Last month we announced the release of the third issue of the 2.0 magazine, titled Product Market Fit. In it, the community comes together to show the impact that Customer Success can have if it owns Product Market Fit (PMF) for its company.
You might be asking, “What in the world does Customer Success have to do with Product Market Fit?”
In this newsletter, we’ll include the foreword from 2.0, which tees up how we got to a place where the Customer leader must own PMF to unlock an entirely new growth lever for their business: Customer-Led Growth.
But to get the full story, download the magazine. It’s free!
Dear 2.0 readers,
Let’s start by talking about the Rule of 40 and its impact on software companies.
Before 2015, companies were incentivized to grow at any cost. That led to Sales Led Growth companies that had good growth rates, but they also burned so much cash on Sales and Marketing that they never became profitable.
To fix that problem, investors introduced the Rule of 40 in 2015, which is calculated as follows:
Growth Rate + Profitability = Rule of 40 score
What the calculation means is that when you add a company’s growth rate to its profitability, if the combined score is over 40, then the company is an attractive investment. Let’s apply the Rule of 40 to two different companies:
Before 2015, Company A would have been the more attractive company because of its high growth rate. But let’s apply the Rule of 40 and add the two numbers together and we get the following:
After 2015, everything changed. As you can clearly see above, not only is Company B more attractive than Company A, it has more than double the score. Now companies were handsomely rewarded for balancing growth with costs. For example, in 2021, Expensify and Weave went IPO. They both had similar revenue and growth, but here’s how things ended:
- Expensify had 61% growth and 24% profit (score of 85) and got a 23x revenue multiple
- Weave had 45% growth and -31% profit (score of 14) and got an 8x revenue multiple
It’s no surprise that Product Led Growth (PLG) emerged as a popular growth model shortly afterward. In PLG, companies made it stupid simple to try the product. Combined with ease of sharing and network effects, companies were able to grow quickly with minimal investment in Marketing and Sales.
We were sold the idea that PLG was the new gold standard for software companies, but it has 2 major problems.
First, almost no B2B companies have a product that’s simple enough for PLG. In fact, if you have an onboarding team, a training program, or an online university then your company is definitely not PLG because the product is too complex to use without help.
The second problem, arguably the bigger problem, is that PLG is hard to control. Even if you are a PLG company, you can’t “double your features” to “double your growth from the product.” Let me explain.
What’s the biggest Sales Led Growth software company you can think of? You probably thought of Salesforce. As of 2022, Salesforce has an enormous 26% of its headcount in Sales or Marketing (source: Linkedin).
Now let’s compare that to three of our PLG darlings: Zoom, Calendly, and DocuSign. Their Sales and Marketing headcounts are as follows:
- Zoom - 25%
- Calendly - 33%
- DocuSign - 36%
So our poster-children PLG companies invest more in Sales and Marketing than the largest Sales Led Growth company. How is that possible? Because these companies have not been able to sustain growth via their products alone. They needed Sales to activate accounts that didn’t engage with the product and to chase larger Mid Market and Enterprise deals.
So now we’re stuck. Product-Led is difficult to control, and Sales-Led is too expensive. So what’s the path forward?
That’s what we’ll explore in this edition of 2.0. We’ll propose that ownership of Product Market Fit is the biggest opportunity for Customer Leaders, and when done correctly, unlocks an entirely new growth lever for their business: Customer-Led Growth.
While the 2.0 magazine is compiled and published by Nuffsaid, it’s a community effort to develop the content which is shared with you for free. So I’d like to thank everyone who contributed to this magazine, everyone who posts their ideas online, everyone who challenges the status quo, and everyone who helps us level up our skills as Customer Leaders.
The best resources for Customer Success teams this week
The Hierarchy is Bullshit (And Bad for Business)
Here’s an absorbing read from CEO of Honeycomb, Charity Majors, who challenges the vertical organizational structure tech workers have become accustomed to and offers practical tips to “drain your hierarchy of social dominance.”
The One Thing Billionaire Frank Slootman Got Wrong
In his book Amp It Up, enterprise software CEO, Frank Slootman claims, “If the basic functions of the company are working properly, and are held to account, you won’t need a separate [Customer Success] department.” Here’s Nick Mehta’s reaction to that argument and why “Slootman’s view reflects a dated perspective around the future of software.”
Should I Create a Performance Improvement Plan For My Direct Report?
Queen of leadership content and coaching, Lara Hogan, shares how to navigate the Performance Improvement Plan process “in a way that’s as fair as possible to your direct report”. Definitely worth a read if you, like many, have complicated feelings about PIPs.
The Problem With Customer Success
For Customer Success thought leader and Investor at Crane Venture Partners, Rav Dhaliwal, now is the time for a major overhaul of Customer Success. With an economy that has put CEOs and CFOs into survival mode, this important piece makes you wonder, is a Success team with no commercial responsibility a "must have" to survive?