Optimizing GTM for PLG with Stage 2 Capital Co-Founder and Managing Director Mark Roberge

SaaS disrupted almost every software category, and product-led growth has a very similar potential. We're in inning number 1 of such an amazing revolution and disruption to software. The world of investing needs a venture capital firm that's run and backed by sales and marketing professionals. We have like the CRO, the CMO, the CCO from most of the cloud 100. 100, from Snowflake to Asana to Atlassian to Salesforce to Oracle to SAP. You want to be moving as fast as possible, but sometimes that fast as possible is how fast you're learning. When I get nervous and I have goals and I'm stressed, I move to science and data.

What is it that you could see in the first month of a customer's life cycle with you that if that happens, they're going to be with you forever?

Let's define what that leading indicator of success is, and let's see if we can get 70 to 80% to hit that. You can do that, I'm very excited about the business we're gonna build together.

What does this team do? What does this team do? Growth. I know what sales does, I know what marketing does, I know what product does, I know engineering, I know finance, I know HR, and we've got this growth team. That's what we're gonna debunk today. Specifically in a PLG context. So I've been thinking about this for a while, and I don't know, some of the best descriptions I see for PLG is the consumerization of software. I like that, the consumerization of software. And if you buy that for PLG, then perhaps we can draw some parallels between the highest-flying, most successful consumer tech companies and what they do in their growth team and learn from them for our growth teams in PLG. And so 3 years ago, I started a class at Harvard Business School to explore that, and I had the growth leaders from LinkedIn and Pinterest and Lyft and Facebook, and also on the B2B PLG side, like Shopify and Atlassian, Asana, and Dropbox. And my students, I studied these teams, and we see a pretty big gap between the average, median, B2B PLG growth team and what these teams are doing. And that's what we're gonna kind of demystify in the beginning, and then we'll move to some of the go-to-market overlays. So what does the growth team do? This is not profound. They manage the self-serve funnel. And this is a very simple way to talk about that self-serve funnel. They acquire free users, they retain those free users, they monetize them, And then they expand them. But my question for you is, if your growth team, if your company could be best in class at one of these and average the others, which would you choose? Which of these four would you want to be best in class at? How many of you would want to be best in class at free user acquisition? And average at the rest? Don't be shy. How many of you would want to be best in class at free user retention and average at the rest? Almost half. How many of you would want to be best in class at monetization and expansion? I'll put those together. Almost half. Little more than half. That's what I actually see, is I see a lot of B2B growth teams and PLG companies focus on the monetization But these folks that we studied focused on the free user retention. And it might challenge us to think a little differently there. We were pretty split on that, and maybe we can debate it. So anyway, the— what these teams do is they actually, while they think the free user retention is the most important, they actually evolve their North Star metric as they achieve different milestones. So the first thing they do is try to create a flow of free users to experiment with, and they kind of force them in there. They don't care about the CAC to do it. This is where they use like paid digital marketing. Can we get 100 users in here a day? Can we get 100 users in here a week? The faster we get the users in, the faster we can experiment, the faster we can learn. And then they focus on free user retention. There's two ways I personally like to look at this particular goal here. The first is by Sean Ellis on the left, and the second is by Brian Balfour on the right, and they happen sequentially. Sean Ellis is from Growth Hackers. He was an early growth consultant at Dropbox. He's done a bunch of these. This particular analysis is a great article around Superhuman, if you use that email productivity tool. And what he argues is when you have your first 30, 40, 60, 80 users, survey them and ask them how disappointed would they be if your product didn't exist. And he argues that if 40% or more are very disappointed, then you have very strong signals of product market fit. And if you don't, you should talk to them and find out why. But eventually you'll evolve out of that. Eventually you'll start acquiring 100 users a week, and you can move to Brian Belfort's chart, who founded the Reforge School. And what you see here is each color are users acquired in a given week. So we acquire 100 users in the first week, and after week 2 and week 3 and week 4, how many are still active? So if that chart goes to zero, you cannot move forward. You do not have