Software Sales Tips by Matt Wolach

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Scale Your SaaS

Is Your Pricing Wrong? – with Dan Balcauski

EPISODE SUMMARY

In the bustling world of SaaS startups, where innovation is critical, and competition fierce, pricing strategies often hold the key to success or failure. It’s a topic that can make or break a company, yet it’s usually approached with more art than science. This week Dan Balcauski, founder of Product Tranquility, dove deep into the nuances of SaaS pricing. We unearthed valuable insights that every software leader should heed.

PODCAST-AT-A-GLANCE

Podcast: Scale Your SaaS with Matt Wolach

Episode: Episode No. 313, “Is Your Pricing Wrong? – with Dan Balcauski”

Guest: Dan Balcauski, Founder & Chief Pricing Officer at Product Tranquility

Host: Matt Wolach, a B2B SaaS Sales Coach, Entrepreneur, and Investor

Sponsored by: Leadfeeder

TOP TIPS FROM THIS EPISODE

Understanding the Who and How of Pricing

One of the fundamental misconceptions Dan highlighted is the obsession with the price itself rather than the underlying strategy. Too often, SaaS companies fixate on the numerical value without understanding the who and how behind the pricing decision. Dan emphasized that successful pricing is about what you charge and who and how you charge them. This distinction sets the stage for a more holistic approach to pricing strategy.

Assessing Pricing Effectiveness

So, how do SaaS leaders know if their pricing is right or if it needs optimization? Dan pointed out that there are three key areas to assess: acquisition, monetization, and retention. While acquisition often receives the lion’s share of attention, monetization, and retention are equally vital components of a healthy SaaS business. Metrics such as net revenue retention and customer expansion rates offer valuable insights into the efficacy of a company’s pricing strategy.

Uncovering Customer Value

One of the core tenets of Dan’s philosophy is customer-centricity. He emphasized the need for in-depth conversations with customers to uncover the true value of a product. While customers may not always articulate their needs explicitly, probing questions and active listening can reveal invaluable insights. Understanding the customer’s pain points, desired outcomes, and willingness to pay lays the foundation for a robust pricing strategy.

Embracing Value-Based Pricing

Moreover, Dan stressed the importance of value-based pricing, anchored in the value delivered to the customer. While this approach requires a significant organizational commitment and rigorous analysis, it offers unparalleled benefits in aligning pricing with customer value and driving profitability.

EPISODE HIGHLIGHTS

The SVCs Framework: A Comprehensive Approach

Dan’s approach to SaaS pricing revolves around a comprehensive model he dubs the SVCs framework: Segments, Value, Competition, and Strategy. This model underscores the importance of understanding customer segments, discerning value drivers, assessing competitive alternatives, and crafting a cohesive pricing strategy. By aligning these elements, companies can develop pricing structures that resonate with their target audience and differentiate them from competitors.

Conclusion: The Choice is Yours

In conclusion, SaaS pricing is as much an art as it is a science. By adopting a strategic approach rooted in customer understanding, value differentiation, and competitive positioning, companies can unlock new avenues for growth and profitability. As Dan Balcauski aptly put it, “Pricing can either be a lubricant in your go-to-market engine or sand in that engine.” The choice is yours.

TOP QUOTES

Dan Balcauski

[07:11] “Value-based pricing requires a significant organizational commitment and rigorous analysis but offers unparalleled benefits in terms of aligning pricing with customer value.”

[10:52] “Pricing can either be a lubricant in your go-to-market engine or sand in that engine.”

[21:52] “Successful pricing is not just about what you charge but who you charge and how you charge them.”

Matt Wolach

[20:02] “Pricing can make or break a company; it’s essential to approach it with a strategic mindset and a deep understanding of customer needs.”

LEARN MORE

To learn more about Product Tranquility, visit: https://www.linkedin.com/company/product-tranquility/ 

You can also find Dan Balcauski on LinkedIn: https://www.linkedin.com/in/balcauski/ 

For more about how Matt Wolach helps software companies achieve maximum growth, visit https://mattwolach.com.

