Episode 225: Aligning Pricing With Product and Customer Segments with Dan Balcauski
Join me in the latest episode of the Product Thinking Podcast as I welcome Dan Balcauski, founder of Product Tranquility.
Dan is an expert in optimizing pricing and packaging for B2B SaaS companies. In our conversation, we discussed strategic nuances of pricing models, the importance of understanding customer value, and the common pitfalls organizations face in their pricing strategies.
In this episode, Dan addresses the intricacies of pricing beyond numbers, emphasizing the need for a strategic approach that aligns with both market demands and customer needs. He shares insights on how effective pricing can transform from a liability into a formidable competitive advantage, thanks to segmentation, value-based pricing, and strategic decision-making.
If you’re looking to refine your pricing strategy and leverage it as a competitive edge, tune in for actionable insights and expert advice.
You’ll hear us talk about:
06:38 - The Journey to Pricing Expertise
Dan shares his transition from software engineering into the pricing world. He highlights that companies often neglect how they capture value, resulting in rushed pricing decisions despite the significant impact pricing can have on a company’s success.
15:03 - The Mechanics of Pricing and Packaging
Explore the four elements critical to pricing in B2B SaaS: price metric, price model, offer configurations, and price fences. Dan uses the McDonald's menu as a relatable example to illustrate how these elements play out in the real world.
39:18 - Lessons for Long-Term Pricing Success
Dan advises treating pricing as a process that evolves with market changes, noting the importance of governance, continuous improvement, and alignment with customer value and business strategy.
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Episode Transcript:
[00:00:00] Dan Balcauski: I don't think this may be the first time you've ever heard of this, where maybe you have a senior executive team who does say all of our customers are alike. But, not all customers are the same. So how do you segment your customers? Who owns that? Oftentimes you'll start to see breakdowns even at that level where Somebody on the product engineering side went through agile training and they were told they had to go create personas. But then the problem is that maybe the marketing or the sales team has different personas or different users. And so it's like I've never seen companies be successful when you build a product for one, and then tell marketing, Hey, go position it for this other customer. You're probably gonna end up in a ring of sadness in some dimension or the other, when that happens.
When it comes to SaaS pricing, especially like most executives think that what you charge determines your success. In fact, who and how you charge determines your success. So I would say for most folks, if they're sitting there arguing, should this product be 19 or $99 probably having the conversation on the wrong level. I would spend most of my time on what the price tag goes on and little to barely any time on what number goes on the price tag . It often combines a bunch of different qualitative factors and interrelated choices that we have to make sure that our differentiated value is clear to users, and that we get compensated for that value as they receive value as well.
[00:01:11] PreRoll: Creating great products isn't just about product managers and their day to day interactions with developers. It's about how an organization supports products as a whole. The systems, the processes, and cultures in place that help companies deliver value to their customers. With the help of some boundary pushing guests and inspiration from your most pressing product questions, we'll dive into this system from every angle and help you find your way.
Think like a great product leader. This is the product thinking podcast. Here's your host, Melissa Perri.
[00:01:49] Melissa Perri: Hello, and welcome to another episode of the Product Thinking Podcast. Our special guest today is Dan Balcauski, the founder of Product Tranquility. Dan is a strategic advisor who specializes in optimizing pricing and packaging for B2B SaaS companies. I'm thrilled to dive into the conversation, explore how we can rethink pricing to drive better product and business outcomes.
But before we talk to Dan, it's time for Dear Melissa. This is a segment of the show where you can ask me all of your burning product management questions. Go to dear melissa.com and let me know what they are.
Hey, product people. I have some very exciting news. Our new mastering product strategy course is now live on Product Institute. I've been working on this course for years to help product leaders tackle one of the biggest challenges I see every day, creating product strategies that drive real business results.
If you're ready to level up your strategy skills, head over to product institute.com and use code launch for $200 off at checkout.
Here's this week's question.
Dear Melissa, as the director of product and operations for the e-commerce division of a pharmacy company, I oversee an e-commerce platform integrated with the health tech component. Within our structure, there's also a director managing the commercial strategy, deciding what products we sell and which to prioritize online.
Our long-term vision is to evolve into a marketplace where a digital presence offers a broader selection than our physical stores. In this context, how would you define the role and the focus of the product management and operations areas? Specifically, how can we ensure alignment and maximize value within a broader ecosystem that includes both commercial, product and operations strategies?
So I've worked in a lot of e-commerce companies, so I am familiar with this problem. And what you want to do is separate here, the e-commerce component from the physical products that you sell, right? We've got our digital products and we've got our physical products here.
Now you are going to be building this e-commerce platform, that serves up those physical products and you wanna be able to sell them in the best light. So you do have to be intertwined and understand what the commercial strategy is going to do, what products you're gonna offer, why you're offering them who you really wanna target on the platform, who you think will be coming to it, how you attract them.
Is there some kind of health tech component, you said, maybe there's a watch that alerts people, they need to come to the platform and do something. Or you have data that you can back in there where you steer them towards the right products. Not sure. But you wanna understand what's the angle of who you're selling to and what those products are.
