Six years ago, Dynatrace was in trouble, compared with a rival, Datadog. Its cloud monitoring business faced stiff competition from Datadog, a company using a product-led growth (PLG) strategy. Dynatrace revenue stayed flat from 2017 through 2018 while Datadog’s nearly doubled.
Dynatrace wasn’t the first company to face a PLG disrupter, and it won’t be the last. A recent Bain & Company survey of 176 North American business-to-business software senior executives found that nearly 75% of them are concerned about competition from PLG companies.
The appeal of self-service
PLG has caught fire in software markets, spurred by the success of companies such as Datadog, Atlassian, and Snowflake. Yet many companies still aren’t clear on exactly how it works or how to excel in the strategy, and many underestimate the difficulty of building the requisite capabilities.
LG focuses on enabling end users to discover, try, buy, and scale up their usage in a self-serve manner, without prompting from a sales team. Companies can apply the model to select products in their portfolio or use some PLG capabilities in a hybrid approach—for example, relying on a sales team for the initial sale, then shifting to PLG self-service for renewals and expansion.
Firms that rely primarily on PLG are growing faster than companies with limited or no PLG focus and are almost three times as likely to have gained market share in recent years.
This growth leads to strong performance on several important metrics. For example, companies that rely primarily on PLG exceed the Rule of 40 (a combined revenue growth rate and EBITDA margin of at least 40%) and the even more aspirational Rule of 50 at a higher rate than their non-PLG peers.
In addition, investors reward primarily PLG companies with higher valuations, especially at higher revenue growth rates.
So how can an individual software company determine whether PLG will fit its product portfolio and organization? The approach works best in markets where automated deployments are possible; end users can make purchasing decisions; the product is sticky, with usage growing over time; and the potential customer base is broad, with lots of free users who can convert to paid.
What it takes
If the market fits, our research suggests that companies must master five capabilities to deliver a strong PLG experience.
Product design. The most important product feature is easy deployment by end users, removing any friction to getting started.
Packaging. The key to effective PLG packaging is a free version that allows users to try before they buy. This could either be a time- or consumption-limited free trial or a feature-limited free tier.
Digital discoverability. Since PLG companies rely on user-led product discovery and exploration, they need to drive traffic to their website through search, paid media, communities, influencers, and partners.
Self-guided education and support. Users who found the product need to see value quickly. About 95% of PLG companies surveyed offered user-driven onboarding through videos and guides.
Enterprise sales handoff. While PLG is commonly associated with self-service sales, all large PLG companies have enterprise sales teams.
Investment implications
While some observers believe a PLG strategy means companies can reduce sales and marketing spending to fund research and development, our analysis of public company data shows that primarily PLG companies spend more on both R&D and sales and marketing as a percentage of revenue.
Dynatrace revisited
Returning to the Dynatrace story, while Datadog remains the PLG leader in its market, Dynatrace has been investing in select PLG capabilities: easy deployment, free trials, scalable pricing, and user-driven onboarding. However, because of constraints from Dynatrace’s pricing model, user buying still goes entirely through the salesforce, and the website does not provide complete pricing details.
Leap, but look first
PLG is a major growth opportunity that every B2B software company should consider. The best practices of any transformation still apply: top-down sponsorship from the CEO, recognition that the company will likely need a different operating model, and thoughtful integration with the legacy business.
Product-led growth can delight customers, spur faster growth, and command high valuations—if a company applies the approach in the right markets, with the right products and capabilities.
The original content of the note was published on Bain.com. To read the full note visit here
