In the past few years, the PLG model has gained significant traction among founders and VCs. It has emerged as the preferred business approach for addressing consumer demands and achieving scalable growth for businesses. However, in light of the recent economic turbulence, the tech industry needs to determine – is PLG still the golden child of startup growth? In this blog post, we’ll discuss when PLG is the right way to go, when a different approach might be preferred and how to make the right choice.
This blog post is based on a fascinating conversation between Rona Segev, Co-Founder & Managing Partner at TLV Partners and Mackey Craven, Partner at OpenView, which took place on February 27, 2023 in Tel Aviv. You can watch the entire discussion here.
Background: What is PLG?
PLG, Product-Led-Growth is a go-to-market philosophy in which the product is the primary mechanism for the go-to-market and company growth. This means the product propels the acquisition, retainment and engagement with users and customers. There are various ways to execute PLG. However, the basic principle is about de-laboring the business processes: sales, customer success, account management, etc. The product replaces these functions and fulfills those needs for the user base and customers.
PLG Pricing Models
The discussion presents two main pricing strategies for PLG products: consumption-based and tiered.
- In the consumption-based model, also known as the usage-based model, pricing is determined based on the extent or frequency of product usage. Users are charged according to metrics like the number of active users, data storage, or API calls.
- Tiered pricing, on the other hand, is based on multiple pricing tiers with different levels of features, functionality, and support. Each tier is associated with a different price point, allowing users to choose the one that best aligns with their needs and budget.
The Role of Open Source
Open source can be an important growth engine for PLG. By building a community for the product, founders can get pre-validation that they have the right technical solution for a real need. The community can also provide social proof.
There are two main approaches for leveraging open source for PLG:
- Organic – Building an open source business that is truly focused on the community and grows like the self-serve model.
- As a GTM tactic – Building a software company that has an open source component.
It’s important to remember that it takes approximately two to four years to build an open source community. Therefore, the recommended approach is to invest a number of years in building an open source product and its community, before founding the startup (rather than developing them both at the same time).
Not to be confused with open source communities, PLG communities are the group of users who actively use the product, share information with each other and become a source of knowledge for each other. This makes communities another important growth engine in PLG, since they can provide feedback that drives the product roadmap. Once you do have a community, it’s recommended to invest in it rather than rush to monetizing it.
Are Design Partners a Part of PLG?
In most cases, design partners are primarily an enterprise motion
. When working with design partners, the deal size is usually larger than PLG deal sizes. In addition, the interaction with design partners requires a lot of human time and effort. This includes time for onboarding the design partner, garnering feedback and adapting the solution to their needs. These requirements counter the PLG principle of de-laboring these processes.
PLG Benefits and Challenges
PLG is thought to offer multiple advantages to business, including:
- A great user experience
- Organic growth
- Efficient customer acquisition
- Data-driven decision-making
However, the PLG approach is not necessarily right for every busin
ess, product market, user or buyer set. The goal of PLG is to make it as easy as possible for the user or the buyer to derive value from the product. This creates a number of challenges:
- Some users expect to have their hands held rather than wanting to get their hands dirty by diving deep into the product and figuring it out on their own. PLG isn’t right for them.
- PLG enables organic exponential growth. This can be a very frustrating and long process.
- The product and the usage characteristics create a behavioral pattern that influences growth speed and could limit accelerated growth.
- Organic acquisition makes it more difficult to show growth and potential at an early stage.
- PLG products are better suited for users who know they have a problem and are searching for a solution. It’s harder to educate about the problem.
- Consumption-based pricing is tricky if the product is not fully self-served, and could quickly become non-profitable.
- PLG models don’t build human connections.
These challenges can become all the more prominent during times of economic uncertainty.
Rethinking PLG? Navigating an Early-Stage Startup During Economic Turndown
Businesses are now transitioning to a new financial cycle. From the highs of 2020 and 2021, they are now required to operate in a different environment. In this new climate, founders will be pressed for hard dollar ROI, much more than before. In addition, their growth rates are expected to be different, and probably lower.
In other words, conversations that used to be easy, might become very hard and fundraising is expected to become more challenging.
To prepare for these times, founders need to:
- Ensure they have enough runway to achieve their milestones: proving product market fit, releasing the product, getting initial revenue, etc.
- Adjust and lower expectations about the financial performance of the business this year.
- Be able to provide information to VCs about a variety of metrics. These include:
- Retention, and specifically organic net retention
- Growth rate
- Business scale
- Gross margin
- Payback period
- Usage data
- In PLG companies, the ability to show how free users convert to paying customers
Which GTM Approach is Right for You?
In light of these changes, founders should validate, and possibly rethink, their GTM approaches. Sales-led and PLG are both valid and good approaches for entrepreneurs. However, if they don’t fit your business, here are some other hybrid options to consider:
Mixed PLG Models: The goal of PLG is to make the product as easy as possible to use for users and to generate value for them. Therefore, sometimes humans need to be involved. This means incorporating a “classic” PLG model while also letting company employees talk to customers, finding different ways to provide self-service or choosing different pricing models.
Incorporating PLG After Building a Sales Team: Another approach could be incorporating PLG on top of a sales-led approach. In this model, PLG becomes a way to shorten sales cycles, rather than becoming its own core revenue stream but rather as. This can be done by starting out by allowing users to experience the product and understand its value, instead of having a BDR call, qualify, set up a demo environment, etc. This could turn a six-month sales cycle into a three-month sales cycle.
PLG can also have value for retention and growth. Instead of having sales conversations for upsell or price against pure value, a consumption-based pricing model can help scale while de-laboring expansion conversations.
Next Steps for Founders
Your GTM choice is a significant one, and it should depend on your product, company, market and who you are. For founders who focus on control, consistency and getting to series A as fast as possible, a sales-led approach could be easier. However, if you are someone who is excited about building an elegant product that people love and are actually emotionally attached to and effusive, the product-led model can be the right way to go.
In any case, a PLG model should never be forced on a company or market. Instead, PLG implementation should be adapted for your company or market to ensure it supports your business goals.