From there, you're gonna go back and figure out how do I make the best digital experience to deliver those products to people and allow them to sell it. So your e-commerce platform might be very simple. You might just say, Hey, we don't really have a strategy for getting people in here and taking care of this is just an easier way for them to buy than going into the store. Alright. So then you're gonna make a e-commerce platform and you're gonna have your pharmaceuticals on it. You're gonna surface those up to people. But you might have a larger strategy here where you're saying, Hey, with our health tech component, we might be capturing a lot of data about our customers, and we want to help steer them towards the best solutions in this case.
Once you understand that commercial strategy and what those products are there for and why we're doing an e-commerce platform, right? What's the reason behind it to sell more, then you might be able to do more digital strategies that help get people to the right products within that. So that purview right there around the digital stuff is really the product management that we're talking about.
That is the digital product management. So you're in charge of that platform, the user experience on that platform, understanding what types of products are gonna go into it so that you can make it easy for them to get uploaded into the platform and to be sold. So that is one purview. Another purview is going to be selecting those physical products, so going, outsourcing them, doing all of that.
That's somebody else's purview. So two distinct things. Then you probably have the operations about actually getting those products shipped, let's say, to, to the customer. That's another platform, right? That's probably gonna go a little bit, hand in hand or plug into your e-commerce platform. So those three things are pretty distinct, but the idea here is that we have to start from why are we actually building this platform?
What do we think it will do for the business? Do we wanna be innovative here or are we just doing something to offer more solutions than just going into our stores? What do we wanna do? What could we do? That could be a great place for you to paint a vision. And then you wanna understand from the commercial strategy, what types of products are we sourcing and who are we targeting so that you can build the best platform possible.
I'm sure there's gonna be a lot of build versus buy decisions in here too. Don't try to recreate the wheel if you don't have to, but think about where you can be innovative, right? Where can we offer the best solutions and where should we integrate or partner with other people to provide those digital solutions there too?
So that gives you an edge so that you can focus on the most innovative pieces of it and then bring those digital products to life. So I hope that helps, and I hope that clears up the distinction between all of your different lines. You're always gonna have to work together and make sure that goes smooth and your strategies are aligned, but they're owned in separate areas.
I wish you the best of luck with your pharmaceutical products and expanding your e-commerce company. Now, let's go talk to Dan.
Welcome to the podcast, Dan.
[00:06:38] Dan Balcauski: Good to be here, Melissa. I'm excited for our conversation. Thank you for having me.
[00:06:41] Melissa Perri: Me too. It's always a good day when you can talk about pricing. So I'm curious for you how a lot of people don't know much about pricing. Looks like a weird way to get into it from a product background, what led you into the pricing world?
[00:06:54] Dan Balcauski: Yeah, I think by happy accident and opportunity, like all good careers, that's how they're built. I spent 20 years of my career in software. Started as a builder, as an engineer, moving in engineering management, and then into product. And early on I noticed something fascinating, which was most companies obsess over building fancy products and acquiring customers, but ultimately neglect a lot of how they capture value. And that ultimately hit me when I became responsible for product roadmaps and saw firsthand how these pricing decisions were rushed afterthoughts despite what is on its face significant impact on company success?
And today I help you know B2B SaaS CEOs define pricing and packaging for new and existing products, and help them transform their pricing practices from confusing liability to a competitive advantage.
[00:07:40] Melissa Perri: Awesome. And when you were first getting into the pricing world, what were some of the biggest misconceptions about pricing in general that you saw?
Pricing Misconceptions and Segmentation
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[00:07:47] Dan Balcauski: Yeah I think the first most prominent one is treating pricing as simply putting a number on a price tag. Like when it comes to SaaS pricing, especially like most executives think that what you charge determines your success. In fact, who and how you charge determines your success. So I would say for most folks, if they're sitting there arguing, should this product be 19 or $99 or should our price it end in fives or nines, you're probably having the conversation on the wrong level. I would spend most of my time on what the price tag goes on and little to barely any time on what number goes on the price tag because prices really just, barely ever one number one decision.
It often combines a bunch of different qualitative factors and interrelated choices that we have to make sure that our differentiated value is clear to users, and that we get compensated for that value as they receive value as well.
[00:08:43] Melissa Perri: How do you see the, you just mentioned a little bit like who do you sell it to? What are you actually selling? How do those factors actually play into pricing?
[00:08:50] Dan Balcauski: Yeah. I've noticed a lot of fundamental, strategic problems. Like it's very easy for, and if anyone has ever been on this outside of executives getting done with their quarterly business offsite or yearly offsite, and they deliver their OKRs masquerading as strategy. You realize that you can make those things sound good, but pricing and packaging is really where I said this to people before where you, you dig up the skeletons in the closet of bad strategy. So what you run into immediately having done this a bunch of times, is I keep on, kept on seeing the same problems. Like ultimately customers when they would try to price and package their software, they faced these four big problems. They didn't really know who their customers are. They didn't really understand how their product helps customers. They can't explain why their product is special and they forget that pricing is more than just picking a number. And so I, Seeing these problems enough, I ended up creating a model that I call the services model. So services stands for the four it's acronym of course, like all things have to be in marketing, S, V, C, and S. So those letters stand for segments, value, competition and strategy. So quickly let's break it down.
So, S is for segments, so who your customers, how are they different from each other? What do they need? V is value, like how does your product actually help customers? Why is it important to them? C as competition or competitive alternatives, like what other choices do customers have? And then these three first three elements I really think of as like inputs to the overall pricing process. 'cause your pricing power comes from the differentiated value you create for a particular segment beyond the competitive alternatives that are available. So then those three elements filter down into the final piece S, which is strategy.
