Product-led progress (PLG) has change into one of the essential and pervasive subjects in SaaS. 

PLG refers broadly to a method through which an organization places its product(s) on the middle of its organizational technique. Firms that embrace PLG are outperforming trade benchmarks for monetary efficiency and buyer satisfaction.

The definition of product-led growth is commonly simplified within the public discourse to “providing a free model of your SaaS product”. However in observe, PLG is rather more advanced. What’s extra, there’s an unsung hero that’s the beating coronary heart of PLG: pricing

How is PLG impacting SaaS pricing?

OpenView Companions, a Boston-based enterprise capital agency, is usually thought of the primary to coin the idea of product-led progress. In a chunk first printed in Could 2022, OpenView identifies 11 key principles that define a PLG strategy.

Three of the 11 ideas OpenView outlines are particularly targeted on SaaS pricing. These embrace:

  1. Monetize after you ship worth
  2. Monetize primarily based on utilization
  3. Monetize past software program

Clearly, OpenView sees SaaS pricing and monetization as a central component of the trade’s shift to PLG. However why?

For starters, there are solely so many levers you possibly can pull to pursue progress on your SaaS. You may purchase new prospects, promote extra “stuff” to current prospects, or improve common income per person via pricing will increase. 

Pricing is often the forgotten lever, however it really has the largest influence on efficiency. In reality, a 1% improvement in pricing can translate to an 11%+ improve in margins. 

PLG is centered on progress, so it is sensible that pricing is turning into extra of a focus of the expansion technique for corporations embracing the technique.

Firms are evaluating SaaS pricing methods to make sure they help OpenView’s different key PLG ideas, resembling “construct for the tip person”, “construct to be found”, and “supply on the spot product worth”. As these ideas recommend, prospects should expertise on the spot worth in a PLG world – low or no friction engagement fashions that rapidly onboard customers are a requirement.

Conventional sales-led approaches typically require a number of rounds of calls, demos, chats, or electronic mail exchanges earlier than a buyer receives a value. That method doesn’t work in PLG. The shift to PLG calls for new approaches to pricing transparency and pricing technique.

2 key pillars of product-led pricing technique design

Product-led SaaS pricing isn’t nearly following the gang and providing a free product or deploying usage-based pricing (UBP). It’s about making a set of interrelated selections on a product packaging mannequin technique and pricing mannequin technique to optimize for the wants of your supreme prospects.

1. Product-led SaaS packaging technique

There’s lots of work to be achieved earlier than you give you packaging. That you must determine who you’re serving to (your prospects), what downside you’re attempting to resolve for these prospects, and what product you might be providing to resolve that downside. That you must analyze the worth fixing that downside creates for the client.

We’re going to imagine you’re via these gates. You’ve recognized an viewers, an issue to resolve for that viewers, and also you’ve crafted an answer to that downside within the type of a SaaS product.

One of many first key selections it’s essential to make is packaging, or methods to assemble and construction your product on the market to your goal prospects. As with SaaS total, there are a selection of components it’s essential to contemplate in designing PLG-friendly SaaS packaging:

Tiering technique

The primary resolution it’s essential to make is methods to construction your product on the market. Will you supply a single bundle or a number of plans? Or will your product be bought a-la-carte? Will you supply add-ons? This set of choices refers to your tiering technique.

Most SaaS corporations use a tiered packaging technique, through which a single product is bought in a number of plans with completely different entitlements to utilization and options. 

The time period “good-better-best” refers to a packaging technique through which you supply three product tiers, with every successive tier providing extra utilization or options for the next value. The entry-level tier is essentially the most inexpensive and is “good”, the center tier is “higher” and suits most prospects, and, you guessed it, the costliest tier is “finest”.

A tiered packaging technique with three “good-better-best” tiers is the most typical packaging mannequin for SaaS, together with PLG SaaS corporations. That’s an excellent place to begin, however it’s not sufficient to simply associate with the gang. 