a business. You cannot focus on monetization. But if you acquire 100 users in a week, and after week 2, after week 3, after week 4, 20 or 30 are still active, still active, still active, you have achieved something that few entrepreneurs achieve. I might argue that's the most important piece of the PLG journey. I might argue that if you can get people to stick and continue to use your product, you will figure out the scalable user acquisition model, and you will figure out the monetization model. And that's where they go next. Now we've proven that we can put 100, 200 users into this funnel and they'll stick around some percentage forever, but can we do that scalably? So now we move to things like virality, we move to content marketing to decrease that user acquisition cost. I remember when we were doing this at HubSpot for the CRM product, we looked at it and we're like, oh my gosh, to acquire a free user for our CRM, it costs us $120 each user for a free product. So we focused on that and we did 17 experiments in a month and they got it down to $12. And it was through virality and content marketing and those more scalable channels. And then finally they moved to monetization. In the B2B PLG world, at the board level, at the investor level, at the founder level, we skip to monetization too quickly. These best-in-class companies think free user retention is the best and they— is the most important, and they evolve their North Star metric accordingly. How do they operate? They operate by doing high-quality Data-driven experimentation. These are rapid experimentation teams that activate and instrument the funnels. They know that their activation rate is 47% and their goal in the next 3 weeks is to get that to 61%. They know that their free user retention is 22% and their goal is to get to 37%. That's how they're operating. And they segment it. This is an important learning for our founders is We don't, we don't need to get every single user to love our product. We just need to get a large enough segment. So we don't need to do an analysis on, you know, these, these free user buckets on every single user. Maybe it's just salespeople, maybe it's people in finance, maybe people that are in North America and other places. So we can segment to define where do we have product market fit so we can move to the other goals. And shockingly, shockingly, these consumer growth companies, I am so surprised on how much engineering effort they invest in making experimentation easy at their company by non-technical people. Some of them say that over half of their engineering resources are not spent developing features that a consumer will ever experience. They're spent making making experimentation easy. And think about it in your context in B2B PLG. Is your marketing team bothering your product and engineering team every time they want to run an in-app notification experiment? Is it worth it for you to have one engineer spend 3 days in making it easy for marketing and non-technical people to run as many in-app notification experiments as they want? That's super valuable, and that's how these consumer growth companies work and think. They also create an experiment log. This takes 7 minutes to write. What is the experiment? What's the hypothesis? How are you gonna run it? What were the results, and what did we learn, and what is the next experiment we're gonna do? And they review this as a team every week, and guess what? A month from now or 2 months from now when another person joins your growth team, they spend the first day reading all the experiment logs. And they're right up to speed on what you know today and what you're trying to figure out. Okay, the third thing they do is they run in a cross-functional team. They don't put like marketing in charge of free user acquisition and product in charge of monetization and retention. They put them all working on the North Star metric today because if you don't, you're gonna end up with local maximums. What's gonna happen is The product team is going to say, listen, we can't get any of these users to stick because marketing is not generating the right users. And marketing is going to say product team wants like left-handed plumbers in Arkansas. It's like an unrealistic request. So we have to have these two teams work together in growth and harmony on the North Star metric. They put them together as a cross-functional team. And this is how they typically evolve when we go from seed to A to B. When you're seed, like This is like 3 or 4 people, they're athletes, they're full-stack engineers that have some design skills, they're product managers that might be able to code a little bit. But then as you get to the Series A, they become specialists. And you have a data scientist, you have a full-time designer, you have a legit PM, you have a couple full-stack engineers, maybe you have a CSM on the team. And as you graduate to B, C, and D, these teams are specialized by products or features. At Lyft, they have a growth team for the riders, And they have a growth team for the drivers. And that's how we evolved today. Okay. So that's the basics of