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Growth Studies

The San Francisco-based software analytics company New Relic was founded by Lew Cirne in 2008, just two years after CA Technologies purchased Cirne’s Application Performance Management (APM) company Wily for $375 million. [1] Also an APM company, New Relic (an anagram of the founder and CEO’s name) provides real-time monitoring for web and mobile applications that run in cloud, on-premises, or hybrid environments; or, as New Relic engineer Jade Rubick explains, “New Relic does ‘software analytics.’ It sits inside your app and tells you things you didn’t know from your live production app.” [2] Over the past six years the company has seen remarkable growth. New Relic monitors nearly 700 billion data points per day across 1 million websites and more than 1 billion mobile app installs.[29] In their earnings call in February of 2015, New Relic announced it had more than 11,000 customers including Runkeeper, Tableau, Nike, Gawker Media, ESPN, Sony, Comcast, E*Trade, eHarmony, GitHub, Groupon, Zumba, and Healthcare.gov. [5][7] The company saw year-over-year revenue growth of 69% to $29 million in the company's third quarter of 2015. [27] Prior to going public, New Relic raised $214.5M from 14 investors, including Benchmark, Trinity Ventures, Tenaya Capital, and others.[8] On November 10, 2014 New Relic filed a Form S-1 with the SEC, announcing their plans to go public under the ticker symbol NEWR.[24] The company went public on December 12, 2014 at $23 a share and saw their stock price pop 45% and today is $35 per share. That stock price makes New Relic’s market capitalization more than $1.5 billion dollars. [28] But how did New Relic gain their initial traction and what drove them to the IPO? In this growth study we’ll break down their early growth engine, including:

Early Traction

  • Product excellence that solved major pain points for developers
  • Developer-focused marketing effort to create developer advocates
  • Freemium pricing and easy to deploy software to drive bottom-up adoption in a traditional top-down software market

Today’s Growth Engine

  • Marketing and sales investment and excellence
  • Net Negative Revenue churn through customer upsells and cross-sells
  • Product diversification into other areas of monitoring such as insights

Gaining Initial Traction

On a Quora thread in February of 2012, Cirne cited three factors as contributing to New Relic’s early growth—product excellence, market segment focus, and “referenceability from thought leaders in our core market.” [9]

Product Excellence

As with any company seeking product/market fit, it’s critical that the product solves a real need for a critical mass of people. There’s a lot to be said for first-mover advantage. Nevertheless, when there are several alternatives on the market, the product that manages to get users to their must-have experience in the simplest, easiest way has a real advantage over its competitors. New Relic spent the better part of 2008 in private beta, working on the product and iterating it with feedback from the Rails developer community. This early period of customer development and feedback helped New Relic nail it's product strategy to build something that developers would come to trust and love.[30] As Cirne explains:

“There are many APM solutions on the market, but prior to New Relic, none were provided in a SaaS model. But I don't think that's of primary importance to the customer. What is of primary importance is the simplicity and elegance of the solution. Does it ‘Just work’? Can I get up and running in a couple of minutes? Will the product provide a delightful first experience? Now, I believe that we do this in large part because of our SaaS model - so in a sense the customer cares, but in a derivative fashion.” [9]

Spotify engineer Jade Rubick echoes this sentiment, explaining:

“It is a sort of aha moment when you use it, like, oh my god, how did I ever live without this information. A lot of things you used to guess about are immediately obvious. … You can build this yourself or use a tool that takes a few minutes to install and does it all for you, and gives you more info than you would ever build.” [2]

For developers, the ability to quickly and easily adopt a service that solves a real need and just works saves precious time—the scarcest of all engineering resources—was crucial to New Relic’s early growth. All the market focus and thought leader references in the world wouldn’t have convinced developers to keep using a product that didn’t work.

Market Focus

Most know that New Relic has been hyper developer-focused with its ubiquitous “deploy and get a tee-shirt” campaigns; but what many don’t know is that early on, the company focused on an even smaller market segment: the small but growing Ruby on Rails market. They were far from a mainstream group at the time but, as Cirne explains:

“Based on my personal experience with Rails, I saw productivity gains over Java that reminded me of Java's productivity gains over C++ when I founded Wily Technology in 1998. I figured it was a good market opportunity for a new startup: not too big to attract a ton of well funded competition, but large enough (and more importantly growing quickly enough) to support an early stage company.” [9]

Having already grown and sold an APM company, Cirne had invaluable insight into the ideal target market. For New Relic, the choice to focus on Ruby on Rails—a market that both lacked a ton of competition and held potential for growth—was yet another critical move in gaining initial traction. The notion of dominating a niche is not uncommon with startup growth stories, however Cirne’s insight into focusing on a fast-growing niche of the developer community would turn out to be an important part of their growth story.

