Velocity vs First Contract Value

Choosing between PLG and Sales - Part 3/3

In the first part of this series I covered the consideration between Scalability and Time to Market, and last week I went into the differences in Repeatability and Personalization when choosing between PLG and Sales.

In the third and final part the focus is on the initial deals you can close in either motion. The options are to close deals as fast as possible (Velocity) or to maximize the First Contact Value. Let’s explore what that means.

Different stages of the buying journey

As we know, a lead from a traditional sales motion is something different than a Product Qualified Lead (PQL) from a product-led motion.

For example, a user who only signs up to your product typically has lower buying intent than for example a demo request from an ICP customer (MQL). However, a PQL could be someone who signed up AND got first value out of your product.

Through their usage, this potential customer has shown a level of interest and fit with your product that they are much more likely to buy than someone who just requested a demo.

Understanding these differences is important, because they impact if and how you would deploy a sales team. While a PQL is more qualified than an MQL, they might still benefit from a little support by an onboarding specialist or some other guiding sales role.

But because the context is different, these roles are lower touch and aimed at helping the user take further action in the product up until the moment that they are ready to buy.

We’ll cover this role in more detail in the next chapter but for now it suffices to know that working with PQLs is a very different approach to sales than a classic discovery and demo approach.

These potential customers have gone through an experience which is centered around their intended use case. Therefore, they tend to be less open to a sales conversation. They just want to solve their specific problem.

Assessing customer lifetime value

Because of this, the aim in PLG is typically to convert the customer as fast as possible. That means optimizing for velocity of deal closing and trying to upsell further value later. Also known as a “land and expand” approach.

In a traditional sales motion, the aim is more often to maximize value on the first transaction. The sales rep is tasked with the goal to understand the full need of the customer and position a comprehensive offering for that. Commissions provided to sales reps typically also incentivize this behavior.

There is a trend though of companies who are updating their sales compensation plans to include rewards for expansion within the first year after closing the deal Basically prioritizing velocity over initial contract value.

Especially in a product-led approach this is a must-have. You don’t want the pursuit for maximum value to prevent you from closing the deal in the first place.

If you provide real value, it’ll be easier to upsell further products to an existing customer later on, and again PLG can play a big role in that.

However, to fully commit to a land and expand approach, the organization needs to get comfortable with the fact that the initial deal size is potentially smaller than the full potential of that customer.

Comparing customer value

So how do you then compare these two approaches with each other? The answer is to look at the full customer journey to say something useful about this.

Let’s say you start with the number of people visiting your website. You would compare how many of them would convert on a Demo Request button today, versus how many would convert on a Start Free Trial button.

With that you have the first audience defined and then you calculate the different conversion steps of the model. For PLG, this could look like a conversion from Signup to PQL to Paid to Expansion, and you’d add the revenue values where applicable.

Then do the same for the sales funnel and make sure to include expansion there as well. This will give you a comparable assessment of the lifetime value.

The assumption is often that you will close more deals of a lower value with PLG but the only way to know if that’s realistic is to actually run the numbers and do some experiments.

In some cases though you might aim for an increase in the efficiency of you Go To Market, which could mean that even the same volume is ok. The point here though is that you actually run the numbers, and don’t just assume that PLG will be better.

Even if the full model is not proven yet, a simulation like this will give you the targets you need to prove that this model is superior to what you are doing today.

Focusing on expansion

As became clear from the previous section, it’s not only the potentially higher volume of customers but especially also the expansion potential that needs to be proven for PLG to be considered the better option.

This is another reason why companies who have focused mainly on sales until today could be well off by starting to apply PLG for expansion.

The more standardized the expansion process becomes, the more a company has command over these metrics. It’s harder to evaluate the potential for expansion in PLG if this is currently brought up randomly by a CSM on their quarterly or monthly catchup with the customer.

If a company leverages PLG to present expansion offerings within the right context in the product then this can provide more confidence for one of the unknown metrics for the PLG funnel.

Adding product-led support for expansion is a low risk effort which has a direct impact on the bottom line and provides much more clarity on the potential of a broader PLG model in your business.

In the end the 4 most important conversions are:

·      visitor to signup

·      signup to PQL

·      PQL to paid

·      paid to expanded

The first 3 happen early in the customer journey, whereas expansion can happen after 6 or even 12 months. It’s important therefore to have a good understanding of how you expect expansion to behave, as it will often be an important part of achieving your ROI if you are moving away from a sales model.

It’s not an either / or decision

When deciding between PLG or traditional sales, it can be helpful to consider where on the spectrum of the discussed topics you would perform better.

To give some examples:

• If you need revenue today and don’t have a long runway for the business, then it makes most sense to go for direct sales or in some cases PLG for expansion if you have a good customer base.

• If you need to tailor the conversation and customize to offer for each customer, you are better off going with sales, whereas if you can standardize at least part of that process, PLG could be an interesting growth opportunity.

• If your models show that maximizing the first deal is better for the business than a land-and-expand approach, then you might choose sales over PLG.

What’s important to be aware of though is that you don’t always have to choose between using only traditional sales or only PLG.

The question in most cases will be how to best combine them. There are no fixed rules about what can be combined or even what should be the first step. The only things that matters is what works for your business. The data should always be guiding your decisions.

To illustrate, let’s just take a different tool from your go-to-market toolkit: marketing. Would you let anybody tell you that you can only use marketing as the first step of your customer journey?

Probably not. You will want to do marketing campaigns to nurture, reactivate, or expand the relationship with your audience, even if they have spoken with sales already.

And there’s no reason why it would be any different when using the product in growth. You use it where it makes sense.

So don’t interpret the term “product-led” too literally when coming up with your growth model. Just decide where you want to drive improvement, and then use some of the above considerations to decide the best way to achieve this goal, be it product-led or not.