This article was taken from a presentation by Kyle Poyar at the Product-Led Festival, held by our sister community Product Led Alliance in June 2020. Catch up on all presentations with the OnDemand feature. Since the presentation, Kyle has since changed roles and is now Operating Partner at OpenView.
I'm Kyle Poyar, VP of Growth at OpenView, a venture capital firm based in Boston. I work hand in hand with our portfolio companies to drive the best practices for product-led growth.
In this article, I'll be focusing on:
- Where product-led growth came from,
- Why the freemium model is growing,
- Why adaption is critical to product-led growth, and
- How to harness the power of product-led growth.
I'm excited to walk you through the changes in the market that have driven product-led growth by empowering end-users. I’m also going to explain how you can harness the power of product-led growth to expand your business even faster and more efficiently.
Where did product-led growth come from?
At OpenView, we coined the term product-led growth based on what we were seeing in our portfolio companies.
Organizations like Datadog, Expensify, and Calendly were taking an innovative approach to building products and growing the business, and we realized that this was going to be key to the future of software. Based on these trends, we’ve built a community around product-led growth.
Thinking back only five or 10 years, adopting new software was a long and painful process. The journey from sales through to implementation and user certification could take months or even years. Literally, years before anyone got any value at all out of the product! These days, we just don't have the patience for that.
The era of the end-user
Today, if you think about how your organization adopts software, it just kind of shows up unannounced.
End-users are finding products like Dropbox, Calendly, and Expensify, and they're telling their boss what software to buy instead of the other way around. The end-user era is here, and it's here to stay.
The SaaS companies on everyone's minds recognize the magnitude of this shift. So when you look at the S-1s of companies like Atlassian, Dropbox, and Zoom – the documents that they file when they go public – they're highlighting the dawn of the end-user era and how it’s transforming the way they build software.
Atlassian is saying, “We recognize that users drive the adoption and proliferation of our products.”
Dropbox says, “Bottom-up adoption within organizations has been critical to our success, as users increasingly choose around tools at work.”
Zoom, which everyone's using right now, says, “We grow through viral demand driven by individual users.”
And this isn't limited to just a few companies. HubSpot’s CEO and co-founder Brian Halligan has talked about how they've completely pivoted their business model to reflect the end-user era.
His aha moment came when he was looking at how his own organization was buying software. He said,
“Software buying has been turned on its head, and you need to market and sell to humans and enable those humans to put it to work for you.”
And so HubSpot started opening up freemium offerings of all of their products. Every product they have is available to try out before you need to talk to anyone. It's a huge shift in the organization, and it's setting them up for strong future growth.
Why is the freemium model growing?
We took a step back and looked at the trends in the software industry that have created product-led growth, and we found that there are four main factors:
1) The cloud evolution
First up, we have the cloud evolution. Gone are the days when data was held in a physical data center. Physical software has moved over to the cloud; from there, you can rent it and access it as opposed to installing it on-premise on a physical machine.
And now we're moving towards a more connected cloud. We have this expectation that every piece of software we use should be interconnected and available wherever we want to use it – not just on a computer, but also on our mobile phones and other devices.
2) Price evolution
The second major driving factor for the end-user era has been a price evolution.
Back in the 90s, all the time, work, and on-premise infrastructure needed meant that buying software was extremely expensive – you're talking hundreds of thousands, if not millions of dollars.
In the 2000s, software started to get a bit more affordable, generally $10,000 to $30,000.
Now we're seeing that users rarely pay anything upfront – they get either a free product or a freemium offering, which makes it much easier for them to try out new software.
3) Buyer evolution
The buyer has changed too. In the old days when software infrastructure was extremely complex, the CIO was king – essential in making sure that new products could actually work in the organization.
Moving to the 2000s, with cloud-based software, we saw the rise of the executive. The head of marketing would be responsible for the marketing automation platform, the head of sales operations would run CRM, and so on. But today, with the connected cloud and free software, it's all about the end-user.
4) Distribution evolution
Lastly, distribution had to adapt to this new environment.
Back when conversations around buying software were complicated and purchases were eye-wateringly expensive, you needed sales reps to meet with folks, wine and dine them, and build a close relationship, given the kind of investment that was being made.
In the executive era, we started moving toward inside sales and marketing-led growth. Marketing would generate a list of inbound leads, and then sales would close the deal over the phone.
In this new era, we're seeing the product take on more and more of the responsibilities of both marketing and sales. The product itself has become key to how you acquire, convert and retain users.