Bottom Up Growth

Traditional enterprise software sales is a top-down process, beginning with IT leadership. With this approach, developers are forced to simply do what they’re told—they don’t have to love or even like the product. New Relic chose to take a bottom up approach, enlisting developer evangelists who would spread the word for them. By building a developer-first product and approach to growth they ignited word of mouth among passionate and influential fans, evidenced by the Tweets below:

Big shout out to New Relic. We're doing some performance optimization at @37signals and I don't know what we'd do without it. — DHH (@dhh) June 15, 2010
Because we made a billing mistake we didn't have @newrelic working for 6 hours today. Great reminder how incredibly awesome newrelic is. — Tobi Lütke (@tobi) April 2, 2012

It was New Relic’s focus on Rails that allowed them to tap into an important pool of influencers: Rails developers, including DHH, Tobi Lütke, Rick Olson, Obie Fernandez, Tom Mornini, and others.[9] As Cirne explains:

“Rails developers are known for adopting the latest technologies, and passionately supporting products that rock, while brutally and vocally criticizing products don't meet their high standards. We were not the first product to target the Rails market, but we believe we had a strong product that immediately earned the support from thought leaders in the rails community.” [9]

Yet choosing to focus on developers in particular presented an interesting challenge for the company. As Cirne points out, “This kind of endorsement can't be bought; it needs to be earned.” [9] Because influential Rails developers were known for their honesty and high standards, their endorsement meant something to the Rails community at large and was critical in helping New Relic gain early traction. It’s important to note that product is a precursor to thought leader references, and much of New Relic’s appeal among developers came from within the product itself. As Kevin Chau points out in his presentation “Marketing to Developers,” there are several ways to ensure that products appeal to developers, including keeping features front and center, using straightforward (“no BS”) pricing, and building a developer-friendly API. [23] Rather than flashy ad campaigns, New Relic sponsored meetups, hackathons, and conferences to help build and foster the community of developers that was so important to their growth. A look back at New Relic’s Twitter feed circa 2009-10 shows their dedication to this community:

SF Bay Area New Relic Users - Join our Meetup Group http://tinyurl.com/9rocma — New Relic (@newrelic) January 13, 2009
We are hosting SF Ruby meetup at our office. Love to sponsor one in your town. — New Relic (@newrelic) September 18, 2009
Also excited about meeting the Solr users at SF Bay Area Lucene/Solr Meetup next week with @BrianDoll of http://www.sheetmusicplus.com/ — New Relic (@newrelic) January 15, 2010

Even today, these community-building efforts are still an important piece of New Relic’s growth puzzle. Events the company has recently hosted, sponsored, or promoted include a Learn Java Together meetup for women; a workshop for parents whose children are interested in programming, robotics, or engineering; Design for Habit; and more.

Freemium Model

New Relic operates their SaaS business according to the Freemium model, and all accounts, including mobile accounts, begin with a free trial. Currently, a standard New Relic APM account begins with a 14 day free trial of the Pro tier of service, while Mobile APM accounts begin with a 30 day trial of the Enterprise tier. After the trial periods are over, both accounts automatically switch to the free-forever Lite tier. This free to try and free forever plan reduces the risk of deploying New Relic. Developers can try the product first for free, and if it works they can evangelize using it on a paid plan at scale across the organization. Removing as much friction from the signup process as possible is critical to New Relic’s adoption among the developer community. Making it simple to deploy code and get instant feedback on performance is a key hook in their acquisition efforts.

New Relic Pricing

Image via New Relic [10]

As we’ve discussed with companies as diverse as Dropbox, Github, LinkedIn, and Evernote, the freemium model is an effective model for growth so long as the product itself becomes more valuable over time. Or, as New Relic CMO Patrick Moran explains in a company blog post:

“We have a free version – we think you’ll like it! Our model works like many freemium models (like, say… Dropbox). You try us. 80% of you will never buy from us. But 20% will, and we make money on that math.” [11]

With New Relic’s Lite tier, data is only retained for 24 hours. Like Github’s requirement that free repos are public, this limitation helps to ensure that paid tiers are worth paying for, especially for those who see the service’s true utility during the free trial period.