You need to outline your tiering technique primarily based in your buyer segmentation. You possibly can have a single product providing or as many as 10 or 12 tiers. You need to have a product bundle that’s designed to serve every of your product’s key buyer segments.

One other consideration in packaging is whether or not or not you’ll supply a free tier of your product. A free tier may be the “good” providing in your “good-better-best” packaging construction or one other tier along with your paid “good-better-best” tiers. 

The choice on whether or not or to not supply a free tier is as a lot a call in regards to the nature of your product and your organization’s buyer acquisition targets as it’s a pricing resolution.

Tier definition 

You have got a SaaS product, and also you’ve outlined the client segments it’s essential serve along with your product. Your product gives sure options which might be accessible to prospects. How do you determine which options to supply to which prospects?

This problem refers to tier definition – the way you outline the “content material” of every of your product plans to swimsuit the client section(s) that every plan is meant to serve.

There are mainly three choices for a way a SaaS product plan is structured: options, utilization, or a mix of the 2.

  • Options: In our framework, options discuss with elements of your product which might be both accessible or not accessible and don’t scale with consumption; it’s a binary resolution. For instance, you may entitle prospects to SAML SSO or not – it is a characteristic.
  • Utilization: Utilization components typically discuss with entitlements to eat your product. For instance, you might need a plan that permits prospects “5 customers”, “5GB storage”, or “5,000 advertising contacts per 30 days”. These are limits on the quantity {that a} given buyer can use the product.
  • Hybrid: That is merely utilizing a mix of options and utilization to set limits on how a buyer or prospects can use your product.

The idea of “utilization” is central to establishing a SaaS packaging technique for product-led progress. PLG or not, software program entitlements to options generally improve for dearer plans of a given product. However in PLG, the idea of utilization, alternatively referred to as consumption, is on the forefront – in spite of everything, a key tenet of PLG is to monetize primarily based on utilization.

We discover that the majority product-led SaaS corporations design their product plans round a mix of options and utilization components. Sometimes, they set limits on consumption round 3 to five key utilization components. 

Free and lower-cost entry-level plans sometimes have extra utilization components than dearer plans, and dearer plans are sometimes entitled to limitless utilization throughout extra or all utilization components.  

There are additionally many linkages right here to pricing – you possibly can’t design packaging in a vacuum. Good pricing begins with analyzing worth. A part of analyzing worth is figuring out worth metrics, or the items that measure how your buyer will get their perceived worth from consuming your product. 

The worth metric turns into the inspiration of methods to decide a pricing metric, which is the unit(s) used to cost your buyer on your product. The worth metrics not chosen as your pricing metric sometimes change into these utilization components that outline the bounds of every of your product’s plans.

2. Product-led SaaS pricing mannequin technique

Figuring out your SaaS pricing mannequin technique is the opposite key basis of creating a product-led SaaS pricing technique.

Product-led pricing mannequin technique includes figuring out how you’ll value your product to your goal prospects. This includes defining quite a few components related to how you’ll value your product, that are interrelated to 1 one other, and contemplating your product packaging selections as effectively. 

Product packaging issues

Key components you’ll have to find out embrace:

  • Your product’s worth metrics and a correlating pricing metric as described within the earlier part
  • A pricing mannequin on your product, which is straight influenced by your chosen pricing metric(s)
  • Metering and billing phrases that decide for those who supply a pay-as-you-go mannequin, require time period subscriptions, or have a hybrid of the 2
  • A pricing meter that defines whether or not your pricing can be expressed per 30 days, like most SaaS choices, or per second, per minute, per hour, per 12 months, and many others.

One of the vital essential of those selections is your chosen pricing mannequin, as this may outline the way you monetize your product and also will assist decide the way you arrange the opposite components of pricing described above, resembling your critically-important worth and value metrics. 

