Dan Balcauski, Founder & Principal Consultant at Product Tranquility, talks about how B2B SaaS founders should think about pricing & packaging their products. We talk about how to think about pricing, when it starts really mattering & finally how to increase prices without affecting your existing SaaS customers.
The interview covers the following topics:
- How Product Tranquility helps high-volume B2B SaaS CEOs define pricing and packaging for new products
- The importance of pricing strategy for SaaS companies and the common mistakes that companies make.
- Why understanding customer segments, value drivers, and competition is crucial for creating a pricing strategy that maximizes profitability.
- Why companies looking to increase prices should align on goals, evaluate expected revenue and costs, and test changes at a smaller scale.
- Why pricing and packaging should be approached as a multidimensional strategy rather than just focusing on price level.
You should see about, uh, a third of your deals lost according to price. And if it's, if it's below that, like you're probably, uh, priced too low, um, you should be seeing some pushback on pricing. Um, you know, if customers actively tell you how cheap you are, you know, if you have demonstrable proof that you create a really good r o i, if you haven't touched pricing for a couple of years, it's prob those are all probably really good reasons for you to, to, to go forward.undefined:
everyone. Welcome to the B two B SaaS podcast. I'm your host ra. We have Dan Koski with us. Hey Dan, welcome to the show.Dan Balcauski:
Good to be here, Pendra. I'm excited for our conversation. Thank you for havingUpendra Varma:
me. Alright, Dan, so let's try to understand how you, you know, help B two B SaaS companies, right? What's, what's, what's your company product Tranquility do and how it helps companies?Dan Balcauski:
Yeah, with product Tranquility, we help mostly high volume B two B. SAS CEOs define pricing and packaging for new, and even optimize pricing and packaging for existing products, and so customers will. Come to us to help with a couple of different things. Pricing and monetization in general tends to be one of these things where if it isn't broke, they don't fix it. And so the areas where folks will come to us for help is when it tends to break, and that tends to happen in a few different cases. One, uh, might be what we're seeing now in this new monetary inflation regime where it's, it's getting the attention of a lot of CFOs specifically. Uh, not only is there. Funding and burn rate going down, but then they're looking at their own cost of inputs, both infrastructure and labor going up. Another big thing is when these startups grow and they start to see that they're outgrowing their existing customer segments. Their existing pricing and packaging approaches don't work for those segments. Uh, and then this will manifest itself also in either organic or inorganic product expansion. So you can imagine if a software company acquires another firm and tries to roll up, you know, either the second product or now it becomes one among many portfolio products, it could really make a go-to-market. Team's head spin, if they're talking to sales, is talking to a customer or prospect explaining, you know, the value of a product and, and how it's priced and then potentially brings another product in the portfolio into the deal. It has to do a 180 and start explaining, oh, this works entirely differently. Here you go. And so that can cause all sorts of friction. So those are the kind of the reasons that, that we see that companies come to us. Um, oh, the big thing we've been seeing recently as well is how. Especially with the macroeconomic conditions, it looks like we're unfortunately heading into a recession. Hopefully it won't be too severe. Predicting the future is always risky, but what we're seeing already is a lot of companies who were benefited, I. In the last, say, 24 months by economic tailwinds. For example, let's say your pricing metric, the unit of value you charge customer for is based on seats. A lot of people, especially other pricing experts, will rail against how seats is terrible, but you know, it, it is still pretty much the standard. So if we could have a deeper discussion on that, but. Just in general, if you price on seats, well that works really well as a tailwind for your business. When everyone's growing headcount, you know, your Salesforce selling a c r m and everyone's adding sales folks to their, uh, you know, you don't have to do anything as a, as a go-to-market team. You're, you're, I mean, obviously those folks are working very hard. I'm not saying they're sitting around other, their, their, uh, resting on their hands, but the idea is that, With or without you doing much, those existing accounts are gonna be adding, uh, capability and adding consumption. Well, those head, those tailwinds have turned into headwinds now. And so we're seeing folks who, you know, they've. Their customers are going in the opposite direction of headcount, unfortunately. And you know, I have a lot of friends who are affected by that and, but you know, my clients are also affected by that, where, you know, and they've added a lot of value in the intervening months and years where they're, they've built. Uh, capabilities into their product to help their customers do more with less, but never actually monetize that. And so they're, they're hit with this double whammy where now they're starting to see, you know, overall slowing growth, but then the way their pricing packaging model has, has set them up to.Upendra Varma:
I wanna understand a bit more about your customer base. So just help me understand what's, what sort of clients do you work with, right? How big are they? Right? So what sort of revenue are they doing? Or how many employees have they got? Right? Just help us understand that. Client profile of yours before we sort of dive into that? Yeah.Dan Balcauski:
Generally, uh, the B two B SaaS, uh, companies more in a high volume or product-led growth approach. Um, ideally sort of in the 20 to 50 million in revenue a r uh, range. Uh, I have worked with companies outside of that though. Got it.Upendra Varma:
Right. So, so exactly. Just. Like, can you speak one of your recent examples, right? Where one of your, one of your recent clients, right, just help us understand right. The, the moment they came to you, right? What exactly did you do? Right. How exactly did you sort of, you know, change the positioning or pricing in such a way that, you know, it ended up, you know, uh, doing something good for them. Right? So just walk us through one of the examples, because that would be very helpful. Yeah. So,Dan Balcauski:
uh, you know, this could get really far into the weeds, so, you know, maybe, maybe it will help sort of at a, at a very high level to understand sort of where pricing fits in. Mm-hmm. Because there's a lot of different elements of the, the work that, you know, we do. Uh, and you know, if we talk about the details of specific projects, I feel like we could really get lost in the forest for the trees. So, you know, at a very high level, you know, pricing is a function of your. Company and marketing strategy. And so it really needs to support that. And one of the things I've found over and over again is that, uh, many pricing problems turn out to not be pricing problems. What ha what will happen in a lot of scenarios is that I will unintentionally, because it require good pricing, requires this, I will dig up skeletons in the closet of. Bad company strategy, the things that haven't been really decided. And so, you know, at a high, at very high level, you know, what I usually see is companies face, you know, four really significant, uh, challenges, uh, when they try to tackle pricing. And the first is they have an unclear target customer profile. They don't understand what customers are serving. They have a poor understanding of how they create customer value. They're unclear about their product's, unique differentiation. And finally, they have a general under-appreciation for the depositions that go into a strong. Pricing and packaging approach. So we tend to think about pricing as a decision, mainly around price level, and we neglect many other factors. So when I work with clients, I have built a model called the services or S V C S model for SaaS pricing. It's S V C S stands for the four components of the model. Uh, I promise I didn't plan it that way. It happened by accident. But the four components are segments, value, competition and strategy. And so we always will start at this, you know, going back to your question, like I'll always start with. Clients on, do they have well-defined customer segments? Because you do not price your product for everyone. You do not try to serve everyone. And this is a number one thing I see that people immediately get wrong. Um, and the context your customers are in is critical because I'll dictate the constraints they're facing and which value drivers they view as most important. So that leads us to the second part, which is, you know, each segment will rank order. VA value drivers differently, which will cause them to value your product differently. And the third party model is competition. The different segments have different competitive alternatives available to them. Like what would they use if your company didn't exist? So we think of those three elements as our inputs, the overall pricing process. 'cause your pricing power really comes from the differentiated value create for particular segment. Beyond competitive alternatives available. So when I work with clients, you know, this, this applies to the, the last 10 I've worked with. You know, it's not just specific to one, but it's really helping them get clear on those as sort of fundamental building blocks. Um, you know, again, a lot of folks like to think about very, sort of what we call last mile aspects of pricing, which is like, oh, should our prices end in nines or should they, you know, or should they end in zeros? It's like, okay, well let's. Those are fun conversations and they can have an impact, but if you're focused on that, you're really looking at the, the wrong end of the stick, uh, to start with. Alright,Upendra Varma:
so Dan, so I've got a question here, right? So let's just say I'm like, I'm like under 10 million or 10 million, $10 million in a i r, right? So is pricing that big a deal for me? I mean, what I could just do is, okay, I just could look at my competition, look at their per pricing, right? Maybe look at the pricing that they have for typical add-on features and all of it. Isn't it a simple thing for me to worry about, or should is, is, is there something that I'm missing out here? Especially when I'm, you know, you know, under 10 million or something like that.Dan Balcauski:
Yeah, so it's a great question and um, I, I think it's, I think you're on to something. So I will actually tell companies that are under 10 million a r r, uh, pretty much that it's like they've got, if you think about, you know, the, the model I just outlined, right? A lot of it comes down to understanding what is the, the value and specifically the differentiated value you provide for specifically groups of customers and, and companies that are at the scale that you mentioned. They're still really on a value journey. Like they're still really trying to figure out like, what is the problem we're solving? Like, is there a market here? What is the, and trying to create a repeatable model that they can go and find customers with that problem and, and you know, actually deliver any value. And so monetizing that value and just at that scale, it really has to be. Good enough that it's not significantly getting in the way, right? Mm-hmm. It doesn't have to be amazing. Does that help? Yeah,Upendra Varma:
exactly. And when exactly does it really start mattering? And when does it really have an impact? Right? Let's say hit 20, $30 million. Should I really rethink my pricing? And if yes, why? Why can't I just follow the same strategy? Why can't I just look at my competitors and just come up with a simple strategy? Why is it so tough? Why do I need an expert like you to bring in and, you know, sort of, you know, deal with all of these things?Dan Balcauski:
Yeah, it's a great question. So the, I'll take it. There's two, two very different questions there. So let me take the first one first. So yeah, when you hit sort of that 20 million a r r mark, um, you know, there's a few different things that have happened, right? You've, you've, you've got to a point of scale that there's, you know, there's, there's enough. Hands in the business where, you know, it's not purely about just chasing the next dollar of, of revenue, right? Things do tend to get a little bit more, uh, strategic, right? Where before that it's like, well, if it's not about, you know, next month sales numbers, like I, I can't really pick my head up to think about anything else. So the, and not to say that companies as they hit that point don't have, you know, a ton of problems that demand daily attention. Um, But it does tend to have a little bit more of a ability to be like, okay, what do we really need to get to our next stage of growth? And the. The impact, you know, really is clear at that point. At that point, you, you sort of have a, hopefully have a clearly defined customer segment that you're going after. The, you understand the value, and now it's a matter of like, there's a lot more options available to you to really use that as a, a lever to drive, uh, increased growth. And, you know, I've seen tons of benchmarks and I've seen different results from clients. Uh, they could be, you know, I think the, the standard would be, uh, accelerating 20%, uh, a r r. You know, easily, sort of on a sustained basis. Um, but I mean, if you really sort of nail it, I mean, it can be multiples of your a r r acceleration from a, from a price change. So at that point it just, it's, it's pretty much a no brainer to, to make those changes.Upendra Varma:
Um, so should you just increase the prices at that point? Is that it? Well,Dan Balcauski:
so this goes back to my previous point, which is I think people get really enamored with. Pricing and packaging where they focus purely on the price level. So there's so much more to, uh, pricing and packaging than just the price level. Again, is it, should it be $19 a user or, you know, $99 a user or 29 95? Those are fun, interesting conversations, but they're sort of, If we especially think about a B two B scenario, those are ultimately the, it's the easiest thing to change. What tends to be much, uh, more important is the elements of packaging. So packaging is really, like, it has four components in the SaaS world. So it's your price metric, the unit value charge customers for. So that could be, you know, seats or a p i transactions or amount of data stored or transferred. Uh, you've got your price model. So is it a perpetual transaction? Is it. Uh, subscription. Is it, uh, pay as you Go utility based billing model? Is it hybrid model, which is, uh, very, uh, popular these days? Um, is it your offer configurations? Uh, usually in terms of we see good, better, best, and. I believe it's, you know, about 70% of SaaS companies use some type of good, better, best package, uh, offer configurations these days. Mm-hmm. Um, and then finally, your, your price structure. Price fences. So this is how do we give two different, two different customers? How do we charge them two? Different prices perspective, the same product. We see this all the time in a, in a B two C context. Like if I go to a, a matinee showing of a movie at the movie theater versus the evening show, right? That's based on time. We have a similar thing. If you call the sales person at the first day of the quarter versus the last day of the quarter, you're probably gonna get a different discount offer to you to close the deal. Um, and, you know, there's others based on on time and, and volume as well. So those four elements, right along with price. Price level, uh, you know, this is where the multidimensional nature of it really gets complex. And this is where I think I've been thinking about recently is that it's really difficult for companies to drive this conversation internally. Going back to your other, uh, mm-hmm. Comment of like, well, why do they, why would they need someone from the external to help you? I, I wish there wasn't. I, I mean, I, I'm, I'm all about trying to educate people on this. I feel like, It'd be like trying to describe or paint a sunset if you only had the language of primary colors. Like when people only think about pricing in terms of price level, it really limits the ability of a C E O to drive a, uh, a really in-depth. Practical, uh, and beneficial conversation around pricing and packaging because then it just, you know, it's like no negotiation. You should ever make one dimensional, right? There's always, there's always multiple things you could, you could offer, right? I, you know, talking to the car salesman, right? He's saying, well, you know, car's 20,000, right? I want for 18, right? It's like, well, you know, you could throw in the. The rust coating and the, you know, I want the extra, you know, the, the heated seats, right? You, you wanna make the, these multi-dimensional, and I really feel people do themselves disservice when they don't really understand all the elements. That it's notUpendra Varma:
that simple as I, I might have thought of, thought of it, right? So it's, it's way too complicated given the number, the sort of models and data points in there, right? So, yeah. Got it. So, so one question, Dan, that I typically hear from founders, right? Especially, you know, under 10 million or so, right? So they wanna increase prices because they, they see that their product really adds that value, right? But they're worried because they've got tons of customers already out there. They're worried that they might lose all of those customers, right? So how does one go about, you know, executing this price increase, right? So how does a founder think about it and how does a founder execute it without actually, you know, sort of taking a big hit?Dan Balcauski:
Yeah. So I think one of the things that. Really, I work with executive teams front and center to get aligned on is what is the goal that you're trying to achieve Because, you know, there's, you know, many goals floating around a company and unfortunately if all the executives are, have different goals in mind, whether that's customer lifetime value or decreasing customer acquisition costs, or increasing a r r or increasing profitability. Generally I will push people that a good price, uh, maximizes long-term profitability. That's like a, a proper pricing goal. But you know, you may be at a different stage where you have a different North star, uh, that's more appropriate. Uh, you know, and it doesn't matter, like we could bring back the best pricing study in the world. I. If people aren't aligned on the goal, all they're going to do is attack the data that you bring. So getting people aligned on what are we trying to achieve first before you go to any research is super, is huge. So I think, you know, to give you more tactical, I think two things that founders need to really evaluate for any pricing decision. Like what is the difference in expected revenue and what is the difference in cost incurred? So costs could be. Like you're losing customers due to churn or could be costs incurred because hey, we we're trying to go do, uh, willingness to pay studies, right? And those are gonna cost things and we're gonna have, uh, engineering has to change entitlements and our subscription management system needs to get updated, right? So those are gonna be all costs, right? And then you're gonna have some idea of, hey, what is expected revenue? And, and, you know, just the level of, for better or worse, I just don't, I tend to not see at least even that level of business case, uh, done of, of how, where do we, what do we think they, uh, expect to change? Uh, ed, one thing I, I've seen, uh, I saw a stat on this is like over 50% of SaaS companies have never tested or piloted pricing. And 13% have only done it once. Um, and you know, 6% have only ever actually done. Pricing research on buyer needs and willingness to pay. So, you know, if you want to go down this path, like first, you know, again, assess whether or not, uh, your, your goals are in line, what you're trying to achieve, what do you think your expectations might be? And then, you know, a couple of things. Like, I wouldn't just blindly write, raise prices. I, I wrote a, a really extensive blog post on, you know, pricing during inflation. You know, overall, like it might be a good time to raise prices if generally you don't see pushback on pricing. Um, there's good rule of thumb that if you're. You should see about, uh, a third of your deals lost according to price. And if it's, if it's below that, like you're probably, uh, priced too low, um, you should be seeing some pushback on pricing. Um, you know, if customers actively tell you how cheap you are, you know, if you have demonstrable proof that you create a really good r o i, if you haven't touched pricing for a couple of years, it's prob those are all probably really good reasons for you to, to, to go forward. Um, and. So, so then it's a matter of, you know, is there, what is the risk appetite of companies? And I see this really in dramatic fashion from client to client, where companies, different CEOs, some CEOs are just cowboy, whatever. Like we're just make the change and we'll see what happens. And some people are like, no, we need. This, this data, we want this, you know, we want our fp and a team to model it to the nth degree. We want all these scenarios. Uh, and then we're gonna inch, you know, prices forward, you know, over time. Um, there's a lot of different elements of this. And so it really, a lot of it is, is cultural, depending on the risk tolerance of the, of the company. Um, but, you know, generally it's a, a good idea to, you know, plan through announcements and timelines for changes well in advance. Um, New and existing customer price changes can be different. Uh, like, you know, if, if I change the price just for new customers, that's a certain sense. It's not really a price change because like those people didn't know what the price necessarily was before. Um, so, so you could handle that very differently. Um, and, you know, depending upon the level, right? There's ways where you can. You could do a whole bunch of things with packaging, but you know, one, uh, if you're, if you realize, like say you go through a pricing study, you realize like, we're three x below where we should be in a market, and you don't wanna make that jump in one go. You can plan, you know, sequences of, of price hikes. So, uh, generally a, a rule of thumb, you know, can be like, don't increase more than 50% in a year. Uh, but, you know, and then there's, there's the whole other discussion of, you know, should you grandfather people are along. So then,Upendra Varma:
