PLG Will Eliminate the Subscription-Based Software Model
I spent several years as a General Manager at Amazon Web Services and my teams launched two Tier 1 services: Amazon CloudSearch and Amazon OpenSearch.
Like every product at AWS, these were scaled with a product-led growth (PLG) market motion: no gated features, no subscription tiers to choose from. Instead, a Usage-Based Pricing (UBP) model is used to charge based on consumption, directly correlated to the value being delivered to the user.
Despite the fact that the software landscape has evolved completely in recent years, one aspect that hasn’t kept up is the buying process. Since the shift from on-premises to cloud, vendors have relied heavily on a tiered subscription model in which product features are divided between tiers, and customers choose the tier that best suits their use case and number of users. Product-led growth (PLG) has emerged to disrupt this status quo and help buyers understand if a product is right for them.
PLG makes the product the primary driver of the sales motion. Rather than engaging with a business development rep or account manager, buyers can immediately create an account and begin using the product from a self-service workflow.
This immediate immersion with the ability to quickly realize value (or not) from the product in its true (ungated) form, helps convert users to champions. Usage-based pricing (UBP) is another lever that PLG companies are increasingly using to differentiate. UBP eliminates the friction or step function to growth; rather than selecting and negotiating a subscription, customers simply use the product as they need and are billed in accordance with what is consumed.
It is my prediction that companies that don’t adopt a usage-based pricing model will be disrupted by competitors that do in the coming year.
Subscription Pricing Was an Aberration
Thinking about daily life, most of our transactions are usage-based. When we go to the grocery store, we pay for the food we take home to eat. Our electricity bill maps to the amount of energy we use in our home. You pay Uber for the miles you travel and pay Airbnb for the number of nights you sleep. Why should software be any different?
It’s worth pointing out that the monthly subscription model for selling software was originally meant to disrupt the model of long, multi-year licenses driven by sales. The promise was that customers would be able to renew their subscription each month as their user base grew/shrunk or their needs changed. This kept vendors engaged with their customers and in tune with their customers’ needs — because at any time a customer could cancel their subscription if they were unhappy.
But the reality today is that these subscription models look a lot like the cumbersome licensing deals of the past. Just about all vendors offer heavy incentives to try and lock customers in for annual subscriptions, sometimes even longer. This leads to a lot of shelfware (e.g., companies paying for software they no longer use), which is a negative experience for the customer and in turn leads to eventual churn, which is a negative experience for the vendor.
Simply put: the subscription model does not offer harmony between the amount being paid and the value being delivered. The PLG model ensures that the equation is constantly in balance. Compounded with challenging economic conditions, customers deserve a more flexible and transparent billing model.
PLG Model Better for Vendors and Customers Alike
There’s a reason that over half of all SaaS companies have already adopted some form of usage-based pricing (UBP) and PLG motion, with that figure on track to continue growing each year. While customer preference for having more control over and transparency about their spend is easy to understand, the model offers some key benefits to vendors as well.
A PLG motion lowers customer acquisition costs by leading with the product rather than expensive salespeople and business development teams. The sales cycle is shorter and there are fewer rounds of negotiation needed (if any), which allows vendors to spend more resources on product development, differentiation and customer success. Additionally, product usage data generated from this motion streamlines and simplifies actions like renewals, up/cross-sales, targeted outreach and discounting.
Consequently, PLG with UBP drives improved Net Dollar Retention from both ends, reducing the customer acquisition cost as mentioned and decreasing churn by giving customers the option to scale their usage up or down as needed instead of imposing a binary choice of paying the subscription or churn.
Increasingly, we are seeing the world shift towards self-service models. Software buyers, particularly millennials and younger generations, prefer a self-service option over engaging with a salesperson. This echoes the trend that users no longer want to be “sold to” and instead want assistance realizing value for their use case as quickly and easily as possible.
By offering a self-service channel, customers can engage with a brand at their own pace, using their preferred communications. Immediately being able to access the ungated product and apply it to real-world use cases will sway next-generation buyers more effectively than the lure of a paid-for dinner meeting or a well-timed phone call.