Speaker 1: Hey there Product Lovers. Welcome to the Product Love podcast hosted by Eric Boduch co- founder and chief evangelist of Pendo and super fan of all things product. Product love is the place for real insights into the world of crafting products as Eric interviews founders, product leaders, venture capitalists, authors, and more. So let's dive in now with today's Product Love podcast.

Eric Boduch: Well, welcome over to the Product today. I am here with Dan Balcauski who's the founder of Product Tranquility. Dan, why don't you kick this off by giving us a little overview of your background?

Dan Balcauski: Sure Eric. Thanks for having me, it's great to be here. So I started my career actually in the engineering side of the fence, so building software. And I got more and more interested in how the software we were building actually created value for customers and then turned into dollars for the business. And as I migrated up into engineering management and product management, that became more and more of a curiosity for me. I got very lucky in my career, I ended up pursuing my MBA at Kellogg. And I found out in retrospect actually most business schools don't have pricing courses at all and Kellogg had a bunch of them, so I took as many as I could as well as my internship there back in 2011. I was lucky enough to work for a Silicon Valley startup that was doing very well with some mobile apps, and they were getting pressured to build freemium versions. And so that actually turned into my first foray into the real world of dealing with monetization models. So I spent a good part of that summer researching the ins and outs of freemium, how to model it, how it works, when it's successful, when it's not. TLDR, we can get back to this later if you want, but I don't recommend freemium for anyone. Mostly all the benefits can be done with a free trial, so got to experience that. And then also lucky post MBA to go start working for a company called SolarWinds. And they ran what was called a volume and velocity type sales model that kids today might refer to it more as a product- led growth type model. And the benefit of that was we saw a lot of customers in terms of the pure volume, so we got to study a lot of transactional data. And we acquired a bunch of other bootstrapped technology companies. And so I got to see a lot of the lessons of how not to do price ticket packaging and product decisions. At any one time there, I was working on three to four separate products at the same time helping on the value creation and value capture side. So that's a brief intro to me. And I've been running Product Tranquility for the last two years and now mostly focused on helping high volume B2B SaaS companies with pricing and packaging for new products.

Eric Boduch: So what made you decide to start your own company, what made you decide to start Product Tranquility?

Dan Balcauski: That's a great question. So I found that oftentimes inside of companies you don't necessarily get to work inside what you'd call your genius zone, so that area where you're most effective. Often times you're pulled into projects or areas where you're trying to figure things out, which is fine. For example, previous company I was at, on the product management side, all the product management product strategies work was done. But because engineering ended up being a bottleneck would get pulled into engineering recruiting. And while that's a useful skill, and I massively respect people who have to hire and retain engineers was not necessarily where I found myself being put to best use. And so I wanted to become an expert in being able to work inside one area and really become world class in that. And I thought this was the best opportunity to do so.

Eric Boduch: Awesome. Let's jump into this, specifically pricing packaging. And we're definitely going to get back to freemium because I think that's an interesting topic because you see more and more companies, especially SaaS companies playing with the freemium models. So we're not going to forget that, we'll put a little marker there and get back into that. But in general, I feel like pricing and packaging are often overlooked and maybe undervalued in the SaaS product community as a whole. Would you agree with that?

Dan Balcauski: 100%, yes. So most companies I've found are focused primarily on acquisition to grow their businesses. In the SaaS world, there are really three ways to grow. It's acquisition, monetization, and retention. Most folks are entirely ignoring monetization. It also depends on what stage your business is in however. If you're really early stage pre- product market fit, monetization pricing is not your most important concern. Important concern is the thing we're building, are we solving real problems? Is this creating value? Will people buy it at any price? And so optimization of the perfect pricing is not the most important at that stage. But I think folks don't necessarily look at pricing as a process, they think of it as a one and done exercise, which to me strikes me a little bit odd because most technology businesses are constantly working on value creation, improving and iterating their product. That's one thing I'd like to see change is folks start to embrace pricing as a process just the same way they do their new product innovation development.

Eric Boduch: Yeah, yeah. You mentioned something I want to dig into a little farther that there's cycles. And I can totally understand the importance of monetization when you get to a certain level. But what about at the earliest levels? I talked to some startups that are concerned about getting the right dollar early on and maybe have a higher price point. One comes to mind, there was this company I was always trying to buy software from at Pendo. And then at every stage I went back to them, it seemed like their pricing had increased to the point where it was just like 30% more than I wanted to pay, than the value was there for me. When you talk to the earliest- stage startups, does pricing have a... I would imagine pricing has an impact on them getting those first customers. What advice do you give those early stage startups when they think about pricing? Because it is still important at that level, isn't it? Even though you're not maybe looking at it from an optimization standpoint, you're looking at it from a penetration standpoint.

