TL;DR
- For businesses focused on product-led growth, usage-based pricing is a game-changer, ensuring customers pay fairly based on their actual usage.
- UBP encourages more frequent and longer product usage, leading to increased engagement and customer satisfaction.
- Adopting pricing software for PLG companies, such as Togai, streamlines billing and usage tracking, making the pricing model more transparent and aligned with customer value.
- UBP can lead to higher customer retention rates and lower churn by making pricing transparent and fair.
- Success stories from PLG companies like Canva and Dropbox illustrate the benefits of UBP, including higher customer engagement, satisfaction, and retention.
- Usage-based pricing not only supports a customer-centric approach but also aids in upselling and cross-selling by naturally aligning with customers' growing needs.
- Considering a switch to usage-based pricing? Tools like Togai offer the infrastructure needed to implement a fair, transparent, and efficient billing system based on customer usage.
If you are considering PLG or already are PLG enabled, then usage-based pricing could be the best approach for you. Here's why!
Introduction to product-led growth and usage-based pricing
What is product-led growth?
How did you start using some software?
When I wanted to explore design assets for my social posts, I explored different tools before deciding on Canva. The product experience was great and that's the value I derived.
Canva delivers value fast—from discovery to design to value in 52 seconds!
When a friend started podcasting and was looking to create designs to complement her posts, I immediately suggested she and her team try Canva.
The product propels buying. So I ask again, what makes you start using software and why do you continue to use it?
In the case of Canva, the reason why it is such a compelling product:
- it’s built with your needs in mind.
- it is easy to buy the product without consulting an IT team
- You don't have to depend on a designer to create stunning graphics. Their thousands of templates curated for every possible use case will help you get started right away.
Canva has successfully adopted the product-led growth approach. It built an amazing product, informed by data on how users interact with it. They allow for free users and build a loyal pipeline. Their go-to-market teams use data to strategize for profitability and inform their product roadmap. Here the sales team focuses on helping users get to value faster.
Openview Partners defines product-led growth as follows:
Product-led growth is a go-to-market strategy that relies on product features & usage as the primary drivers of customer acquisition, retention, and expansion.
What is usage-based pricing?
This is a pricing model where customers are charged based on the amount or level of usage of a product. Here is a simple example of usage-based pricing:
Before ride-sharing apps stormed the scene, autos were a popular mode of transport in India. It charges customers based on the distance they travel. Their usage-based pricing model could look something like this:
- $2.50 for the first mile travelled
- $0.50 for each additional mile travelled
The customers who travel further will pay more, while customers who travel shorter distances will pay less.
Usage-based pricing allows businesses to capture value from customers who use the service more frequently.
Today, this model is commonly used in industries such as telecommunications, software as a service (SaaS), and utilities. Usage-based pricing is trendy. Did you see the latest report by OpenView Partners on the state of usage-based pricing? Here are some interesting points discussed:
- 61% of the general SaaS index will have adopted some form of usage-based pricing, with another 21% planning on testing UBP in the future.
- About 46% of SaaS companies are taking a hybrid approach, either by testing UBP alongside traditional subscriptions or offering a usage-based subscription plan.
- A new class of SaaS products is on the rise to help companies offer complex pricing to their customers. Togai is one such product.
So, how does usage-based pricing fit into a product-led growth strategy?
Usage-based pricing perfectly complements PLG
Product-led growth adopts a customer-centric approach to business that prioritizes creating a valuable product that customers love. Similarly, usage-based pricing keeps customers at the centre, helping them understand the product's value and how it solves their problem, leading to more informed purchasing decisions.
It encourages customers to use the product more, which can lead to increased engagement and customer satisfaction. All user activity can be tracked and metered to get a billable metric. It allows customers to use the features and pay for the same. Customers perceive it as fair as they can truly pay only for what is used.
Can you see now how PLG and UBP go hand-in-hand?
A product-led growth company with a usage-based pricing strategy can create a sustainable revenue model by focusing on delivering value to customers through its products.
