How Software Companies Can Avoid the Trap of Product-Led Growth

By Liam On Sep 22, 2023

Enterprise technology companies typically grow by investing in costly sales and marketing activities, experiencing long, expensive sales cycles. If it works, their software will eventually be implemented ‘top-down’ across the entire enterprise. That approach is tried and true, but it’s not the one Dropbox or Slack took. Over the past decade, these companies and many others have pioneered a groundbreaking new business model that is taking over the $250 billion software-as-a-service market. It’s called Product-Led Growth (PLG).

The PLG playbook is elegant in its simplicity: first build a compelling product that is indispensable to end users. Then drive widespread internal use without friction and add more and more value for those individual end users. Finally, leverage internal champions and their case studies to approach corporate IT buyers to purchase the product for enterprise-wide use. One of us, Oliver, has successfully executed this strategy as a sales leader at both Dropbox and Asana.

When it comes to building initial traction, the benefits of the PLG model are clear. A recent Bain study showed that PLG companies had generally experienced higher sales and market share growth in recent years compared to non-PLG companies.

However, there is a catch. Companies that follow the PLG playbook risk getting stuck in what we call the PLG trap. While the PLG approach delivers rapid initial adoption and growth, scaling a PLG business is a different story. A recent analysis showed that publicly traded companies that initially pursued a PLG model are actually 5 to 10% less profitable compared to their sales-oriented counterparts – implying that many PLG companies, despite initially benefiting from superior unit economics, actually increase their efficiency losses as they scale up.

For ambitious software company executives, the lesson is not to avoid a PLG approach. Instead, embrace PLG as an initial strategy, but commit to winning the business in the long term. Plan ahead and you can avoid the PLG trap.

Understanding the PLG Trap

Ultimately, scaling an enterprise technology company will require classic enterprise sales. But adding enterprise sales as part of a multi-faceted approach to growth isn’t the same as flipping a switch. It takes years to build and execute a corporate product roadmap and go-to-market strategy. PLG companies that neglect this approach early on will unfortunately find themselves stuck once they tap into the pool of initial bottom-up users. Very few companies have shown that they can escape the PLG trap once they get stuck.

The PLG trap creates a common and natural dilemma for SaaS executives and boards for several reasons:

When building a great product that appeals to end users, companies optimize their product and support organizations for small teams.
As expansion opportunities arise, companies add the bare minimum of features (such as additional security, reporting, and administrative functions) to drive initial adoption by classic early adopter customers.
The success of these early adopters inspires the company to quickly scale an external sales and marketing team to execute this top-down, sales-led movement.
The company then realizes that they are caught in a gap: the early adopters thought the minimum set of features was sufficient, but the majority of the market did not. Meanwhile, the customer service team is not used to serving large enterprises and the marketing team focuses on small end users, not senior IT managers. The PLG company is not really ‘enterprise ready’ at the product or organizational level. Sales stall.

A PLG company makes every decision logically, but every decision can be a step deeper into the PLG trap. Many companies are stuck around the Series C stage – around 200 to 400 employees – but the principles also apply to larger, publicly traded companies. For example, Dropbox has seen steadily declining year-over-year revenue growth from 25% in 2018 to just 8% in 2023 as this transition has not been achieved. A seamless transition from a PLG to an enterprise, by avoiding the PLG pitfall, requires thoughtful planning from an early stage.

Avoiding the PLG trap

To become fully enterprise-ready, a PLG company must simultaneously deliver bottom-up value and be prepared to ultimately deliver enterprise-scale value. Here are three activities a PLG company must undertake to seamlessly evolve from a PLG-only to a PLG+ enterprise company that can avoid the pitfall:

Create communities of champions at multiple levels in the customer organization.

The most successful PLG companies draw inspiration from successful open source companies and cherish community building as a competitive advantage to be won over the long term. Establishing an advocacy program becomes a core competency early on, even before investing in monetization. It is important to note that PLG companies must build multi-tiered community programs to engage multiple stakeholders, unlike sales-led companies that may focus primarily on developing top executives. PLG companies need to develop champions at the end-user, IT and executive levels, with each level likely requiring a different approach to community building.

Build a go-to-market plan (GTM) that includes multiple sales moves.

Successful PLG companies may start with one GTM move, but eventually build multiple GTM moves to capture different types of customer opportunities. Unlike sales-led organizations, which are often segmented based on customer size (i.e., SMB vs. Enterprise), PLG companies are often segmented based on sales movements.

The most popular moves that PLG companies are building include:

Self-service: an e-commerce experience that generates demand and entices end users into organizations
sell at high speed: a data-driven sales campaign that uses modern CRM (Customer Relationship Management) tools, automated workflows and analytical segmentation to identify and convert organizations with a higher willingness to pay,
expansion sales: a capability that focuses on the transition of organizations with strong product usage to adopt the product company-wide, and
outgoing sales: an outbound move targeting senior executives on prospects who may not adopt as many organic products.

Deliver product value at multiple levels, including at the enterprise level.

PLG companies often start by providing value to end users or small teams. The bottom-up adoption stimulates the viral adoption of the product in organizations. As PLG companies scale, they also need to deliver product value to centralized purchasing personas such as IT and executives. To address IT, many PLG companies are developing an enterprise version with better management and security capabilities. To appeal to executives, some PLG companies, such as database software company MongoDB, naturally deliver enterprise-scale value due to the nature of the product. Other PLG companies, especially those at the application layer, may need to build, acquire, or package adjacent products that deliver value at enterprise scale. HubSpot has done this very effectively, evolving from a lightweight and limited blogging tool to a powerful CRM useful for larger enterprises.

Case study: MongoDB

Database software company MongoDB is an example of a company that successfully avoided the PLG trap, despite starting with a bottom-up sales push. (One of us, Jeff, is a partner at a venture capital firm that invested in MongoDB.) With more than $1 billion in revenue, the company has nearly 2,000 customers who spend more than $100,000 a year on its software. Yet the company’s origins lie in an open source tool that end users could download for free.

The company’s original product, an open source, document-based database tailored to the rise of Internet applications and the era of big data, was released in 2009 and has been downloaded millions of times. As the company grew in popularity among large enterprise customers like Goldman Sachs and Thermo, it built advanced security features and invested in massive scalability to earn its way into the enterprise. At the same time, MongoDB created a turnkey sales team, marketing team, and customer success function.

While the company had just over 100 customers making over $100,000 per year at the start of 2015, that figure had doubled by the end of 2023. At the same time, the organization was redesigned to be enterprise-ready, with multiple sales promotions, flexible product configuration and a major investment in empowering the end-user community. By building both an enterprise-ready organization and a community-driven organization, MongoDB has smoothly scaled past the PLG pitfall and become one of the largest software companies in the world. At the time of writing, the product has been downloaded more than 265 million times.

By planning ahead, PLG companies can make the necessary strategic decisions to build a team and product platform that is truly business-ready. The PLG model is seductively simple. Winning software companies must be willing to embrace complexity and go beyond the typical management advice to “do one thing and do it well” and instead manage to chew gum and walk the walk at the same time.