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PLG vs Freemium

In Product circles, PLG or Product Led Growth is pretty much the thing today. PLG is often associated with frontrunner Slack – a straightforward success story about getting into enterprises via a useful everyday tool. However, the drive and essence are often misinterpreted by product owners and startup CEOs alike. Instead of true PLG, they just rebrand Freemium to PLG and think they have everything sorted out. Let’s dive into this phenomenon and clear some air.

What is PLG?

According to Openview Partners, a VC exclusively focused on PLG, “Product-led growth (PLG) is an end user-focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion, and expansion.”

TLDR; – and what most founders ignore: “Your product has a built-in network effect—the more people using the product in a network or company, the more valuable it becomes. If it’s a platform, the more services a user connects to it, the stronger your product’s value.”

Read their summary and interpretation here. Product-Led Growth: What It Is and Why It’s Here to Stay (openviewpartners.com)

What is Freemium?

According to Techopedia: “Freemium is a business strategy or model implemented by business owners or service providers to allow a user to use the basic features of a service or product free of charge for a limited time period. The service providers normally charge a premium for additional or advanced features. The term freemium is a blend of the words “free” and “premium.” (original here: What is Freemium? – Definition from Techopedia)

It differs from a trial version in that the freemium will not stop once the initial period is over, you just have access to fewer functionalities  – no premium features. Whereas trial gives you full access and revokes all access at the end of the trial period. Think of freemium as a free tier + trial for selected premium features.

B2B vs. B2C

I believe the reason for the mixup is that PLG uses the same dynamics as most viral social media platforms do but in a B2B setting. Think of Facebook: being alone on Facebook is (or was) no fun. The more friends you have/invite, the more value the platform is to you.

In B2C the customer and the user are no different from each other, whereas in B2B these are two different stakeholders.


Often, these platforms operate through ads and selling your data, having no direct cost to the user & customer – remember that they are the same person. This business model in B2B is yet just partially existent – some payment gateways gather and sell your data – both customers and the shops’, but this is not the primary business model. Even these additional revenue streams just make the service cheaper and not free. So in B2B there are no free services that can run on just the sheer number of users with alternative business models.

In B2B, by default, you cannot sell the client’s data and no one is interested in seeing ads all the time. They instead pay to raise productivity.

The Advent of Product Led Growth

Cracking product-market fit and creating product growth in B2B was and still is challenging. Too often, innovators mix up the buyer and the user. Focusing too much on just one of them and not creating a balanced situation will result in getting stuck in the Valley of Death, where you have your first few clients but no real scalable growth and traction. There were two key ingredients necessary for PLG to show up. 1) Freemium business models and 2) affordable cloud PaaS/SaaS infrastructure (back in early 2010, it was pretty much AWS only).

  1. With the Freemium business model companies are trying to lower the entry barrier for software products. Make it easy to try it out and move the understanding of benefits from the marketing collaterals to the user-software interaction process. Freemium worked very well for various businesses: B2C, apps, online media services (think of walled garden newspapers offering some free content), enterprise apps, etc.
  1. With SaaS, and cloud in particular it is easier to onboard users, control the experience and gather insights even from free users to make the solution better. You can control the access to features, maintain the code for thousands of clients without having to worry about the different setups and contexts. If you have a browser, it will work. Period.

I do not know if it was intentional (e.g., we should invent a new user number growth model) or if 

Slack came up with it first, but they made it famous, and their software was probably the best suited to mix up freemium and B2C growth tactics of social media platforms.

Slack was definitely not the first communications platform, but the timing was just right – one of the things that no startup has an influence on. They became the rising star and the role model to follow with flawless execution.

Rule 1: The use of the product grows the user number

Product-led growth works for products where you need to invite users to make the most of the product. Additional users add additional value to all users. Therefore users are the vessel for driving user growth. Adding users is not “a nice to have”; it is essential from the effectiveness point of view.

