With the recent buzz around the Figma acquisition, product led growth (“PLG”) has once again been thrust into the spotlight. While certainly not a new phenomenon, this growth strategy really only began picking up traction as recently as 2016. Looking to copy the success of unicorns like Slack, Dropbox, and Calendly, startups across all stages began to experiment and eventually adopt this approach. Some seven years later, PLG has taken over the startup scene, with a majority of B2B SaaS companies claiming to have actively deployed a PLG motion. Most notably, 91% of those companies indicated they planned to invest even more into PLG initiatives in 2023.
Before diving into the obstacles, let’s level-set on what we mean by PLG. In its simplest form, product led growth is a model where product usage drives customer acquisition, retention and expansion. For a typical B2B SaaS startup, this means implementing a sales motion that places the software front and center of the customer’s buying journey. In other words, instead of a dedicated sales rep doing the selling, the product “sells” itself. While the concept may seem simple enough, executing well is not exactly straightforward. Outlined below are three challenges where PLG can break down, especially in the context of early-stage B2B startups.
While the stats around successful PLG strategies are staggering, with some indications that product-led companies are “twice as likely to be growing [more] quickly (100%+ year-over-year revenue growth)” than sales-led companies, it’s important to temper expectations. PLG is not a one size fits all for every startup. Especially at the early stages, perfecting a sales motion can be incredibly difficult. PLG, like any other go-to-market strategy, comes with notable pros and cons. And in the context of B2B, those cons can present incredibly high hurdles to overcome. For early-stage founders, failing to overcome those hurdles can be make or break for your startup.
Challenge 1: Self-Serve Distribution
To do PLG well, SaaS startups traditionally need to offer customers self-serve tools with their products. Everything from signup to upgrading to troubleshooting should be seamless and customer-facing. Wherever possible, the customer should be capable of doing everything they need within the product without ever having to interact with a representative of the startup. From the startup’s perspective, obtaining and retaining customers should equally be a hands-off experience.
Achieving this at the early-stages is incredibly challenging. To properly build a self-serve distribution model, you need to have a strong understanding of your end-user. In many cases, the individual making the decision to purchase your software may not be the one actually using it. Even if you can identify the end user, understanding how your product serves their current needs may not be enough when those needs can easily change in the future. To execute self-serve well, your product must be explicitly tailored to serving both current and future needs. That’s a fairly high bar, especially considering more than half of startups fail because of poor product market fit.
Challenge 2: Achieving Virality
A successful PLG approach relies on continued and growing adoption. To reach any meaningful scale, word of mouth is not enough; your product needs virality. While often confused, word of mouth and virality are not the same. Word of mouth is effectively a referral, a suggestion to a colleague about a positive experience with a product. In contrast, virality is the promotion of that product, the sharing of results with people in and outside your network. For PLG to work, you need access to the vast number of users only virality can provide.
Canva is a great example of this. People use the platform to create custom graphic design templates. Designs can be built solo, or through collaboration as a team. Once the final project is done, results are shared and typically presented to a final audience. On every slide of that presentation, the Canva logo is boldly displayed. Those who saw the presentation, and liked the designs, are enticed to check out and eventually join Canva. Rinse and repeat.
Canva is an outlier though. The level of virality it obtained is incredibly hard to replicate at the early stages. Much of that has to do with the finite resources early startups have in regard to capital and bandwidth.
To achieve virality, you typically need some form of a collaboration component for your product. Building out that functionality usually requires investment in strong platform infrastructure. And then, for your product to eventually benefit from explosive user growth, that infrastructure needs to be built flexibly. Layering on this level of complexity to your product can quickly become capital intensive.
Even after you’ve successfully grabbed new users, you then need to retain them. While your product may be good enough to attract initial interest, if it’s not sticky it’ll never go viral. To keep users repeatedly coming back, a PLG startup has to sink a lot of time into optimizing user engagement. Managing how customers interact with the product, continuously incorporating their feedback, frequently promoting product improvements; all of that becomes core to the startup’s day-to-day operations. Cycling through that process can easily become time consuming.
Side Note: It's also important to remember that not all problems require collaboration to solve. Platforms like Calendly, Canva and our portfolio company Everyware intrinsically require collaboration to work, so PLG virality is required. Other, equally successful, B2B companies like Snowflake, OpenAI, and our portfolio company Turn have no collaboration component, which makes them a worse fit for PLG virality but no less valuable or exciting.
Challenge 3: Sustainable Monetization Strategy
To drive product adoption, PLG companies usually adopt a freemium model where customers are encouraged to use the product at no initial cost to them. While this does immediately remove a pricing barrier, which should encourage greater adoption, this strategy can be risky. Arguably the most difficult challenge for freemium models is the conversion of users to paying customers. On average, only 1% - 4% of freemium will convert to a paid plan. In more extreme cases, like DropBox, conversion rates can be as low as even 0.04%. These levels of conversion present a disproportionate challenge for early-stage startups, who typically have just begun to define their target customer, much less scale their total user count to a meaningful number they can then attempt to convert.
Even after achieving a strong user base, freemium models can continue to struggle. Customers need to be enticed to pay “up” for premium tiers, and the price they pay should be consistent with the upgrade in features. Finding the sweet spot between a fair price for new product functionality can be hard, especially when considering users go 0 to 1 in terms of value when they first onboard to the product for free. At base the free product already must be “good”, otherwise you wouldn’t have stickiness in the first place. Therefore, to get upgrades to the premium tiers, the premium product must then be excellent. And as your core user is intrinsically price sensitive, each priced plan must be carefully considered.
All of this requires a balancing act. The freemium product must be good but limited. Step ups in product tiers need to consistently build on functionality, but only so far as to entice a paid upgrade to the next tier. Pricing should reflect a bargain at each upgraded tier, to spur greater upgrades or at minimum continuing the current paid plan. Perfecting any one of these facets is hard enough, and doing all of them well in unison is nearly impossible. That’s why PLG pricing is so difficult to master.
Ultimately, while product led growth can be an effective strategy for B2B SaaS startups to scale, it is not a one-size-fits-all approach. PLG has garnered a lot of a buzz over the last few years primarily because it’s a near cost-less way to acquire customers, something deeply attractive in the early stages. Though it’s certainly true that this approach can save money at the outset, it does present significant hurdles which can at times far outweigh its benefits. Building out a robust self-serve tool, achieving virality, and monetizing effectively are issues that plague most new businesses, but are even more mission critical for PLG startups. In the context of B2B, where sale cycles are often longer and customers come with higher expectations, these concerns need to be weighed even more carefully.
This is why startups considering this path need to tread lightly. If entered into carelessly, a poorly executed PLG strategy can quickly become detrimental for a young startup. With limited resources and time, taking on that risk may not be worth it.