so if, if I'm a founder, right? And if I'm not star at this point of my company is to just, you know, grow my top line, right? Just increase that a r r metric. Do you really think, you know, thinking and spending time on pricing is gonna help me reach that goal. If that happens, I think everybody's gonna do that. But for some reason people believe that might not be happening. Right? I mean, why, why should I touch pricing? Maybe that will end up, you know, losing, I, I might end up losing a bunch of customers and then it's gonna hit back a lot of things. Right. So is there any direct correlation between, you know, sort of thinking about the whole pricing and, you know, the top line growth? If that happens, then maybe people will start getting about it. So do you think there's a correlation there?Dan Balcauski:
Yeah, I mean, pricing is, Probably the most high leverage thing you could do to grow your company. Uh, the, it's always a big mystery for me. I have high policies why it people don't touch it. I think number one is it's very difficult for managers to see opportunity cost. So if I have an a w S bill that comes every month and I see how much that's growing, it's like, oh my God, I gotta have my VP of engineering take a look at this and get our infrastructure costs down. But if you're supposed to be selling your. Your product for a hundred dollars a seat. Instead you're selling it for 10. That $90 doesn't appear on your p and l anywhere. It's just gone. And so it's out of sight, out of mind. And so I think that's maybe one of the mindsets that, you know, I'd like to see changed. And I think also, you know, look, pricing is an art and a science, but it's much more of a science. And you think there's a lot of risk, of course you're not gonna touch it, but there's ways to, uh, approach all thoseUpendra Varma:
elements. Well, I think it's, it is hard to, to sort of, you know, quantify that impact that I'm gonna. Take as a company when I sort of increase the prices, right? For example, if I'm just saying, okay, I'm, I'm gonna increase per perceived pricing by just a $50, it's easy to say, okay, my number of number of customers are gonna remain the same. My, you know, overall revenue is going increase by 50%, but I'm not sure how many of those customers are gonna go back, right? How many of them are gonna churn out, right? So how do I even calculate that number or how do I even estimate that number, right? Because I think. That's where people are struggling with it. Really. 'cause if, if you can't give me that number, why would I not increase the prices? Right. It's pretty obvious for everybody. But 'cause doing that is very hard because you know, you have to deal with, you know, real customers churn out. Right. So how does a founder sort of deal with this? 'cause that, I believe is the biggest and trickiest problem.Dan Balcauski:
Yeah, I mean, look, the, the methods of decision analysis are not, you know, solely the, uh, forum of pricing people, right? I mean, if, uh, any c major public company, c e o, you know, if they're, if I'm the CEO of Intel and I have to decide, am I gonna spend $10 billion on a fab? Right. There's a lot of things I have to understand and know if that's a good investment, right? So look, uh, you know, there's, there's elements you can get to with a spreadsheet and good fp and a teams, right? There's elements you can get to with really good, uh, market data, uh, right. Marketing research, uh, that we can add to that. And there's elements that, you know, the, it's very rare that the executives in a company don't know anything. And I think this is the number one thing I see with measurement problems is people are like, well, it's so ambiguous, I just give up. Right? And it's like, well, no, you have a sense, you have a sense because you, you've, you've made changes in the past and you've seen how customers react, right? Uh, We haven't really talked, I know we we're running outta time, but you know, in terms of even like rollouts of changes, right? And this is affecting both messaging and, and, and to a se sense, the magnitude of, of changes that you might have, like you can do. S targeted rollouts, right? Say by geo, right? Where it's like, we're gonna roll this out in only, you know, a part of North America, right? Mm-hmm. Versus worldwide. Or we're going to notify a segment of customers who we're pretty sure are happy with us, right? Either 'cause they're N P s scores or their usage metrics, et cetera. Right? And we're gonna. Even drip out our announcements to them, and we're gonna test how many angry emails our support staff gets. Right? And like, but again, right, like you would approach ab testing, hypothesize. What do we think is the worst case? What happen? And what would be okay if like, because look, every time you touch pricing, even if it's to lower pricing, you'll get people to churn, right? Because it's, it's forcing people to, to become aware of like, oh, we have the service. Do we really need this? Right. It doesn't necessarily relate to the magnitude or the fact that you increase prices at all. So there are ways to go about this and I know we're running outta time, but yeah, IUpendra Varma:
think testing at a smaller scale is the key that you're sort of getting at, right? Yeah. Yeah. Got it. Alright, Dan, thanks for taking the time to talk to me. It's, it's a wonderful conversation on the whole SaaS pricing. Thank you.Dan Balcauski:
Thank you. Have me and hopefully it's valuable for your listeners.