Dan Balcauski: There's so many decisions involved in the pricing process. So we'll start with, well, bring the freemium back a little bit. This is one of the reasons why I don't believe freemium is a good option, especially if you're super early stage because the ability for you to create a product and then have users, not customers use the product for free doesn't really tell you if you're creating value. So freemium creates this infinite dollar gap, having people go from zero to whatever price you're going to pay. And so I think it's important that you get over that dollar gap, you charge something. But overall, companies are generally, every single client I talk to immediately focuses on price level. Price level is not the most important consideration. So when I talk to folks and I say I do pricing and packaging, the packaging aspect which we can unbundle a little bit more is actually much more important. Who you're charging, what customers are going after and how you're charging are much more important to your success than exactly what you're charging. And I don't see a problem with an iteration or testing of your pricing points because as you evolve, as you add more product functionality, your value is changing as well. So I totally accept the fact that you can iterate your price level over time.

Eric Boduch: Well, let's jump into that then, let's talk about these basic foundations of pricing. You talk about the three potential orientations of pricing, let's start there and then we can dig back into things like strategies and price levels.

Dan Balcauski: Sure. So I'm glad you used the term orientation. In the world of pricing, there's what's called the three Cs of pricing. Those would be cost based pricing, competition based pricing, and customer value- based pricing often referred to as just value- based pricing. And so-

Eric Boduch: inaudible three Cs.

Dan Balcauski: Yeah, inaudible have three Cs. And marketers are big three Cs, the four Ps, those are huge in this world.

Eric Boduch: Maybe inaudible.

Dan Balcauski: Yeah, this just doesn't work. So going back to your point, at that early stage, you want to make sure you have viability. So what many of those early stage companies will do is focus on a cost based model. So I'm paying AWS or Snowflake or whoever else to run this infrastructure. I get a couple of proof of concept deployments, I figure out how much that usage pricing scales. I go, okay, I'm going to add a 10X margin on my infrastructure costs so that way I can at least guarantee I don't go out of business prematurely. That's where folks usually stay. And that's not a place you want to stay long term. It does help you understand a price floor below which pricing would be unprofitable. But it doesn't give any consideration to the competitors in the market or your customer willingness to pay. And honestly, your customers don't care about your costs. So that's not long term where you want to play. The next level is this competition based pricing. So understanding that you're not the only player in any market, you have many direct and indirect competitors, including the status quo. Most be to be SaaS companies are actually not competing with a bunch of other Silicon Valley based companies, but mostly are competing against interns, spreadsheets and Google Docs and email. That tends to be the competitor that is mostly being disrupted or in the marketplace business everyone's disaggregating Craigslist. Competition based pricing is useful because as your customers are going through a buying process, they're evaluating these other competitors. And so those competitors are going to effectively set a market price. And so it helps to understand that at that level. However, there are still drawbacks at that level because you are effectively giving your competition a giant strategic lever to pull on your behalf. It also assumes your competition knows what you're doing. This was one lesson I learned early on in product management, if you spend too much time looking at your competitors and they have a new feature release, they release all these features, it's usually bad form to assume that they've actually done their homework and those features are going to resonate with their customers. So you have the same problem in the pricing world, which you really don't know if customers value the features that your competitors are putting out or the pricing that they have. And depending upon the market, if you're SMB mid- market, maybe some more of the product- led growth type companies, you have usually more transparent pricing. So for example, look at the project management space, the Asana, Monday. com, Trello, that's a bloody red ocean market, And all of the pricing is totally transparent. You're selling enterprise, Your ability to do competitive based pricing is difficult because usually your source of information is prospects in existing deals, which is difficult to assess how trustworthy that information is because you don't know if procurement department IS trying to extract some price concessions by telling you, oh, your competitor is charging X when you have no other visibility into what that deal entails, SLAs, et cetera. And then finally again is this customer value- based pricing or value- based pricing. And really the value- based pricing is focused on in a transaction. This goes back to the Adam Smith in a free market when a buyer and seller transact, economic value is created. And what customer value- based pricing looks at is how does the buyer and seller divide up the value created in that transaction? Really that's what the price is at a high level.

Eric Boduch: I imagine you're a big proponent of value- based pricing and the idea that startups should be thinking about their pricing from a value- based perspective. Do they do that enough? Are they thinking about things? Are they pricing their products from a value- based lens?

Dan Balcauski: Simon- Kucher is probably the McKinsey of the pricing world. I think I heard them refer to value- based pricing as a holy grail. I also view it as a North star, it's a destination that is difficult to reach. This is why I view it as an orientation. Can we continually move in that direction to get better at it? I don't see it being used very often. One, there's a lot of confusion about what it is. Is it a framework, a strategy? It requires a lot of confidence because it demands that you have a deep understanding of your customer, your customer segments. That requires costs in terms of time and money to go evaluate. Often in a value- based pricing world, there's a lot of managerial judgment required because market research data won't give you the exact right price. And also it requires a philosophy shared across the organization. So it's not enough for the CEO or marketing or whoever owns pricing in your organization to go do the research and say this is the ROI that we're creating, and thus we can support this price. If that doesn't permeate all the way through the organization down to sales and sales can't stand behind a value- based price, it's not going to work. And so there's a lot of research and organizational alignment that has to happen in a true value- based pricing model. That creates some impediments for folks to adopt it fully.