Free Press with Healthcare.gov

New Relic did gain quite a bit of attention in late 2013 when The U.S. Department of Health and Human Services employed the service to troubleshoot the Healthcare.gov website. As Cirne explained in an interview with Bloomberg TV, “I got the information and asked, is this the HHS I think it is? The answer was yes.” [16] Though they didn’t call New Relic by name, the software is easily recognized in the screenshots released by the government in December 2013:

New Relic running on healthcare.gov

Image via Gigaom [17]

Americans have New Relic to thank for the reduction in Healthcare.gov’s error rate from 6% to less than 1%, as well as the increase in system response times.

New Relic improves healthcare.gov performance

Image via Gigaom [17]

 

Current Growth Engine

Though many of the factors above—in particular, product excellence and the freemium business model—continue to contribute to New Relic’s growth, their current growth engine also relies on a heavy marketing and sales investment and product diversification.

Marketing

Moran explains that the company’s marketing model is as simple as 1-2-3: 1) Try it. (Sign up & Deploy) 2) You’ll love it. (Get real-time visibility into your web & mobile app performance) 3) Make sure to complete step 1 to enjoy step 2. [12] In addition to a free usage tier and free trial period, New Relic has employed several tactics aimed at persuading new customers to complete step 1 at ever higher rates. As anyone who has marketed a piece of software that requires code on site knows, this is often the largest hurdle in the customer acquisition funnel. The company is relentless in testing motivators to help customers get over the deployment hump including display advertising as well as giving away t-shirts, free extended trials of Code Academy, remote controlled helicopters, and TechCrunch Disrupt NY tickets to new members. [13]

 

New Relic Nerd Life tshirt 

 

data nerd t-shirt from new relic

The early Nerd Life t-shirt from New Relic / Image via New Relic [11]

One of the company’s most popular promotion involves giving away free t-shirts like the one pictured above. When announcing the free shirt promotion via the company’s blog, Moran explained: “We look at our marketing budget this way: We’d prefer to spend a little money outfitting our users in cool shirts rather than giving it to google for expensive adwords. We end up doing both, but we love the idea of you wearing our shirts to your next local meetup. We’re a global company, but hey…we act locally.” [11] Close to two years later, in October 2013, Moran reported that since the free shirt promotion began, New Relic had shipped out 75,000 around the globe—including Japan, Ireland, Australia and Argentina. [12]

new relic facebook ad

Image via Facebook

new relic ad

Image via Youtube

In addition to earning the company a marketing award from Marketo (for their use of APIs to automate the process),[14] the free t-shirt campaign has generated considerable reach among developers and still features heavily in the company’s promotional efforts, as seen in the above retargeting ads being run by the company in August of 2014. As Moran made clear, New Relic’s marketing budget isn’t devoted exclusively to t-shirts and helicopters. In August of 2012, he told Dave Feinleib of Forbes that the company was currently spending about $150,000 per month on Twitter and $10,000 per month on paid search. He went on to explain, ”I’ve never been able to be as data-driven as I am today,” [3] asserting that every step of New Relic’s marketing plan is incredibly data driven, and the company uses a range of other SaaS solutions, including Salesforce, marketing automation from Marketo, and customer service ticketing from Zendesk. For storing the massive amounts of unstructured data generated by these various services, they used the open source software package Hadoop. To make sense of it all, the company hired a data scientist to analyze the disparate data using the open source statistics and analysis package R. The end result of all this data and analysis, Moran explained, is "a ‘profile’ that we then create cohorts upon. From there, we can recreate success." [3] Though the company’s process of making several small bets and tests (in 2013 New Relic briefly experimented with Reddit ads, though the absence of present campaigns seems to indicate they weren’t a good investment [15]), and analyzing the resulting data, the company continually optimizes and doubles down on what’s working. New Relic’s marketing budgets have only grown since. According to Redpoint VC Tomasz Tunguz, who analyzed the numbers made available in the company’s recent S-1, New Relic has consistently invested twice as much in sales and marketing (92% of revenue) than the median company (48% of revenue). Though this has resulted in a substantially higher burn rate, it has also led to greater sales efficiency than the median—until recently–when New Relic increased sales and marketing spend from $10.7M to $28.4M in order to expand their sales team and reach new markets. [25]

