The Trap of Product-Led Growth

0:00All right. So we are going to talk about the trap of product-led growth. So Neil, do you want to explain what product-led growth is? Product-led growth is a way that you end up generating more growth, more traffic, more users with your product. And a great example of this is Slack. I can give away seats for free. And Slack is more useful when your team is on Slack. But after a certain amount of seats, someone may have to upgrade to pay. Or Microsoft Teams, at the beginning, they're like, Microsoft Teams is 100 % free. Invite all the people in your organization and they can use it for free. Just pay for Outlook or whatnot.

0:33And you can end up using as much as you want. Actually, I think at the very beginning, you didn't even have to use Outlook. It was just pretty much free. But the product led to more growth because instead of spending it on marketing, they spent it on the product. By adding in more features, you can get more growth or you can create a viral effect. So another example of product-led growth is Dropbox. You want more space and storage, tweet. And if you tweet it out like, hey, sign up for Dropbox and people sign up, we'll give you more space. And that was the way Dropbox grew. So a few years ago, so those are two good examples.

1:05A few years ago, I was speaking to the HubSpot's APAC leader. He was basically their general manager. And we were talking about what led to HubSpot's rise. And basically, when the leaders of HubSpot wanted to implement this PLG motion, so freemium, where they gave away a lot of features, they basically crippled the product where you could use some of the free features, but you'd have to upgrade and pay for it at a certain point, right? and 99 % of the company was against that. And the leaders decided to still push for it anyway. And once they implemented that, it was hockey stick growth and that catapulted them on the way to their IPO.

1:42I don't wanna say that changed everything, but their growth really accelerated a lot. So what I wanna show you is this Harvard Business Review article over here talking about the trap of PLG. So PLG is great, don't get me wrong, but there's a catch. So here's what it says. Companies that follow the PLG playbook risk getting stuck in what we call the PLG trap. Although the PLG approach yields rapid initial adoption and growth, scaling a PLG company is a different story. A recent analysis shows that public companies that initially pursued a PLG model are actually 5 % to 10 % less profitable compared to their sales-led counterparts, implying that many PLG companies, despite initially benefiting from superior unit economics, actually lose efficiency as they scale.

2:24So last paragraph here. So for ambitious managers of software companies, the lesson is not to avoid taking a PLG approach. Instead, embrace PLG as an initial strategy, but commit to winning the enterprise over the long term. Plan ahead and you can avoid the PLG trap. One more thing, Neil. So over here, so it says many companies find themselves trapped around the Series C stage, around 200 to 400 employees. But the principles apply to larger public companies as well. For example, Dropbox, the example that Neil gave, Dropbox has seen steadily declining year-over-year revenue growth from 25 % in 2018 to only 8 % in 2023 due to a failure to make this transition.

3:04Seamlessly transitioning from PLG to an enterprise company by avoiding the PLG trap requires deliberate planning from an early stage. So let's look up Box now because Box is in the same space as them. And I also think Dropbox and Box and all of them have gone hurt mainly because of people like Apple and Google. Box has been growing. 2022, they did$874 million. 2023,$990 million. So, 13 % growth there. Let's look at Dropbox. Wow. Bigger market cap. Dropbox has been growing. 2028, 1.39, 19, 1.66, 1.91 in 2020, 2021, 2.16, 2022, 2.32. Even when I look at the last quarter, June 2023, year over year for that quarter, it's an 8.7 % growth.

3:55So I'm not sure what the Harvard, unless I'm messing up the dates, but the Harvard article was saying a drop in revenue or drop in growth? Revenue growth declining. So I don't think drop in revenue, drop in revenue growth. Got it. Yeah, their growth is slowing down, but they're still making money, right? $622 million a quarter is a lot of cash. And I'm not going to try to fight Harvard Business Review on which one's better or worse. I think in the Dropbox example, and even the Box example, they both got crushed because, dude, can I use Dropbox or just click a button on my iPhone and I get more space?

4:30It's an easy drive. Yeah, I don't know why people use Dropbox. Funny enough, I still do because I still have some files on there and I'm too lazy to change them over, but it's not really needed anymore. I downloaded Dropbox from paid to free because of that. I still pay for it. So case study, MongoDB. So the database software company, MongoDB, most people don't know about this, but example of a company that successfully avoided the PLG trap. So they have over a billion dollars in sales. The company has nearly 2 ,000 customers spending over 100 grand a year. So they've made the transition. So in 2009, they were an open source document-based database and they attracted millions of downloads, right?

5:05But then they transitioned to enterprise and it worked out for them. So I think it's just worth calling out that a lot of the marketing tactics that we talk about, there's always a situation where it depends. So for example, in the last episode, it's like we talked about this LinkedIn potentially genius thing, like it depends, right? It's like how big of an impact is it going to make for LinkedIn? Like it depends. Might it make a big impact for you if you have a site with strong domain authority? Maybe, right? So take everything with a grain of salt. do your own research. And the stuff that we're giving you is to hopefully at least set you up, but then you have to do your own research and then you can decide where you want to spike the ball.

5:36Anything else? Oh, that's it. All right. So that was it for today. Please don't forget to rate, subscribe and we'll see you tomorrow.