Eric Boduch: Well, there's a few threads I want to go down just from your answer like who should own pricing, should product own pricing? Segmentation and its importance. And orientation versus strategies and pricing levels. Why don't we start with segmentation? You mentioned segmentation, talk to me about its importance to pricing and packaging and how companies and product managers should think about it.

Dan Balcauski: So modern marketing, this got beat into me at Kellogg. So modern marketing is built around this concept of segmentation targeting and positioning. So on understanding as you look at your market what are the different potential buyer groups, and what do they value? Once you have that assessment, understanding which of those are you best positioned to go win and pursue. And then your positioning is how you are going to change the mind of your prospects in that particular market to define for them how you are better than other relevant competitive alternatives. The evidence help them establish a product category. And so when I think about pricing, pricing is really a function of your positioning. So you need to understand who are you targeting, what is the value that you are creating for them? What are the relevant competitors? And that helps you understand your price levels as well as the packaging that you create. Now, I said a lot there, so I'll let you pull out any thread you like.

Eric Boduch: Well, I think that's a good segue into pricing strategies and price levels and how that impacts packaging. I think that's probably a good way to look.

Dan Balcauski: Sure. So when I think about packaging, I'm going to step back because there's several components that often don't get delineated well as folks dip their toe into the pricing waters. So again, when you talk to most folks about pricing, they think about price level. But as I mentioned before, I focus on pricing and packaging. And so packaging is really four different components. Your price metric, so these are the units to which the price is applied. Your monetization model or pricing model, so how a customer pays for your product or service. Your offer configurations or bundles, so the bundles of different features you're going to create for different segments as well as potentially price fences. Often means how are you going to charge different customers, different price levels for the same products. So all of those things combine. And I think where this gets really confusing, and we can go down a whole rabbit hole here, we could avoid if you don't want to. But usage based pricing is having a moment right now, which I find funny because the electric company has been charging a utility based model for 100 years apparently. The software folks have just realized this.

Eric Boduch: We're good about taking what's worked elsewhere and being like, hey, this is brand new.

Dan Balcauski: Exactly, exactly. So the reason why I delineate those four components is because most of the discussions around usage- based pricing are really a combination of a discussion around your price metric and your monetization model. So when I say monetization model or pricing model, that's for example a subscription versus pay as you go versus freemium. An auction- based model, for example, Google ads, that's a monetization model. They have live auctions. So when you're thinking about usage- based pricing, it's usually a conversation that's combining these two separate concepts of your price metric do we charge per seat, per transaction, per database call, whatever it might be. As well as, oh, and now we're going to have the customer pay on a utility basis and build them in arrears. That's where this conversation can get quite intense in helping clients understand these different decisions that can be made and can move mostly independently of one another.

Eric Boduch: I feel we've thrown a lot out here, and I'm hoping we're not. There's so many different threads to go down, I hope we're not confusing viewers here or listeners since no one's actually viewing this given it's a podcast. Maybe we step back a minute and let's lay the foundation for those people out there who maybe haven't spent as much time with pricing or packaging and maybe start with here's the difference. We talked about orientation, so maybe we talk about here's orientations versus pricing strategies versus pricing levels and maybe set that framework.

Dan Balcauski: Sure. As I mentioned before, pricing is a process. And so I think it's important that as we talk about these concepts, you understand where these decisions or definitions fall in the process. So when I talk about the three Cs, cost- based pricing, competitive- based pricing, value- based pricing, customer value- based pricing to be consistent, that is how you view the pricing exercise as a whole. So that sets the terrain, if you will, for how you think about how you create and capture value in the market. That's the preliminary step. Along the way as we understand or potentially our segments that we're going to serve and target, those segments may desire different pricing metrics or pricing models. For example, I used to work in the IT space. And if you're selling to a fortune 500 company, they want to pay either, back in the day, a perpetual license or subscription. But if you're selling to a managed service provider because of the way their businesses work, that segment of the market requires a pay as you go because that's how their revenues come in from the customers that they're serving. And then they pay their infrastructure providers based upon the revenue that they take in. Not as much of a concern if you're a fortune 500 company because that's not how your revenue model works. So understanding those first two pieces, then the third one that you mentioned is the pricing strategy. So pricing strategy in my world is a very specific meaning that's at the tail end of the process when you're deciding on price level. So price level is the number that everyone immediately starts thinking about when thinking about pricing. So we're charging per user, is it$ 20 a user, is it $100 a user. That's the price level. The pricing strategy, once you've done all your pricing process helps you decide, okay, given where we're trying to play, how are we going to use price level as a strategic lever to go in the market? So there's normally three pricing strategies that are discussed, penetration, neutral or skimming strategy. To give people a sense of examples, I think three of the largest companies in the world each pursue a different pricing strategy. And I think the key thing is that it's not one is superior over the other but aligning your execution to your strategy is important. So for example, Amazon generally be considered to be running a penetration strategy. So they've made it very clear they're going to be a low cost, low margin type business. Highly profitable because they run tremendous volume. And so they're going to disrupt the entire retail industry with this penetration strategy, at least in their core business. Separate out AWS because that runs fairly differently. On a neutral strategy would be a company like Microsoft. Normally, they're about on par, they do some very interesting things with other bundling, et cetera. There's a long history on the success of the Microsoft office package because their success with bundling. But in general, from a pricing level, Microsoft is about neutral. And then Apple generally runs what would call a skimming strategy. And you see this a lot with hardware products. And so the iPhone is a perfect example where you'll see they have their newest iPhone they'll release at a stream price premium. And then as they release future models, they'll gradually reduce the price of that model over time as they introduce new models above it. And this allows them to capture customers who absolutely have to have the latest and greatest. And then over time as that market is tapped out, they're able to lower the price sequentially to tap lower and lower levels of the market's willingness to pay.

