In our latest episode, we’re thrilled to feature Dan Balcauski, Founder of Product Tranquility, as we navigate the world of SaaS pricing models.
Summary: SaaS pricing is more than crunching numbers; it’s an art, delicately balancing value, customer engagement, and competitive positioning. It calls for a nuanced understanding of customers, strategic implementation of usage-based models, and an agile approach that evolves with market dynamics. All while keeping an eye on transparency, user control, and a profitable yet customer-friendly balance in the ever-evolving pricing models.
Jump to a section
- Unraveling the Complexities of Pricing in the SaaS World
- Deciphering Value-Based Pricing: Metrics, Outcome-Based Pricing, and Reality
- Shifting the focus from product features to benefits
- Dismantling the Complexity of “Willingness to Pay”
- Demystifying Usage-Based Pricing Models
- The Taxi Meter Effect in Usage Base Pricing – A Balanced Perspective
- Unbundling vs. Usage-Based Pricing – Composable Packaging in SaaS
- The Metamorphosis of Martech Pricing: Database Size vs. warehouse-native
- Utilizing AI for Streamlining Solo Travel: Discovering the Potential Customer Segments
- The Balancing Act of Life, Work, and Wanderlust: A Meditative Journey
- Episode Recap
About Dan Balcauski
- Started his career in product management at National Instruments, based in Austin, Texas.
- Ascended to the role of Product Strategy Principal at SolarWinds, a SaaS company serving DevOps and IT professionals.
- Made a significant shift to B2C, leading product at LawnStarter Lawn Care.
- Boasted a successful freelance career as a product manager, earning a place in the top 3% of PM professionals worldwide on Toptal.
- Imparts his industry knowledge as a program leader at Northwestern University, where he teaches product strategy.
- In 2019, Balcauski launched Product Tranquility, a venture dedicated to assisting B2B SaaS CEOs in defining pricing and packaging for their products.
Unraveling the Complexities of Pricing in the SaaS World
Dan offers a fresh perspective on the turbulent, often fiery, world of pricing discussions. In many companies, these meetings become an arena of conflicting opinions, with little to no structure to guide the process. However, Dan steps into the fray with an aim to bring order and rationality to these proceedings.
His weapon of choice? A structured approach he refers to as the ‘SERVICES’ model. This acronym symbolizes four core components he believes are often neglected in these pricing discussions: Segments, Value, Competition, and Strategy.
In the realm of SaaS pricing, a clear comprehension of the target customer segment is often overlooked. Knowing which customers a company is serving and the specific constraints they face is pivotal. This knowledge shapes how they perceive value, the second component of Dan’s model.
Understanding how a product creates value is an integral part of this model. Different customer segments prioritize different value drivers, influencing how they perceive the worth of a product.
The third component, Competition, pushes companies to think beyond their direct competitors. Instead, it urges them to consider what alternatives their customers might turn to if their product wasn’t available. This understanding of competition, in turn, feeds into the final ‘S’, Strategy.
When Dan speaks of Strategy, he does so in the Michael Porter sense of the word – a world where trade-offs are not only necessary but inevitable. Strategy, in this context, pushes companies to make decisions on who they’re going to target, how they position themselves in their customers’ minds, and which elements of SaaS packaging they need to focus on.
This Services model, as Dan points out, isn’t just about deciding whether to charge $20 or $100 per user. Instead, it’s about the deeper, often neglected decisions that go into a comprehensive pricing and packaging strategy.
Key Takeaway: Pricing isn’t just a numbers game. As Dan demonstrates with his SERVICES model, effective SaaS pricing requires a clear understanding of your customer segments, the value your product delivers, the competitive landscape, and strategic decisions regarding positioning and packaging. It’s about crafting a comprehensive strategy that respects the complexity of the task at hand.
Deciphering Value-Based Pricing: Metrics, Outcome-Based Pricing, and Reality
Diving into the complex world of value-based pricing, Dan provides some much-needed clarity, breaking down commonly used terminologies that often cause confusion. His perspective on value-based pricing is not simply a method of determining a product’s cost. It is, instead, a philosophical approach on how buyers and sellers divide value in a transaction, tracing its roots back to the principles of trade presented by Adam Smith.