Product Diversification

Over the past year, New Relic has been in the process of pivoting away from strictly offering APM and toward a market that ultimately has more potential for growth. Cirne explained in an October 2013 interview with VentureBeat:

“This company has immense opportunity. … It depends heavily on how well we break out of APM [application performance management]. An APM company can be a billion-dollar business, but we want to break out of that in the long term.”[18]

He touched on the subject again in a Re/Code interview the following February, explaining, “I have respect for [the APM] market, but it’s really about reducing cost and automating tasks and improving efficiency.” [1] Indeed, APM is just a fraction of the global IT management tools market, which according to Gartner was worth around $18B in 2013.[19] This is where much of New Relic’s growth potential lies, as Cirne explains, “We’d love New Relic to be for the IT management market what Salesforce is to sales and CRM.” [7] New Relic’s future growth will depend not only on APM—or, as Arik Hesseldahl puts it, “watching software run”—but also on the loftier and ultimately more lucrative goal of “making companies grow.” [1] The company is accomplishing this through their newest software offerings, New Relic Insights in May of 2014 and New Relic Synthetics in Q4 of 2014 [28].

Negative Revenue Churn

One of New Relic’s most powerful growth drivers has been their ability to achieve negative churn through expansions and upgrades like those discussed above. As Tunguz explains:

“If I were to use only one chart to summarize why New Relic has built an amazing business it’s the following one which shows the annual revenue growth rates of New Relic customer accounts.” [25]

new relic net negative revenue churn

Image via Tomasz Tunguz [25]

 

Indeed, on average each New Relic customer spends 14% more than the previous year, thanks in large part to the fact that the longer a company uses the service, the more servers they’ll need. As customers become accustomed to the insights generated by New Relic, they come to depend on them—meaning New Relic is worth more the longer a customer uses it (you’ll remember this is also a key growth driver for Evernote, too). Tunguz points out that despite the fact that New Relic’s acquisition numbers have stayed consistent—at around 750 per quarter—their revenue has continued to expand thanks to this negative churn. Furthermore, as Tunguz explains, it’s noteworthy that—unlike the pre-pay annual contracts that are standard at many SaaS companies—most New Relic customers subscribe to the service on a monthly basis. New Relic is able to do this because of negative churn—they don’t need extended contracts to hold on to customers. [25] New Relic made it to a public offering through a unique combination of developer focused marketing, product excellence, pricing model and ultimately a lot of heavy investment in user acquisition. By maximizing their customer value through upsells and customer retention, New Relic was able to build a powerful growth engine that catapulted them to the NASDAQ in just a handful of years. So what did we miss? What other growth levers did New Relic use to drive remarkable growth?

Written by
MB
Morgan Brown
  • MB

    Morgan Brown

    over 2 years ago #

    If there's ever a company growth playbook to copy when trying to reach developers at an early stage, New Relic has to be it. They really nailed it.

  • DP

    Divyesh P.

    over 2 years ago #

    This shows that Growth at Tech Startups are not hacked but created and built..Awesome Work on Growth Stories..

  • GA

    gonzalo arzuaga

    over 2 years ago #

    Another great piece by Morgan, kudos (again!) and keep them coming.

  • BW

    Brand Winnie

    over 2 years ago #

    Great insight into New Relic Morgan!

  • AE

    Audrey Enriquez

    over 1 year ago #

    Morgan, would love to talk about our continued growth if you're interested in doing a follow up piece.

  • NA

    Nissar Ahamed

    over 2 years ago #

    Thanks for this case study...

  • RT

    Roman Temkin

    over 1 year ago #

    Thank you for sharing. This was incredible.

  • JE

    jonah engler

    over 1 year ago #

    Thanks for sharing.

  • EH

    Elie Hirschfeld

    over 1 year ago #

    Thank you for sharing this case study.

  • RG

    Robert Gibb

    over 1 year ago #

    I work with content and growth at a company that focuses on developer and IT success (web performance optimization in particular) and I have grown to respect the developer community.

    They are brutally honest and hate being meddled with. They demand the truth. If you give them anyhing but, they will tear you apart. They can smell BS from a mile away.

    I'm sure New Relic knew this and developed a type of transparency that kept their customers in the full loop. This transparency jjcomplemented their awesome product. Can anyone comfirm this @morgan ?

  • JS

    Jessica Son

    about 1 year ago #

    Thanks for the case study! Really impressed with the untraditional down-top strategy

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