Product-led development (PLG) has grow to be one of the vital and pervasive matters in SaaS. 

PLG refers broadly to a technique during which an organization places its product(s) on the middle of its organizational technique. Firms that embrace PLG are outperforming business 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 follow, PLG is rather more complicated. 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 mostly thought of the primary to coin the idea of product-led development. 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 centered on SaaS pricing. These embrace:

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

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

For starters, there are solely so many levers you’ll be able to pull to pursue development to your SaaS. You may purchase new clients, promote extra “stuff” to present clients, or enhance common income per person by pricing will increase. 

Pricing is normally the forgotten lever, but it surely truly has the largest affect on efficiency. The truth is, a 1% improvement in pricing can translate to an 11%+ enhance in margins. 

PLG is centered on development, so it is smart that pricing is turning into extra of a focus of the expansion technique for firms embracing the technique.

Firms are evaluating SaaS pricing methods to make sure they help OpenView’s different key PLG ideas, akin to “construct for the tip person”, “construct to be found”, and “supply immediate product worth”. As these ideas recommend, clients should expertise immediate worth in a PLG world – low or no friction engagement fashions that shortly 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 worth. 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 group and providing a free product or deploying usage-based pricing (UBP). It’s about making a set of interrelated choices on a product packaging mannequin technique and pricing mannequin technique to optimize for the wants of your splendid clients.

1. Product-led SaaS packaging technique

There’s numerous work to be performed earlier than you give you packaging. You should determine who you’re serving to (your clients), what drawback you’re making an attempt to resolve for these clients, and what product you might be providing to resolve that drawback. You should analyze the worth fixing that drawback creates for the client.

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

One of many first key choices you have to make is packaging, or find out how to assemble and construction your product on the market to your goal clients. As with SaaS general, there are a variety of parts you have to take into account in designing PLG-friendly SaaS packaging:

Tiering technique

The primary determination you have to make is find out how to construction your product on the market. Will you supply a single bundle or a number of plans? Or will your product be offered a-la-carte? Will you supply add-ons? This set of choices refers to your tiering technique.

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

The time period “good-better-best” refers to a packaging technique during which you supply three product tiers, with every successive tier providing extra utilization or options for a better worth. The entry-level tier is essentially the most reasonably priced and is “good”, the center tier is “higher” and matches most clients, and, you guessed it, the most costly tier is “greatest”.

A tiered packaging technique with three “good-better-best” tiers is the commonest packaging mannequin for SaaS, together with PLG SaaS firms. That’s place to begin, but it surely’s not sufficient to only associate with the group. 

It is best to outline your tiering technique based mostly in your buyer segmentation. You would have a single product providing or as many as 10 or 12 tiers. It is best 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 will 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 choice concerning the nature of your product and your organization’s buyer acquisition objectives as it’s a pricing determination.

Tier definition 

You will have a SaaS product, and also you’ve outlined the client segments that you must serve together with your product. Your product presents sure options which are obtainable to clients. How do you resolve which options to supply to which clients?

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

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

  • Options: In our framework, options seek advice from parts of your product which are both obtainable or not obtainable and don’t scale with consumption; it’s a binary determination. For instance, you would possibly entitle clients to SAML SSO or not – this can be a characteristic.
  • Utilization: Utilization components typically seek advice from entitlements to devour your product. For instance, you might need a plan that permits clients “5 customers”, “5GB storage”, or “5,000 advertising and marketing contacts per thirty days”. These are limits on the quantity {that a} given buyer can use the product.
  • Hybrid: That is merely utilizing a mixture of options and utilization to set limits on how a buyer or clients can use your product.

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

We discover that the majority product-led SaaS firms design their product plans round a mixture 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’ll be able to’t design packaging in a vacuum. Good pricing begins with analyzing worth. A part of analyzing worth is figuring out worth metrics, or the models that measure how your buyer will get their perceived worth from consuming your product. 

The worth metric turns into the inspiration of find out how to decide a pricing metric, which is the unit(s) used to cost your buyer to your product. The worth metrics not chosen as your pricing metric sometimes grow to be 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 building a product-led SaaS pricing technique.

Product-led pricing mannequin technique entails figuring out how you’ll worth your product to your goal clients. This entails defining various parts related to how you’ll worth your product, that are interrelated to 1 one other, and contemplating your product packaging choices as effectively. 

Product packaging concerns

Key parts 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 to your product, which is instantly influenced by your chosen pricing metric(s)
  • Metering and billing phrases that decide if you happen to 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 will likely be expressed per thirty days, like most SaaS choices, or per second, per minute, per hour, per 12 months, and many others.

One of the crucial vital of those choices is your chosen pricing mannequin, as it will outline the way you monetize your product and also will assist decide the way you arrange the opposite parts of pricing described above, akin to your critically-important worth and worth metrics. 

You will have 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 are used to outline every plan of the providing. 

EXAMPLE: You pay $100 per thirty days for the “Gold” plan of a product, which offers 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 during 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”, akin to energetic 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 during which the client pays for what they use. Utilization is outlined and metered based mostly on a pricing metric(s). 

Utilization-based fashions are generally structured as pay-as-you-go, during which the client is billed in arrears on a month-to-month foundation for precise utilization. Utilization-based fashions may use credit or comparable constructions to cost based mostly on utilization however require a term-based subscription.