Eric Boduch: Awesome, I think that was a great summary of that. Now, let's layer on top of that packaging.

Dan Balcauski: Again, your packaging is a set of decisions. So between your price metric, your monetization model, your offer bundles or configurations and price fences. And so I think most of the attention at least the questions that I get from clients is around selection of pricing metrics. This is do we charge by seat, by API transaction, by document? Whatever it is that your business is involved in. And I think the important thing is what are you trying to achieve with your selection of a pricing metric? You want to make sure it aligns with your customer's business requirements and perceived value of the product. It allows your company to capture fair value in a predictable fashion. And it minimizes operational friction of both the buyer and the seller in that, one, both sides have visibility and feel that they can exert some reasonable control over the metric. And so oftentimes what happens is there's a set of potential ways you could charge, and there's a process by which you run through a set of filters to understand if they match those objectives.

Eric Boduch: Thanks. Let's get back to product. We talked about who owns pricing, who do you think should own pricing in a SaaS company? And maybe that changes as companies mature and grow, but take me through the different cycles. Who do you feel should own pricing from the earliest stages to the later stages of a startup or even a public company? How would you approach that?

Dan Balcauski: Yeah. So my view is that in larger established companies, product marketing should own pricing. Now, this is not by any means the norm, and it definitely does change by stage. OpenView actually had some very interesting data where they had done surveys over time of how ownership has changed. Overall, it's usually owned by the founders at the earliest stages. And so if you think about companies less than 20 million, most of the time it's still owned by the CEO, sometimes product or sales owns it. Even though at the, say, IPO stage 100 million plus, still less than 50% of companies have a dedicated pricing person or a pricing team. And I mentioned before product marketing in early stage companies is not usually even a position. And if they bring a product marketing person in, usually that person is more focused on messaging and more demand gen type focused than strategic pricing activities. Ultimately at any stage pricing is so important and affects all areas of business. Usually CEOs are still involved or at least have veto authority, But I think the problem that I've seen is that normally it's not owned explicitly by anybody nor is there a process. And that's unfortunate because there's so many stakeholders in pricing, when they think about finance, sales, product, marketing, customer success. If you don't have clear ownership or process and you have all these owners, all of your conversations and attempts to change or modify are going to get lost because there's no clear authority. I think this is one of the reasons why it tends to get ignored or avoided because there's so many strong opinions. If nobody's really seen as the pricing expert backed by a process and the grant of authority from the executive team to break log jams, much like product management, it's the reason product management exists because you've got so many stakeholders in the business that maybe want to pull in different directions. And part of the role of the product manager is to be that empathetic ear, understand the customer perspective, understand the perspective of all the stakeholders in the business and push forward the best possible solution given all the constraints that they face. And I think you have the same thing in pricing as well.

Eric Boduch: How early should companies be putting in a product process? Is this as soon as they start selling a product? How much emphasis should be put on pricing, and at what stage?

Dan Balcauski: Oh, so you said a product process, you mean a pricing process?

Eric Boduch: Yes, pricing process, yes.

Dan Balcauski: I think it makes sense to at least at the executive level have a quarterly assessment of pricing right off the bat. Now, that doesn't mean you're going and running full market research studies. But get the muscle built early that pricing needs to be revisited. We're constantly revisiting all of the features and value we're creating, and that can be during quarterly planning or-

Eric Boduch: Yeah. So what does that assessment look like? So say you're doing it quarterly even twice a year, what does that assessment look like?

Dan Balcauski: As I mentioned before, you have so many different stakeholders in the pricing process. We could go around that table and look at what the motivations of each of the people are at that table. In early stage, maybe you don't have a CFO, maybe the CEO is running double duty as the head of finance.

Eric Boduch: Or you have an accountant or controller.