what these folks do. Now what about the go-to-market overlay? There's a lot of founders that are super hesitant of like, I've got this beautiful, they're product founders, I've got this beautiful growth PLG motion. If I add a salesperson, will it ruin it? Will it ruin that magic? And a lot of times it does. And these are the 4 things that I often see on the difference between these high-scale folks and the failure and mistakes that happen. Where does the growth team sit? Does your growth team, or are you gonna put your growth team in sales, product, or marketing? Are you gonna put your growth team in sales, in product, or in marketing? How many have or will put your growth team in sales? How many will put it in product? How many will put it in marketing? Okay, we're still split a little between product and marketing. And this was a surprise to me, because a lot of these startups I see in PLG, almost all of them actually, put their growth teams in marketing. And I think that's an opportunity because all of the best-in-class ones put their growth team in product. And what happens if you put your growth team in marketing is you won't have any engineers. I've never had met an engineer whose career goal was to work in marketing. Like, no offense, right? It's just like not what they want to do. And so if you have your growth team, which a lot of these PLG companies put them in marketing, you're not gonna have any engineers. And if you don't have any engineers on your growth team, you're gonna be limited to your experimentation footprint to top of the funnel, nothing in the product. And your competition's gonna do the opposite and they're gonna beat you. So if you can actually put your growth team into the product team, you will attract engineers and have that full-stack motion that we want, and you'll beat the competition. 'cause your experimentation footprint will be much broader. Now, thank you so much for the questions after, and thank you so much for the comments and questions on the blog articles that we write, because I learn from you, and I tweak the messaging and the frameworks, and one of the concerns that the audience had when I've talked about this before is, aren't you gonna turn your marketers into product marketers if you do this? 'Cause seriously, what, A lot of marketers want to work in product and then they become product marketers. So I have some small font there for you to read and remind you if you consume this later. But that's not what happens. Because when you look at these high-performing growth teams in product, these organizations have actually siloed their product and engineering teams into core product that owns the roadmap and growth that owns the funnel. And so the core product team with the roadmap, that's a different type of— if marketing goes in there, yes, they will become a product marketer. But for the growth team that owns the funnel, those marketers are performance marketers. They're demand gen marketers. They don't become product marketers. Otherwise, you're not doing it right. So thank you for those questions, and hopefully that clarifies that concern. Okay. How do we add the sales team in there without ruining the motion? And really what it comes down to is comparing the growth rate of your growth funnel compared to the growth rate of your sales team. The growth rate of your growth funnel, whether you measure that as users or MAUs or PQLs, product qualified leads, that has to grow faster than your sales headcount. Because if it doesn't, like when you first add these two salespeople and it's beautiful, these salespeople call on these folks who've adopted the product, they're ready to upgrade, some of the rest of their company's adopting it and they can help nurture that with executive sponsorship. It's beautiful. But then when you double the size of your sales team and only increase your growth funnel by 20%, these salespeople get desperate. They have to make their quota. So they start calling these leads earlier before they can actually adopt the product, and they start giving them demos and they start sending them contracts before they've seen the value. And you've ruined this growth funnel and you've gone from adopt before buy model to a buy before adopt. You've accidentally changed yourself to a sales-led growth model. So if you, if you actually grow the acquisition model Faster than your sales team, then the magic retains and you stay product-led growth. The PQLs per salesperson stays static and you have nice expansion. Okay, the third mistake. The comp plan actually drives this. The comp plan drives that behavior of making the quota and ruining the PQL funnel. 'Cause in a lot of cases, we're using compensation models from the 1970s. In the 1970s, we were selling on-premise software. Whoever had the best sales team won. Product quality didn't matter. That's what many people argue. 