Hybrid

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

In a twin pricing metric technique, a buyer could pay a foundational flat-fee or per-user license, after which a usage-based price for consumption of a selected 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 shopper on this state of affairs could select to pay the overage price or improve to the subsequent tiered plan to entry larger consumption limits 

EXAMPLE: A software program license permits customers to retailer as much as 500 advertising and marketing contacts per thirty 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 on the subject of establishing the proper mannequin for product-led development.

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

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

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

PLG SaaS pricing developments

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

 

Right here’s what the analysis found:

  • There isn’t any one proper solution to method SaaS pricing and packaging for PLG. General, 17 completely different mixtures of packaging and pricing fashions have been noticed within the research. That stated, there have been some fashions that stood out as rather more common 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 development leaders. The truth is, 58% of PLG firms 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 firms analyzed within the research use a usage-based tiering mannequin.

These outcomes recommend that if you’re a product-led SaaS firm working as we speak, you probably at the moment make use of or will quickly make use of many of the following methods:

  • Flat-fee or per-user pricing mannequin; overage pricing is dependent upon firm and business
  • Between three and 5 complete product editions, normally together with a free plan, two to 3 self-serve plans, and an enterprise plan with customized pricing
  • Editions are outlined based mostly on a mixture of options and utilization components 
  • Three to 5 utilization components (based mostly 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 could have extra components gating utilization (roughly 10 to fifteen on common) than different plans, which is completed 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 normally softly managed limits, that means distributors will monitor utilization for repeated overages after which interact with clients to handle the improve; overage is just chargeable if the corporate employs a UBP technique.

For many, the above framework presents place to begin when shaping a product-led SaaS pricing technique.  However you have to additionally take into account the state of your product-led journey and the objectives of your pricing technique.

The product-led SaaS pricing roadmap

Whereas there are clear norms in how main product-led firms are approaching pricing technique as we speak, product-led SaaS pricing technique is just not 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 development.

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

It’s vital to know the journey and the choices, so you’ll be able to align your product and enterprise to a product-led SaaS pricing roadmap that’s optimum to your objectives.

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

No usage-based pricing or packaging  

Similar to it sounds, with any such mannequin, you don’t worth with a usage-based pricing mannequin, and also you don’t have any utilization parts included into your packaging technique. This mannequin is normally greatest for merchandise with per-user pricing the place everybody within the group is meant to be a person. 

A very good instance is Lattice, a supplier of worker engagement software program. This mannequin is usually a place to begin and ending level for firms which are unlikely to deploy a usage-based mannequin.

Utilization-based tiering with conventional pricing 

That is the predominant mannequin amongst as we speak’s product-led SaaS leaders. With this mannequin, you might have 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 crucial utilization metrics. This mannequin incentivizes clients 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 expenses based mostly on usage-based pricing. Mostly, these further expenses are for overage. 

EXAMPLE: A enterprise intelligence software program firm could cost a flat-fee or per-user worth 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 typical instance is feature-based pricing, akin to that utilized by Stripe or others within the funds market. There’s a base cost and different expenses which are enabled based mostly 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 during which the corporate costs solely based mostly 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 aspects of your small business. 

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

Steps to making a product-led pricing technique 

With regards to figuring out your pricing and packaging technique, selecting the best method actually comes all the way down to

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

Outline possession

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

It is best to consider pricing as a course of, not a venture. It’s inconceivable to ever be “completed” with pricing. Markets transfer, buyer expectations change, and that you must adapt your pricing technique accordingly. 

Set up a course of

As soon as pricing possession and roles are outlined, that you must outline a course of for the way your organization will consider and make pricing choices. A key ingredient of that is additionally defining how you’ll prioritize the pricing challenges you sort out (of which there will likely be many). 

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

Do your homework

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

Many firms guess at pricing. You’ll differentiate by doing all your homework. This implies doing as a lot buyer, competitor, and market class analysis as you’ll be able to inside the sensible constraints of the sources, funds, and timeline that you’ve.

Earlier than you’ll be able to set pricing, that you must perceive, measure, and handle your product’s worth. Worth units the context for pricing, and helps you identify key parts of your providing, akin to your worth metrics, which information your pricing metrics. Worth definition and administration is a broad idea that could be a crucial place to begin for establishing a pricing technique.

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

Prospects contextualize your SaaS product based mostly on its positioning. Each market has low cost and premium gamers. Differentiating the methods you bundle your product, or the pricing fashions you employ is a strategic determination that may require defining positioning, after which successfully speaking that positioning to clients.

Lastly, that you must discuss to present and potential clients to assist inform your packaging and pricing technique. This once more is dependent upon who you might be and the place you’re at – it could embrace conducting a handful of interviews or executing a quarterly world pricing survey program with hundreds of surveys. 

Nonetheless, don’t let your clients lead you astray – your clients could have biases that they introduce that must be managed. 

However you’re at a major benefit if you happen to’re speaking to clients to know the perceived worth, in addition to desire for options and completely different pricing fashions.

Every of those steps warrants a separate publish, and there’s nice studying on the market out there to get you began. When you set up individuals and processes, work round frequent objectives, and undertake a analysis mindset, you’ll be on the street to efficient product-led SaaS pricing.

Conclusion 

Product-led development 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 development. Product-led development emphasizes low-friction, fast worth, and monetization aligned to utilization – which in principle, is healthier aligned to worth acquired.

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

Identify your worth (and your technique). Pursue product-led development and decide the proper worth factors with pricing software