Head over to leadfeeder.com and sign up for a 14-day (no strings attached) free trial: https://www.leadfeeder.com/ 

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Check out the whole transcript of the episode here:

Matt Wolach  00:06

Hello, and welcome to Scale Your SaaS. Thank you very much for joining us really glad to have you here. By the way, if that’s your goal to scale your SaaS, we’re here to do exactly that. We’re going to help you understand how to grow your leads, how to make sure you set up your structure correctly for go to market and for sales, how to close deals and how to scale your team so that somebody else can do it for you. If you want those things, subscribe to the show right now hit the subscribe button on your podcast app. That way, you’ll be notified of new and upcoming amazing people we put in front of you, who will help you scale your SaaS and one of those amazing people I have with me today. I’ve got Dan Balcauski with me, Dan, how you doing?

Dan Balcauski  00:41

I’m doing fantastic. Good to be here, Matt. Thank you for having on the show. Absolutely.

Matt Wolach  00:44

I’m really glad to have you here as well. And I want to make sure everybody knows who you are, Dan, because you got a great background and doing some cool things. Dan is the Founder and Chief Pricing Officer at Product Tranquility. Basically what Product Tranquility does it helps high volume B2B SaaS CEOs define pricing and packaging for new products, something that I can tell you working with SaaS companies is really, really needed. Over the last 15 years, Dan has managed multiple products throughout the product lifecycle from new concept incubation, product launch product maintenance, platform transitions and end of life. He absolutely knows his stuff. And I’m delighted that he’s here. Thanks for being on the show. Dan.

Dan Balcauski  01:21

I’m very excited for our conversation, hopefully to drop some hot takes on pricing for your listeners.

Matt Wolach  01:27

Awesome. I’m always good for hot tech. So looking forward to hearing that. But first, tell me just what’s going on with you lately. What do you have coming up?

Dan Balcauski  01:34

I’ll be out. Well, you know, we have South by Southwest here coming up here in Austin, Texas, where I’m based, and so got a music wristbands and looking forward to that that’s always a journey, either love it or hate it. It’s either for the Austinites Get the hell out of town or get yourself a wristband and dive in because the town gets taken over by investors. And so we’ll leave that to another topic. And then the other thing on my mind, I’m looking forward to this summer, and one of my best friends is getting married out in Italy. So we’re looking to spend a full month out there on either end of that adventure. So looking forward to getting out of the with the temperature, the mercury rises here in Austin, get the hell out of dodge.

Matt Wolach  02:14

Well, I’m right there with you. I’m in Arizona, and we don’t like spending summers here. So I’m also going to Italy this summer. So it’s going to be a great time. And in fact, I’m going to be in Texas in April, by the time this episode airs, this will have already happened. But you probably already know, Dan, that Texas is one of the epicenters for the Eclipse coming up. That’s where the eclipse is going to be passing right through Texas and Arkansas and all the other states going up kind of north east of there. And so my mom is big on astronomy, I guess and eclipses and she’s making me take my family out there so that we can watch this thing and get a full Eclipse like total lunar eclipse so it’s going to be pretty ridiculous. I don’t know if you saw that that was coming your way. 

Dan Balcauski  02:56

We had a partial one earlier this year. Just remind everyone on like our former president Do not stare directly at it. It conceal your retinas. So be careful.

Matt Wolach  03:06

Yes, public service announcement by Dan Balcauski. Thank you very much. Okay, cool. Let’s actually get to business here because I’m really interested in Product Tranquillity. What you’re doing is needed as everybody out there knows I work with software startups, helping them understand how to grow how to sell. And pricing is always one of those things. So first, let’s go way back. What gave you the idea to start product tranquillity?