'Cause the moment that they signed the contract, that company was committed to buying 50 servers in their basement hooking up to the local area network, and spending 6 months training the entire 50,000-person company on how this software worked. And the software sucked. And that's where shelfware came about. And that's how the companies that won in the '70s and '80s and '90s worked. But due to a lot of different things, from the internet to SaaS to cloud to all this stuff, that world has changed, but compensation plans have not. We are still paying our salespeople more for the first revenue from a company and less or nothing at all for expansion revenue. Beautiful comp plan design for the 1970s. Terrible comp plan design for PLG, because this is what happens in a PLG motion. The buyer says, hey, I love your product and I'm ready to upgrade. Can I upgrade to the pro version? And what does the salesperson say? They say no. 'You have to upgrade the entire team and company.' 'But no one else uses it.' 'I don't care, you have to do it.' Because they're thinking, 'That's how I get paid.' And you switch to— that's what drives the buy before adopt, and it ruins CAC, it ruins expansion, it ruins retention. But if we can just pay our salespeople a little bit more, pay them more for the expansion, then our salespeople become aligned. They become aligned with the buyer. And when the buyer says, listen, I would like a pro account, the salesperson says, great. And by the way, does anyone else at your company use it? Why don't we get them set up with some free accounts? And I'll check in in a week or a month or whatever it might be to see how that's going. And we retain the adopt before buy model and we retain The beauty of PLG. Okay. The last and final mistake is on pricing. I— oh gosh, I forgot my asterisk on that one. So can you actually go back one second? Nope, no back on the clicker. So there's one other concern that people brought up here, and that is, are you just turning your salespeople into customer success people? And that's not what I'm advocating here. That's not what I'm advocating. Just because they're getting paid more on the expansion, a lot of research has shown that the success of a customer in retaining and expanding has a lot more to do with the sales process than the onboarding process. It's the expectations that are set. Case in point, let's say there's some IT configuration work that's needed for your product to be successful. A salesperson doesn't have to talk to IT to get the deal sold, but that company's not going to be successful unless IT's bought in. And if they're surprised by this purchase, they're going to be pissed and they're never going to set it up and this thing's going to churn. And so this is just motivating salespeople to set expectations properly so that the expansion occurs. You still use your CSM team. Okay, so a little clarification there. Alright, the fourth mistake on pricing. I almost didn't put this in. There's very little literature on optimal pricing in PLG, so I put it in because I want to start the conversation and I wanted to get your reactions to this. And so maybe in the next year we can talk a little more and try to figure this out. And so let me just lay the groundwork for a hypothetical adoption cycle of a company where you have a user that finds this company, PLG, They set it up, they hit the aha moment, or moment of value, or lead indicator of retention, or whatever you want to call it, and then they become a power user. And when they become a power user, they tell everyone else at the company, and virality occurs, and now more and more people start using it. And then the CIO or the executive team finds out, and they're like, oh my gosh, we gotta lock this thing down, we gotta make it secure, we gotta integrate with the tech stack. So where should we put the pricing tier? 'Cause we work really hard in product engineering, in PLG, with user experiences and user interfaces to remove friction from adoption. But then we introduce pricing models that introduce friction to adoption. It's inevitable. But where should we put it? I don't think a lot of people put it here. I don't see a lot of examples of putting a pricing tier that prevents someone from becoming— getting value. A lot of people put it here. A lot of people put the pricing model where it's once you hit the aha moment, let's start charging them so they have to pay to become a power user. Maybe that's right. I don't know if I agree. More people put it here, which is like, yeah, become a power user, but when you have 3 users or 4 users, you have to start paying. And that's like slows down virality. I personally like putting it here if we can, because the end user is not going to care if the executives have to pay to make this secure, or to get the dashboard that they— so they can know more about their business, or to integrate it with their tech stack. It doesn't stand in the way of the power user. And you might say, well, maybe we're leaving money on the table. Maybe we're leaving money on the table. But I was having this debate with Liz Christo, one of my colleagues at Stage 2. She'll be on tomorrow, I think around 3 o'clock. And she's seen early signs of this as well. Which is one of the beauties of PLG, and the reason why I think this is such a disruptive business model, is if a user wants to adopt a new category