You have got the next product-led SaaS pricing models to select from:

Flat-fee

In a flat-fee mannequin, the client pays a recurring, predefined month-to-month, annual, or different time period subscription price for entry to an outlined product and tier. The pricing metric in a flat-fee providing is structured into the utilization components which might be used to outline every plan of the providing. 

EXAMPLE: You pay $100 per 30 days for the “Gold” plan of a product, which supplies you with as much as 100GB of storage. On this case, the GB of storage is the pricing metric.

Per-user

Per-user, or seat-based, pricing is a mannequin through which the client pays a recurring, predefined month-to-month, annual, or different time period subscription price for every person that has entry to a product and a given tier of that product (if relevant). 

Per person is a broad class of pricing fashions that encompasses extra particular definitions of “person”, resembling lively customers, brokers, workers, or any mannequin the place every particular person person of the software program should pay for entry to the software program.

Per-user fashions are sometimes utilized in mixture with a tiered packaging technique. In a per-user mannequin, customers are the pricing metric. 

Utilization-based

A usage-based mannequin is a pricing construction through which the client pays for what they use. Utilization is outlined and metered primarily based on a pricing metric(s). 

Utilization-based fashions are generally structured as pay-as-you-go, through which the client is billed in arrears on a month-to-month foundation for precise utilization. Utilization-based fashions can even use credit or related buildings to cost primarily based on utilization however require a term-based subscription.

Hybrid

A hybrid mannequin is a mix of a number of of the above pricing fashions. Frequent hybrid methods embrace twin value metrics in addition to overage pricing. 

In a twin pricing metric technique, a buyer might pay a foundational flat-fee or per-user license, after which a usage-based price for consumption of a specific characteristic. With overage pricing, a buyer sometimes pays a flat-fee or per-user license for an outlined plan, and that plan permits the client a specified quantity of utilization. 

If the client exceeds that utilization, they pay for the overage on a utilization foundation. The client on this situation might select to pay the overage price or improve to the subsequent tiered plan to entry greater consumption limits 

EXAMPLE: A software program license permits customers to retailer as much as 500 advertising contacts per 30 days. The person should pay the overage price per each 100 further contacts. 

Commonest product-led SaaS pricing technique

With all of those interrelated selections for SaaS packaging and pricing, it may be tough to know the place to even begin in relation to establishing the proper mannequin for product-led progress.

You may even see and listen to the thrill about “monetizing primarily based on utilization”, however aren’t positive if that mannequin is sensible for you, or what it actually even means on your product context.

When you end up with this problem, it may be useful to be taught from what your direct and aspirational friends out there are doing.

In a latest examine referred to as PLG Pricing: Seats and Usage, PeerSignal and XaaS Pricing analyzed this matter by breaking down the packaging and pricing fashions of 125 SaaS distributors that PeerSignal categorized as PLG leaders. 

PLG SaaS pricing traits

The businesses included in PeerSignal and XaaS Pricing’s examine ranged from startups to established public corporations. The businesses studied handle a broad vary of SaaS classes. 

 

Right here’s what the analysis found:

  • There isn’t any one proper method to method SaaS pricing and packaging for PLG. Total, 17 completely different mixtures of packaging and pricing fashions have been noticed within the examine. That mentioned, there have been some fashions that stood out as rather more widespread than others.
  • Utilization-based pricing is commonly talked about, however not typically used. Solely 6% of the businesses that have been analyzed used true usage-based pricing the place pricing is metered by utilization. 28% use some usage-based pricing, sometimes for overage pricing.
  • The normal per-user pricing mannequin is hottest amongst product-led progress leaders. In reality, 58% of PLG corporations use a per-user pricing mannequin. The remainder largely use flat-fee fashions.
  • Tiered packaging fashions with usage-based tier definitions are commonplace. 74% of the PLG corporations analyzed within the examine use a usage-based tiering mannequin.