In order to make sense of this concept, Dan delineates between two critical terms: value metrics and price metrics. Value metrics, as he explains, are tied closely to the concept of ‘jobs to be done.’ These are customer-oriented measures, focusing on how a customer perceives the effectiveness of a product, whether that be through economic outcomes like saving time and reducing costs, emotional outcomes like decreased anxiety, or social outcomes related to pro-social goals.
Price metrics, in contrast, are product-oriented. They denote the unit of value that a customer is charged for in relation to the product, be it users, seats, gigabytes of data transferred, or API transactions. The goal, as per Dan, is to ensure a strong correlation between these two metrics, ensuring that the price reflects the customer’s perceived value.
When the conversation veers towards the possibility of outcome-based pricing (e.g., a CRM charging based on deals closed), Dan concedes that while philosophically appealing and successful in specific contexts (like Stripe), it doesn’t always translate well into practice.
The challenge lies in its execution. It requires intricate reporting processes and creates room for potential disagreements over definitions of success metrics. This could inadvertently lead to strained relationships between vendors and clients, as they find themselves continuously scrutinizing each other’s work.
Key Takeaway: Value-based pricing isn’t a straightforward process. As Dan outlines, it requires a delicate balance between value metrics and price metrics, a keen understanding of the customer’s perspective, and a realistic approach to outcome-based pricing. The ultimate goal should be aligning the pricing strategy with the value delivered to the customer, without compromising the vendor-client relationship.
Shifting the focus from product features to benefits
When it comes to understanding the inner workings of pricing strategy, few can articulate it as eloquently as Dan Balcauski. A champion of the concept of value-based pricing, he navigates the nebulous terrain of pricing with an ease that only comes with deep knowledge and experience. His approach is built upon foundational concepts like Jobs-to-be-Done and the Value Cascade, a framework proposed by pricing guru Tom Nagle.
At the core of Dan’s perspective is the understanding that value is multi-faceted. He explains the notion of ‘use value’ – the summation of all benefits, functional, emotional or social that a customer can derive from a product. However, in a market economy, this ‘use value’ is immediately influenced by competition, thereby introducing the concept of ‘exchange value.’ This refers to the differentiation that a product offers compared to competitors, essentially, how it better helps customers achieve their goals.
But it doesn’t stop there. Delving deeper, Dan highlights the importance of ‘perceived value,’ which he argues has a profound impact on a customer’s willingness to pay. This perceived value, often influenced by the marketer’s ability to position the product, can set an upper limit on what customers are willing to pay, independent of any calculated or inherent objective value the product may have.
While these insights provide a robust framework for understanding value and pricing, Dan insists on the irreplaceable importance of interacting with customers on a deep level, understanding their context and their decision-making processes. Only by having these conversations, he argues, can businesses cut through the noise and make valuable decisions.
Shifting the discussion towards the product features and benefits, Dan argues that while these may be the bread and butter of technical teams, customers ultimately only care about the value they get from a product. By transforming the discussion from features to benefits and then to value, businesses can develop a clearer understanding of the impact their product has on a customer’s workflow, thus enabling a more precise calculation of the value provided.
Key Takeaway: Pricing is more than just numbers on a spreadsheet; it’s a multi-layered concept deeply interwoven with value. The right approach entails understanding the multi-faceted nature of value, shifting the focus from product features to benefits, and deep engagement with customers. Only then can businesses unravel the mystery of value-based pricing and optimize their pricing strategy.
Dismantling the Complexity of “Willingness to Pay”
Having a clear comprehension of the term “willingness to pay” is critical in setting product prices. But as Dan aptly points out, it’s neither straightforward nor consistently reliable. To understand why, one must delve into the nuanced terrain of human decision-making processes.
- Firstly, willingness to pay relies heavily on self-reported data, which is not always reflective of purchasing behavior.
- Secondly, it assumes rational decision-making, a trait not often associated with humans. We humorously pointed out that even our own experiences in martech and SaaS decision-making committees were colored by biases and preferences.
