Does anyone get pricing and packaging right the first, fifth, or seventeenth time?
When it comes to monetizing PLG products, pricing and packaging is one of the most high-impact growth levers at your disposal. It's also the hardest to nail.
In this guide, we'll explore the fundamentals of pricing and packaging in PLG, dive into granular tactics for pricing and packaging success, and learn some real world examples from the folks at Clay and ngrok.
What is pricing and packaging?
Let’s get our definitions out of the way.
Pricing and packaging, put simply, is how you monetize your product. It’s a strategic exercise that every SaaS company goes through. Your ultimate goal is to build packages, plans, or pricing that your customers are willing to buy.
Monetization in general is a huge topic, so for this blog we’re going to focus on the common pricing and packaging strategies we see most often with PLG companies.
Let's dive into both aspects of the pricing and packaging umbrella: pricing models and creating packages.
Usage-based vs. seat-based pricing models
PLG companies often employ either a usage-based, seat-based, or hybrid pricing model. The best model for your business depends on how users get value from your product. How that value increases should determine how you price.
- Choose seat-based if… your product’s value grows as more team-members join.
- Choose usage-based if…your product’s value is directly tied to feature usage. For example, Amazon Web Services’ or Snowflake’s credit systems, Twilio’s “per SMS” pricing, or Clearbit’s pricing based on API requests.
This model charges customers based on their usage of the product or service. The pricing is tied to the specific features used, the volume of usage, or any other quantifiable metric.
You see usage-based pricing often in PLG companies because the pay as you go model aligns best with self-serve products where you can add a credit card to get started. This model is especially popular with infrastructure and developer products, since developers often want to tinker and have a wide variety of potential use cases. A usage-based model provides them with flexibility and scalability to turn usage up or down.
In this model, customers are charged based on the number of seats or users accessing the product. Each user represents a separate charge, regardless of their usage level. Seat-based pricing is often used when product value increases based on the number of users. This model works especially well with multiplayer products where collaboration is a core value proposition. Think tools like Canva, Miro, and Slack.
Let’s explore each of these models.
The best of both worlds: Hybrid pricing
Many PLG companies opt for a mix of usage-based and seat-based pricing by packaging tiers to accommodate a range of users and applying limits to usage within each tier. Typically, these packages will align to use cases, company size, or some other useful grouping that helps customers benchmark themselves at a particular plan that meets their needs.
If you only structure your pricing based on the number of seats, there’s no real incentive for businesses to consolidate team accounts into a single enterprise license. On the other hand, smaller teams with advanced feature needs might be priced out. Hybrid pricing allows SaaS companies to create a flexible structure that captures both value metrics.
For example, HubSpot has seat-based pricing for their marketing and sales CRM. They also include usage-based pricing add-ons, for teams that might fall into a smaller tier based on number of users, but need enterprise-grade features like higher reporting limits or advertising capabilities.
Understanding the art and science of packaging
Your goal with pricing plans should always be to make it easy for customers to understand which plan aligns best to their needs. To do this you need to apply some art and science.
The science is looking at your existing customers and segmenting them based on firmographic details like their company size and their aggregate product usage. Each plan or package should ideally align to the different customer segments you target. The most common plans will typically segment by:
Company size or maturity: Tiers that map to different target company segments like individuals, teams/SMBs, and enterprises. Differentiation between the tiers is based on the size of the company which will usually map to a specific set of needs and a certain level of maturity.
Example: Notion’s packages include more advanced features like private team spaces in their Business tier and workspace analytics in their Enterprise tier.
Use cases: Packages that bundle different products or features based on the goals each customer segment has with the product.
Example: ngrok’s packages include options for different use-cases, like developers working on their own projects (Personal) or teams of developers looking to scale production (Pro).
The balance of art and science continues as you define the tiers and paywalls within each plan. How do you balance giving customers enough in lower tiered plans to get real value, while incentivizing upgrades to higher tiered plans? Use science, i.e. look at data to understand what features appeal to different customer segments to draw lines between plans and use some art, i.e. talk to customers to fill in any gaps.
Striking this balance between your tiers and customer segments isn’t easy. There are two common pitfalls we see with PLG packaging:
- Under-monetization: As Kyle Poyar recently put in his guide to PLG pricing, “PLG companies under-monetize as they add value.” By offering too many features in lower tiers, users don’t have enough incentives to upgrade.
