Understanding The Two Types Of Product-Led Growth In Cloud Business Software

Andy Stinnes, General Partner, Cloud Apps Capital Partners.

PLG, short for product-led growth, has been the talk of the (tech) town for a few years now. In this go-to-market motion, a traditional top-down software sales approach to C-level decision makers based on value proposition and a product demo is replaced with a bottom-up, end-user focused, try-before-you-buy model that relies on a compelling product and self-service buying experience. Zoom, Calendly and SurveyMonkey are perfect examples.

A Massive Shift In B2B Software

PLG isn’t just some idea dreamed up by smart technology marketers. It’s part of a broader change in business software buying behavior. As my company has recently reported, the confluence of easy-to-deploy cloud software, a younger and more demanding application user and changing company cultures that put more power in the hands of end-users, has triggered a democratization of the business software buying process—and consumerization of the software. PLG is a result of and a catalyst of this evolution.

The numbers that emerge describing the PLG trend are compelling. Per a recent report, “58% of companies surveyed in Gainsight’s 2022 PLG Index already have a product-led growth strategy in place, and 47% plan to double their investment.” And for good reason: The same report finds that “free trials using product qualified leads convert users to paid customers 25% of the time. Compared to only a 9% conversion rate from free accounts to paid accounts.”

Those conversion advantages translate directly into top-line and bottom-line company performance. John Ma of Public Comps has done an interesting analysis of public cloud companies and compared common SaaS metrics of those that use PLG versus traditional top-down sales motions. And the results are clearly in favor of PLG.

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Two Types Of PLG Models

For B2B software, there are two distinct variants of PLG: free trials and business freemium. Free trials offer buyers the ability to test the product, often a limited feature set, for a period of time—the standard being two weeks but some allow longer trials. After the trial, the company either purchases a long-term subscription or loses access to the software.

Business freemium on the other hand offers a perpetually free version that is limited in feature set and/or scope of use, such as number of users, business objects or transactions. The vendor then offers higher level for-fee versions that remove such limitations and banks on enough users converting to paying customers. There are good articles describing the subtle but important differences between both models.

Examining The PLG Model

Does PLG work equally well for all business software companies? In my experience, I’d highlight the following characteristics to look at:

1. Ease-Of-Use

Some apps are born to support a PLG model because they’re easy to understand. Partly because they’re brilliantly designed. Partly because they solve a simple, yet ubiquitous, business problem. Calendly is a great example. For PLG to work, the end user must be able to self-serve from sign-up and set-up to use. Certain business problems are inherently so complex that a PLG model becomes hard. Free trials tend to do better here but are still challenging. Imagine a B2B app that requires integration into the companies back-office ERP system to work. Good luck scaling PLG for that.

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2. Dual Value Proposition

The beauty of consumer software is that the user and the buyer are the same. In business software, the end user isn’t the economic buyer, the person owning the financial value proposition for the purchase decision. PLG works best in business apps when the product delivers a dual value prop: first, personal value to the end user, such as removal of manual work. That end-user value prop can drive PLG adoption as use of the app spreads across teams. The software vendor then can get a departmental or companywide purchase once enough end users ask for paid features. That’s where the second value prop comes in: if the solution offers the economic buyer a roll-up benefit such as security.

3. Adoption Model

PLG lives off individual users falling in love with an application. That works for Calendly, which offers value for a single end user. It works for Slack, where individuals get small teams to sign up for free. If an application is more of an “everybody needs to use it” solution that requires wholesale change like an ERP or supply chain management system, PLG becomes more difficult.

4. Value Scalability

To drive conversion to paid accounts, feature sets and service levels must be carefully designed. One mistake is to dumb down the free version and hold back high-value features. However, that leaves the entry-level solution lacking enough value proposition. Clearly, the opposite is also true, i.e., giving all “the good stuff” away in the free version can depress expansion. The right balance can be hard to achieve. That’s why usage metrics (Zoom’s free 40 minutes, Slack’s free storage of 10,000 messages) work because you get the full experience but are bound to bump up against those limits. A general rule is to be more generous in the free version and trust that a captive free user base will show you the way to upsell, as I reported in an article on SaaS pricing.

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5. Virality

How do you get the word out about your PLG product? Certainly, you can rely on traditional marketing techniques, both inbound and outbound, to drive sign-ups, but generating the right leads can be expensive. Yes, it can work, but companies need to consider the economics. I believe virality is an important PLG buttress. By virality I mean aspects of the software that, as a byproduct of use, expose the app to potential new customers. Calendly or SurveyMonkey are great examples—every calendar scheduling link or survey exposes the product to new users, creates “viral” awareness and potential new leads. Does your application have that ability? It’s worth looking into.

Product-led growth is a powerful force in cloud business software. It’s important to recognize the two different flavors that exist and the context in which they thrive. In part two of this series, I’ll dig deeper to understand PLG as a qualification method and discuss some of the nuances required to make it work.

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