- Thirdly, willingness to pay is erroneously viewed as a static figure when, in reality, it can vary greatly due to numerous influencing factors.
- Lastly, this concept tends to overlook lifetime value (LTV) and potential upsells, focusing instead on individual purchases.
However, Dan offers a fresh perspective on the complexity of the “willingness to pay”. He underlines that the term shouldn’t be seen as an absolute numerical answer, but more of a psychological construct, a reflection of desire, and an estimation of what people might do. It’s an outcome, rather than a universal constant like the speed of light.
For instance, when asked what they’re willing to pay for the same water bottle, two people could provide vastly different answers based on factors like thirst, whether they already own a similar item, or even their relationship with the seller. This makes the concept more of a range than a fixed point.
Moreover, Dan stressed the importance of distinguishing between “stated preference” and “revealed preference”. He acknowledged that revealed preference data has its downsides, but pointed out that market researchers have developed techniques to address those shortcomings over the past 60 years. He went on to explain that just as psychologists have various methods for measuring happiness, pricing experts have multiple ways to gauge willingness to pay, each with its unique biases and outcomes.
Understanding human irrationality is another crucial element. Customers are not as rational as traditional economists might have us believe, but they’re also not as irrational as behavioral economists argue. This knowledge is particularly useful for fine-tuning pricing strategies and creating value for customers.
Especially in a B2B context, Dan noted, an emotional decision often needs a logical justification. While people may make decisions on an emotional level, they usually require a logical rationale, particularly when large amounts of money are at stake.
Key Takeaway: Willingness to pay isn’t a straightforward pricing metric. It’s a psychological construct reflecting a range of possible outcomes based on myriad influencing factors. Understanding these complexities can lead to smarter pricing strategies and improved customer value.
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Demystifying Usage-Based Pricing Models
Dan also tackled the intricate topic of usage-based pricing models. His frustration with the industry’s tendency to conflate various aspects of this model was palpable. For him, it’s important to distinguish between two fundamental elements in packaging: the price metric and the pricing model.
The difference between price metric and pricing model
A price metric could range from seat licenses to gigabytes of data stored or transferred, while a pricing model could take the form of a subscription, utility-based billing, or even a hybrid approach. Crucially, Dan reminded us that the confusion often arises from misinterpreting these components, especially between capability and consumption metrics.
A capability metric, like purchasing a software license from a store, grants access to everything within the purchased product, while a consumption metric often scales with usage – data transferred or stored, API transactions, or number of contacts in a marketing database tool.
Bringing up the example of Snowflake, Dan pointed out that the popular platform employs a consumption-based metric for data stored in their data warehouses, alongside a utility-based billing model. This, he noted, aligns more closely with traditional services like electricity – where you pay for what you use – rather than modern subscription models.
However, Dan acknowledges the increasing popularity of hybrid approaches, reminiscent of 90s cell phone plans with a set amount of minutes and potential for overages. These models, in essence, could be seen as risk-sharing arrangements, where adoption risks are borne more by the vendor than the buyer.
In a changing world with unforeseen events and market disruptions, having the flexibility of paying for what is used rather than a static subscription can be a significant benefit for customers. With usage-based pricing, the adoption risk shifts towards the vendor, offering customers the flexibility to scale usage according to their needs without committing to a flat subscription cost.
Key takeaway: Usage-based pricing models, if properly understood and implemented, can offer a more equitable risk-sharing arrangement between vendors and customers, providing flexibility and potential cost-savings. However, the effectiveness of these models depends heavily on clearly distinguishing between price metrics and pricing models.
The Taxi Meter Effect in Usage Base Pricing – A Balanced Perspective
Dan also shared insights that shine a light on the pros and cons of usage based pricing models.
First and foremost, Dan pointed out a phenomenon that he referred to as the “taxi meter effect”. The term was coined from an insightful article by an MIT researcher exploring people’s disdain for paying by the minute or mile. The anxiety felt while watching a taxi meter incessantly ticking up mirrors how some customers feel when using a service priced according to user base models. They’re left pondering how much the final bill will be, similar to a cab ride with unanticipated detours or stoplights.