- Over-pricing for upgrades: Sometimes, the opposite occurs, and companies struggle with compelling feature differentiation for higher tiers. This can happen either because products aren’t yet enterprise-ready, or because the packaging needs to be restructured to better match the needs of businesses and individuals.
In both cases, getting packaging wrong leaves revenue on the table by not creating a clear path to upgrade. This is why optimizing your pricing and packaging to align with the needs of individuals, teams, and businesses — specific to your product — is one of your most important growth levers.
Case study: Clay's pricing and packaging process
1. Moving downmarket to target new segments (smaller startups, recruiters, salespeople at bigger companies) and make it easier to get started on a paid plan with Clay with a more affordable tier.
2. Optimizing enterprise monetization and upgrades with usage-based add-ons (integration and API/webhooks limitations).
Varun shared additional insights from Clay’s pricing and packaging process and key considerations for PLG companies.
Prioritize customer happiness over revenue extraction
In the early stages, PLG companies should prioritize customer happiness rather than focusing solely on revenue extraction. By prioritizing customer satisfaction and delivering value, you can build a loyal customer base and foster long-term growth.
I basically thought of every single feature gate that we could possibly do, then talked to a bunch of customers and showed it to them. I asked what made sense and felt reasonable, or what felt ‘nickle and dime-y. — Varun Anand, Head of Operations, Clay
Align pricing tiers with user personas and usage patterns
Segmenting pricing tiers based on different user personas and their usage patterns is essential. Analyze data on user behavior, preferences, and needs to create pricing tiers that align with the specific requirements of different customer segments. In Clay’s case, they were hearing from recruiters and smaller startups that they were priced out of their most basic package. To solve this, the Clay team came up with a “starter” tier that would accommodate their needs.
Varun says this was a calculated risk.
We want to accommodate that use-case, but not cannibalize our other plans. It’s an interesting balance, figuring out what are the features that feel good and make sense in a higher plan vs. how many credits recruiters need to do their job; and for this more basic plan to have value. — Varun Anand, Head of Operations, Clay
Authentic communication and transparency with customers
Authentic communication and transparency are crucial in building trust with customers. Be open, honest, and transparent in your interactions and pricing communications.
Balancing pricing complexity and customer education
Explaining complex pricing structures and models can be challenging. Varun says it's important to strike a balance between providing sufficient detail and maintaining simplicity. He advises to gradually introduce customers to more complex pricing models and improve the clarity of pricing explanations over time.
Just explaining credits on its own took a while. We’ve been intentionally making changes over the last eight months. We first moved from charging based on rows of data to a credit system. We’ve gotten better at explaining gradual improvements, laying the foundation over time, so we could jump into a more complicated model. — Varun Anand, Head of Operations, Clay
Pricing by use-case: ngrok’s “jobs-to-be-done” framework
According to Sam Richard, Head of Growth at ngrok, 80% of your focus should be on packaging, while pricing accounts for the remaining 20%. She suggests using the jobs-to-be-done framework to align packaging with customer needs.
For example, ngrok's packaging was initially focused on one use-case, which didn't align with the majority of their users. So, they analyzed their usage data to determine the most common use-cases or “jobs-to-be-done” within their ICPs. To validate their findings they ran simple experiments by packaging infrastructure usage with different options with sales-led prospects.
To price for a wide variety of use-cases, without a complex sea of tiers, credits, and add-ons… Sam suggests two approaches:
#1 Use the Amazon Web Services model. Provide visibility into usage without impacting price.
Everyone is already used to it. You can have a meter running in the back-end that gives admin visibility, but customers can still use it as much as they want. They’re [vendors] not going to stop them or add friction, they’re just going to inform the customer how much it’s going to cost.— Sam Richard, Head of Growth, ngrok
#2 Offer an all-you-can-eat model. This model offers a great experience for customers, they know exactly how much they’ll be billed every month and don’t have to worry about credit limits. But, for vendors, it’s a pricing model that makes packaging more challenging. You risk leaving money on the table by offering all you can eat on features that could be potential upsell levers.
The most important factor to reduce complexity is standardizing processes and reducing friction wherever possible, like AWS, to enhance the user experience.