These outcomes recommend that in case you are a product-led SaaS firm working immediately, you almost certainly at the moment make use of or will quickly make use of a lot of the following methods:

  • Flat-fee or per-user pricing mannequin; overage pricing relies on firm and trade
  • Between three and 5 complete product editions, often together with a free plan, two to 3 self-serve plans, and an enterprise plan with customized pricing
  • Editions are outlined primarily based on a mix of options and utilization components 
  • Three to 5 utilization components (primarily based in your product’s worth metrics) are employed to outline editions; utilization components are constant from plan to plan, and plans are clearly introduced to point out how upgrades allow further utilization 
  • The free plan and/or first paid plan might have extra components gating utilization (roughly 10 to fifteen on common) than different plans, which is finished to position extra fences on utilization and promote sooner upsell to paid plans
  • One of many components is clearly signaled as the first pricing metric, aligning to your worth metric, and introduced as such on the web page, typically with a quantity pricing drop-down menu or sliding scale calculator
  • Utilization components are often softly managed limits, that means distributors will monitor utilization for repeated overages after which have interaction with prospects to handle the improve; overage is simply chargeable if the corporate employs a UBP technique.

For many, the above framework gives an excellent place to begin when shaping a product-led SaaS pricing technique.  However it’s essential to additionally contemplate the state of your product-led journey and the targets of your pricing technique.

The product-led SaaS pricing roadmap

Whereas there are clear norms in how main product-led corporations are approaching pricing technique immediately, product-led SaaS pricing technique just isn’t a static effort. 

Pricing is dynamic and by no means completed. Main product-led SaaS suppliers began at completely different locations with their pricing methods and can constantly iterate on pricing and packaging to optimize for product-led progress.

There are 4 phases of a pricing and packaging technique that you simply’ll progress alongside as you pursue product-led progress on your SaaS product. Relying in your providing, buyer preferences, market class norms, and rivals, you might have a distinct start line and a distinct ending level.

It’s essential to grasp the journey and the choices, so you possibly can align your product and enterprise to a product-led SaaS pricing roadmap that’s optimum on your targets.

The middle of product-led pricing technique is the idea of monetizing primarily based on utilization. The journey states that idea as a central driver. Levels of the product-led SaaS pricing roadmap embrace the next:

No usage-based pricing or packaging  

Identical to it sounds, with this kind of mannequin, you don’t value with a usage-based pricing mannequin, and also you don’t have any utilization components integrated into your packaging technique. This mannequin is often finest for merchandise with per-user pricing the place everybody within the group is meant to be a person. 

A great instance is Lattice, a supplier of worker engagement software program. This mannequin is usually a place to begin and ending level for corporations which might be unlikely to deploy a usage-based mannequin.

Utilization-based tiering with conventional pricing 

That is the predominant mannequin amongst immediately’s product-led SaaS leaders. With this mannequin, you’ve got conventional subscription pricing with a flat-fee or per-user pricing mannequin. You outline clear tiers of your product (sometimes three to 5), with every tier imposing limits on consumption. 

Tiers are outlined round a transparent pricing metric that ties to your worth metric, and a small variety of different important utilization metrics. This mannequin incentivizes prospects to improve after they want extra options or customers, in addition to for utilization after they exceed the imposed limits of their chosen plan.

Utilization-based tiering with conventional pricing, plus conditional usage-based pricing

This mannequin makes use of the identical tenets of the earlier mannequin however applies further costs primarily based on usage-based pricing. Mostly, these further costs are for overage. 

EXAMPLE: A enterprise intelligence software program firm might cost a flat-fee or per-user value for a given plan and impose a plan tier restrict of printed dashboards. 

With this mannequin, the corporate would then cost an overage price per further printed dashboard. Different variants of this mannequin use the identical construction however apply completely different guidelines for what triggers the conditional usage-based pricing. 

A standard instance is feature-based pricing, resembling that utilized by Stripe or others within the funds market. There’s a base cost and different costs which might be enabled primarily based on situational utilization of these options. These are completely different than add-on merchandise in that they are often dynamically enabled or disabled on a transaction-by-transaction foundation.