So how will you sell your product to the right customers? Like a strategy? I really use the Michael Porter sense of the word, where it's about trade offs. Like we can't be everything to everyone. We have to make choices about where we wanna focus, which customers do we wanna go after? How will we show them our product is the best choice? And then how will we ultimately package and price our product to make it easy for them to buy and then scale with the value that they receive?
So putting all those things together, it's very easy when you go into, again unarticulated strategy where you start trying to realize very quickly that, oh, unless we can have a common language about which customer we're going after, we really can't make appropriate decisions.
'cause you're going to find, as you get into the nuance of these interrelated packaging decisions, oh, this choice of, for example, a pricing metric, should it be per user or per API call, or per gigabyte of data store is gonna work for a certain set of customers and it's not gonna be work for this other set of customers.
And sure that you've articulated those things upfront is incredibly important.
[00:11:22] Melissa Perri: Yeah. I find that a lot of organizations do not know there is segmentation on the customers. Whenever I come in for product strategy, that seems to be one of the biggest things. We might know the markets, but we haven't really segmented out the customers. When you're working with people to do pricing strategies and start to build this out, do you typically start there and how do you deeply understand what those customer segments are?
[00:11:42] Dan Balcauski: Yeah. I think, there's a sub problem there, which is, segmentation is like MVP or product market fit, it's one of these really abused terms in the marketing world where everyone thinks they know what it means, but we all talk past each other. I think one of the first kind of mistakes, especially as it applies to a pricing project or initiative, is that, People have a very difficult time in thinking past, like things like firmographics being the equivalent of demographics in B2C, size of the company by revenue, a number of employees or the industry vertical it's in, or the geographic location of the headquarters for example, or how many branches it has. Those things may be relevant, but they're often not why people buy like you're a Fortune 500 CMO, you do not roll out of bed in the morning and be like, I am going to buy MarTech software because I am a Fortune 500 CMO. Like you've got some situation, some problem that is causing you to lose sleep, to be like, oh my God, I gotta fix this. yeah, it may related to the size of your organization, but it's probably related to a bunch of other contextual factors. And we really want to deep into what those contextual factors are. So I'll always start like a multi-step process when I talk about people like segmentations.
'cause I think like you could end up in a business, I don't think this may be the first time you've ever heard of this, where maybe you have a senior executive team who does say all of our customers are alike. And that case, maybe for your audience, I might recommend they start searching for another job because that's gonna be a very difficult place to try to make an impact as a product leader. But, I would start with, okay, like we realize that all, not all customers are not the same. So how do you segment your customers? Is that widely shared? Who owns that? Oftentimes you'll start to see breakdowns even at that level where Somebody on the product engineering side went through agile training and they were told they had to go create personas.
So they went off in a room and created the Sally SMB and Molly mid-market and whatever, but it wasn't based on any research. Or maybe it was based on some research, But then the problem is that maybe the marketing or the sales team has different personas or different users.
And so it's like I've never seen companies be successful when you build a product for one, and then tell marketing, Hey, go position it for this other customer. You're probably gonna end up in a ring of sadness in some dimension or the other when that happens. So just even starting with, okay, do we have a segmentation?
What are those factors based on? Is it shared? then from there you'd be like: Okay, are these the factors that we've split these groups? Are these what help them make decisions between what they buy? And I'm a big believer in things like jobs to be done. I know you've had a lot of the greats even on this podcast a big fan of like folks like Bob Vesta and Tony Ulwick who have written extensively about this.
And I really like, Tony's breakdown because it really helps you understand very clearly. Okay, We have this user in a particular context, They're trying to achieve some functional outcome. How are we gonna measure that functional outcome? And then we can look at different customers and ask them what the problems are that they're trying to solve, what's most important metric for them to affect.
And then based upon that, they will have a different perception of the value we bring. And that's how we really wanna think about segmenting these customer groups.
[00:14:52] Melissa Perri: Wow. That's awesome. So when we segment those groups and look at it, you also mentioned this is kinda like the who you mentioned, the how do we charge, what's the difference? What are the different ways of like, how we charge, what should we be thinking about there?
Pricing Mechanics and Internal Ownership
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[00:15:03] Dan Balcauski: Yeah, so as I mentioned, the price isn't just the number on the price tag. For all of the non pricing people out there, you have my greatest sympathy, and I apologize for everyone in the pricing world who has not created a common language around this. I try to be consistent but it's very difficult as you're trying to get your groundings. Especially when were talking about B2B SaaS, this concept of packaging, I think of as four separate elements. I'll break 'em down quickly. So price metric, price model, offer configurations or bundles, and then price fences. Let's use our favorite fast food restaurant, McDonald's as an example. I go to McDonald's, I order a hamburger, I pay money for that hamburger. The price metric there is a price per hamburger. So that's what I am paying per transaction value, right? That is the thing. If I buy 10 hamburgers, I pay 10 times as much.
And so that is the price metric. And we have this all over at B2B software with per API, per user, per gigabyte of data transfer to storage. In any number of different elements. Your pricing model, I go and I buy that hamburger. I pay my money, I get that hamburger, I have the rights to do with whatever that hamburger is forever.