Dan Balcauski: Yeah, exactly. And so that person or that stakeholder is incredibly concerned about margins, runway, how much cash do we have till we go out of business potentially. Also potentially, what do our numbers need to look like in order for us to raising a venture capital round, to IPO, to please Wall Street? So the finance aspect is incredibly important. Obviously, sales is held to a revenue number for quota for the quarter. And there's always interest from sales in using prices lever to help them meet their quota. I believe that CROs or VPs of sales should own pricing. Not because they're bad people, I just don't think the incentives are aligned for long term company profitability. But they're an important stakeholder to understand, because the sales reps every day are talking to customers, and prices usually being brought up in the conversation whether or not it's act actually the most important part of that deal. So in most B2B sales, price is actually usually about the third or the fourth most important thing on the list. But guaranteed price is getting brought up in every deal. And so sales is an important stakeholder at the table because they're getting that direct feedback. And so that should be getting worked its way in a formalized process back to, again, whoever owns pricing. Customer success has a aspect of it because they need to be able to... Customer success is still a immature function, so it differs quite dramatically between organizations. But if they're held to, for example, a gross retention or a net dollar retention, dollar value, it's important that the price metrics and the packaging is aligned so there is an upsell path or a growth path that does not create undue friction for customers. And so their perspective is incredibly important. And obviously marketing depending upon your positioning, if you are the low cost provider, if you're the low cost leader from a operational perspective in your market, accentuating your pricing in your demand gen activities may be incredibly important. And so keeping a close eye on new competitors that have come in, et cetera. Each of those stakeholders has something to bring to the conversation based upon things that have happened in the market in the intervening time. And again, whether that's once a quarter-

Eric Boduch: So how do you have this conversation? We went through all the major stakeholders and their concerns. How does that all roll up to either, okay, pricing's good, or, hey, we change pricing in this way?

Dan Balcauski: I think the first thing is, one, aligning on objectives, and what is it that you're really trying to optimize? That's one of the things I find most... Given that description I just mentioned where you have these different stakeholders who have potentially different drivers that they're trying to optimize towards, making sure that you have alignment of, do we think that changing price is going to affect what we think our key objectives are going to be, and making sure that that's the first decision that gets made. This is where it becomes important, if you do not have a pricing process or a leader, again, this goes back to the point I made about a product manager. It's very clear the product manager's responsibility is to keep everyone abreast of the roadmap, the situation, what's coming, what's not, what's changed for product. If you don't have somebody designated, it becomes very difficult to drive that conversation because then it's just, oh, everyone brings their ideas to the table. If the CEO is going to own pricing, they need to be driving this conversation in the quarterly business meetings or in whatever the cadence might be.

Eric Boduch: And with the intent of making sure that pricing is optimized as best as it can to meet both the objectives and the underlying concerns of the constituents involved in the process.

Dan Balcauski: 100%.

Eric Boduch: Got it. So we talked about CEOs potentially owning the process. At what point do you think companies should be bringing in a dedicated pricing expert onto their product marketing team? At what point is that valuable for companies? Because obviously someone that has deep experience in pricing could help a lot in that optimization aspect. You talked about acquisition, optimization of pricing, retention. That optimization aspect could be helped by a professional. At what point would you advise people to say, hey, you should have a pricing expert on your team?

Dan Balcauski: Yeah. So in- house, so there's two different dimensions to that question. One is where do folks really start to take pricing seriously? And that's normally at North of a$ 10 million mark because that's where you start to create serious additional modules or potentially additional, their second or third products. But those tend to be a little bit more of one- off events. For a full- time pricing person, normally not until you at least, let's say, 100 million in revenue. Now, you may have a product marketing person who has ownership of that, but there's not enough pricing work necessarily on a day- to- day basis to make that someone's full- time job. Once you get North of 100, 200 million in revenue, that's where you start to see a dedicated pricing person or a dedicated pricing team because there's enough pricing questions floating around the building that's become somebody's full- time job.

Eric Boduch: Got it. Use a consultant in the meantime, and how would you approach it or is it just make due with someone that has some of that expertise? It feels like this is important enough that we should be putting more effort into it than we do at that 10 to 100 million point or even before 10, I would argue.

Dan Balcauski: Again, it depends upon where you are in your stage because you can get a long way on creating the actual product that creates value, some monetization scheme that does not have your company go out of business, but it still allows you to grow and focusing on that acquisition go- to- market model. In the interim obviously if there's different project work... I'm going to speak to my own. Yes, talk to Dan, I'll come in and help on an advisory basis. Also, I think the amount of content that's part of what I'm trying to do as well is push out some of this knowledge into the world in more digestible forms where it's currently buried in very deep textbooks and market research study reports. So depending upon the significance of the problem, it may help to do... In the market research study, they can vary in cost dramatically. I was talking to a friend of mine who used to work at General Mills and she's like, " Look, if we change the price of Cheerios and the revenue drops 1%, nobody gets their bonuses for the next five years." And so those giant CPG companies will spend millions of dollars on pricing studies. You do not need to do that for most of the situations that these early stage companies are in where you can reduce or mitigate risk with a few customer conversations, very light surveys. The major problem that I see, and this maybe ties back to another question that you threw in, which is product managers tend to be focused on the, hey, is this feature valuable for you? But if I ask you, hey, will you buy this? Is this widget valuable versus will you pay$ 10 for this widget? Those are two very different answers to the questions. And I think we can get a long way especially at those early stages if product managers learn how to have those willingness to pay conversations much earlier in the process.