Pure usage-based pricing

This refers to a mannequin through which the corporate costs solely primarily based on utilization.

How to decide on the proper product-led SaaS pricing technique

Step one is to make sure that your group correctly defines what being product-led means for your small business. Being product-led is an organization ethos that extends effectively past pricing and impacts all sides of your small business. 

As with product-led SaaS pricing, there are various choices for being product-led. That you must perceive which working mannequin works for your small business, what the dependencies are, and the way pricing suits into that equation.

Steps to making a product-led pricing technique 

In terms of figuring out your pricing and packaging technique, choosing the proper method actually comes right down to

  • Defining possession
  • Establishing pricing as a course of, not a undertaking
  • Doing all of your homework

Outline possession

Pricing is a tough perform as a result of there’s sometimes not a single proprietor. That is very true for startups and early-stage corporations. Pricing is both nobody’s job or everybody’s job. To succeed with product-led pricing, it’s actually essential to determine clear roles and accountability.

You need to consider pricing as a course of, not a undertaking. It’s inconceivable to ever be “completed” with pricing. Markets transfer, buyer expectations change, and it’s essential adapt your pricing technique accordingly. 

Set up a course of

As soon as pricing possession and roles are outlined, it’s essential outline a course of for a way your organization will consider and make pricing selections. A key component of that is additionally defining how you’ll prioritize the pricing challenges you deal with (of which there can be many). 

There isn’t any single script to observe. It should rely in your firm. However establishing a course of mindset and constructing techniques that enable for normal analysis of pricing will set you on the proper path.

Do your homework

With folks and processes established, it will definitely comes time to do the precise work and conduct pricing research.

Many corporations guess at pricing. You’ll differentiate by doing all of your homework. This implies doing as a lot buyer, competitor, and market class analysis as you possibly can throughout the sensible constraints of the assets, finances, and timeline that you’ve.

Earlier than you possibly can set pricing, it’s essential perceive, measure, and handle your product’s worth. Worth units the context for pricing, and helps you determine key components of your providing, resembling your worth metrics, which information your pricing metrics. Worth definition and administration is a broad idea that could be a important start line for establishing a pricing technique.

In defining worth and establishing pricing, it’s essential monitor your total class, direct rivals, and aspirational rivals to anchor you within the actuality of what’s taking place out there. 

Prospects contextualize your SaaS product primarily based on its positioning. Each market has low cost and premium gamers. Differentiating the methods you bundle your product, or the pricing fashions you utilize is a strategic resolution that can require defining positioning, after which successfully speaking that positioning to prospects.

Lastly, it’s essential discuss to present and potential prospects to assist inform your packaging and pricing technique. This once more relies on who you might be and the place you’re at – it might embrace conducting a handful of interviews or executing a quarterly world pricing survey program with hundreds of surveys. 

Nevertheless, don’t let your prospects lead you astray – your prospects may have biases that they introduce that should be managed. 

However you’re at a big benefit for those who’re speaking to prospects to grasp the perceived worth, in addition to choice for options and completely different pricing fashions.

Every of those steps warrants a separate put up, and there may be nice studying on the market out there to get you began. If you happen to set up folks and processes, work round widespread targets, and undertake a analysis mindset, you’ll be on the highway to efficient product-led SaaS pricing.

Conclusion 

Product-led progress is a disruptive and transformational development that defines how people and firms purchase software program.

Pricing is an unheralded focus on the middle of product-led progress. Product-led progress emphasizes low-friction, speedy worth, and monetization aligned to utilization – which in concept, is best aligned to worth acquired.

Establishing a pricing roadmap on your firm’s product-led progress technique journey will assist align you to buyer demand and most successfully pursue your progress ambitions.

Title your value (and your technique). Pursue product-led progress and decide the proper value factors with pricing software

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