That is a perpetual transaction. So price model defines how and when money flows through the system. And so we also have things like in B2B SaaS subscription, or pay as you go. So now with price, metric, price model. Next is offer configurations or bundles. I'm back in the McDonald's drive-through.
Maybe I don't just want the hamburger, but I want the fries and the Coke. McDonald's understands this, They've created the valued meal or the Happy meal for the children. So these are ways that we take individual product capabilities or features and group them together in ways that make it easier for customers to buy more from us, to solve whatever problem is that they need based upon our understanding of the market and their value.
And so obviously most B2B SaaS companies will have something like good, better, best. That's one architecture among many there are among their other choices as well. But about 75% of B2B SaaS companies have something like good, better, best model. And then finally it would be things like a price fence. The price fence. Is something that you don't probably think about a lot, but you do see pretty often in the B2C world. So price fence is how do we make different customers pay different prices for the same product? You might be like, that doesn't make any sense. But if you've ever taken public transportation, give your money to the bus driver, senior citizen gets on behind you, they show their senior citizen card, get a discount. The student shows their ID get a discount. If you've ever attended the Friday matinee showing at a movie theater, you've seen a time-based price fence where you're gonna pay different price at seeing the movie at noon versus if you go at six o'clock.
'cause everyone else wants to go at six o'clock. And so we have these as well in the B2B software world where potentially we have different discounts. When the Russian War and Ukraine broke out, I know a lot of people gave like full, like a hundred percent or equivalent discounts to companies that were based in Ukraine, for example.
So there'd be like an ID based discount, or maybe there's ones for like nonprofits, et cetera. So thinking through those elements to be much more important than the focus on the number. Of course, once we figure out all those elements, we have to put a number on it, we could get the number entirely wrong. As long as we get those other things right, we're gonna be much more set up for success.
[00:18:10] Melissa Perri: Awesome. And when you think about rolling this out inside of organizations too, you mentioned your services model a little bit. We were looking at the customer part, those things. How does that all come into play to develop these different pieces?
[00:18:21] Dan Balcauski: So are you talking about we have the strategy developed and now we're trying to have it actually in the market? Is that the part you're curious about?
[00:18:29] Melissa Perri: I guess, how do they use that services model to break down each one of these individual pieces? And who should be involved in that too?
[00:18:36] Dan Balcauski: Yeah. Yeah. Let me take the second part and then I'll I'll take the first the first part second, so in terms of who should be involved, I think, one of the big mistakes I see a lot of companies make is that they haven't defined actually owns any of this. And so that's a big recipe for success because much if we go back in time. There was a time when there wasn't product management. And there's a reason that product management as a function exists because there's a lot of really difficult, ambiguous decisions that are important that are going to affect every single stakeholder in the business that we need somebody to drive forward and have ownership with. Now that person gets to be a dictator or tyrant and do whatever they want. They have to be able to listen to all the stakeholders, including the stakeholders, not in the room, most often the customer, and then be able to make the decision in the best interest of the business. We have a very similar problem with pricing, so my general recommendation is that product marketing is well suited to own pricing and packaging because they usually are the caretakers or owners of positioning and pricing and packaging and positioning are directly related, I believe, your pricing and packaging is a function of positioning. I believe product can own it. The problem is product often has so much else on their plate that in order to rigorously own it it's like asking the CEO to own it.
It's like they, they should be heavily involved and they should be consulted and maybe have veto authority on the decision, but they've just got so much else that they probably just don't have that bandwidth. So that's the main problem with having product management own it. But product marketing, they're in a strategic position in the organization, they understand the value messaging, they understand the competitive environment. They've got the long term view. But at the same time, you do need to bring in as much as you would in product management, other stakeholders. So sales is gonna be a very important stakeholder. Finance is gonna be a important stakeholder. Obviously the CEO. Every member of the executive team actually is gonna be, have a personal view on what the answer should be. So you're gonna face a lot of the similar challenges that a product manager will make trying to make those decisions. So that's on who should own it. I generally do not believe that Sales should own it. You've got a bad mix of incentives there. It's like putting Dracula in charge of the blood bank. I just don't think it, it's a good decision. And I find that, although it might make sense intellectually to say this involves numbers.
Let's put finance in charge of it. It's, they're too far removed generally from the customer and the value to, I think, really do the job. You do want them as a stakeholder, they have to understand, you may even want some of their help in being able to model revenues and cash flows and churn, et cetera. Having a good fp and a counterpart is important. But, just having them own it outright is a little bit too removed from the value side of the equation that we talked about earlier.
So how do you use that services model? So again, starting with understanding the segments. If we've gone through the exercise of, okay, now we, we have a sense of these three to five different customer groups we may go after. do we understand the context that they're in? How do they get value? Because one of the first decisions we're gonna wanna make is around the pricing metric. It's one of the most critical decisions.
If anyone is out there and they're trying to do something with pricing it's probably one of the highest leverage tasks that you can do. They would say that between that and offer configurations, but I would, if I had to rank them, I'd put pricing metric first. So, when we look at the pricing metric, we wanna look at for these customers, this metric scale with, three things. Things like value the cost and is it understood by, understood and enabled to control by both sides of the transaction. Cost is important because we wanna make sure that we're not, you don't wanna be selling $20 bills for $10. That's not a good idea. You're not gonna be a business very long. and then perceived value, and that's really where having that underpinning of the different customer segments in the context that they're in. This is really where that rubber meets the road because what you'll decide, discover in that discussion, if you haven't done the segmentation work upfront, inevitably what will happen is you'll get to the end of this process.
