Pricing StrategyMay 12, 2022
The following article is not a “play-book” for converting your SLG business to a PLG business. That is an extremely heavy lift. Instead, Todd Gardner outlines practical operational tactics common in PLG businesses that have been successfully used in sales-led companies to foster growth.
Let’s say you were entered into a year-long fishing contest. (Stay with me here.) You have an entire year to catch the most pounds of fish you can. One approach is to scour the lake searching for the hot spots where the biggest fish live and bait your line with tackle known for landing the lunkers. Alternatively, you could fish off your dock and easily catch a bunch of little fish in the first few days. And since you have a full year, you could feed these fish a calorie-rich diet for the rest of the year.
I’m not sure which approach will win, but it’s the length of the contest that determines the approach. If it were a three month contest, you would always go for the big fish, and if were a three year contest, going for the little ones is the better option.
When applying this analogy to building a SaaS business, remember it’s the investors and management team that set the time line. Are you trying to optimize the quarter, or the next five years?
Contrary to all the recent product-led growth (PLG) buzz, it may be surprising that most SaaS companies are still sales-led and fishing for the “big ones” according to 2021 research from Paddle Ltd. And the truth is, many of these business should, and will remain, sales-led.
The following article is not a “play-book” for converting your SLG business to a PLG business. That is an extremely heavy lift, and is not a smart or viable option for many companies. What is outlined below are practical operational tactics common in PLG businesses that have been successfully used in sales-led companies to foster growth.
The list is a distillation of over fifteen interviews with notable VCs, CEOs, CFOs, and pricing experts. Special thanks to James Wood and Whit Rothe at Insight Partners, Andre Lavoie at Clear Company, Eu-Gene Sung at Sift, and the team at M3ter. Here are six takeaways from my discussions:
(Note: A pre-condition to many tactics below is a more granular approach to tracking customer usage data. Most experts suggested following a variety of usage metrics up-front, as you don't always know the ones that will provide the deepest insight.)
A product-led go-to-market strategy begins with the product and an effort to undo years of product bloat resulting from the desire to drive ever higher average selling prices (ASP).
Sales teams drag these behemoths to market and ask their prospects to commit large amounts of time and money before there has been one click of a mouse. Understandably, this approach requires sophisticated consultative selling and takes a long time.
In addition to a long sales cycle, the large upfront sale sub-optimizes pricing by bundling most of the product into a discounted package. It's prix fixe pricing as opposed to a la carte. Furthermore, the comprehensive solutions are complicated to implement, take longer to deliver value, and make it hard to build meaningful usage across the entire application. The lower usage will have retention implications later on.
Consider breaking down your solution into easier to sell, easier to buy, and easier to adopt products.
Andre Lavoie, the CEO of Human Capital Management provider ClearCompany, explains it like this:
SaaS companies can optimize their unit economics through finding the product in their solution set that has the most efficient and repeatable new-sale CAC and use that product to convert a customer who can then be expanded with upsells once they are papered.Andre Lavoie, CEO at Human Capital Management
So, instead of focusing new sales resources across their portfolio of products, ClearCompany focuses on the product that is the easiest to sell and adopt.
Andre continues, Often a 2-4x unit economic improvement can be realized through the upsell because we are not incurring the sales and marketing costs required to move the prospect through the entire sales funnel, but selling to a company that is already converted both literally and emotionally."
Selling new products to existing customers may require a tweak to the org. chart. Eu Gene Sung, the CFO at Sift, a digital trust and safety provider, explained how their business has evolved into a land-and-expand approach.
As we added functionality to the platform over the years, we recognized the need for a sales team dedicated solely to introducing our current customers to our new functionality.Eu Gene Sung, CFO at Sift
The approach taken by ClearCompany and Sift is only possible with a portfolio of products or many tiers of functionality. Therefore, if you are starting this journey with one main product, it needs to be carefully segmented, or several other stand-alone products need to be built. To best leverage PLG tactics, focus on products that will most easily attract new customers which can then be migrated up to your larger existing products.
In conjunction with a simplified product offering, scrub your sales process of unnecessary friction. Buying behaviors have changed dramatically in the last five years, and a traditional sales process might actually inhibit growth.
Andrew Davies, the head of marketing at Paddle and long-time PLG operator says:
Ask yourself, is this step in the sales process benefiting the prospect?Andrew Davies, Head of Marketing at Paddle
Some complex products often require detailed conversations with salespeople to flesh out the potential fit, but other times, the prospect is directed to a salesperson because the website can't answer their questions, and the "sales process" map calls for a check-in. For example, the complexity of your product might not allow for self-provisioning, but what about other steps? Why do clients need to call you to upgrade their account? Can the demo be done in a video? Does the prospect really need to be "qualified" by an SDR? How is that helpful to them?