Dan Balcauski  03:28

Yeah, well, you know, I have been in multiple different positions in the software world I’ve been my entire 20 year career in software started out more on the value creation side than what I consider the value capture side now both sort of building products in two is a IC engineer and engineering management, made a switch over into product management product strategy, and worked my way into more senior levels of management and was head of product at a two sided marketplace for a bit. And at a certain point, you know, and I always had the back of my mind, I’d love to start my own thing. Being an engineer, turn product person, I always thought I’d start a product company. But you know, either I’m a pessimist or a realist, but I know the entrepreneurs out there, you have all of my respect, because I’ve never had a product idea that I haven’t did shot 1000 holes in before I got off the ground. And I feel like that entrepreneur, you know, driving a product vision just has to be able to not only outlast their own doubts about their product, but to have every one of their friends and family and everyone else tell them that what they’re doing is a dumb idea that’s never gonna work and still go anyway. So I but I didn’t believe in myself and I was like, Well, let me try my hand at consulting. So I decided to go off and start a consulting company and you know, was looking at a lot of things that fell under the product management product marketing, umbrellas and realize that a lot of folks had a big challenges with product pricing and packaging, and it was one of the areas that threw some lucky happenstance of experience I’ve had, you know, cut my teeth on made plenty of mistakes on in the past that don’t want to make any apologies about that I did not come fully baked into this world I’ve, you know, seen and made a lot of those mistakes directly but you know, hoping to help the next set of entrepreneurs avoid those, that same fate or at least go out and make new mistakes and come back and tell me what those are.

Matt Wolach  05:21

Yeah, exactly. That’s always fun making those new mistakes. But let’s jump into that. So, you know, I’ve been a SaaS founder, I think a lot of people out there listening are SaaS founders right now, what are some of these mistakes that SaaS leaders are getting wrong around pricing? 

Dan Balcauski  05:36

Well, I don’t want to take up all of our time on this one question. I would say that number one is 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. Too often, prospects or clients will come to me and they’ll be very concerned about you know, should this widget be $20 per user, or $100 per user $29.95, or price has ended fives and nines. I love those conversations, I think are super interesting. But honestly, they’re optimizing at the wrong end. There’s way more impactful decisions that obviously at the end of whatever you package price sell, you’ve got to put it, you’ve got to put a number on it. But the much more impactful decisions are really understanding who the customers are going to serve the understanding of customer segments, how they define value in the marketplace, how they have different kind of alternatives available to them. And then how we charge so there’s different elements of of SaaS packaging that we talk through, those are much more impactful, they’re harder to change. And I think they don’t get near as much attention as they should.

Matt Wolach  06:48

Yeah, I agree. I think that’s absolutely something that needs to be helped with the native SaaS founders often are struggling with that. So if you’re SaaS founder, you’re moving along, you set your pricing, how do you know if it’s right? Or how do you know if it needs to be fixed or optimized?

Dan Balcauski  07:05

Well, I would say the question itself is should something be optimized, there’s always places to optimize in your business, even if you’ve already just gone through work on that particular area, it can be optimized further. So I think the question is really like, how do I know it’s so broken that we really need to go take some action on it. Ultimately, there’s really only three ways to grow SaaS business acquisition, acquisition, monetization and retention. And I think all the oxygen in the room gets sucked up by acquisition. As the economy especially the tech SaaS economy started to turn in mid 2022, we started to see a little bit more focused on retention. But still monetization, I think was kind of ignored. For the most part, it’s kind of viewed as this black box magic voodoo. And so people were kind of either scared to touch it or didn’t know that it was even an option. At a high level, even if I’m talking to a CEO or founder, I’m gonna ask a couple of questions like, Are you meeting your goals is pricing getting in the way of those goals. And I think there’s something to be thought through here, which is your your pricing and packaging, can either be a lubricant and your go to market engine, or it can be sand in that go to market engine, it affects so many different other metrics or KPIs that you’re probably tracking the length of your sales cycle, the number of deals, you win the percent discounts that you’re having to give up. You know, how your salespeople sort of talk about the value and have. So again, this goes into both the sort of, are you able to actually operationalize what you’re trying to sell, because we’ve got, because we don’t have the right packaging thought through, then we end up in custom contracting, or we can’t optimize in scale efficiently, because we need, you know, humans to go manage everything. And so, you know, I think about pricing, you know, affecting all of those KPIs. And so I think those goals are at a very high level. Have you tried to do something with your pricing, like a change or an increase? And did it succeed? Do you understand? You know, have you done any win loss? Do you understand why you lose deals? And what role did price play compared to other factors? I’m a big fan of doing a rigorous win loss that doesn’t include the rep who was who was in the deal, potentially even not even the sales or even a third party organization to come in and do it to have a unbiased viewpoint. But you should at least be tracking loss codes and you know, I know your worlds in sales and those are never the ground honest truth. But if you’re not even doing that, like you should at least get a be able to get a ratio of like, Hey, where’s Where’s pricing it relative to other areas, we lose? Do we have these categorically defined so we can feed that back to the rest of the organization? Because God forbid the other direction you have to go is digging through Salesforce notes or interviewing rep by rep and nobody. Ain’t nobody got time for that. I think a wise will have been one said, for sure. At a more tactical level, you know, are too many customers you’re buying and staying in your lowest or entry level plan are too few customers upgrading or expanding. So net revenue retention is like one of the number one metrics to understand there’s a pricing problem. And so if customers are just sort of staying flat, they’re not expanding over time, that’s a big consideration. And, you know, hinting it back at something I was mentioning before about customized contracts, you sales regularly selling something that is customized for each deal. So those are a few areas that I would I would point people to look at it. There’s obviously a bunch of different metrics, we kind of go down the rabbit hole and talk through that can help sort of identify what those should be. But those are some high level areas I would I would help people to focus on first.