Most products have a problem: it might be beneficial to invite other users, but it adds just a marginal or zero value to both parties. In Slack, inviting missing team members becomes essential the more the conversation switches to the platform. If you are not on Slack, it becomes a massive pain in the ass to remember who is missing what information. It will be apparent quite fast what huge problem it causes in the tissue of team communication that you are not using Slack. Therefore it practically forces users to invite and add others. Because it is great to use, it adds value, and pain arises if not everyone is onboarded. The last part of the sentence is the key to understanding the difference between nice to have and must have.

Let me repeat again: not everyone using it creates pain.

Rule 2: The cost of replacing the product

In B2C, there is not much cost associated with replacing one product with another. At least it is not a perceived cost, and there are no contemplations in advance on what it would cost to replace one thing with another.

Let’s put a short math thought process here. If 100 people are using Slack, and we want to transition to another platform (let’s say Teams, just for the sake of the example, no pun intended), we have to consider the following costs.

  • Transferring data
    • Accessing the data
    • Importing the data
  • Or maintaining both systems
  • Teaching the use of a new system – onboarding costs
    • Working hours lost due to adaptation
    • Possible issues due to non-familiarity
    • Training costs

Most salespeople do not even consider the above and understand the real consequences: the most significant cost factor is never the technical cost but the working hours lost.

It becomes cheaper to maintain the status quo at a certain adoption rate than to replace it. In the short term: definitely – in the long term: maybe. And if the product happens to be easy to use and technically capable, even better. But at this point, it wouldn’t matter if it is running in a terminal window without any graphical interface.

To sum it up

Freemium is a business model, and PLG is a growth model for the user number. 

If the number of free users can elevate the usefulness of your solution to every user, PLG can work for you. That would be the official version.

The real question, though if I add more users (network effect at full speed), will it become gradually more and more difficult for the organization AND the users to stop using it, replace and migrate data to a new system? At the same time, does the invitation of more users add exponential value to their work? 

If yes, go for PLG. If you have a cap on potential user numbers for any reason, PLG will never work as a growth model. If everything checks out except the network effect, stop applying PLG. If you have a network effect, but some of the other components are problematic, try to work it out. The only things that can definitely break a PLG strategy are the low cap in potential user number and the lack of network effect.

Example

To put this in context: the longer I have been using Slack, the more people are using it, the higher the transition cost, the higher the cost of lost information and employee friction. If you are running an email marketing service, then the user number is capped at probably 1-5% of the whole company, depending on the company’s size.
An automated round-robin calendar booking system could use PLG if they can come up with a limitation. For example, meetings with 3 participants can be scheduled with the free tier, whereas more people would require a paid service. If the number of 3+ meetings is big enough, you’ll have no problem adopting PLG. Think of Calendly. If you use Calendly for booking outside meetings only, you wouldn’t think of it as a PLG. And probably it isn’t. Once you start using it internally, it can immediately become a PLG.

Again, in this case, you are not limiting user number, but a feature that they use every day, and sometimes they just hit the wall, causing a huge pain to both users and the organization. That’s when the team would trigger the P/O for the licenses.

Takeaways

Believe it or not, Slack is a Freemium service and PLG driven simultaneously, just that it is not limited in user numbers (as most freemium services are), but on a feature that at some growth point renders the software useless: keeping 10k messages. I vividly remember the point when we couldn’t look up something in Slack and had to dive deep in the stats to see how the adoption rate of Slack with less than 10 users has resulted in 10k messages / 4 weeks.

The key is that the growth in the number of users will eventually, automatically trigger the paid transition. That’s why in the end, PLG is driving business numbers up. But it doesn’t change because it is a freemium business model with specially tailored limitations.

PLG is the bug, and Freemium is the insect in the phrase: all bugs are insects, but not all insects are bugs. All PLGs are Freemium but not all Freemiums can be PLGs.

Photo: Business illustrations by Storyset

Akos Tolnai

Akos is a customer experience specialist who helps Enterprises and B2B & HW Startups with product-market fit, business development, and product strategy. The main tool he uses to improve business results is changing their mindset to be aware of customer's needs.