This evolution can't be stopped
We're now firmly in the era of the end-user. It’s not a light-switch change, more like a dimmer switch. There’s increasing end-user empowerment and product-led growth, and we can expect to see that trend continue in the future. Other business models aren’t vanishing completely, but they are being superseded by the PLG model.
Why adaption is critical to product-led growth
Product-led growth is critical to building a business in today’s world. This is a strategy where product usage is the main driver of user acquisition, conversion, and expansion, and it’s at the core of how software companies like Slack, Dropbox, Atlassian, and Zoom have built their success.
As COVID-19 and the recession mean that everyone's trying to reduce the cost of acquisition, product-led growth is becoming even more important. Customers don't have much of a budget for software anymore, but they still have the same pain points and they still want to try out new tools.
With this in mind, more and more companies are making their tools available for free or going self-service so that they can build a pipeline of satisfied users to sell to in the future.
How to harness the power of product-led growth
When it comes to implementing product-led growth in the SaaS community, there are four essential steps to getting it right, and it’s critical to follow each one of them.
I've seen people think, “Alright, we're going for product-led growth, that means we're going to launch a freemium edition.” However, if you don't do all of these things together, that initiative can fall flat, so I'll walk you through each step.
Appealing to end-users
The end-user doesn't care about the same things the executive cares about. A lot of us are used to responding to executive pain, issues like, “We need to manage our sales pipeline,” or, “We need ROI”.
End-user pain is more about everyday annoyance, and annoyance is opportunity. For every one of the top product-led companies, you can come up with an annoyance statement. It might be “I hate scheduling meetings,” and that's where Calendly comes into play.
For Slack: “I hate internal emails – they’re so annoying!” Expensify: “I hate expense reports!” – that was literally the tagline on their website for the longest time.
Appealing to end-users also means making it easy to get started. End-users demand self-service and they hate friction.
For example, if you were trying to sign up for Uber and they were making you request a demo, talk to sales, and sign an order form, you would not download Uber – it would be too complicated and too time-consuming.
End-users love easy-to-use products, where you can sign up with just a few clicks and get started. Ideally, they want to be able to connect with other applications and logins. They want automated terms and conditions, fast onboarding, knowledge bases in case they run into issues, bots, in-app chat, and community so that they can continue to get value out of the product over time.
2) Price comes after the value
What is the aha moment for your customer that helps them see the value of your product? This is about solving the annoyance that they initially came to you for. Don't charge them a cent until you've dealt with that pain point.
Slack is a great example of this. They have an incredibly generous free plan – some even consider it too generous – that allows you to use their platform to collaborate with as many people as you want. At OpenView, we actually continued to use Slack totally for free until we had about 50 people on board.
But when Slack pivots from being this nice-to-have tool to the place where all your work happens and you have your business-critical data on there, that's when the paywall comes up.See, there’s a limit on how much data you can store with Slack, and when everyone's using it, you want access to that data. So after users have seen Slack’s value, that’s when they monetize. Pretty clever, right?
Another example is Zoom. Anyone can set up a Zoom meeting for free and have unlimited one-on-one meetings, but when they want to have a group meeting, there's a time limit, and these are the meetings that tend to be more important; they’re with your prospects, your customers, your executive team. At the 40-minute mark, your meeting ends. You can quickly start another one, but you don't want to. You've seen the value of Zoom at this point so it's a great time to start paying for it.
What’s more, a free offering is table stakes these days. In our annual SaaS Benchmark Survey, we found that product-led growth companies pretty much all have a free offering. A free trial is the most common – 74% of PLG companies offer one – and freemium was adopted by about 38%. You can do the math: this adds up to more than 100% because some companies do both – they have an edition that's free forever, and they have trials of more premium products.
Freemium vs free trial
When you’re weighing up whether to offer a freemium product or a free trial, you need to think about if you’re trying to attract a larger number of new customers or if it’s more important for you to create urgency and drive adoption.
Freemium is an acquisition play: it opens up the top of the funnel and reduces the barrier to trying out your product because a customer can use it for as long as they want. The free trial is more of a sales tactic. It creates urgency and makes sure people are adopting now. Marrying both these approaches can be extremely powerful for certain businesses.
What if my product can’t be used right away?
One concern that many folks bring to me is, “My product can't be used immediately. It’s not like Evernote or Dropbox – there's some friction to getting started.”
But friction is not an excuse to gate your product. Of the companies with free versions, only 41% said that the product can be used practically immediately. The rest say that there is some friction to getting started, and this is where having great product onboarding is key.
