, because these numbers were not public and not readily available, especially in B2B software,” Richard said. She highlighted a data point from the report: That even standout PLG companies that took the survey only retained 16% of users after one month — likely because their top of funnel is much larger than at sales-led companies.
Without context, low retention “can be very much soul-crushing for a product manager or product owner,” Richard said. “I wanted to have that information out there so we can start speaking more as a community about creative ways to solve for this, as well as what are best practices in the market today.”
Best practices are more crucial than ever for PLG, Poyar said. “As we look at product-led growth becoming more normalized, the bar for being a standout PLG company has to get higher. Just offering a free trial or freemium product isn’t enough if all of your competitors have one as well.”
OpenView is now hoping that more companies will not only dabble in PLG, but follow the 11 principles as defined by the firm.
“We’ve found that the companies that follow those 11 principles are far outperforming their peers, even in this down economic market,” Poyar said.
This could be a very product-led way for PLG to grow; with deepened usage among existing adopters rather than by winning swaths of new users in the middle of a downturn.
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