You'll say, Hey, here's our new pricing and packaging. And somebody will put their hand up and say, but what about customer X? What about customer Y? It won't work for them. And so we wanna be, looking through the lens of these different packaging decisions through like a rank ordering of saying price metric A works for customers is like the best for customer segments one and two, but three and four are gonna hate it because the way they use or get value from the product is gonna be different and they would prefer customer two.
And this is really where then that strategy element comes in and be like, okay. And also the competition, like is there a market standard? For example, if you're in the CRM space, standard is price per user. So you're gonna be wanting to look at that, or, there, there could be options where it's yeah, we wanna make a sharp turn from that because we believe it'll have some competitive advantage. But then also what does that mean? We mean, 'cause we're gonna go after, I've seen, I've actually been involved in conversations like this with clients where, for example, I had a customer, they were building CRMs for nonprofits and they explicitly, they're like, because nonprofits don't have the sort of standard revenue incentive that follows the logic for a per user model. The way CRMs are priced for that market doesn't make as much sense. And so we're gonna explicitly make a left turn for, and go with a different direction for that market. Yeah thinking through those decisions with the underlying basis of having understood what your customer segments, how they differ in the context that they're in, important for being able to think through those individual decisions rigorously. And, the process continues to go, but I'll stop there.
Scaling Pricing Metrics and AI-Related Challenges
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[00:23:50] Melissa Perri: The pricing metric is really interesting to me. When you were looking at defining like a great pricing metric and honing in on what's going to make or break this, because I've seen this too, make or break a company, if you price something completely wrong, it'd be a great product, but then nobody's gonna adopt it.
When you think about like settling on that pricing metric, how do you also think about scale ? For example, if you're doing per seats and then you're thinking about selling into like the enterprise and you're going for 10,000 people, 20,000 people, what are the different considerations that you think about there?
[00:24:20] Dan Balcauski: Yeah, so there, there's so many different considerations when it comes to enterprise. I would say two things that really trip people up when thinking about selling an enterprise. The first is I. A lot of the work in pricing we were, we had this drilled into us from an early age of dealing with the normal distribution or the Gaussian distribution.
Averages means standard deviations. This will cause you a lot of pain. If you continue to think in that mindset as you go into enterprise, outliers are really gonna throw things off when it comes to things like price metrics, things like willingness to pay. Why is that? It's let's just, for example, let's just say you price per user, it's $20 per user. You're like, okay, we're creating an enterprise platform. What would be a good price? Let's say it's $50 per user. For an enterprise it could easily be 10 x what that first tier is right of. And they wouldn't even bat an eye. They'd just be like, oh yeah, $200 a user is not a problem. Similarly with price metrics, where we run into maybe your standard customer has say on average, 50 seats or 50 users but then you come across, JP Morgan or somebody, and they're like, oh yeah, no, we've got 50,000 users.
So it's not just an, it's not even like an order of magnitude. It's multiple orders of magnitude bigger. And one is knowing that going in, and then two is planning for that in terms of how you, there's a bunch of different sort of sub decisions that go in here. But how do we think about the structure of our tiers to accommodate that? Meaning, instead of just blocks of one to 10 users, 11 to 20, I have to instead think of one to 50, 50 to 500, 500 to 5,000 because I need to be able to accommodate those much higher ranges than I was expecting to. And this is the type of thing that, if you're doing this well, I always suggests like testing and iteration. It's difficult to know these things a priority without going into the market first. You could do as much research as you want, but something that you're gonna learn along the way. I would think the other thing that kind of surprises folks is this pertains more to the price model aspect, which is as you're selling the enterprise, the big news over the last, I would say three years in the pricing world has been, oh, everyone's going to usage based pricing.
Usage based pricing is a big thing. I hate the term usage based pricing because I think people, when they say that you don't know if they're talking about price model, do they mean any pricing that is not seat based. Is that usage based? Because I could have a subscription based upon number of devices I'm monitoring or number of documents I'm signing.
That, so that'd be a change in the pricing metric or do they mean like this pay as you go model? Or is it, or are they talking about both? So that's why I like to separate those things out. But what are the big things that people have always talked about is with the usage based models oh it just, it allows so much flexibility and if we think about.
One of the big advantages is like it's a risk shift between the vendor and the buyer in that. Hey, you don't need to make this large commitment because you don't know how fast you're gonna roll this out in your organization or how much you're gonna use, and so we'll only charge you for what you use. So what does that do? That moves a lot of cash up from upfront in the sale of a commit on a subscription to, Hey just pay us and we'll bill you in arrears for whatever you use. Like is utility billing model, like your electricity or your gas line. You might have built at the end of the month. The problem is you get into enterprise, you end up, that ends up working against you because oftentimes predictability and transparency are often valued more than flexibility. And so you have these large enterprise buying cycles where they may have a defined budget and maybe you're selling sales software to the CRO as your primary buyer, and they've gotta go make a pitch to the CEO and the CFO.
