Friday, September 29, 2023

Understanding the two types of product-driven growth in cloud business software

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Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

Andy Stinnes, General Partner, Cloud Apps Capital Partners.

PLG, an abbreviation for product-driven growth, has been the talk of the town in the (tech) city for a few years now. In this go-to-market movement, a traditional top-down software sales approach for C-level decision makers based on value proposition and product demo is being replaced by a bottom-up, end-user-centric, try-before-you buying model based on on an attractive product and a self-service purchasing experience. Zoom, Calendly, and SurveyMonkey are perfect examples.

A huge shift in B2B software

PLG is not just an idea conceived 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 corporate cultures that put more power in the hands of end-users has led to a democratization of the enterprise software purchase process – and consumerization of the software. PLG is the result of and a catalyst of this evolution.

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

Those conversion benefits translate directly into top-line and bottom-line business performance. John Ma from Public Comps has an interesting one analysis of public cloud companies and compared common SaaS metrics of those using PLG to traditional top-down sales moves. And the results are clearly in favor of PLG.

Two kinds of PLG models

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

Business freemium, on the other hand, offers a perpetual free version that is limited in features and/or scope of use, such as number of users, business objects, or transactions. The vendor then offers higher-level versions for a fee that removes such limitations and ensures that enough users are converted into paying customers. There are good articles describing the subtle but important differences between the two models.

Exploring the PLC model

Does PLG work equally well for all business software companies? In my experience, I would highlight the following features to look for:

1. Ease of use

Some apps are born to support a PLG model because they are easy to understand. Partly because they are brilliantly designed. Partly because they solve a simple, yet ubiquitous business problem. Calendly is a good example. For PLG to work, the end user must be able to operate themselves from login and setup to use. Certain business problems are inherently so complex that a PLG model becomes difficult. Free trials usually do better here, but are still a challenge. Imagine a B2B app that needs to be integrated into the company’s back office ERP system to work. Good luck scaling PLG for that.

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 is not the economic buyer, but the person who owns the financial value proposition for the purchase decision. PLG works best in business apps when the product has dual value: first, personal value to the end user, such as removing manual work. That end-user value can drive PLG adoption as app use spreads across teams. The software vendor can then get a department or company-wide purchase once enough end users demand paid features. That’s where the second value plug comes in: if the solution offers the economic buyer a roll-up advantage, such as security.

3. Adoption Model

PLG lives on individual users who fall in love with an application. That works for Calendly, which provides value for one end user. It works for Slack, where individuals get small teams to sign up for for free. If an application is more of an “everyone has to use it” solution that requires large-scale change, such as an ERP or supply chain management system, PLG becomes more difficult.

4. Value scalability

To encourage conversion to paid accounts, feature sets and service levels must be carefully designed. One mistake is to stomp the free version and hold back high-end features. However, that leaves the entry-level solution insufficient value proposition. Obviously, the opposite is also true, i.e. giving away all the “good stuff” in the free version can push the expansion. The right balance can be difficult to achieve. That’s why usage stats (Zoom’s free 40 minutes, Slack’s free 10,000 message storage) work because you get the full experience, but you’re bound to hit those limits. A general rule is to be more generous in the free version and trust that a steady free user base will show you the way to upsell, as I mentioned in an article on SaaS Pricing.

5. Virality

How do you publicize your PLG product? You can certainly rely on traditional marketing techniques, both inbound and outbound, to drive signups, but generating the right leads can be expensive. Yes, it can work, but businesses need to consider the economy. I believe that virality is a major mainstay of PLG. By virality I mean aspects of the software that, as a by-product of use, expose the app to potential new customers. Calendly or SurveyMonkey are great examples: any calendar scheduling link or survey exposes the product to new users, creates “viral” awareness and potential new leads. Does your application have that capability? It’s worth investigating.

Product-driven growth is a powerful force in cloud business software. It is 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 needed to make it work. Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?

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