Matt Wolach  10:45

Yeah, I think that’s a great focus for sure. And take, take a look at those if you’re trying to figure out what’s right, what’s wrong. But tell me, you know, I know you work with a lot of different leaders and companies. So do you have an overall model that you use for SaaS pricing? What would that be? 

Dan Balcauski  11:01

yeah well, you know, I’ve seen companies usually face for significant challenges when they try to tackle pricing. So they have an unclear target customer profile, they don’t understand what customers that they’re serving, they have a poor understanding of how they create customer value. They’re unclear about their products, unique differentiation. And finally, they have a general under appreciation for the depth of decisions that go into a pricing and packaging approach. Again, kind of what I mentioned at the beginning, where folks are very consumed by Oh, price is just the number that’s there. And is it your the ends and fives or nines? Or should we have discounts, you know, and so it doesn’t tend to go much beyond that. And there’s so many more dimensions that come into play. And so this situation over, I counted again, again, led me to create my services model for SaaS pricing services stands for the four components of the model. So it’s an acronym SVCs, promise it’s a happy accident, I didn’t plan it that way. The four components are segments, value, competition and strategy. So you need to understand your customer segments first. Because the context your customers are in dictates the constraints they’re facing, and which value drivers they view is most important. And something that, you know, companies you’re going back to, like, Should pricing be fixed or optimized question. Those value drivers for even customers you’re serving today can change. If we have a major shift in macro conditions, where we go from a a boom cycle to a recession, all of a sudden, all of the, you know, in the in the gogo days of 2020 and 21. It was all about how can you help me expand my customer base, get more revenue, get more share, right? That’s where people were buying your products is to go expand that opportunity. Flip around to bid 2022. And then what most software companies probably lived through through 2023 was we’re in the middle of cutting all of our costs, all of our projects that aren’t core to the business are getting slashed, can you help me save costs, otherwise, I might be cutting you. And so those value drivers can change. And it’s important that we are we understand what those are and also are able to have open conversations understand how the market is faring there. As we get into the second part of the model, each segment will rank order value drivers differently will cause them to value your product given the value and price are intimately related. In third part of the model, we consider competition, so different segments will have different competitive alternatives available to them. So just stated plainly, it’s like what would they use if your company didn’t exist? So we can think of those first three elements, segments value and competition as inputs to our overall pricing process, because your pricing power really comes from the differentiated value that you create for a particular customer segment beyond the competitive alternatives that they have available. So and then those three elements filtered down into, you know, the term strategy and strategy I use in the Michael Porter sense of the word where you ultimately have to make trade offs, like many companies would like to be everything to everyone. But ultimately, we have to decide what customer segments are we going to go serve, given the available segments in the market? Where are we best suited to play? And when? Who are we going to target? How do we position ourselves and those customers minds to clarify differentiated value? And how do we make the necessary trade offs among all the different elements of sass packaging, which we haven’t covered in depth that things like pricing metrics, offer configurations, pricing, model pricing fences, in order to go and make that differentiated value clear? And I highlight at the core of that the the foundation that the customer segments because what you’ll end up if you don’t do that first, you will inevitably end up in a conversation at the end of a very long pricing. rehash, where you say, Hey, here’s, here’s now we’re going to do and the The most common phrase, your question you’ll get is, Well, what about x customer? Because that won’t work for them. So we want to front load that conversation. Yes, ultimately, whatever you come up with is not going to work for everyone. But we want to bring that conversation forward. Because there’s always going to be some use case, some group of customers, they really only care about 10% of your product, that 10% actually is maybe its own entire market, maybe their competitors, sort of, you know, one shot sort of bit player competitors that play in that space. So you have to make a strategic decision up front, like, do we care about that space? Because it worth us for us to contort the rest of our go to market in order to satisfy that that particular end of the market. Maybe it is maybe it isn’t, but you probably wanted to have a conversation early rather than at the end of the process. 