This constant worry, according to Dan, is what separates traditional taxis from services like Uber or Lyft. The latter present the cost upfront, negating the worry of an unexpected hefty bill. In software terms, this would be equivalent to a fixed price model, compared to the running meter of user base pricing.
Dan emphasized that this effect doesn’t uniformly apply to all services or products. For instance, low-level infrastructure services like Snowflake circumvent this issue as they are far removed from direct user engagement. Architects building on these platforms are focused on resolving substantial business challenges rather than fretting over data usage and its impact on their bill.
However, the situation differs with more tangible services like MailChimp. The simple act of adding another contact to a database directly affects the user’s bill, prompting a hesitation that could potentially impact how they use the service. This hesitance is counterproductive to both user and provider, turning the focus from productive tasks to bill management.
Usage based pricing models, Dan believes, work best when usage is consistent, the user feels in control, and there’s a predictable increase over time. It’s all about striking a balance between flexibility, predictability, and transparency.
A key risk, though, is that usage based pricing can get out of hand with certain types of products, particularly in areas like security, where data flow is unpredictable and can suddenly surge during an attack incident, leading to customer dissatisfaction.
Key takeaway: In the end, understanding the “taxi meter effect” underscores the delicate balancing act required in user base pricing. It’s not a one-size-fits-all strategy. Success lies in aligning the pricing model with the nature of the service or product, ensuring transparency, and keeping the user feeling in control.
Unbundling vs. Usage-Based Pricing – Composable Packaging in SaaS
Dan clarified that he does not perceive a tension between usage-based pricing and unbundling. Instead, he views them as distinct facets of packaging that can move orthogonally to one another. While some businesses might tie these elements together, it’s not a necessity.
Drawing upon Silicon Valley stalwart Jim Clark’s insight that the only two ways to make money in business are bundling and unbundling, Dan used the evolution of the PC industry as an analogy. It started with IBM’s monolithic presence, but then transitioned into the Wintel monopoly, effectively unbundling the operating system from the CPU architecture. The subsequent shift towards vertically integrated, bundled offerings, epitomized by Apple, demonstrates the cyclical nature of bundling and unbundling.
Weaving this narrative back to pricing strategies, Dan pointed out that the decision to opt for unbundled, composable packaging or consolidated solutions depends on industry timing and specific use cases. This dynamic isn’t something one company can dictate; rather, it emerges from market conditions and shifting platforms. A company’s ability to capitalize on these shifts ultimately determines its success.
Key takeaway: The takeaway here is a reminder of the fluid nature of SaaS pricing strategies. There is no inherent conflict between usage-based pricing and unbundling. Instead, the most effective approach may hinge on industry timing, market shifts, and the specific needs of the user base. Pricing isn’t static; it needs to evolve alongside changes in the market landscape.
The Metamorphosis of Martech Pricing: Database Size vs. warehouse-native
Dan’s take on the future of pricing within the marketing automation industry reveals the complexity and ever-evolving dynamics of Martech. He asserts that different companies adopt different pricing strategies, often dictated by their unique market differentiation.
One interesting transition is the shift from database size pricing to a model that leverages native data warehousing capabilities. Instead of charging clients based on their user database size, a factor that has historically determined the invoices from giants like MailChimp and Marketo, some companies are moving towards a new model. This approach charges a flat fee, potentially coupled with a composable pricing system or user tiers and doesn’t limit buyers based on the size of their database.
Companies like Castled.io are pioneering this change. The rationale behind this change lies in the fact that customers are already investing heavily in data warehousing through services like Snowflake and Redshift. Thus, MarTech companies are repurposing these investments to offer pricing that’s more reflective of actual usage, rather than a somewhat arbitrary database size.
However, Dan cautions against blindly adopting innovative pricing models. He cites the example of Rolls Royce’s ‘power by the hour’ pricing strategy, which worked well in their context but might not be universally applicable. The success of such a drastic change hinges on the company’s standing within the industry and the innovativeness of their product.
