10 Steps to Build a PLG Machine from Zero to IPO
What to build at each stage of a Product-Led-Growth company to drive your valuation from zero to over a billion dollars and exit.
How do you build an efficient growth machine and how do you know its impact? What do you build at each stage of the company? When do you invest where?
Especially in 2024, your investors are focused on Net Revenue Retention (NRR). This metric will be a big part of your board meetings. This is how you’ll measure impact and a key measure of how investors will evaluate the business you’re building.
This post tells you what to build at each stage of the company and what metrics you can expect to move.
I’ll walk you through what we did at Outlook Mobile, Slack, and Spendesk to build successful businesses and outsized valuations. All put in the context of the Customer Journey and where you are in your company growth story. From 0-to-1 discovery up to exit.
🎯 The Goal
Before we get started, what is NRR, what does it mean, and how can PDE (see below) drive it?
NRR is the effective sum of all the things your customers and employees are doing and how that activity converts to efficient revenue generation.
Calculated using the below equation and expressed as a percentage, an NRR greater than 100% indicates that your business is growing.
According to surveys conducted by Iconiq Venture Partners, the NRR of a top-performing business will vary depending on the company’s stage. But a good rule of thumb to aim for is 110%-120%. Higher is better.
NRR and the Customer Journey
The challenge is that NRR is a lagging indicator. This means that by the time you know you are wrong it’s too late. It can also be challenging for folks to make the connection between revenue generation and what they should be building this month. Where should the teams focus?
To provide context, below is a generalized version of what we used at Spendesk to articulate the customer journey. For a company with a sizeable PDE (Product, Design, Engineering, Program Operations, Data….there are a lot of folks these three letters include), and with the right weighting, it’s reasonable to create OKRs (Objectives and Key Results) that stretch the entire journey.
Here is where we see the connection between company objectives, unit economics, and where resources can be focused (what to build).
Three key takeaways from this.
You can have the best product in the world, but if you haven’t got an efficient engine to drive Acquisition and Activation, it won’t matter. Growth and efficiency will slow. Customer Acquisition Costs (CAC) will rise and NRR will drop.
You should experiment with when you monetize relative to when the customer is using your product (getting value). In the case of Slack and Outlook Mobile, we prioritized the delivery of value and retention before monetization with a freemium model. This kept CAC very low and enabled us to focus on building valuable features and driving user acquisition, which drove NRR higher.
Expansion can be gaining more users, upselling, and cross-selling. But to get to this, you need to nurture your customers through the entire user journey while you’re building value and expanding your product portfolio.
The building, evolving, and development of the above pipeline is the balance of company, product, and Go-to-market (GTM) transformation for a PLG company. The next sections will walk through each stage of the journey to get to a highly performant, efficient growth machine.
🐣 Zero-to-One: Validate Hypothesis and Build an MVP
This is the most fundamental of starting points. You have a website and a manual onboarding process that separates the customer from the value the product delivers. Those of us who have been in the SaaS business for a while will recognize the Customer Journey of a Seed-Stage startup. A company at the zero-to-one phase of development. However, when was the last time you opened a bank account or got a credit card to then access their online portal or mobile app? The process looked like this, with the additional paperwork and Know Your Customer (KYC) process jammed into onboarding to slow everything down.
Customer acquisition is via paid search and onboarding is highly manual. The website is purely informational and is just a landing page to point prospects towards. Engineering resources are focused on building the core product. The team is engaged closely with customers to carry out qualitative user research and discovery while iterating rapidly toward the first product. This is the AirBnB genesis story.
Key characteristics:
Acquisition, Activation, and Monetization are long
CAC is high
Customer churn is high
Ideal Customer Profile (ICP) is to be determined
NRR is below 100%
Even if you have 5-star reviews, you do not have Product-Market Fit
All available resources are building the core product, so there is no Expansion effort.
Some investors consider success at this stage to be closing a paying customer. This can be a distraction. The value of investing resources to make that sale when the core product is still to be determined is debatable. If you’re going to charge at this stage of the development of the company, then bundle it in with account creation and the onboarding flow as it’s still probably highly manual.
🌱 Seed Stage - Onboard Customers & Build Awareness
Once you have validated the hypothesis central to your product and realized it in code, you’re now ready to start leveraging your existing customers to gain more. You have your Minimum Viable Product (MVP) and you’re ready for your first experiments in flywheel creation.