Eric Boduch: Meaning is this widget worth$ 10 to you as opposed to do you like this?

Dan Balcauski: I would never phrase it that way because that's not usually how people think about it. People tend to think about value in ranges and in comparison to alternatives. Say we're working on a new feature and I propose it to, I'm walking a customer through a potential demo, some screenshots and say, " Hey, we're thinking about adding this as an add- on, it'd be an additional$ 5 per user for your team." Potentially, that's one way to phrase it. Or you can ask some more range questions of what would be affordable, what would be expensive for this feature as a series of questions.

Eric Boduch: In general, I've heard whatever people say is expensive is what your pricing should be, agree?

Dan Balcauski: Generally yes.

Eric Boduch: Got it, got it. It's interesting when crosstalk psychology into pricing.

Dan Balcauski: They will begrudgingly pay it. There's a lot of behavioral psychology involved in the pricing world. One of my favorites is most of the SaaS world, we have good, better, best packaging. So normally a very slim down offer, maybe a prosumer type offer, one for maybe the mid- market and one for the enterprise as an example. And how people actually make decisions, they've done a bunch of studies on this in the psychology world is they actually don't decide which option is best for them, but they decide by eliminating alternatives. So first they look at the alternative that's the absolute worst fit for them, and then they eliminate the second alternative by which of the two left are closest to the one they already eliminated. So you have different behavioral economic activities going on there that are very interesting in the pricing world that you can take advantage of in your research studies as well.

Eric Boduch: Yeah, that's interesting. I want to get back to freemium and PLG. Let's start with freemium. I know we touched on that. Talk to me more about why people shouldn't do freemium.

Dan Balcauski: So freemium is a monetization model or a pricing model as we mentioned. Almost every argument I've heard for freemium can be achieved with a 14 to 30- day free trial plus free trial extensions. That's usually what I recommend except in a few rare cases. Freemium causes a bunch of problems internally. It's difficult to move customer... In the freemium world, I want to be very careful, a free person using the software referred to as a user, a paying person I've referred to as a customer. So it's difficult to move users from free. However, in most of these freemium models, what you see is there's only about 1 to 3% conversion from free to paid. And so there's this constant temptation where you have the executive team looking at this giant pool of people who are using the product, and there's this constant temptation of, hey, can we do more to move those people? And a lot of that energy is wasted. There definitely are people who will convert, but it's very hard. 3% is world class in the freemium model. And so what that also dictates is you have an extremely large market. If you're only selling to the Global 2000 and you're trying to do a freemium, that doesn't make any sense because you'll only convert 1%. Okay, that gives you 20 customers in a freemium model. I think the argument that most annoys me recently is there's this elusory improvement to the CAC metric. So CAC is Customer Acquisition Cost. This is the argument as I've heard it. So when we have a freemium approach, it helps us acquire customers because they get more experience with the product before they have to purchase and this lowers the amount of activation energy it takes from lead to sign up because then we can just dump them in this freemium pool and eventually they convert. It may look better, but that's only usually, you're just playing around with numbers on the income statement because usually R& D investment is not treated as a marketing expense. Except if you go that model, you need to treat whatever investment you're putting into the freemium approach as a marketing expense, so it doesn't actually improve your customer acquisition costs. So as I mentioned, there's a few rare cases where freemium makes sense. To be a viable option, you need to have an incredibly large market. Again, if you're only expecting 1% to convert to paid, a specific competitive environment. So at the time I was working on this as a research project during my internship, the company that was held up as the king of the freemium approach was Evernote. But if you look closely at Evernote, they had a very tough competitive environment because Microsoft as I mentioned with their amazing bundling strategy gave away OneNote, which is the exact same product for free. And so Evernote was put in a position where it had no choice, it had to do a freemium approach because the exact same product has been giving away for free by one of the largest technology companies in the world. And so it really requires your assessment of what are your competitors doing? There are specific situations where freemium may make sense. In some developer focused products, it can make sense. So where those breakdown with a 14 to 30- day free trial is if a developer product that I have to connect with the APIs or something, I may be in development cycles for an incredibly long time using it in a staging environment. So in that case, it might make sense to have a freemium tier that is only useful in a staging environment. If you tried to migrate it to production, it wouldn't really make any sense. So that way the developers can get acclimated to it and use it in the development process.

Eric Boduch: Yeah. And that's almost an aspect of value then because there's not a lot of value until that product gets moved from staging to production and has a huge amount of users. But they need a solution at that point. Is that a way to look at it?

Dan Balcauski: Yeah, 100%. I see a lot of bad excuses thrown up. Usually also when people talk about freemium, they're like, " Oh, well, we'll get all this data." It's like the Underpants Gnomes in South Park, it's like, we get all this data, question mark, profit. Understanding what is the value of that free user. Potentially the other way people approach it is, oh, well there's advertising base. But in that case, it's not true freemium. I don't view Google search as-

Eric Boduch: Facebook, Facebook's not free.