Companies considering this shift must evaluate whether their pricing metric aligns with their customers’ business requirements and perceived value. The metric should also enable predictable value capture, minimize friction between buyer and seller, and allow both parties to exercise reasonable control.
In the end, the core principles that guide pricing strategies remain unchanged – balancing the customer’s perceived value and the company’s profitability. As the industry navigates these changes, companies must avoid the temptation to “get too cute” with their pricing metrics just for the sake of being different.
Key Takeaway: The evolution of pricing models within the marketing automation industry is driven by a balance of customer value perception and company profitability. Companies must avoid over-complicating their pricing models, instead focusing on straightforward metrics that align with customer needs and expectations. Innovation in pricing strategies should be pursued carefully, considering the impact on market education and customer acceptance.
Utilizing AI for Streamlining Solo Travel: Discovering the Potential Customer Segments
The final part of the interview revolved around a hypothetical AI application designed to assist solo travelers, with features like tracking reservations, making dynamic dinner reservations, and offering real-time travel updates. The proposed monetization strategy is a freemium model, with added features for premium users.
Dan, however, pokes holes in the concept from the start, presenting the hard reality that solo personal travelers might not be the best target, given their limited disposable income.
More importantly, he challenges us to think about the wider context of the solo traveler. Is the individual traveling for pleasure or business? What’s the duration of their travel? Are they experienced travelers or novices? What tools and solutions are they currently comfortable using? Dan emphasizes that understanding the different contexts of these potential customer segments would help in identifying different value drivers.
By using the example of airline ticket pricing, where last-minute tickets cost more than those booked in advance, he highlights how understanding these segments can lead to smart price differentiation strategies.
When considering competitors, Dan encourages them not to focus on the startup landscape but rather consider what these solo travelers are currently using. In his own experience, a Google Sheet serves as a comprehensive tool for travel management. He suggests that understanding these prevalent alternatives can help define the unique value that the new AI app can provide.
Key takeaway: To build a successful product, it’s essential to clearly understand your customer segments, their context, and the value drivers that resonate with them. By comparing the proposed solution with existing alternatives, one can gain an insight into differentiated value and devise effective pricing strategies.
The Balancing Act of Life, Work, and Wanderlust: A Meditative Journey
Discussing the theme of work-life balance, Dan, a self-professed “seeker,” delves into his strategies for managing the hustle of working with top brands, traveling the world, and constantly learning new things.
With an infectious curiosity, he shares that his favorite travel destination was the west coast of Norway, describing it as an amazing and worthwhile experience, albeit expensive.
However, when it comes to striking the right equilibrium between work, happiness, and life, he acknowledges that he hasn’t discovered a universal truth. What helps him maintain his sanity amid the chaos is a regular meditation practice. He commits to this practice wholeheartedly, crediting it with keeping his mental state balanced. Participating in multiple meditation retreats has further solidified this practice’s significance in his life.
His yearning for his solo travel days seems to manifest itself in this meditative practice, a means of exploring the uncharted territories within his own mind, just as he once traversed the globe.
Key takeaway: While there’s no one-size-fits-all solution to the challenge of maintaining work-life balance, adopting practices that promote mindfulness, such as meditation, can be an effective way to navigate this complex landscape. This allows individuals to handle the demands of work while ensuring they are able to pursue their personal interests and maintain their well-being.
In this episode, Dan offers his deep expertise and unique perspectives on the world of SaaS pricing models. We delve into various aspects, ranging from the ‘Services’ model to value-based pricing, outcome-based pricing, bundling and unbundling, as well as the exciting realm of AI in pricing strategies. Each topic comes with a host of insights and stories from Dan’s vast experience, illustrating the depth of his knowledge and his ability to communicate complex ideas with clarity and impact.
Dan’s unique background, blending his passion for product strategy and global travel, sets the stage for an engaging, insightful conversation that leaves listeners with a wealth of valuable takeaways. Whether you’re an established SaaS CEO or a budding entrepreneur, the wisdom shared by Dan is sure to elevate your understanding of pricing and packaging in the SaaS industry.
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