By enabling existing happy customers to invite or otherwise spread the good news of your MVP via sharing and invitations, you’re doing a few things.
Validating the value of your solution. A share by a user is an implicit NPS score of 10.
Decreasing CAC slightly
Increasing NRR slightly
Ideally, you’d be building a Freemium model, but if you want/need to charge at this stage of the company, put the payment step after you’ve onboarded the user. Payment will be broken out and automated to lower cost-of-sales.
This was the stage the Outlook Mobile team was at when I joined. A small but incredible engineering team with an App Store presence and two simple growth actions.
A link in the footer of every email: Sent from Outlook on iOS/Android
Send availability: A neat workflow to link your calendar and email
The reality is, we’re continually iterating towards achieving Product Market Fit. We’re still working out our personas and narrowing in on the ICP definition. With so many unknowns and changes in the product (inspired by direct user research), we’re not ready to invest deeply into instrumenting the app. Churn will still be high and the only metric of success that is useful at this point will be the number of sign-ups and Monthly/Daily Active Users (MAU/DAU).
🛫 Series A+ Product & Company Launch
While zeroing in on the MVP, ICP and key persona you will be working very closely with Product Marketing (PMM). You need to be building the product while defining how we should be talking about it. Branding, messaging, positioning, etc. All of these will be designed and tested in a tight close loop as you’re building and refining the MVP. Product influences messaging, and messaging influences product.
With these key components in place, you’re now ready to launch your product and your company. This is when you bring on a marketing leader who builds out the marketing component of the company. This often involves a lot of outsourcing and consultants, but you need leadership and PMM in-house working closely with Product and Design.
By building out the marketing function, we expect the following metrics to improve.
CAC will initially increase with the investment, but then decrease as SEO, SEM, etc. start to take effect.
Top of Funnel (TOFU — website hits) will increase and you’ll start to ramp up the number of customers you’re converting and onboarding.
Installs, MAU, DAU will increase
Churn-rate may go up.
NRR may go down.
The fact that NRR may go down is expected but may be counter-intuitive. It can be a trigger for disappointment in the team. But it’s just a data point to learn from and an indication of one of two things (or both).
Marketing has gotten a little over its skis and we’re positioning the product as doing more than it actually can. The promise of the product is higher than what the product delivers. We do not have Product Truth. In this case, we need to adjust messaging and/or fill the gaps in the product to ensure expectations are met.
We may be targeting the wrong customer, the wrong demographic, the wrong socio-economic layer, the wrong age, geography, etc. The marketing may be landing with an unexpected segment of the market and we need to pivot the product to meet that unexpected demand. Alternatively, we may need to pivot our messaging as the segment we’re tapping into doesn’t have the Total Addressable Market (TAM) we need to build a fundable business.
From an infrastructure perspective, Spendesk was in this position when I joined. With the addition of a robust community and a broad set of functionality. We had Product Truth and we’d driven growth through effective sales motions.
The challenge was to increase the velocity of value delivery and bring CAC Payback down. We’d also accomplished a tremendous amount of this progress with very little automation and tooling. So overall capital efficiency was low. Our task was to right-size this through investments in PDE to bring that organization on par with the very effective commercial organization that had been put in place over the preceding two years.
📊 Series B+ Understand Customer Behavior at Scale
As the company navigates the previous phase, Product and PMM work closely to get the product and the messaging in the same place. Both sides of the funnel (Product and Marketing) iterate rapidly to move their metrics in a positive direction.
At this point, we’re hitting a level of scale where we’re losing sight of what customers are doing in the product and what is most effective to drive the TOFU. We have more questions than answers in how to drive up conversion rates, drive down churn rates, and drive up NRR. The call goes out for more data.
At the same time, to reduce CAC, the revenue organization starts to turn on affiliate and/or partner programs. They may also be able to bootstrap a user community as a source of increased engagement and lead nurturing.
Marketing increases the sophistication of their multi-variant testing and introduces the concept of a Marketing Qualified Lead (MQL). They’ve instrumented their various assets and are experimenting with Call-to-Actions (CTA).
Product needs a way to understand the customer’s engagement with the product at scale. To get data to validate hypotheses and to inspire further user research. As confidence in the product increases, this may be the time when a small but dedicated Growth team is created that starts to experiment with new in-product flywheels.
