#2 - Kyle Poyar @ Openview, Growth Unhinged
#2 - Kyle Poyar @ Openview, Growth Unhinged
Overcoming pricing challenges in the transition to PLG
"Focusing on enterprise customers doesn't mean the same thing as not doing Product-Led Growth.” - Kyle Poyar
Audio links
Video
Podcast notes
[02:32] Barriers to adopting Product-Led Growth
[06:31] Strategies for transitioning to Product-Led Growth
[11:07] Using PLG to create shared incentives across Go-to-Market teams
[13:07] Which companies aren’t the best fit for Product-Led Growth?
[17:10] Current market developments around Product-Led Growth
[22:32] A common mistake when going from PLG to enterprise
[25:02] Moving beyond user journey automation in PLG
Transcript
A company’s existing pricing model may not always be ready to support certain product-led motions. What have you seen companies struggle with on this front?
Well, there's a lot of barriers to shifting to a product led growth model. Pricing and packaging certainly come into play, because when we think about product-led growth, we think about focusing on end users and using the product as a means of acquiring, converting and retaining those users.
It often corresponds with:
Having some sort of free offering for people to try before they buy
A relatively affordable entry price. If you're getting all of these people in, who are more users or team leads for the product, then hat's often a lower starting deal size than many enterprise focused companies are used to.
And you need more simplicity and transparency around pricing. Folks would be hesitant to even try out a product if they think there's going to be sticker shock. Why invest all that sweat equity in setting it up, if it's just a nonstarter in terms of the affordability?
All those things are challenging to a business that's usually enterprise focused. Many companies give some discretion to sales to figure out pricing on a specific deal. Sometimes they call that value-based pricing. That type of model doesn't work so well in a product-led growth environment.
And often folks are thinking about cannibalization risks, because they might have some existing customers that are paying a lot of money. If they introduce an entry level package or have more transparency around pricing on their website, there's a risk of these existing customers wanting to downgrade to these other offerings. So if you have that history, it's definitely challenging to be able to adapt pricing to a way that fits PLG.
I personally believe that usage-based models work really well in these situations, because you can really grow with the customer as they grow their usage and having a lightweight or affordable entry point is really just meaning you're offering less usage. In terms of the initial commitment and initial spend, classic seat-based subscription models might not work so well for that type of purchase.
The other thing I would flag is that when you think about this idea of freemium or a free trial as part of letting people try before they buy, people start to really worry about what they are giving away.
They are concerned that it’s too generous and would mean someone can just keep using the free version and never need to upgrade. This often ends up being an excuse for watering down the free version so much, that it's not actually usable anymore for the high value customers you’re trying to attract. And it ends up only really being useful for like prosumers, personal users and small businesses.
Then you end up having all of these free users who have a support burden, but who have no real likelihood of converting to a big paying customer down the line. So you've got to really strike that balance. And unfortunately, I think too many people are nervous about offering too much, and then it ends up coming back to haunt them.
Something that’s also common in PLG is to operate a land-and-expand motion. Proving that a model like this is better can take a long time and once you make the switch, it's hard to go back. How can a company get more confidence before making such a big step?
I think there's actually a lot of different routes to test out product-led growth strategies that don't require jumping into the deep end right away.
I like to prove out those different steps and sequentially build out a more sustainable PLG model. Ultimately it’s about using your product as a means for growth. That means it's more of a dimmer switch than an on or off switch.
There are companies that are quite extreme in terms of using the product across the entire journey and having most of the revenue come from self service purchasing without any human interaction. But the product can also be a great source of leads for the sales team.
A great example of that is where you have interactive demos on the website. This is a great way of taking existing prospects and getting them more interested in an actual demo and purchase process. There's also the expansion angle where once someone's an existing customer, they can try a free trial of a new product offering that you have. So there's a lot of different elements.
The first thing I would try if I was doing sales and thinking about PLG is to test a Free Trial call to action on the website. This would actually be a person-assisted free trial, so not fully self serve. But someone can request a free trial and then gets set up in a 30 minute onboarding call. This way you can see if that actually meaningfully influences the number of folks that take an action when they visit the website.
Another angle is testing an interactive demo on the website. Interactive demos allow folks to see the experience of what using the product would look like and the value that they'd be able to get from it without actually doing all of the work around setting it up.
For many people, that's something that they want to be able to see before they ever talk to someone on the sales team. And once they've seen it, they're often a lot more bought in to the sales process. So we tend to find that when you have these interactive demos on the website, you're able to increase the amount of qualified demo requests.
So those are really great product-led entry points. From there, I would think about moving towards a more self service free trial or freemium edition and you can often do that while continuing to have the same pricing.
If you end up getting a lot of these free trial requests or free trial signups but they're ultimately not buying because the price is too high, that's when you can really start thinking about a new entry level kind of package or offering designed around this audience that already exists and is already eager to buy, just at a different price point than you're selling today.
I tend to find what works best for testing PLG is focusing on an area that is known as a critical focus point for the business. So the business might need to get CAC payback down for a segment, or accelerate time to close or increase competitive win rates.
Whatever is the number one thing the board currently cares about, I'm sure there's actually a PLG angle to go after that opportunity that might not have been considered. If you can apply PLG towards the main problems in the business, that ends up unlocking a lot of permission to go further on the PLG journey.
Are there any industries, types of companies or pricing models specifically where you’ve seen that PLG is just not the best or first idea a company should consider for growth?
Well, in our product benchmark survey from earlier this year, we surveyed hundreds of companies to get a sense for what categories seem to be ready for PLG and in which categories is PLG just a much harder sell or harder to pull off.