Considerations for pricing structure
When revamping pricing structure, the biggest thing might seem obvious, but… thinking through pricing from the perspective of your target customers will help you build and test your pricing with someone specific in mind.
Sam recommends the Monetizing Innovation book for guidance on identifying what customers care about and pricing accordingly.
And, keep it simple!
Everyone feels this pressure to have a website with three tiers, but if you don’t even have enough features, it’s just bonkers. Instead start with a “contact us” button on your website, then add a price point, start testing, and iterate from there as your product evolves. — Sam Richard, Head of Growth, ngrok
How to structure a pricing experiment
Pricing updates require constant maintenance and can be a slow process. It’s really about making a series of small tweaks or optimizations and perfecting your structure overtime, as you scale.
Step 1: Analyze your data
Both surveys and historical usage data analysis can help identify price points and assess alignment as your revenue goals shift.
When structuring your pricing and segmentation, you should be paying attention to:
- Correlations between feature usage and deal size, industry, and customer goals.
- Usage differences between smaller teams and bigger accounts.
- Product triggers that signal an account is a good opportunity for expansion.
- Customer feedback
Step 2: Formulate a hypothesis
What is the data telling you? Does it match with what your customers are saying? Based on your analysis, pick an experiment you think will move the needle on your revenue goals. A hypothesis can be a simple “If I ______ then _____ will happen” statement.
For example: If I lower the price of our starter plan (and remove a few rarely used features), we’ll increase ARR through higher acquisition of SMB customers. To maintain our current accounts in the starter plan, we can offer feature add-ons per user.
Step 3: Report on findings and iterate
The earlier you start testing, even by running small A/B tests on a pricing landing page, the more data you'll have to dig into.
Give your pricing experiments enough time to run for accurate findings. Keep in mind the enterprise sales cycle is longer and involves multiple stakeholders. Once you have enough meaningful data, report on conversions, ACV, and churn to determine areas of improvement for your next iteration.
With Pocus, you can study customer trends and get a clear visual of historical data to improve every customer interaction. Easily visualize time-based comparisons such as percentage increase over last week, last month, or last year.
Curious how it works? Check it out for yourself!
Pricing and packaging best practices
The best way to figure out how to optimize pricing and packaging for revenue growth is asking your current customers, validating their feedback against your usage and customer data, and looking for areas where there’s a disconnect between the price, the offering, and the customer value.
Here are a six tips to keep in mind as you set out to package and price your product from Kyle Poyar's Growth Unhinged newsletter:
Make it easy on the admin
Simplifying the administrative aspects of pricing and packaging is crucial for enhancing the customer experience. The goal is to streamline processes such as subscription management, billing, and user management. By reducing administrative complexity, you can reduce friction for both your customers and your internal teams.
Upgrades need to have sufficient differentiation
Encouraging users to upgrade to higher-tier plans is key to the PLG business model. Provide compelling value propositions that make the upgrade appealing. Highlight additional features, advanced functionality, increased limits, and dedicated support that come with higher-tier plans.
For enterprise pricing and packaging, PLG companies need to go beyond single sign-on (SSO) integration and provide additional value and capabilities that address enterprise needs. Compliance with industry standards, white-glove service, and dedicated support are table stakes for enterprise differentiation.
Gather customer feedback
Conduct surveys, interviews, and user testing to understand their perceptions, pain points, and willingness to pay for certain features. This data-driven approach helps align your pricing and packaging strategies with customer needs and expectations.
Measure perceived value
Determining the perceived value of features is essential for setting pricing tiers effectively. Conduct customer research and analysis to understand which features drive the most value for your users. By aligning pricing with the perceived value of features, you ensure that customers feel they are getting the right level of functionality for their investment.
Frictionless enterprise upgrade
When targeting the enterprise market, it's important to minimize friction when enterprise customers need to upgrade to higher tiers. Simplify the upgrade process, ensure a smooth transition, and provide dedicated support to assist customers in their journey. By removing barriers and making the enterprise upgrade experience seamless, you enhance customer satisfaction and retention.
Get a head start with Pocus
The hardest part about pricing and packaging? Understanding the nuances between user behavior and how that relates to usage at the workspace and account level. With Pocus you can easily combine firmographic and product usage data to get a 360-degree view of each customer (users, workspaces, teams, and accounts), spot trends, and refine your pricing and packaging strategy without any blind spots.