TOFU increases
Conversion rates increase
Churn rate decreases
NRR increases
Without close coordination between marketing and product, this could be the first time that unnecessary technical debt could be built into the Customer Journey. By using different instrumentation tools and creating separate data pipelines we have a disconnected view across the Customer Journey. With the choice of tools available, this is unnecessary.
🔂 Getting to Product Market Fit
By charging a customer before they’ve used the product you’re creating an imbalanced exchange of value. Your product is unknown and all the customer has seen so far are promises of the value your product delivers. Product Truth has not been established in the mind of the customer. This is the primary reason why your retention rate is so low while having a small but devoted set of users who love you.
Rare is the product that delivers sufficient value immediately upon its first use. Or even after a full day or month of use. Even a known quantity such as a car has a test drive built into the sales process.
We need the customer to fall in love with your product and become a reliable source of additional customers themselves. We need to move beyond the Early Adopters and Visionaries and make the leap across the chasm to the Early Majority. This takes investment.
Working very closely with PMM, you collectively devise a Freemium business model. If this is the first time you’re charging, you’re creating the Premium tier (ex. Notion, Slack, etc.) or building in-app purchases (ex. Fortnite, Roblox, Headspace, Duolingo, etc.). If you’re doing the reverse maneuver, you’re introducing a Free tier (ex. Netflix, Instacart, Amazon, etc.).
Do not build a new and additional product or service. Not yet. You’re still working on PMF and your resources should be spread very thin. (Look at your ARR/FTE for a gauge of efficiency.)
Package, price, and brand what you’re currently delivering in a way that enables you to charge for the value you’re delivering. Deepen your customer maturity model through data to differentiate between your free users and your paying customers. You should have different goals for each as you nurture both personas.
TOFU will increase
Churn will decrease
NRR will increase
Get/keep NPS high (always)
🚀 Product Market Fit Unlocked
During the Freemium product launch and beyond, you’re looking across your entire funnel. You need to get very close and understand both quantitatively and qualitatively customers’ behavior, opinions, and thoughts while using the product and not using the product. All within a deep understanding of their context. You’re validating that you’re delivering the expected value for the paid product (Product Truth) and you’re getting clarity on how free users are engaging with your product.
Based upon analysis of the data, you will be able to define a proxy for intent to upgrade to the paid product. This proxy is a combination of behaviors you can measure within your product to identify a user as a Product Qualified Lead (PQL). Someone who has an increased propensity to buy.
With that clear definition, we now have a metric we can drive towards. We can start with some lightweight product-initiated messages via email or text. This is another area of deep collaboration with PMM. PM defines the triggers and PMM iterates on the messaging to drive up the conversion rate from free to paid.
Now we have the Demand Generation team driving the front of the funnel, Growth PM driving deeper engagement to create PQLs, and PMM/Demand Generation driving the conversion from free to paid.
TOFU continues to increase
MQLs increase
MAU & DAU increase
PQLs increase
NRR increases and CAC decreases
This was where Slack was when I joined. One of the goals of the teams I led was to build out useful value-added features and workflows that would become flywheels to bring in new users to the product.
With the right product solving the right problem for a meaningful market (TAM), we now have a machine that can drive up NRR well above 100%. Combined with a healthy CAC Payback, you are now able to declare Product Market Fit!
🤖 Series C+: Automate Customer Nurturing
We now have a pipeline from Awareness all the way through to Monetization. We have cross-functional collaboration across marketing and PDE with clear visibility along the entire Customer Journey. We also have alignment and agreement of what teams are accountable for what metrics and that the whole team is responsible for the goal — driving up NRR. We have PMF, and it’s time to start scaling. It’s time to automate the nurturing process.
Hubspot is a great tool for automating the nurturing of customers, but it’s not integrated into the product data pipeline. Customizing the triggers and actions to take to nurture a user towards becoming a PQL and a paying customer is time consuming. It’s better to take the instrumentation and data pipeline you’ve already implemented using something like Amplitude and layer on top Coho.ai (shameless plug — I’m a Board Advisor for this company).
Because of Coho’s ease of integration, the delta in the engineering work is tiny, so it doesn’t look like much of a difference to the overall Customer Journey. However, because your Growth Team can now customize, automate, and experiment across personas, features, messages, channels, and behaviors you’ve supercharged the pipeline.