Hey, this, we need $50,000 for this software. Okay, yeah, that's approved. You go through this whole thing. CRO, the CEO and the CFO do not wanna have a conversation six months later that says, oh, actually we are using way more than we expected. It's now gonna be $150,000. That's gonna, you're gonna have a bad time.
Because their budgets aren't gonna be flexible to that extent. And so you may want to consider that, depending upon if there's if enterprise is your goal, like that can be a thing that is gonna work against you.
[00:28:10] Melissa Perri: It's good to know. Yeah, I think that's great for people out there thinking about going up market like that too. When you were talking about the usage based stuff it started making me think about AI and all the pricing considerations that are going into that. So I see so many B2B software companies out there now.
They wanna add an AI component, they want the LLMs they're getting everything ready. What do you have to take into account when you start pricing stuff in with AI components?
[00:28:35] Dan Balcauski: So one thing that we didn't really touch on before is, all of these initiatives. need to start with what's our goal? What are we trying to do here? Is it, are we trying to accelerate a RR growth? Are we trying to improve customer lifetime value? Are we trying to increase net revenue retention? So you might have a blend of, rule of 40 or, so your p and l metrics or your unit economic metrics. What are we trying to do? Because right now I think there's a lot of companies that are not they're adding AI because they were told to or they just, it's the thing they're supposed to do or their board's demanding that they have an AI strategy. But the goal are not really clear. And so you may end up with entirely different approaches depending upon what your goal is. And so just to simplify that, are you trying to get maximum adoption. Are you trying to maximize monetization? Are you trying to do a little bit of both? And I think you could end up in very different positions depending upon what you know, what your goals are. First of all taking even one step back let us not make the mistake that our brethren in the Web3 crypto world made by talking about AI to our customers because our customers don't care. AI is an enabling technology. It is not a solution to any problem that a customer cares about. As well as the fact that every software vendor says we have AI. So it's simultaneously everywhere and become meaningless and it didn't mean anything in the first place. So you're not differentiated. So it just works against you on all levels. So then the question is again, what problem are we solving and how do we make that available to our customers so that we can improve their perceived value in line with our medium and long-term goals? I think as we get into the goal conversation, I think we're in a weird place right now where there's a lot of weirdness going on, especially when it comes to AI. Especially B2B software companies have gotten away for a long time without having to really understand foundational business logic. cogs are effectively free. And then, on a p and l if you look at publicly traded B2B software companies, it's not zero, but you're blending in a lot of fixed costs that you know, are not the true incremental costs of a user, 'cause storage compute network, AWS or Azure is effectively, costless. But now you have this, pretty significant variable cost coming in as were AI application integrators. Keeping aside the foundation model providers Open AI, anthropic, Google are now have a significant variable cost going out the door. And so I think, for any conversation about pricing and packaging there's always going to be a blend of inputs of, customer value competitive pressure and cost. And know what's happening there is that I think the value part of that equation is uncertain. We're hoping the customers see the value in the thing we bought, but that variable cost is very apparent. CFO is very aware of how much of a bill they're getting from open AI or Anthropic every month. And so I think people are under a lot of pressure to do, margin maintenance. So I think it's imperative on strategic product leaders in in coordination with their chief executives to really help understand, are we making an investment right now with the understanding that we don't know if this thing actually is gonna create value, but once we have those signals, then we'll price according to that value versus this other knee jerk response, which I think is really mistaken, people exposing their cost model to their customers. I call it don't show your customers your underpants. Because customers do not care about your costs. knee jerk reaction that I've seen a lot of companies do, and I just think it's really not appropriate, is trying to, Hey, we have this per user model, but now we also have this per token, either quota or hybrid model we're gonna lay on, and now you've made all your customers have to understand what a token is, and they don't want, like, I'm super technical and even I, like my eyes glaze over when I start talking about what a token is. So of course like your, even if your sales folks are super talented they can get the prospect's head nodding on the other end of the line as they explain it to 'em, that person's gonna hang up and five minutes later to be a guy, I totally forgot. I don't understand what that is. So it's just gonna add a bunch of sand in the gears of your go to market motion. So you just, you wanna avoid that. What can we do instead? I've seen probably two different foundational approaches that I think are really working well for companies. So the first is, using these new capabilities as upgrade incentives. So much like you would come out with shiny new features, X, Y, Z, you may just a good general practice I would give folks is like, when you do that, put them in your highest tier first as a general rule.
Unless you're having some really weird competitive pressure that's forcing you to do some catch up and put it in your lower tier. But having that waterfall from high to low is generally a good way to do it. And so folks are putting those in their highest tier in order to increase, tier upgrades. that's a really good way to do it. The other is, and that really works well if you are enhancing existing value drivers. What do I mean by that? So I've been using the CRM space, so I'll say in CM space for this example. Pipedrive is a popular CRM provider. They introduced some AI capabilities and they put it into, I think they have five packages.
They put it into the top two packages in order to increase the upgrade. Those capabilities, again, they're AI enabled, but what they really are is I'm helping the existing sales rep their job better, faster, more effectively.
So Intercom has the same idea with adding capabilities to their higher tier packages to make the support rep more efficient. So you might think about summarize all the interactions in this account. Of all the support tickets, there's nothing worse than you've probably had this experience everyone has where you call a company, you've been a customer for years, and it feels like the first time they've ever talked to you. And you're like I've been a customer for 10 years.