Dan Balcauski: Yeah, it's not freemium. They're multi- sided networks, which is a different monetization model. It's a multi- sided network with a auction- based ad model, that's how they're making money, it's not a freemium model. And so once you have an advertising base it's not true freemium. Potentially as well, the other case I think that might be valid is if you need... There's nothing worse than showing up to a party and no one else is there, and you're like, " Oh, well everyone else is going to wait an hour." Some of these community type platforms, and Slack's a good example. I think Slack made a smart decision because it's like, well, if I'm the only person on my chat, it's not a useful product at all. And so the value is having other people there in those... So there's a couple of rare situations where I think these things can work. But generally, I steer people to a 14, 30- day free trial, give your sales team a process to request extension keys. And normally that'll cover 99% of the cases without totally destroying your business.

Eric Boduch: One thing on that end, what about the perspective of using freemium or a free tier? And it doesn't necessarily need to be thought of as freemium but a whole free tier to stop the competition coming up from the low end. When you're thinking about enterprise charging maybe a premium price point, price erosion from low- end competitors that are providing a substandard product and giving it away at a much lower price point, say like 10% of your price point. Could you eliminate that by in essence cannibalizing the low end with a free tier?

Dan Balcauski: That's a fantastic question. This is actually a really challenging problem and Clayton Christensen's whole innovator's dilemma is exactly built around this conundrum because most of the time people do not defend the low end and they're not incentivized to. I don't think the freemium is the right approach. In that case, I would try to figure out, is there a low- end package that we could sell at that level? I don't think free is the right answer. It would be is there an opportunity to meet that company head to head on a price parody or maybe slightly below? I would not go to free.

Eric Boduch: We talked about freemium and free as a tier where it might make sense and how you feel it generally doesn't make sense. Let's talk about like what insights do you have for people that are product- led, growth driven and how that impacts packaging and pricing?

Dan Balcauski: In general, as I mentioned before at SolarWinds, we called it a volume and velocity model. But the rebranding of everything in marketing now is product- led growth.

Eric Boduch: You're welcome. I definitely helped with that one.

Dan Balcauski: Pendo specifically responsible for that, thank you.

Eric Boduch: Oh yeah, some impact. I wouldn't say we're entirely responsible. I like thinking of product- led as opposed to product- led growth because growth just applies customer acquisition and there's a lot of ways you can use product data to make your business better. We'll get back to the question at hand.

Dan Balcauski: Well, thank you, Eric. So in general, so you were talking about product- led growth and a freemium approach. So in general I would say, again, free trials generally better than freemium. The whole concept of a volume and velocity or product- led growth model is based on the premise of software as an experience good. And so this is a fancy term that economists use that basically says your perception of a product's value changes as you gain experience with it. And so the free trial has that aspect to it. And the idea is that, can we offset some of the resistance that customers have to jump into a deal, change some of the focus of our marketing organization from focused on non- product actions? If you think of traditional enterprises, if you're a CMO, it's like, well, how many white paper downloads did we get or how many signups, new emails at the event trade show did we get it? Instead trying to drive them into the product to lower that activation energy between, oh, hey, now you really understand the value, and so now the price is not as much a barrier. Or we can have a more qualified conversation because now your sales representatives when they reach out to prospects, those prospects actually want to talk to them. It's not that I have a bunch of pipeline of people that don't want to talk to me, these are people who are actually actively getting value out of the product. And so when I reach out and say, hey, do you need help, those conversations actually are able to happen and move forward in productive fashion., the relationship fundamentally changes. All of this is premised on keeping your customer acquisition cost low. So if I can drive customers into the product, they can see the value for themselves. I have a lighter touch with my sales cycle and the sales relationship. I'm able to reduce all those costs because sales cycles are one of the highest drivers of customer acquisition costs in a B2B model. We talked a little bit about pricing and packaging before. Generally I think of a product- led growth company, if you have a annual average contract value less than 25,000 is probably a fit. It gets a little bit less appealing above a 25K price point. But the main reason for that as well is that what you're trying to do with product- led growth is usually a bottoms up sales motion versus top down. And so as those price points get higher, now you're exceeding what that frontline manager, director can put directly on his budget. Then he maybe have buying committees, maybe he has to go to an executive level. You have to get procurement significantly involved. And so you start to lose some of those other-

Eric Boduch: So it's less the 25 grand, it's when procurement gets involved, it's when pricing committees are there. It's when the complexity of the sale reaches a certain level.