NRR increases
CAC Payback declines
More than anything, the confidence your team has of defining and hitting OKRs and KPIs that drive the business goes through the rough. You’ve now transitioned from building a product to building a business.
We got to this stage with Outlook Mobile and drove adoption from well under 1 million MAU to nearly 60 million MAU in 2 years. Then we switched over to a Sales-Led Growth model as part of the drive to adopt Microsoft 365. That’s another post.
🧹 End-to-end Customer Journey Optimization
This seems like a small difference in a slide, but bringing all of your instrumentation and data pipelines into a single integrated stack is a painful exercise. This is the unnecessary tech debt I was referring to earlier. The desire to move fast and keep budgets lean early on is a fair trade to make. Now you’re starting to scale though, it’s time to take a moment and get ready for the next phase.
🏎️ Efficient Growth Acceleration
You’ve now moved past early adopters and the visionaries. With all of the growth activities and brand-building you’ve been doing leading up to this point you could also be taking a chunk out of the early majority of your target market.
To move beyond this point of market penetration we need to persuade and convince time and attention starved folks who will not read your blog, will not go beyond the fold of your brochure website, and will not think about any of your marketing collateral and messaging. They also filter all of your emails to spam and only get to your website because of a share from a friend.
They need to understand what your product does and what it does for them before they hand over their name and email address. You have to show them the product, what it does and how it works without onboarding them to the product.
Enter, the immersive experience website. Embedded videos will go some way, but these customers need to see and ideally interact with product functionality. Take a look at how Spendesk did this (another disclosure, I was their CPO). Spendesk took a very complex and specialized product and enabled new users to interact with it before signing up.
At the same time, take this opportunity to optimize your Acquisition and Activation stages of the funnel. The ideal will that users move into the actual product without really feeling or noticing the transition.
TOFU increases
MQL increases
MAU increases
We’ve still got to work on the rest of the pipeline. The difference in behaviors, demographics, firmographics, etc. may indicate that you’ve hit on a new user type or persona. Keep analyzing keep learning, and keep iterating to keep driving your metrics up and to the right.
💹 Multi-Product & Expansion to Exit
Congratulations!! To get to this step, you’ve gone from an idea and a hypothesis to a product and a company. You’ve gone from $0 ARR to something north of $100M ARR.
You’ve closed multiple rounds of funding and your organization has grown from five folks with a dream to a company of hundreds, if not thousands. That is an incredible achievement.
We got to this level of development at Slack and at Spendesk. Slack is famous for being the fastest-growing PLG company before being acquired by Salesforce for over $27 Billion. Spendesk became the most valued spend management SaaS company in Europe, valued at over $1 Billion.
All along this journey, you’ve been tempted to create a feature factory and crank out feature after feature. But you’ve been judicious with your investments. You’ve invested in distribution as well as product. Driving efficient growth and maintaining a manageable CAC Payback period. All while deepening users’ engagement, and building a product they love and a brand they trust.
Whether it is B2B or B2C, the principles are the same for a Product-Led Growth (PLG) driven company. Your product suite is a coherent set of SKUs that increase in price the more value you deliver and problems you solve. The entire pipeline is instrumented and automated. You build upon the data and automation infrastructure you put in place in previous phases.
The goal now is to make the transition from MQL to PQL to paying customer and all the way through to a successful customer as smooth and short as possible. Your investments are in Monetization and Expansion — building more value and accelerating the growth motion through flywheels all along the pipeline.
Each step of the customer journey has a different set of growth playbooks that is constantly being updated and optimized.
Your data and user research team is surfacing insights into customer behaviors that can be leveraged to drive growth or open new product opportunities.
Product marketing is constantly providing insights into market dynamics and finding opportunities to refine messaging, positioning, and pricing.
Your growth team is driving a clean set of metrics with increased confidence of ROI and greater predictability of how the business will grow.
The different PDE squads are iterating rapidly on building value with a clear voice of the customer present in every meeting and Slack channel…and better informed with reliable data. Roadmaps are clear, OKRs shared across the company, and the rhythm of business becomes the heartbeat of the company.
You’ve got an NRR over 110% and a CAC Payback period of less than 10 months. Your Corp Dev leader brought in an acquisition opportunity to consider. Sure, you could handle that.
Life is good.