I I do use your research interviews with your product managers. Come on. So helping that support rep give a better customer experience, versus with the Finn AI agent, what they've done is saying, Hey if our agent resolves a ticket without any human involved. We'll just charge you per completed resolution for that.
And so that's a net new value driver that they're pricing separately from their per user. So I think those are two really clear ways that folks that are integrating AI in a way that doesn't, there's no explanation of tokens in there, right? Or if there is there it's like way buried in the fine print. We're not trying to push that to the very front of the marketing pricing and packaging page.
Avoiding Bad Pricing Metrics
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[00:34:45] Melissa Perri: Very cool. It's I like the idea of putting it into tiers too and baking it in, but I do see that really wonky one where people are like, we're just gonna charge you per, thing or per whatever you use after a certain amount. And it's I don't know how much I'm using right now, why would you just add like a variable cost on top of my subscription?
[00:35:03] Dan Balcauski: Yeah, and this is a general principle is that, it's usually a bad sign if your pricing metric is something that your customer isn't already counting. The reason why CRM users works really well is 'cause you're talking to a director of sales, VP of sales, CRO you'd be like, how many salespeople you have? And I'm sure they could answer that question in their sleep. If you have to ask them how many custom reports do your make per month? They're gonna be like, I don't know. We might have that somewhere if we track it at all. And all of a sudden now you're having this really wonky conversation.
It's even worse when you start talking about tokens, right? It'd be like pricing you based upon how many AWS EC2 instances my server uses on the back end of my SaaS software. Then all of a sudden you're in infrastructure land completely far removed from the problem that your customer's coming you for. We talked about a lot of things here, but pricing and packaging really has an opportunity to help you convey the value that you provide it, like it aligns with the problem the customer's trying to solve. If you or your sales folks have to take this hard right turn to explain some obscure architectural detail in order to ascribe your pricing, you've completely shifted from your customer's frame and the value that they're trying to achieve into implementation details that they should have no reason to care about and don't care about.
[00:36:20] Melissa Perri: Yeah, that's a great way to put it. When you're thinking about the landscape of B2B pricing, what have you been seeing as some major changes that are happening?
[00:36:27] Dan Balcauski: We've been going through this transformation from perpetual into SaaS. This was, Marc Benioff and the Salesforce's contribution to the world 20 years ago now where, subscription has pretty much taken over. Very few companies are launching, perpetual products and obviously that was a technology shift as we move things from on-premise into the cloud as well as a business model shift. There's been a lot of conversation around, what I mentioned before, usage-based pricing. It has pros and cons. I think folks have realized it's not the panacea that it's painted as. It can work very well in certain situations and doesn't work very well in others, depending upon, your specific use case and need. I think that something that has really made that more tenable for companies, I would say, even in the last couple years than previous was one thing we really haven't touched on at all is the operational overhead that is required for a lot of these models. One of the ways to think about it is. Customer success as a role didn't exist in the perpetual software world because you got 90% of your customer lifetime value in that transaction. So the sales guy's favorite customer was the next one because I don't care if that customer ever installs the software, I just sold them let alone a successful with it. But when it came to a subscription model, we had to, because we needed that customer to stick around and renew. And so customer success as a role, evolved, and we can look at the same thing like revenue operations dev, DevOps, like all of these roles happen because of that business model change. we've also, as we've moved to usage-based folks have realized that, in order to effectively, keep customers informed of what they're using, make sure their bills are correct. You will never hear from a customer for years. You make one mistake on their bill, you will hear from them with, within an instant. It is. So you wanna make sure that those things are correct and they're just, there wasn't commercial off the shelf products that are available. And now there's there's a, all the billing system providers charge me and, maxo et cetera, have made, and there's others have propped up just for that have made really good gains in helping that.
So that's something I've been keeping an eye on. Obviously, you can't throw a stick these days without hearing people talking about either AI or I guess the buzzword of 2025 is agents , you know, so I am, I am skeptical. We will see actual working agents. I started as an engineer.
We used to have agents 20 years ago. So I think, we're just recycling everything old is new again. But, could we get, I think Open AI was talking in the last several weeks about having, $20,000 PhD level equivalent $20,000 per month PhD level equivalent AI agents that, that could do work on your behalf. I'll believe it when I see it. So I think, we could talk about what that would entail. I think it may be too soon. We are still a little bit ahead of the hype cycle versus reality on, on, on seeing those. But I think there's a lot of work, good work being done, like I said, on the operational side to make usage based available as well as, the changes to AI that have been happening.
Advice for Long-Term Pricing Success
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[00:39:18] Melissa Perri: Nice. One of the biggest trends I think in the last couple years when it comes to pricing and packaging has been very much the like product-led growth model where you get an individual in and then you can expand into the teams. have you seen that shifting? What's your take on doing that successfully too?
[00:39:33] Dan Balcauski: This is this is one of these other terms that is just morphed. So I spent part of my career at a company called SolarWinds before product-led growth was a term, we called it a high volume velocity go to market model. And really a lot of the same practices were there.
And when you're in those type of models you do have to make your pricing extremely easy for customers to understand because, we, as a general rule sales folks were expected to close a deal a day. You did not want sales engineers touching more than 10% of deals. So if you had to get on the phone and explain very complicated either user experience, feature capabilities, or pricing. It was just gonna slow down velocity. So we made a lot of energy to make those things easy to easy to find, easy to try, easy to buy and then easy to renew and had incredible, net revenue and gross revenue retention rates there as well.