Dan Balcauski: Yeah. There's a lot of drivers to it, but 100% that. How much of this is going to be changes to internal? For example, we're talking on Zoom right now. And I can go sign up for Zoom and I can use it immediately. If I'm going to go buy an ERP from Oracle, well, that has to hook into a bunch of other systems, entire teams have to be trained on it. There's going to be integration, just doesn't make any sense to sell an ERP in a product- led growth motion because of all of those factors. Maybe someone's doing it, I'm not totally aware. And if they are, God bless, I wish them best of luck, but I just don't see how that works. But going back to that packaging, your packaging has to be simple. And what that does is well is focus on lowering the customer acquisition costs. It allows customers to self- select into an offering, which increases the velocity of every sales opportunity. And again, allows your sales personnel to spend less time on any particular deal.

Eric Boduch: Yeah. I think the ERP thing is interesting because I think that's where it goes to some of the product- led factors. Because, well, you're not going to implement a new ERP is kind of like, hey, download this, install it, try it. If you like it, buy it. There is an opportunity for upsell and cross sell, different modules and different functions within that sale on the enterprise. So I think the enterprise can take advantage of product- led motions just not necessarily in the same way that a really low price point would take advantage of them.

Dan Balcauski: I agree. I think the other thing that gets challenging as I've seen companies try to pivot or tack on a product- led motion is it can be very difficult for a CEO or executive team to care about the sale of a$10, 000 add- on module when they're busy selling seven, eight- figure deals to give that the amount of attention and investment that it requires to really drive that successfully. That's where there's an internal organizational commitment where it's like, hey, we're going to have a part of the organization that's focused on driving that motion because otherwise all the energy gets sucked up by the larger enterprise dollar value business.

Eric Boduch: Yeah. And maybe that goes back to pricing strategies too where it could just be on a user basis and you get a small number of users but then it grows. A communications layer like Slack added onto something as a cross sell or an upsell. I think there's ways that makes sense, but I do agree with you.

Dan Balcauski: 100%. Most B2B software needs continuous improvement in onboarding. That includes getting other users within a sale who have already bought the product onboarded, ramped up, Onboarding is one of those areas, I lived this as a product manager for many years, it's just never done. And it's critical in a product- led growth process.

Eric Boduch: So I think we talked about a lot today. One of the things we didn't dig into is product management or product marketing, who should own pricing and packaging to some extent? Think we can make arguments on either side of that. But if you're talking with someone right now that is either in product marketing or product management and owns pricing or packaging or both but doesn't have a lot of experience there, what's the top three things you would tell them?

Dan Balcauski: SO when you think of packaging, it's four different components, pricing metric, your bundles, price fences, your monetization model. And I emphasize the packaging aspect because when it comes to SaaS pricing, most executives think that what you charge will determine your success. In fact, who and how you charge determines your success. Your good packaging, it helps competitive comparison, differentiation, allows customers to self select, allows you to clearly communicate your value proposition and help you justify your price.

Eric Boduch: Now, you mentioned something and we haven't specifically talked about yet. So let's just cover that quickly too, fences. It's come up a few times, talk to people about what fences are and why they're important.

Dan Balcauski: Yeah. So I'll use a simple example. If you've ever attended a matinee at a cinema, you've seen a price fence. If you've ever shown your student ID to get a discount at a restaurant or wherever, you've seen a price fence. So the idea of a price fence is certain people, either based on identity, time of purchase or volume will pay a different price for the same exact product. If I go to the movie theater before five o'clock on a Wednesday, well, they don't have a lot of business. So they say, okay, people who attend at that time get a discount. If I show my veterans or student card, I get a discount. In the B2B world, usually where we see it is a volume price fence also sometimes referred to as a price structure. This is where the language is not precise in this world and is somewhat annoying. But usually that's where you see the tiered price model. If I buy 100 seats, the per user fee is different than if I buy 1, 000 seats versus if I buy 10, 000 seats. And that's because I'm changing the volume effectively. All those seats are using the same product, but that's considered a price fence as well.

Eric Boduch: What else do you see as far as price fences in the B2B world?

Dan Balcauski: So normally you see them in distinctly in the good, better, best packaging as well. Because if I'm looking at the good, let's say, the good package is$ 10 a user. And then there's$ 20 a user for the better package, that can be considered a price fence as well.

Eric Boduch: Got it. Well, great. Well, this has been a blast. I know we've covered a lot today. There's a lot more I think we can dig into detail in a lot of different areas, but we got to wrap it up sometime. So let's wrap this up by talking a little bit about you Dan, what's your favorite product?

Dan Balcauski: Every day I've been using Duolingo, they've got me hooked. Their onboarding and engagement model is bar none the best. And I used to complain that they needed to really work on their monetization model, but they eventually hooked me and now I'm a paying customer. So I've got 190- day streak going on Duolingo currently. I can't say my Spanish is anywhere near world class yet, but they definitely have me addicted to their product.

Eric Boduch: Hey, a great Pittsburgh company. I've a soft spot in my heart for those Pittsburgh companies. One final question for you. Three words to describe yourself,

Dan Balcauski: Analytical, determined, and direct.

Eric Boduch: Awesome, Dan. I enjoyed, this was great.

Dan Balcauski: I loved it too, Eric, thank you so much for having me. I hope you enjoyed the conversation.