Puneet Gupta, Daniel Elman
June 15, 2022
In this post, we want to talk about how Usage-Based Pricing (UBP) and Product-Led Growth (PLG) go hand-in-hand. In fact, if you are considering PLG or already are PLG enabled, we will make a case for why UBP should be your default business model.
Product-led growth (PLG) is an emerging go-to-market strategy, where the product is the primary channel for driving customer awareness and acquisition. It differs from traditional sales-led go-to-market motions, as prospects’ first experiences with the company comes as a self-service experience using the product at their own pace instead of the expected series of meetings, demonstrations and collateral sharing, and contract negotiations that traditionally precede users realizing value from the actual solution. In this bottom-up approach, vendors are selling directly to end-users rather than to executives or management. A low-friction sign up process and easy-to-use product are essential to drive rapid user adoption and value demonstration.
Usage-based pricing is a natural fit to enable PLG, as the user can simply engage with the product organically and is billed for this usage after the fact. The activity is metered and aggregated behind-the-scenes, so there is no hands-on involvement required from the customer or a sales team. There is also no friction up-front in dealing with contracting, negotiating, and onboarding; in many cases, the user doesn’t even need to enter credit card details until after the trial period expires. The result is dramatically reduced operational costs for the vendor, with the average cost of customer acquisition and the average time-to-close going down as well. The customer sees a significant reduction in time-to-value and greater overall ROI from the substantially lower-friction contracting and onboarding process.
More importantly, with usage-based pricing, there is no need to restrict or gate features or capabilities behind different tiers or packages. Instead, since all user activity can be metered and tracked, the product can be ungated and offered to all; customers simply access the features they need for their own respective use cases, and are billed accordingly. This reduces the proliferation of shelfware and increases perceived fairness to customers as they can truly pay only for what is used. If you are truly looking to lead with the product, then usage-based pricing and an open, ungaged product are must-haves to deliver real value from the first interaction and spur viral adoption.
Virtually every technology company has adopted or is in the process of incorporating product-led motions with new products and add-ons or completely overhauling sales-led organizations into being product-led. Recent data from OpenView Partners asserts that 80 percent of leading enterprise technology companies have adopted PLG elements, and for good reason (Image below sourced from OpenView report PLG and Sales – A Powerful, One–Two Punch). Companies like Slack and Twilio pioneered the PLG model and are shining examples of the rapid customer and revenue growth it can enable, and demonstrate how the right product can spawn viral adoption faster than any sales team could drive manually. The graphic below compares the rate at which the included vendors reached $100 million in ARR, showing how pairing usage-based pricing with PLG presents a clear advantage in terms of growth rate over more traditional sales-led subscription-heavy vendors.
Kyle Poyar, Sanjeev Kalevar, and Chris Gaertner from OpenView Partners shared this graphic on LinkedIn on 11 Principles for the Age of Connected Work. We wanted to respond to a number of these principles where usage-based pricing is a natural talking point and further tie in how usage-based pricing is a must-have for modern PLG companies.
Unlike subscriptions or tiered packages, successful product-led companies should make their entire offerings available to customers without feature-gating or tiers. So many customers of legacy vendors have horror stories of needing to purchase subscriptions with unnecessary add-ons and capabilities just to access one or two critical functions that are only available at that high tier. This leads to the proliferation of shelf-ware and unhappy customers who are knowingly paying for more technology that will go unused.Since use case and customer usage profiles are unique, and customers increasingly demand personalized experiences from their technology, don’t presume to know how your customers want to consume and utilize your product (as they do in a traditional subscription or packaged model). Instead, open up the solution and let customers access the functionality they need when they need it. With a quality metering infrastructure, you can simply track what is used and charge users after the fact.
With a usage-based pricing model, customers can begin using and realizing value from your product immediately, without having to engage in a lengthy contracting process or even break to enter credit card details. The focus of the first experience with your product should be entirely around delighting customers and effectively demonstrating value. Instead of offering a weak free package that doesn’t offer enough capability or capacity to solve any real business problems at scale, consider welcoming new or prospective customers with a prolonged free trial or offer to the full solution.
Similarly, by opening up the product for use right away instead of focusing on the seat count or number of users, you facilitate rapid user growth and increased adoption (more users means more chances to convert paying customers), unlike in a seat-based model where managers would often limit access to certain tools to control costs or stay within contracted limits.
Usage-based pricing is the only strategy that allows a business to first focus earnestly on delivering value instead of trying to book revenue. Unlike in a subscription model, a usage-based vendor must be genuinely invested in the customers’ growth and success. One cannot simply sell a multi-year contract that must be paid regardless of whether the customer is able to realize any true value from the solution or indeed whether or not the product is even used. In a usage-based world, monetization only happens when customers are actively using your solution to solve problems for their company. This puts power back in the hands of the customers and ultimately, the end-users, so those companies that are earnestly committed to delivering value at all stages of the customer lifecycle will ultimately be most successful.