• Proxi Team

Product-Led Growth - Is the emperor naked again?

Updated: Dec 2, 2021

Product-Led Growth or ‘PLG’ is the latest buzz phrase to come out of Silicon Valley. It describes when the product experience itself is the main driver of acquisition.

So, how are you performing in comparison to other SaaS companies?

Essentially PLG is an attempt to quantify the Natural Rate of Growth of a company. Natural Rate of Growth (or NRG) is how fast a company grows in the absence of any sales or marketing investment. Or, put more simply …. how ‘viral’ your product is (or isn’t).

The concept of virality has been around forever, over the years it’s been rebranded, renamed and reinvented several times - think network effect or flywheel effect - which describe the same basic idea using different buzzwords.

It goes without saying, pretty much everyone in business starts out with a Product-Led Growth strategy in mind, even if they don’t know it. High PLG describes a company whose product is so good that people can’t help but talk about it and sign-ups just happen as if by magic. Everyone wants to believe they’ve got one, but the reality is that very few actually do.

So, how do you measure your Natural Rate of Growth?

Well, the basic math goes like this:

Natural Rate of Growth = 100 X Annual Growth Rate X %Organic Signups X %ARR from Products.

Annual ARR (Annual Recurring Revenue) growth rate. Measure year-over-year growth by taking your current ARR, subtracting your ARR from a year ago and dividing by your ARR from a year ago.

% organic sign-ups. An organic sign-up is any sign-up that you didn’t have to pay for. These new users come from referrals, organic search, organic social and direct to your website. Take your number of organic sign-ups and divide it by your total number of sign-ups in the past quarter.

Incremental ARR that starts in product. We’re looking for how much incremental recurring revenue comes from users who started by using the product, whether via a free trial, free product, open source product, freemium version or paid self-service product. Users who immediately went down a sales-assisted path before getting into the product, for example those who requested a demo, do not count. If a user begins using the product, sees value, and then talks to sales to expand their usage or begin paying you, that does count as starting in product. An easy initial way to measure this is to take the timestamps of conversion and compare them to timestamps of when a user first enters your product.

Again, it goes without saying, calculating NRG relies on having really good data. The higher your NRG number, the better. Obviously, the bigger the ARR number, the harder it is to drive a high NRG number, so the benchmarks for larger companies are lower. Openview has come-up with the following table that [US] companies are using to benchmark themselves.

Given the current situation with COVID-19, companies like Zoom are off the charts. In fact, any SaaS business facilitating work from home transformation or helping organisations to cut their costs is likely to be doing well right now on the NRG scale.

We know intuitively that high NRG numbers are better than low numbers and that, given the choice, every company would like a high NRG number. We also know companies with high NRG will find it easier to raise money from investors and will likely sell / IPO for higher multiples than those with lower NRG numbers.

In fact, we know this stuff. It feels…obvious and it feels like the emperor may be lacking a few items of clothing right now.

We remember a famous quote from the CEO of Audi back in the 90’s who, when asked “why isn’t there any advertising for the new Audi TT in any magazines?’ replied “we don’t need to advertise; the car is the advert.” The Audi TT was, and still is, a brilliant example of pure PLG.

No one WANTS to spend money on sales and marketing. We spend it because our products aren’t naturally compelling enough to spin-up demand on their own. So, we advertise and we live in hope that we’ll be kissed by the flywheel effect and we’ll wake up to discover we’re the next Expensify.

And that’s all completely bonkers.

So, what are we supposed to do with an NRG number (other than get depressed about it)?

An NGR number gives us a starting point. It tells us whether our products are good enough for people to want to talk about. That should lead us towards a line of questioning that is far more challenging and interesting, such as ‘WHY aren’t our products compelling enough to drive word-of-mouth?’

To answer that question, we need to look inwardly and explore how we understand customer need, how we define ‘problems worth solving’ and how we go about designing products that address pain points that customers are genuinely wowed by, to the extent that they can’t help but tell someone else.

Now we’re talking about Product Management and the relationship between Product Management and PLG, which is much more interesting.

Organisations with high PLG numbers generally have incredibly strong Product Management disciplines. They typically have strong product visions, rigorous and robust product management processes and they’re more often than not ‘lucky’ (in that they have read the market right and are in the right place at the right time with the right product...).

So, if your PLG score is low, and let’s face it, most are, the first thing you need to do is look very closely at your Product Management function - not your marketing team or your customer support team - but the very essence of your business: your product team. If what you see when you get there makes you uncomfortable, then maybe it’s time you did something about it…

To help you build your product management capability we created Proxi ASSET, our Product Management Fundamentals for SaaS Leadership coaching programme. It runs over six half days and is designed for mid-to-late-stage tech companies looking to make a step-change in the way they manage product. Contact us to find out more.