So not seeing so much, new under the sun as it were. Other than I think a lot of companies are now realizing companies and venture capitalists have realized that, there is real money to be made not just hunting whales in the enterprise, but you can make a very nice scalable business within inside sales model and relatively low ECV, from a price point level, you do need to figure out pricing strategy. People often ask me is, okay, is it better to have high prices or low prices? Is it better to be skimming or penetration? The land expand or is the Apple model it matters actually less like all of those can be successful, but what matters is that commit and you're consistent because there's so many downstream implications of what that means.
If you go to Amazon. Frugality is one of their cultural values because they run a incredibly low margin business. Let's separate AWS, because that's a whole different story, but we're just looking at the e-commerce business, right? Like it's super low margin, but it's incredibly high volume. And so every dollar they spend everywhere is scrutinized and just, you're supposed to pinch your pennies because that is.
Part and parcel. It flows from the, business model and pricing all the way into like, how are they strategically competitive on a cost efficiency basis versus if you're, apple selling the most expensive personal devices in the world. You can make a little bit different decisions on your cost structure because you are, you can't just waste money, but, so it's important that when you're doing like a product-led growth or high volume velocity model, we would put a ton of energy from a product leadership perspective into the customer onboarding experience because we could not afford to get a sales person or sales engineer on a call to help a customer set things up. But there were players in our space that were whale hunting. I remember they used to annoy us 'cause they would go talk to Gartner Forrester and talk about all the new features they're shipping. But like then we talked to those customers, those CTOs, they're like, yeah, they've been in here for six months with a seven figure professional services thing and we still haven't seen the dashboards they showed us in the demo, but we could never do that.
So we had to really spend a huge amount of time optimizing that onboarding flow and then that entire go-to-market machine was optimized to that. So I think it's really just important to understand that there's no tricks under the sun. But I think where folks get is they try to dabble. And when you dabble in mix these things together is really where you get bit from a strategic perspective.
[00:42:46] Melissa Perri: I think that's great advice for people out there listening to this. And Dan, my final question for you, for those who are maybe going through a pricing project or struggling with pricing what's some of your biggest takeaways for them?
[00:42:56] Dan Balcauski: Yeah. So I'd say first of all, how, treat pricing like a process. And what does that mean? That means having some governance. I always think when I think about governance, the old cartoon with the bill sitting on the steps of Congress of like how a bill becomes a law, right? It's like, how does a bill become a law? Somebody, the House of Representatives, drafts the bill and then it gets argued and then they send it to the Senate, right? And they says so each of those steps, right? There's an object, there's a step-by-step flow.
There's an owners for each of those steps and. Most folks, I would say most companies, the first mistake is they just don't have a defined process. And so anything else in your business, this is not gonna be something you just do once, it's gonna be something that continually evolves. If there's anything we've talked about here, it's that your price is linked to value. Your value and especially differentiated value is constantly changing in the market. As you're shipping new features, your competitors are shipping new features, you got new competitors entering competitors, leaving, you get global trade, war, whatever it might have, you, there's gonna be changes.
And so you wanna have systems in place that allow you to continue to iterate and improve. Product management has come a long way in the last several decades of really professionalizing that. I think if I had to make, say I've mentioned customer success, I think there's probably product management, then customer success.
And I think pricing is somewhere just just after that in terms of the maturity process. And an owner, having a process continuing to improve chipping away. It doesn't have to be a pricing metric transformation is the first bite, but hey, like we wanna do some skew cleanup.
We wanna really look at, are we all aligned on the customers we're serving? And I think that, besides pricing, having a good, I've been in so many product management debates before talking about this stakeholder wants feature A versus this stakeholder wants feature B, and the primary problem is not that one feature is inherently better or worse than the other, but that we're talking about serving different customers.
So whether it's pricing or whether it's product, like having, a better view of which customers are, is the company really trying to serve, can solve, a lot of those concerns. Really looking at those fundamentals to start and then, you'll always get better and improve and I, I try to help demystify this for folks.
So try to blog on it regularly and always happy to talk to folks about it.
[00:44:57] Melissa Perri: Great. And if people wanna reach out to you and learn more about it, where can they go?
[00:45:00] Dan Balcauski: Yeah, so I'm happy to connect with folks on LinkedIn, Dan Balcauski. I try to blog on my website Product Tranquility every so often much less as of late, unfortunately. And then I also have a podcast myself called SaaS Scaling Secrets, where I interview Scale up B2B SaaS CEOs. So if folks want to hear the, you know, we go much beyond pricing of different aspects of trying to scale SaaS businesses, from 5, 10 past to 20 to 50 million mark. So folks talking about how they've had to change hiring processes, culture adjusting the road, remote work, all those things on SaaS Scaling Secrets to wherever podcasts are found.
[00:45:33] Melissa Perri: Awesome. Thank you so much, Dan for being on the podcast, and thank you to our listeners out there. We'll put all of those links that Dan just mentioned on our show notes@productthinkingpodcast.com. Thanks again for listening. We'll be back next week with another amazing guest, and in the meantime, if you have any questions for me, go to dear melissa.com and let me know what they are.
I answer them every single episode. We'll see you next time.