Also Read: A Complete Guide to Usage-Based Pricing
Benefits of adopting UBP in a product-led growth (PLG) business
Aligns pricing with customer value
UBP allows customers to pay for what they actually use. Thus, they perceive the product's pricing as fair and transparent. This approach allows businesses to offer their services/products to customers without feature-gating. Unlike subscriptions, where one needs to subscribe to the highest tier just to access a particular feature, customers can access what they need and pay for it. A metering infrastructure can help you measure usage and charge users accordingly. UBP can lead to higher customer satisfaction and loyalty.
It can also help you integrate with your billing process, which makes it easier for businesses to bill customers based on their usage. This leads to reducing errors and saving time.
Encourages product adoption and usage
Products with a PLG approach are built with the customer in mind. They are designed to ensure customers realize the value fast. With such intention, pricing shouldn't be the one that limits the customers from having a great product experience. UBP allows for incentivizing customers when they use the product more frequently and for longer periods. This can lead to higher engagement and a deeper understanding of the product's value proposition.
For example, a PLG business offers a software tool that helps businesses manage their social media presence. It offers customers different usage tiers or plans, based on their needs and usage patterns. There is a basic plan that charges customers based on a set number of social media accounts or posts per month, and a premium plan that charges customers based on unlimited usage. As they grow their social media presence and require more features and functionality, they are keen to upgrade to the premium plan.
Facilitates upselling and cross-selling
By incentivizing customers to use the product more frequently and for longer periods, UBP can facilitate upselling and cross-selling to customers as they grow. As cited in the example above, they may naturally "outgrow" their initial usage plan and require additional features or services. And UBP makes it easier for businesses to upsell and cross-sell to customers.
A metering tool can help businesses offer flexible pricing plans based on usage to their customers.
Increases customer retention and reduces churn
By tying pricing to usage, UBP helps customers realize the value of the product they are using. It also offers greater flexibility to adjust their usage based on their needs. And the pricing model is perceived as transparent and fair, as customers are charged based on the value they receive from the product.
UBP can lead to higher customer retention rates and lower churn as customers are more likely to stick with a product they perceive as valuable and fairly priced.
Again, leveraging a metering infrastructure can be beneficial. It can help improve the customer experience by providing customers with accurate usage data and real-time billing information.
Provides more predictable revenue
Because UBP is tied to usage, it creates a more stable and predictable revenue stream. Unlike traditional pricing models, revenue can fluctuate based on the number of customers or products sold. Further, UBP creates a more engaged customer base. The demand for the product is more consistent, which also leads to more predictable revenue. UBP also helps reduce churn and that helps maintain a more predictable revenue stream over time.
A metering tool like Togai can provide better visibility into their revenue streams by tracking usage in real-time. This helps businesses better forecast revenue, plan for growth, and optimize their pricing strategy.
Examples of PLG companies and their Usage-Based Pricing Strategy
UBP aligns well with product-led growth (PLG) strategies as it facilitates more personalized pricing and provides customers with more control over the cost of the product based on their usage. It allows for incentivizing customers to use the product more frequently and for longer periods. This can lead to increased customer retention and reduced churn. Moreover, it provides more predictable revenue for SaaS companies and allows them to scale their infrastructure more efficiently.
We talked about Canva before. Canva allows its customers to buy on a credit basis rather than just a traditional subscription.
Other examples of successful UBP models implemented by PLG companies include such as Dropbox, Twilio, AWS, and Datadog.
- Dropbox charges customers based on the amount of storage they use, thus providing customers with more control over their costs.
- Twilio's customers pay based on the number of messages, minutes, and other communication services they use. Its flexible pricing options based on usage help attract and retain customers.
- AWS charges customers based on the amount of data they store, the number of compute hours they use, and other usage metrics. It makes it easier for businesses to scale their infrastructure without incurring large upfront costs.
- Datadog customers pay for the number of hosts monitored and the number of metrics collected.
You can find more inspiration by reading our blog on examples of other companies with a UBP model: 8 Best Examples of SaaS Usage-Based Pricing Models
Conclusion
Usage-based pricing aligns well with a product-led growth strategy and it can help businesses create a sustainable revenue model by focusing on delivering value to customers through their products or services.
If you want to implement usage-based pricing or looking to understand your pricing better, we are here to help. Togai is a metering and pricing infrastructure that helps you track and meter your customers' usage to derive a billable metric. If you are curious and would like to take a look, sign up here. Or you can Schedule a demo!
