Your guide to PLG pricing 201
How to build an unstoppable monetization engine around your PLG product
The guidance on pricing for PLG products is, admittedly, surface-level at best.
Conventional wisdom tends to go something like this:
Let users try-before-they-buy with either a freemium edition, free trial, reverse trial, or low-price entry package.
Design pricing to be transparent and straightforward so that it doesn’t deter users from signing up.
Make your user-focused features as widely accessible as possible while monetizing team- and org-level capabilities such as single sign-on (SSO), advanced security, invoiced billing, robust admin settings, and premium support.
Select a pricing metric that allows you to seamlessly expand within an account as they deepen their product usage.
These are certainly helpful rules of thumb. And what we’re left with is a starting point for pricing that works well enough for the average PLG startup.
I keep thinking about the 201 version of PLG pricing: how to build an unstoppable monetization engine around your PLG product.
Here I’ll start to unpack PLG pricing 201. I’ll walk through the most common PLG pricing mistakes that I see time and again – and what to do instead. Be on the lookout for real-life examples from Canva, Notion, Figma, and more.
Mistake #1 - Your pricing is optimized for individual users
In December 2022, Notion overhauled their self-service plans and pricing. It was a long time coming.
The PLG giant – valued at $10 billion – effectively signaled a shift from focusing monetization on power users to focusing monetization on businesses. They:
Killed their individual user Personal Pro plan
Improved the Free plan to allow for more powerful team collaboration than before
Doubled entry pricing from $4/user to $8/user
Rebranded the Team plan to Plus since every plan has built-in collaboration and is meant to be used by teams
Wait a minute… isn’t PLG supposed to focus on the end-user?
Yes and no. You’ll want to land with an individual and then create products and pricing to go from individual to team as fast as possible.
Single-user products see poor unit economics (low retention, low LTV:CAC, high support burden). Teams products look more like the B2B SaaS economics we know and love. Team revenue is worth $$$ – it should be valued accordingly.
Ideally, all of your plans should have the option of being used with multiple users in an organization. SurveyMonkey actually takes this a step further, requiring their new Team plans to have multiple users. This helps you reach more champions in an org and enables your customers to discover more use cases, making the product stickier.
Mistake #2 - You ignore the *admin* experience of PLG pricing
Bottom-up adoption is wonderful. At least on paper.
The reality is that folks struggle with billing, budgeting, and feeling like they're in control of their spend. Admins probably don’t love managing that viral, bottom-up growth inside of their organization – and that’s not a persona you can afford to ignore.
When Canva launched its Teams product, they smartly introduced key perks to win over the admin. For example, customers aren't charged until a user accepts a product invite and admins get to review/approve new people prior to the next bill. Canva for Teams also only costs $119.99 (the same price as Canva Pro) until the second user accepts a product invite, at which time it increases slightly to $149.90.
Figma’s approach is brilliant, too. Figma lets users invite others for free, then charges for the extra users later. Here's how their approach works – as spelled out in the pricing page FAQs:
Editors – not simply admins – can add new editors to their team at any time and at no cost. This allows folks to share designs, get feedback and move quickly (no admin approval required).
If the customer starts to exceed their plan, team admins get an email a few days before the payment. That email recaps the new bill and highlights any new editors who've been added. This gives admins control over their bill.
Admins can adjust permissions before the payment is due, i.e. downgrade editors to viewers. But they're unlikely to do so because of (i) loss aversion – it's far harder to take something away than it is to never give it in the first place, and (ii) inertia – this requires proactive effort on the admin's part, which may not be worth the cost of a $12 editor seat (for the Professional Plan).
It's a win for the customers, a win for the admins, and a win for Figma's revenue. The learning: pay attention to the admin experience of your PLG pricing.
Mistake #3 - You don’t offer enough value to attract the *right* customers
Land-and-expand only works if your best customers decide to grow with you rather than graduate to a more “enterprise-grade” product that appears to be purpose-built for their requirements. Design your packaging and pricing to make it as frictionless as possible for high-value customers to stick around.
Previously, if you wanted to adopt Canva across a team you had two (bad) choices: stay on Pro, which lacked important features like brand controls and approval workflows, or contact sales to buy an Enterprise plan. Running up against those choices might induce an otherwise happy customer to explore alternative products. (The new Canva for Teams solves for this.)
Notion similarly created a gap between its old Team plan ($8 per user), which lacked important organizational capabilities, and its Enterprise plan, which required a user to request a demo. It’s not hard to imagine departments or mid-size organizations who might experience these deficiencies and start to consider what else is out there.
With the company’s December 2022 pricing change, folks can now opt for Notion’s new Business plan ($15 per user). This plan includes SAML SSO, private team spaces, advanced page analytics—and it can be bought on a self-service basis.
The takeaway: land and expand your customers, don’t graduate them.
Mistake #4 - You never quantify the value of your features for different audiences
Packaging and pricing is part art, part science.
Rather than guess at what your customers care about, you should be asking them. You can quantify the perceived value of your existing and roadmap features through ongoing willingness-to-pay surveys.
“My advice: do not undervalue your own product. Most of the companies I see leave money on the table because they feel that they need to be worth more in order to charge more. But if you understand the willingness to pay from your customers and understand the value you provide to them, that gives you big indicators into how much you should charge.”
Mohannad Ali, CEO of Hotjar (interviewed at SaaStock)
When running these surveys, think about your capabilities broadly and include things that you might already offer as a one-off like 24x7 support, a named CSM, customized reporting/insights, or an uptime SLA. You’ll want to measure the breadth of perceived value (i.e. what % of your customers want to buy it?) as well as the depth of perceived value (i.e. among folks who want it, how much is it worth to them?).
You can get extremely scientific with these types of surveys through conjoint and other techniques. But it doesn’t need to be that complicated.