What we found is for anyone selling to a really small business audience, like an SMB or very small business audience, Product-Led Growth was very common. It was much less common if you're selling to large enterprises with a thousand or more employees. That's where we only saw 15 or 20% PLG adoption. So the size of your target customer matters a lot.
The other angle that matters is the category of software that you offer. For any software that's sold to developers or in an infrastructure type of environment, Product-Led Growth adoption is extremely high. There's almost an expectation now from the developer community that people should be able to use the product on a self-serve basis.
They don't want to be forced to talk to sales. But then if you look at categories like finance oriented technology, vertical specific software or legal tech, you see much lower PLG adoption. Some of these industries are just less tech savvy in the first place. The buyers don't really want a self-service experience. They might need help or want to have a more consultative experience.
So, make sure that you're focusing on an industry where the way people want to buy your software is aligned with PLG. That would be takeaway number one.
Number two is when you think about SMB versus enterprise. At the enterprise there's more stakeholders involved in a purchase decision. There's also a lot more complexity to deal with when setting up the product and there’s a lot more data and workflows to deal with. That's obviously much harder to pull off PLG unless you can find a specific wedge within that bigger opportunity where someone can actually get up and running really quickly.
The final area that I’d point to is if you're selling to a very small business audience, your deal sizes are usually small. Maybe a couple hundred dollars a month. Then the CAC payback just can't support a high touch sales motion like in an enterprise setting, where you're maybe getting a couple hundred thousand dollar deal.
And so in that case, you are really looking for anything that you can do to automate the customer journey. To bring that into the product as opposed to having a human doing it manually. And so that's where it's a much more business critical from a KPI standpoint, to find lower CAC ways of doing business.
So I would say also make sure that you're applying PLG to be able to develop the unit economics that build an attractive business. If your business can support high touch experiences that win over these really high value customers, that's great. And maybe in those cases, PLG is not as much of a requirement. But if you need to focus on extreme efficiency, the calculation switches.
And if you look at the market today, what do you see happening in the PLG space? It’s evolved a lot over the past years. What do you think is coming next?
PLG almost became trendy in 2021-2022 time frame. And I saw a number of companies trying PLG, but it was never core to their business model. It was more a side investment or side project because people thought they should be doing it.
In those cases, I've noticed people are disinvesting in PLG. They're doubling down on what they know works, to build a more efficient business. As anyone looks to do more with less, they're going to focus on what they know works, as opposed to the things that they see as experiments.
I think that's actually a good thing for PLG. We're able to find folks where it's really meaningful for their business and have a conversation centered around that group, as opposed to having a lot of the casual observers jumping in or trying it out.
One thing I look at to see if PLG is effective is ”Product Influenced Revenue“ as a new metric. This measures how much of net new ARR starts with a meaningful product interaction before there's ever a human involved in the sales motion.
In our latest SaaS Benchmark Survey, we found that freemium companies have a range from 25 to 100 percent of revenue being product influenced. So there's a big range and just because a company has a freemium offering doesn't mean that the product influence is that meaningful.
Another thing is that for PLG to really take off, you need to find low cost scalable ways of acquiring users. A benefit of PLG is that you're able to reach people earlier in your buying process and you're able to bring along end users of the product rather than just this executive buyer who might not have time for you and is getting pitched by hundreds of other vendors.
So you're able to get these end users, show them value and have them advocate from the bottom up of adopting the technology. That is, if you can actually attract these end users at scale. It means that you need to be able to reach thousands of these people, a day, a week or a month. And you expect very high drop off rates in terms of how many folks that you reach end up signing up for the product and take further steps.
And the pain points that are motivating the end user are often different from the executive buyer. If you think about Salesforce, they're helping the CRO have predictable revenue. But if Salesforce is trying to get a sales rep as that individual user, the sales rep actually hates the manual data entry in CRMs and they hate the back and forth of scheduling meetings. So you have to keep that in mind.
When you think about finding these scalable marketing channels, it's often a different skillset and a different set of channels than what folks are used to.
One of the key channels that has worked for many of the PLG companies that are great today is SEO. And that's a channel that I think looking ahead, I don't know if we can rely as much on SEO as that really efficient, cheap way of attracting thousands or hundreds of thousands of users to the website and to sign up for the product. With what generative AI is doing with SEO opportunities and zero click searches in general, we have to find other other alternatives.
And so it's about starting to look at some more creative acquisition tactics around the community strategies, social media, particularly like whether it's Linkedin, TikTok, working with influencers. There's a totally different set of these tactics for reaching users than folks were using five years ago.
And finally, if we look at the flip side of that. What's something that you're hearing in the market or seeing companies do that doesn't make a lot of sense to you if you think about PLG?
I see some companies underestimate the value of their PLG efforts. There's some companies that make a shift into enterprise, for example Airtable made a big announcement about their shift to enterprise.
What often happens is they're seeing that more and more of their revenue comes from enterprise customers And enterprises often have higher retention and higher rates of expansion. So it looks like a really appealing customer target and they lose sight of how they're actually able to reach the enterprise.
For many companies that were successful in going from PLG to enterprise, PLG was their opportunity to attract people that were an individual user at a larger company. They could get that person to try out the product on a self-service basis and then advocate for enterprise adoption.
But oftentimes it's like, because we're going enterprise, we're going to water down everything we're doing on PLG. We're going to kill any self-service access. We're going to raise prices for everyone. And it actually looks like it works the first couple of quarters.
But then they look back a year later, and they don't have a pool of users that they can fish from and turn into these enterprise customers. All of that has dried up because they totally disinvested in PLG, which was the foundation for their enterprise growth efforts.
So this notion of ”going enterprise means we kill PLG” often ends up looking short sighted, and I see that companies look back and regret some of the decisions they made later on.
Thanks so much for sharing your views with us Kyle.