Matt Wolach  15:57

Yeah, I would totally agree. And something that you hit I want to unpack a little bit there, you talked about value. And value, obviously, is, is something we want to be able to deliver to our customers. But it’s sometimes hard to figure out you said what your differentiation value and how you differ from your competitors. How can we figure that out? How can we work out what that is? How can a leader say, Okay, this is what it is. I mean, people aren’t just going to probably tell us how do we how do we understand that value based pricing? 

Dan Balcauski  16:24

Oh man, well this is a large question. You said, people won’t necessarily tell you. That’s not necessarily the case. They will tell you if you ask the right questions, 

Matt Wolach  16:38

Maybe read between the lines. 

Dan Balcauski  16:40

Yeah, but I think a lot of people don’t ask the right questions, is number one, because it does require this, this question, maybe a helpful framing for this question, as well as, oftentimes in the pricing world, we’ll talk about what’s called the three C’s of pricing. So this is your pricing orientation, pricing orientation is basically how is pricing done around here? What are the variables or inputs that we really care about. And so the three C’s, just quickly, I’ll name them off and kind of talk through them real quick, cost based pricing, competition based pricing and customer value based pricing, often just referred to as value based pricing. But you know, marketers, we love our, you know, four p’s and three C’s. So it’s not as catchy with, you know, two C’s and a V. So I view that as a ladder, right? Those are, you know, with, with any of these orientations, like you don’t get to skip to value based pricing and just not end up talking about your costs, like I’ve been in that situation with, with, like senior leaders, or even CEOs, founders of companies, and they’ll be like, well, we want to do value based pricing, and be like, great. What’s your marginal cost to serve a customer? Like? We don’t know? Yeah, like, let’s start there. Not that it’s the ultimate determination of where you want to be. But it does set a floor, if you sell $20 bills, excuse me, if you, if you if you sell $20 bills for $10, you’re gonna go out of business very quickly. Right. And so you want to make sure that, I mean, maybe some VC will fund you with that with that model, but I wouldn’t recommend it in general. And so, you know, but that only tells you your floor. Also, your customers don’t care about your costs. So we need to understand competition. And eventually, we need to get value. And so why is that a hierarchy, because I think value based pricing, it gets a lot of play in the pricing world, it’s very difficult to execute and pull off. I was, you know, somewhat facetiously poking fun at like, people ask the right questions, you can get the answer. But it does, it does require a large organizational commitment to a value based approach, it’s in calling it value based pricing also sort of undercuts the rest of the organization’s lift that’s required, and you can’t just have the pricing, people go into a back room and run some spreadsheet, like this is how much value we create for customers, this is what we’re gonna price at, because then you’re gonna hand it off to your frontline sales reps, or your customer success reps. And they’re gonna go tell the customer or prospect that and they’re, what is the prospect gonna say? I don’t believe you. Because I’ve been told that before, show me the proof. And then they’re gonna go Miss prospect, how would you like a 50% discount? Because they’re not going to be able to stand behind the value because they don’t have the proof. Right? And so this is where value based pricing breaks down. The flip side is the answer to your question, how do we if we want to actually pursue that approach, get to value? Ultimately, it comes from having detailed conversations with your customers, understanding how your product fits into their business, and ultimately driving that conversation to $1 sign. So one of the distinctions in my world versus say, for example, product management, product management that is like Oh, talk to your users talk to users in pricing. I want to be very explicit that I want to feel cuz users are important. But I do want to focus on the buyers of focus on the customers, the people who are paying you, because they’re th Ones who are having to write a check. And oftentimes, especially if you’re an enterprise software, they’re gonna have to make an ROI justification. Right. And so they’re, you know, the your champion is, is probably looking to you for help of like, how have you created value for others, because I’ve got to justify spending $100,000, you know, or whatever $10,000, you know, like, help me make this justification to my CEO, or my CFO to write this check. So you’re gonna have a lot of those conversations early on, that don’t necessarily make it to the foundation of your pricing approach. But you’re going to collect those over time, right? Because those are, those are gonna be things that happen naturally. And then when you get really, really serious about value based pricing, that’s where you can go out. And, for example, Forrester does ti total economic impact studies, as you know, if anyone’s seen those, those could be references. But you could do though, you could do those analyses on your own. You can, I’m sure as your customer success reps are trying to, you know, Customer Success owns renewals, they’re having to help justify those those ROI calculations. And then it’s about feeding that back into the rest of your education. So it’s a full organizational behavior. It’s not just a pricing exercise. But really comes back to what I was saying before is having those in depth conversations with your customers. Understanding how your product fits in and how you’re generating return, are you helping them increase revenue, increase profit, decrease costs, okay, what is the outcome that the customers judging the value of your product by? And then, you know, what was their situation before? What was the situation after what were the variables that affect how effective they are. Because even if you’re not going to do full value based pricing, a lot of those inputs are incredibly useful when you are even doing a lot of the packaging conversations. Because you know, helping to understand which pricing metric you should choose, for example, should be aligned with how you’re creating value for customers. So if you’re trying to align, for example, you, you work a lot with sales folks. You know, the idea behind something like CRM, whether it’s Salesforce, or HubSpot, or Pipedrive, or whatever it might be, a lot of it is price per user, that’s the pricing metric, because I’m helping make every sales rep on your team more efficient, more effective closing more business. And so therefore, my pricing scales with the value. So even if I’m not going to base that final number on the overall ROI i create, I still want to have those conversations upfront and build them in early in the process.