and option A is do a sales demo and then pay $10,000 a year and then start using it. And option B is do a sales demo and pay $10,000 a year and start using it, and option C is download the thing for free and start using it and then pay if I like it, the buyer's always gonna choose option C. That's why PLG is so powerful. But as more and more categories where PLG is applicable, I bet buyers may get a little smarter about that. They might see that option A is do a sales demo, pay $10,000 a year, and then use it. They're not going to do that one. Option B is download it for free and use it up to 50 messages. Option C is download and use it for free up to 500 messages. We're not there yet, but we might be there soon. And if you buy into that, then the pricing models that don't put friction in getting buyers to get to the aha moment, getting them to become power users and creating virality will win. Something to think about. I don't know. But we got to figure that out. Okay, what if we try PLG and fail? I do believe that PLG has the same disruptive potential that SaaS had in the last 20 years. It reminds me a lot about SaaS. I don't think it's as applicable to as many categories as SaaS was. SaaS was applicable to almost every tech category. PLG is not, and I'll show you some literature on that. But for the categories that it is, just like today the public markets in B2B are dominated by the SaaS attackers, I predict in the next decade the PLG attackers will dominate the public markets for the categories that it's in. Because it's really hard, just like it was hard to be an on-premise software company and move to SaaS, it's really hard to be a non-PLG sales-led growth growth company and move to PLG. I actually did, just did a talk with Blake over at OpenView on his podcast that I think is going out next week on how to make that move, and it's really hard. Okay, so should you try PLG? Yes, give it a shot. And here's the reason why. If you try it and it fails, all you're left with is a very easy to adopt product. That's what you're left with, and it's really easy to move to sales-led growth, and you're not gonna be looking over your shoulders for the next 10 years to see if a PLG attacker is gonna win because you gave it a legit shot, and for whatever reason, it's not applicable to your category. So give it a shot. The other thing I see is the mistake of waiting to implement PLG. Mark, we love PLG, We're going to get to $2 million in revenue and then we're going to move to PLG. You're stacking the cards against you. You're stacking the cards against you. Because it's hard enough to have a white space, brand new company, and architect the perfect product and pricing tier and free user motion. Never mind having $2 million in revenue with 500 customers. And you're asking ourselves, if we choose this product and pricing model, how much of that will cannibalize down? How many people who are paying us $10,000 a year will stop paying us and just use the free product? The minute you start designing your PLG funnel with cannibalization in mind, you're cooked. Because someone else is gonna cannibalize you. Someone's gonna disrupt you. And you gotta disrupt yourself. Yourself. So just be careful about waiting because it gets a lot harder. So these slides are actually posted on the Stage 2 Capital LinkedIn right now. So you can go there and download it. I talked to you that, um, uh, is PLG applicable to my category? We don't have time to go into that today. I think this is a really important question because I think if it is, the PLG attackers will win and it might as well be you. And this is just an article that you can check out to analyze how likely PLG is applicable to you. And then as we just the, the takeaways here, you can see in there the key points that we covered here. And I know on the, on the great opening here, they talked about Stage 2 Capital. We are the first VC firm that's run and backed exclusively by go-to-market executives. So we have 2 funds. We have a Series A growth fund and we have a growth, a go-to-market accelerator. The Growth Fund is backed by over 300 CROs, CMOs, CCOs from the most famous software companies in the world like Snowflake and Okta and GitHub and Twilio and Drift, who's coming on after this. And then on the accelerator, we have the managers and directors. We've got 200 of those that help out the seed-funded businesses. We invest in anything B2B software or marketplaces. Whether it's DevOps or industrial SaaS, vertical marketplaces, fintech, etc. Usually these companies on the top are around a million in revenue is when we get involved, and these are tens of thousands to hundreds of thousands. And this is the stuff that we help them with, you know, building out that furore sales team. We've put out a lot of content out there. Thank you so much for coming in and commenting on it. If you want to download the science of scaling or how to build your first revenue plan, you can check that out on the blog. And I hope you enjoy the show. Thank you so much for Lemkin and team for the great platform. Have a great quarter and a great show. Thanks so much.