One simple tactic is to ask folks to rate each capability as either ‘must have’, ‘nice to have’, or ‘not needed’. Then follow-up by having them allocate 100 points across their ‘must have’ features – more points go to more valuable capabilities. You should always end these surveys with a question about willingness-to-pay for the ideal package folks just created. I tend to use the van Westendorp methodology: Imagine you had access to the ideal package you just created. At what price per month would you consider this package to be [a bargain, getting expensive, too expensive]?
Bonus points if you complement these surveys with product analytics on actual usage. The takeaway: stop guessing what your customers value and start asking them.
Mistake #5 - SSO is the primary benefit of your enterprise plan
As you quantify the value of your capabilities, I suspect you’ll rethink the role of single sign-on (SSO) in your monetization strategy.
Folks have historically treated SSO as a polarizing feature that security-conscious Enterprises will pay for while the average customer couldn’t care less about it.
That perception is changing, and it’s changing fast. I don’t know who needs to hear this, but SSO is no longer just an Enterprise feature. It’s not enough to justify a 2x or 3x price jump into the Enterprise plan. And PLG companies are missing out by not making SSO more accessible. Here’s why:
Having customers adopt SSO is a good thing! It makes it easier for users to log in and it streamlines the ability to add more users. Customers who've implemented SSO tend to be stickier with better retention rates.
SSO is a "check the box" requirement for many orgs. If you don't offer it, you may not even get included in a customer's evaluation.
Even small, growing businesses are adopting SSO as part of a Zero Trust security architecture. Modern identity providers like JumpCloud (featured in this newsletter) make implementing SSO both affordable and simple, increasing its adoption.
The value of SSO doesn't justify price scaling exponentially (which is what happens when it's charged by the user AND at 2x or 3x of the per-user price). Your user or buyer doesn't have a massive budget windfall just because their IT or Security team gives them certain requirements. Why should they be punished?
Mistake #6 - End users aren’t motivated to help you navigate an enterprise purchase
In addition to SSO, Enterprise plans tend to include capabilities that SaaS companies believe sophisticated IT, procurement, and security folks will care about.
That’s not a bad rule of thumb. But it glosses over the mechanics of how enterprise customers buy PLG products. There should be something of value that you can offer to end-users so that they’ll be motivated to help navigate an enterprise purchase.
At Figma, for example, 95% of sales pipeline comes from the existing user base. Sales is about expanding folks from free and entry-level paid plans onto more expensive, higher value offerings. That process includes reaching out to power users to go bottom-up within the account. How do we convince power users (aka our PQLs) to help us reach a decision-maker and advocate for a large purchase if the only benefits are “enterprise”-y things that power users couldn’t care less about?
If a product-led sales motion is part of your strategy, you’ll want to find a way to create FOMO among your end-users so that they actively want to upgrade. Here are a few examples from at-scale PLG companies like Airtable, Calendly, and Typeform.
Mistake #7 - You aren’t monetizing new products (yes, like GenAI)
PLG companies focus on ways to add more and more value to their users, confident that adding more value will lead to bottom-up growth and word-of-mouth adoption. PLG companies also default to keeping their pricing and packaging as simple as possible in order to minimize choice-paralysis among would-be customers.
Put simply: PLG companies under-monetize as they add value.
This approach worked fine when companies were flush with capital. It still works OK as long as the marginal cost of a new feature is (near) $0. As everyone rushes to add generative AI to their offerings, and as there’s pressure to achieve profitable growth, it’s time to rethink this assumption.
Unlike other product advancements, adding generative AI has real costs for SaaS companies. Folks are usually licensing ChatGPT's APIs, which means licensing on a pay-as-you-go basis (OpenAI charges $0.002 per 1k chat "tokens"). The good news is that this is actually 10x (!) cheaper than GPT-3.5, making it far more accessible and allowing vendors to get creative with free(mium) and bundling strategies.
It’s a great time to test new and creative monetization routes. Here's what I’m seeing so far from the early adopters:
Free trials are ubiquitous here. This helps users internalize how AI helps them get better at their jobs, then go to the execs asking for budget approval. And it benefits from the fact that folks can see value from AI almost instantly and in the context of their existing workflow. At Notion, for example, all existing users get a number of complimentary AI responses included in their plan.
Usage-based paywalls seem to be a powerful way of nudging users to upgrade and start paying for the AI capabilities. These usage metrics are based on either queries, requests, or words generated.
Actual pricing models are all over the place, but the trend is toward "hybrid" pricing based on a combination of user seats and usage. My suspicion is that these hybrid models aligned best with folks' existing pricing, covered the costs of licensing ChatGPT, and were straightforward to launch quickly.
Bonus - PLG pricing mistakes from readers
I turned to Twitter to find out what PLG pricing mistakes readers have made. Here’s the best reply via
👇
The TL;DR - How to fix your PLG pricing
These pricing mistakes are (relatively) straightforward to correct and quick to bear fruit. In the process of revisiting pricing, you’ll grok what your customers truly value from your product and build a powerful monetization engine to fuel profitable growth. The checklist to fix your PLG pricing:
Optimize packages and pricing to reach teams rather than individual users.
Pay attention to the admin experience of your PLG pricing and the mechanics of how you grow from the bottom-up.
Offer enough value to attract high-value customers who can grow with you.
Quantify the perceived value of your features for different audiences through willingness-to-pay surveys and actual product usage data.
Consider democratizing access to SSO rather than making it the main pillar of your enterprise pricing.
If you plan for a product-led sales motion, find a way to create FOMO among your end-users so that they actively want to advocate for an enterprise purchase.
Monetize new capabilities as you add more value to users. Start with GenAI.
⚡️🚀
Pure gold. Thx for this amazing summary!