How to Create an Effective Product-led SaaS Pricing Strategy

Product-led progress (PLG) has change into one of the crucial vital 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 usually simplified within the public discourse to “providing a free model of your SaaS product”. However in apply, PLG is way more advanced. What’s extra, there’s an unsung hero that’s the beating coronary heart of PLG: 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’ll be able to pull to pursue progress to your SaaS. You may purchase new prospects, promote extra “stuff” to current prospects, or enhance common income per consumer via pricing will increase. 

Pricing is normally the forgotten lever, nevertheless it truly has the most important impression on efficiency. Actually, a 1% improvement in pricing can translate to an 11%+ enhance in margins. 

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

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

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

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 perfect prospects.

1. Product-led SaaS packaging technique

There’s lots of work to be performed earlier than you give you packaging. It is advisable to work out who you’re serving to (your prospects), what drawback you’re making an attempt to unravel for these prospects, and what product you’re providing to unravel that drawback. It is advisable to analyze the worth fixing that drawback creates for the client.

We’re going to imagine you’re via these gates. You’ve recognized an viewers, an issue to unravel 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 selections you will need to make is packaging, or the best way to assemble and construction your product on the market to your goal prospects. As with SaaS general, there are a selection of parts you will need to think about in designing PLG-friendly SaaS packaging:

Tiering technique

The primary choice you will need to make is the best way to construction your product on the market. Will you provide a single package deal or a number of plans? Or will your product be offered a-la-carte? Will you provide add-ons? This set of selections refers to your tiering technique.

Most SaaS firms use a tiered packaging technique, through 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 through which you provide three product tiers, with every successive tier providing extra utilization or options for the next value. The entry-level tier is probably the most reasonably priced 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 firms. That’s a superb place to begin, nevertheless it’s not sufficient to only associate with the gang. 

You must outline your tiering technique primarily based in your buyer segmentation. You might have a single product providing or as many as 10 or 12 tiers. You must have a product package deal 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 provide 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 provide a free tier is as a lot a choice in regards to the nature of your product and your organization’s buyer acquisition objectives as it’s a pricing choice.

Tier definition 

You’ve got a SaaS product, and also you’ve outlined the client segments you must serve along with your product. Your product affords sure options which might be obtainable 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 phase(s) that every plan is meant to serve.

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

• Options: In our framework, options consult with elements of your product which might be both obtainable or not obtainable and don’t scale with consumption; it’s a binary choice. For instance, you would possibly entitle prospects to SAML SSO or not – it is a function.
• Utilization: Utilization elements usually consult with entitlements to devour your product. For instance, you may need a plan that enables prospects “5 customers”, “5GB storage”, or “5,000 advertising and marketing contacts monthly”. 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 enhance for costlier plans of a given product. However in PLG, the idea of utilization, alternatively known as consumption, is on the forefront – in any case, a key tenet of PLG is to monetize primarily based on utilization.

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

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

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 items that measure how your buyer will get their perceived worth from consuming your product. 

The worth metric turns into the muse of the best way 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 change into these utilization elements that outline the boundaries 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 includes figuring out how you’ll value your product to your goal prospects. This includes defining quite a lot of parts related to how you’ll value your product, that are interrelated to at least one one other, and contemplating your product packaging selections as nicely. 

Some of the vital of those selections 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, comparable to your critically-important worth and value metrics. 

You’ve 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 payment for entry to an outlined product and tier. The pricing metric in a flat-fee providing is structured into the utilization elements which might be used to outline every plan of the providing. 

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 payment for every consumer that has entry to a product and a given tier of that product (if relevant). 

Per consumer is a broad class of pricing fashions that encompasses extra particular definitions of “consumer”, comparable to lively customers, brokers, staff, or any mannequin the place every particular person consumer 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 may also use credit or related constructions 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. Widespread 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 payment for consumption of a specific function. 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 state of affairs might select to pay the overage payment or improve to the subsequent tiered plan to entry larger consumption limits 

In a current examine known 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 labeled as PLG leaders. 

These outcomes counsel that if you’re a product-led SaaS firm working immediately, 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 determined by firm and trade
• Between three and 5 whole product editions, normally 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 elements 
• Three to 5 utilization elements (primarily based in your product’s worth metrics) are employed to outline editions; utilization elements 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 elements gating utilization (roughly 10 to fifteen on common) than different plans, which is completed to put extra fences on utilization and promote sooner upsell to paid plans
• One of many elements is clearly signaled as the first pricing metric, aligning to your worth metric, and introduced as such on the web page, usually with a quantity pricing drop-down menu or sliding scale calculator
• Utilization elements are normally softly managed limits, that means distributors will monitor utilization for repeated overages after which have interaction with prospects to handle the improve; overage is barely chargeable if the corporate employs a UBP technique.

For many, the above framework affords a superb place to begin when shaping a product-led SaaS pricing technique.  However you will need to additionally think about the state of your product-led journey and the objectives of your pricing technique.

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 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 gotten 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 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 prices primarily based on usage-based pricing. Mostly, these further prices are for overage. 

With this mannequin, the corporate would then cost an overage payment 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, comparable to that utilized by Stripe or others within the funds market. There’s a base cost and different prices 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.

With folks 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 reasonable constraints of the assets, funds, and timeline that you’ve got.

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

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

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

Lastly, you must speak to present and potential prospects to assist inform your packaging and pricing technique. This once more is determined by who you’re and the place you’re at – it could embrace conducting a handful of interviews or executing a quarterly world pricing survey program with 1000’s of surveys. 

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

However you’re at a major benefit for those who’re speaking to prospects 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. If you happen to set up folks and processes, work round widespread objectives, and undertake a analysis mindset, you’ll be on the street to efficient product-led SaaS pricing.

Conclusion 

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

Pricing is an unheralded focus on the middle of product-led progress. Product-led progress emphasizes low-friction, instant worth, and monetization aligned to utilization – which in principle, is healthier aligned to worth obtained.

Establishing a pricing roadmap to 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.