The ultimate tactic for frictionless revenue growth is usage-based pricing. Many PLG businesses couple usage-pricing with a freemium or self-service offer, but there is no reason companies need to be product-led to leverage UBP.
Recently, several sales-led companies have added usage-based pricing and used it in conjunction with other pricing mechanisms. To see if your company is a good fit for UPB, check out Is Usage-Based Pricing Right for My SaaS Company.
In one critical aspect, SLG businesses have an advantage over PLG businesses when converting to UBP. Sales-led companies have less transparent pricing and can experiment with new pricing on a customer-by-customer basis, and can run two pricing plans concurrently during the transition to UBP.
Sift is an example of a sales-led organization that leverages usage-based pricing but does not have a freemium or self-provisioning product. The Sift products require integrations with other systems, so self-provisioning is not a viable option on a direct basis. Sift has, however, pre-built integrations into other applications such as Shopify.
Snowflake uses both product-led and sales-led growth tactics, but even sales-led enterprise opportunities begin with a low-cost "proof of concept" project that expands with usage. Their usage pricing methodology has enabled Snowflake to achieve 178% net-dollar retention.
Commercetools is another example of a sales-led company that leverages consumption-based pricing to align the value it creates with the compensation it receives. This is a relatively common approach in the e-commerce space.
Build or buy the tools necessary for CS teams to identify customers with the capacity and likelihood to grow with your product. Only a few SaaS businesses have built tools to identify upselling based on usage patterns, but it is a growing trend to boost NDR.
Complimenting the CS systems, some organizations have split into retention-focused and expansion-focused groups once they have reach $5 million in ARR. Another popular approach utilized by several successful SaaS companies is to embed salespeople inside the CS organization.
At the extremes, Atlassian does not have a sales organization, and all selling is done by CS, while at Snowflake, there is no CS organization, and sales handles everything. These extremes illuminate the reality of the customer journey in a product-led company. There is no "hand-off" from sales to CS. Instead, the customer runs through a loop of learning, trying, using/buying, learning more, trying more, and buying more. Stepping back, why would you want to ping-pong your customer back and forth between groups as they progress with your product offereings?
Adopt PLG approaches to the user interface that emphasize ease of use and engagement. Identify possible opportunities inside the product for sharing and collaboration that could expand the product's virality outside the initial user base. Most SLG businesses I have chatted with have a major UI initiative in 2022 focused on ease of use and engagement.
According to research from Insight Partners, 25% of SaaS businesses have formed a user community, and a staggering additional 50% plan to launch one over the next 12 months.
Starting a community is not without risks. Whit Rothe, who helps SaaS businesses think through community development for Insight Partners, has a few suggestions. First, dedicate at least one full time employee to the effort. Communities take resources, particularly up-front, and you don’t want to launch a “ghost-town”. Second, do not launch a community as a lead-gen vehicle. The moment BDR’s start direct outreach to community members is the moment the community starts to lose its value. And for sales-led companies, it’s fine to start small. You might focus soley on your existing customers, and you may choose to keep the community private.
Even small communities can be helpful with uncovering new use cases, helping with documentation, supporting retention, identifying upselling opportunities, and broadening customer support capabilities. And all along this path, influencers and thought leaders will emerge over time.
In addition, some SaaS businesses have leveraged communities well beyond their own customer base. UpKeep, a SaaS solution for maintenance professionals, launched its community and soon discovered thousands of maintenance professionals joining the conversation. UpKeep was so “low-key” about promoting their product, the community eventually demanded they be more explicit about sharing product updates and features. It is hard to imagine a better environment to help enable product-led growth.
The list above is not exhaustive, nor do these concepts apply to all SLG businesses, but there are likely some tactics listed here that can be helpful.
You may have noticed one tactic missing from the list -- launching a freemium version of your product. This is a high risk venture as the engineering resources alone may be prohibitive. Additionally, the disruption to the installed base of customers could drive pricing compression and churn. That said, Mark Roeberge, ex HubSpot and PLG guru at Stage Two Capital, suggest that if you are in a space that lends itself well to PLG, you need to “burn the boats” and attempt a complete transition, including a free version of the product. If you don‘t do it, a competitor will.
If, however, your current situation does not require an all-out transition, some of the ideas discussed in this article can help leverage product-led growth tactics without risking your entire company. In the end, PLG tactics should align your product with how customers want to buy it and result in:
Want to introduce usage-based pricing? Talk to our team for a demo, answers to your questions, or to learn our best practices 1:1.