Awesome Product, Scalable Capital
Product-Led Growth (PLG) can succeed massively with the right product, but the main ingredient might be smarter capitalization.
By Oron Maymon, Chief Scientist — Liquidity Capital
The Product-Led Growth (PLG) strategy for company growth is having its moment. Companies like Dropbox, Zoom, Slack, Monday… all examples of wildly successful PLG companies leveraging a product led growth strategy/. The PLG model has serious appeal for investors, too: at IPO, PLG companies tend to have higher growth rates, higher gross margins and higher net ($) retention rates than comparable non-PLG companies.
This wasn’t always the case. PLG has matured on the backs of companies you likely never heard of — companies whose GTM strategy fell flat. The success of PLG we see today is basically an evolution of the Freemium model pioneered by early days of SaaS especially for consumers — but one in which the lead generation and expansion engine comprises users, not sales teams. The Freemium model didn’t always pan out of course. The reason? The value coefficient of Freemium only works when the product value is high, and its adoption has a network effect — propagating both internally and externally to the organization. In order for the unit economics to work out, you need a sticky viral product that people will eventually want to pay for.
What’s the key differentiator and what has evolved? Clearly, an effective PLG strategy is defined by an awesome viral product with clear intrinsic value, and a compelling upward expansion strategy, but also on the need to focus on revenue, capital and cost metrics.
Today, PLG teams leverage mature tactics and methodologies to launch products — focusing both on taming customer acquisition costs and doubling down on retention. These models require that product and marketing teams find the sweet spot between acquisition, growth and revenue as well as having the working capital to reach equilibrium and finance the growth.
Here’s what I mean:
PLG: Where You Can Win, and Where You Can Lose
Like any growth strategy, PLG has advantages and disadvantages.
As a market entry point, PLG fits perfectly with today’s lean and agile development and commercial culture. PLG-focused companies leverage a “land and expand” methodology to scale and a bottom-up approach to sales. They benefit from shorter activation cycles, lower Customer Acquisition Cost (CAC) rates, higher Average Revenue Per Customer (ARPU), as well as higher net retention rates (net retention for SaaS products is 0.95%, versus 1–2% for PLG).
Yet in order to succeed, PLG focused companies require heavy investment on customer acquisition and often longer CAC payback periods. The PLG motion often allows the user to unlock paid plans or features as the product value is realized. This is a counter motion to the top down sales led motion where you pay upfront prior to accessing the product. Sales led motions see CAC payback often sooner in growth companies.
Today’s PLGs Need New Capital Models
Companies adopting PLG — with all its advantages — need to be prepared to initially invest heavily in acquisition before realizing CAC-Payback. In many cases, net new ARR/MRR can be flat (or even declining) against spend in acquisition via marketing and sales.
In addition to the obvious heavy investment in product, PLG acquisition tactics also require significant resources to develop a sophisticated marketing and demand gen model — a model that enables acquisition of users with potentially high LTV, as well as the creation of a viral coefficient that allows for organic expansion.
PLG companies need to plan for a longer CAC payback window because for sales-led (non-PLG) companies, the customer often commits to a purchase before gaining access to the product. PLG companies generally need to prove product value before such a commitment. This means that revenue is a lagging indicator to acquisition at a different rate than non-PLG companies.The need for In many cases, this requires scalable working capital until a company can reach critical mass and payback on new users. Naturally, PLG companies need to place emphasis on product value and the virial coefficient as the holy grail of their growth strategy. To gain the tools to understand what kind of runway and capital are needed to support product scaling, PLG startups should deep dive into their retention rates, CAC, customer lifetime value (CLTV) and CAC payback time metrics.
Type of Capital
If you’re a company growing on the back of a PLG led strategy, then the type of capital also requires minding. We have analyzed thousands of growth stage companies and found that those leveraging PLG need large amounts of working capital to fuel their growth. With that in mind, here debt (or credit) financing offers a financial instrument that fits this model as opposed to expensive equity rounds that carry potentially large dilution costs. Debt instruments also offer a scalable and robust way to structure financing based on the need of the capital.
The Bottom Line
There’s no question that the PLG model is mature and commercially viable, especially for SaaS growth models. But adopting a PLG strategy demands constant pulse check of the capital required to initially scale. An awesome product is the right starting point, but to cross the finish line PLG companies need the right financing and working capital to realize growth.