How to Create an Effective Product-Driven SaaS Pricing Strategy
Product-driven growth (PLG) has become one of the biggest and most prevalent topics in SaaS.
PLG refers broadly to a strategy in which a company places its product(s) at the center of its organizational strategy. Companies that adopt PLG outperform industry benchmarks in financial performance and customer satisfaction.
The definition of product-driven growth is often simplified in public discourse to "offer a free version of your SaaS product". But in practice, PLG is much more complex. Plus, there's an unsung hero at the heart of PLG: pricing.
What is the impact of PLG on SaaS pricing?OpenView Partners, a Boston-based venture capital firm, is widely credited with pioneering the concept of product-driven growth. In an article first published in May 2022, OpenView identifies 11 key principles that define a PLG strategy.
Three of the 11 principles defined by OpenView are specifically focused on SaaS pricing. These include:
Monetize after generating value Monetize based on usage Monetize beyond softwareClearly, OpenView sees SaaS pricing and monetization as central to the industry's transition to PLG. But why?
To begin with, you can only use a limited number of levers to continue growing your SaaS. You can acquire new customers, sell more "stuff" to existing customers, or increase the average revenue per user through price increases.
Pricing is usually the forgotten lever, but it's actually the one that has the most impact on performance. In fact, a 1% improvement in prices can translate to an 11% or more increase in margins.
PLG is growth-centric, so it makes sense that pricing will increasingly become a focal point of growth strategy for companies that embrace this strategy.
Companies are evaluating SaaS pricing strategies to ensure they support OpenView's other key PLG concepts, such as "build for the end user", "build to be discovered", and "deliver an instantaneous value of the product". As these concepts suggest, customers need to experience instant value in a PLG world: low-friction or zero-friction engagement models that quickly onboard users are a requirement.
Traditional sales-focused approaches often require multiple rounds of calls, demos, chats, or email exchanges before a customer receives a price. This approach does not work in PLG. The shift to PLG requires new approaches to price transparency and pricing strategy.
2 Key Pillars of Designing a Product-Driven Pricing StrategyProduct-driven SaaS pricing is not just about following the crowd and offering a free product or deploying usage-based pricing (UBP). It's about making a set of interrelated decisions about a product packaging model strategy and a pricing model strategy to optimize the needs of your ideal customers.
1. Product-driven SaaS packaging strategyThere is a lot of work to be done before proposing a packaging. You need to figure out who you're helping (your customers), what problem you're trying to solve for those customers, and what product you're offering to solve that problem. You need to analyze the value that solving this problem creates for the customer.
We'll assume you've walked through those doors. You've identified an audience, a problem for that audience to solve, and you've crafted a solution to that problem in the form of a SaaS product.
One of the first key decisions you need to make is packaging, or how to put together and structure your product to sell to your target customers. As with SaaS in general, there are a number of things you need to consider when designing a PLG-compatible SaaS package:
Prioritization strategyThe first decision you need to make is how to structure your product to sell. Will you be offering one package or multiple plans? Or will your product be sold à la carte? Do you offer add-ons? This set of decisions refers to your prioritization strategy.
Most SaaS companies use a tiered packaging strategy, where a single product is sold in multiple packages with different usage rights and features.
The term "good-better-best" refers to a packaging strategy where you offer three tiers of products, with each successive tier offering more usability or functionality for a higher price. The entry level is the most affordable and is "good", the mid level is "best" and suits most customers, and, you guessed it, the most expensive level is "best". .
A multi-level packaging strategy with three "go...
Product-driven growth (PLG) has become one of the biggest and most prevalent topics in SaaS.
PLG refers broadly to a strategy in which a company places its product(s) at the center of its organizational strategy. Companies that adopt PLG outperform industry benchmarks in financial performance and customer satisfaction.
The definition of product-driven growth is often simplified in public discourse to "offer a free version of your SaaS product". But in practice, PLG is much more complex. Plus, there's an unsung hero at the heart of PLG: pricing.
What is the impact of PLG on SaaS pricing?OpenView Partners, a Boston-based venture capital firm, is widely credited with pioneering the concept of product-driven growth. In an article first published in May 2022, OpenView identifies 11 key principles that define a PLG strategy.
Three of the 11 principles defined by OpenView are specifically focused on SaaS pricing. These include:
Monetize after generating value Monetize based on usage Monetize beyond softwareClearly, OpenView sees SaaS pricing and monetization as central to the industry's transition to PLG. But why?
To begin with, you can only use a limited number of levers to continue growing your SaaS. You can acquire new customers, sell more "stuff" to existing customers, or increase the average revenue per user through price increases.
Pricing is usually the forgotten lever, but it's actually the one that has the most impact on performance. In fact, a 1% improvement in prices can translate to an 11% or more increase in margins.
PLG is growth-centric, so it makes sense that pricing will increasingly become a focal point of growth strategy for companies that embrace this strategy.
Companies are evaluating SaaS pricing strategies to ensure they support OpenView's other key PLG concepts, such as "build for the end user", "build to be discovered", and "deliver an instantaneous value of the product". As these concepts suggest, customers need to experience instant value in a PLG world: low-friction or zero-friction engagement models that quickly onboard users are a requirement.
Traditional sales-focused approaches often require multiple rounds of calls, demos, chats, or email exchanges before a customer receives a price. This approach does not work in PLG. The shift to PLG requires new approaches to price transparency and pricing strategy.
2 Key Pillars of Designing a Product-Driven Pricing StrategyProduct-driven SaaS pricing is not just about following the crowd and offering a free product or deploying usage-based pricing (UBP). It's about making a set of interrelated decisions about a product packaging model strategy and a pricing model strategy to optimize the needs of your ideal customers.
1. Product-driven SaaS packaging strategyThere is a lot of work to be done before proposing a packaging. You need to figure out who you're helping (your customers), what problem you're trying to solve for those customers, and what product you're offering to solve that problem. You need to analyze the value that solving this problem creates for the customer.
We'll assume you've walked through those doors. You've identified an audience, a problem for that audience to solve, and you've crafted a solution to that problem in the form of a SaaS product.
One of the first key decisions you need to make is packaging, or how to put together and structure your product to sell to your target customers. As with SaaS in general, there are a number of things you need to consider when designing a PLG-compatible SaaS package:
Prioritization strategyThe first decision you need to make is how to structure your product to sell. Will you be offering one package or multiple plans? Or will your product be sold à la carte? Do you offer add-ons? This set of decisions refers to your prioritization strategy.
Most SaaS companies use a tiered packaging strategy, where a single product is sold in multiple packages with different usage rights and features.
The term "good-better-best" refers to a packaging strategy where you offer three tiers of products, with each successive tier offering more usability or functionality for a higher price. The entry level is the most affordable and is "good", the mid level is "best" and suits most customers, and, you guessed it, the most expensive level is "best". .
A multi-level packaging strategy with three "go...
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