The only thing to add in terms of “price before value” is that you can get creative with your free offering.
Before Hubspot had any freemium offerings or free trials, they had a free website grader. They would grade your site on performance, mobile optimization, SEO, and security, and they would make recommendations on how to improve. This was great natural lead generation for their paid product and it didn't cannibalize anything that they had in their paid version.
Think of it like this: if you're willing to spend tens of thousands of dollars on an ROI study or paid demand generation, what can you do instead around the product as a marketing channel in and of itself?
3) Invest in customer success
Coming back to the essential steps in making PLG work for you, I want to talk about investing in customer success.
There’s a common misconception that PLG is anti-sales – it’s not, but it is user-centric. You need to be user-centric to bring in customers.
For this to work, the first group that your company will need is customer support. This is a team that can make sure users are seeing the value and that any concerns they might have are addressed.
Your users will quickly become teams, and teams need more proactive help in finding new use cases for the product and finding ways to collaborate successfully as a group. This is where customer success comes in and offers more dynamic support.
As you start reaching departments or entire companies, sales can play a really important role in expanding an account. The important thing to note is that sales are no longer all about demos, lead qualification, and finding a champion.
You have already internal champions of the product, who are using it successfully. It's about navigating with your customer toward the shared goal of getting even more value and driving adoption of the product that they already love.
Atlassian’s model for adding sales to their organization is really interesting. Atlassian, for a while, was seen as anti-sales: they had no sales team, it was all self-service, and they were completely transparent with their pricing. They could sell a $10k deal without a sales rep. But Jay Simons, Atlassian’s president, has been open about the fact that they've started to layer in more and more sales to accelerate this self-service growth.
In many cases, sales are much more focused on driving customer expansion than new business.
Zoom, for example, mentioned in their S-1 that 55% of their accounts worth $100,000 or more started with a single free user. Sales were hugely important in partnering with those early adopters to drive a broader rollout within the company.
The final thing to add to this point is that data is crucial to facilitating sales, and the greatest tool that you can add to your data toolbox is the concept of a product-qualified lead.
This is an existing user who has shown that they're ready for conversion. They might be clicking on a call to action, or maybe they’re just using the product so much that they hit the usage limit, so you can sell them a more generous package.
4) Measure everything
That leads me to the fourth and final pillar of harnessing the power of product-led growth, which is that you want to measure everything – not just sales funnel data.
This involves a much greater volume of users than in a traditional software company, so you’ll need comprehensive analytics to track these metrics.
Set up product analytics
You’ll need to track user cohort behavior and user activity to find out who your PQLs are.
It's important to pay attention to both the quantitative and the qualitative data on user events and behavior.
Tools like FullStory are great for this – they help you to understand what the user journey looked like and what friction users are running into.
Define and keep tabs on user activation
User activation, as I mentioned earlier, is that aha moment when your product delivers what it promised and you solve the end-user's annoyance.
You need to clearly define user activation for your organization because it's so important as an indicator for future activities like conversion and retention.
It’s also deemed good practice to design experiments so you can optimize the percentage of new users who reach this crucial point.
Run in-product experiments
This is not something that most SaaS companies are super comfortable with, but in-product experiments are critical to driving growth in a product-led business.
This growth comes from optimizing and constantly improving the sales funnel. If you can create a 15% improvement in user activation and then a 15% improvement from conversion to expansion, before long you’ve got exponential growth.
Growth teams catalyze change
Of course, you need people to run these experiments, so product growth teams are on the rise.
These are cross-functional groups dedicated to improving the funnel from sign-up all the way through to post-purchase, and they catalyze a culture of experimentation.
We found that SaaS companies that have a growth team are far more likely to be constantly running in-product experiments that drive growth.
The world’s top SaaS companies are all-in on product-led growth
The companies on everyone's minds, like Slack, DocuSign, Dropbox, and HubSpot are all-in on product-led growth, and if you want to keep up with them, you should be too.
As you can see from their S-1s, everyone’s thinking about the end-user era, and how end-users’ evangelism is driving the adoption and virality of these products.
The PLG IPO wave is building
The majority of software companies that have gone public in the last couple of years are harnessing the power of product-led growth, and they're performing even better post-IPO.
It's safe to assume that even post-COVID, these companies are still out-performing their peers, especially driven by the likes of Dropbox, Slack, Zoom, and Atlassian, which are critical to this remote era.
This is not pocket change. These companies are now worth over $200 billion in market cap and they're here to stay. The end-user era is here and product-led growth is critical to staying on top.