Matt Wolach  22:38

I love it. And one of the things you touched on in there something that we teach and I coach a lot to my clients is you don’t always have to when you’re talking with your prospect, you don’t always have to ask them the budget question, Hey, do you have budget for this? And maybe in some cases you do if you’re selling to government or schools or something. But in many cases, you don’t have to ask that question. You just have to get them to realize that they are losing more than what you cost. And of course, if in your early days, you can set the pricing around that even later days. But at least within the conversations, you’re in discovery, you’re learning about them, get them realizing or get them to voice that they’re losing more money than your product costs. And you talked about that to get them to equate that to some sort of dollar sign. If you ask those right questions, like you said, you absolutely can do it. So I love what you’re saying. We’re totally in sync here, Dan, of course, we are out of time, just right. When I’m like super jazzed and excited. You’re sharing some great stuff. But I want to make sure our audience can continue to learn because you’ve got a lot of awesome stuff. So how can our audience connect with you and learn more from you?

Dan Balcauski  23:39

Yeah, I’m happy to connect with folks on LinkedIn. Dan Balcauski just sent me a note that you heard me on the podcast, I could separate it from the rest of the LinkedIn outreach spam. And also, you know, I try to blog pretty regularly on my website at producttranquility.com. So folks can follow me there reach out via my website. And I think we had the same inspiration. I also have a podcast called SaaS Scaling Secrets. So both of us are are running podcasts for founder. So I just wrapped up season one there where I interview scale up a b2b SaaS CEOs. So wrapped up 25 episode season one here last month. And so folks are looking to, to learn how to scale their SaaS from other veteran CEOs and founders in the trenches. You can always catch me there, wherever podcasts are found.

Dan Balcauski  24:43

I had a blast that would have to do it again. Hopefully it’s valuable for listeners.

Matt Wolach  24:46

Yeah, I think it definitely will be and thank you all for being here. I appreciate you watching and listening. Absolutely. Make sure you are subscribed. You don’t want to miss any other amazing tidbits and anecdotes and stories and just gold like Dan just shared so hit Got subscribe and then we will see you next time. Take care.