Michael Luchen is joined by Dan Balcauski, Principal Consultant at Product Tranquility. Listen as they explore product pricing and the multitude of facets that go into setting up your product’s pricing strategy.
Dan is the Principal Consultant for Product Tranquility — a consultancy that helps high volume B2B SaaS CEOs to find pricing and packaging for new products. Over the last 15 years, Dan has managed multiple products throughout the product life-cycle from new concept incubation, product launch, product maintenance, platform transitions, and end of life. [0:46]
Dan has worked in both consumer and B2B companies, across consumer internet, mobile, IT software, and test and measurement hardware and software in addition to company sizes ranging from startups to publicly traded multi-national enterprises. [1:08]
Dan is also a Toptal-certified Top 3% Product Management professional, and also helps teach Kellogg Executive education course on product strategy. [1:22]
Dan started his career building software. He got a computer engineering undergrad. He started as a software developer but found himself more intrigued by how the products they were building created value for customers and then how that turned into dollars and cents for the business. [1:45]
Dan moved his way into engineering management and product management. He went and pursued his MBA, and ended up in product management and product strategy roles of increasing responsibility. [2:17]
Product Tranquility focuses on helping primarily High-Volume B2B SaaS firms with pricing and packaging for new products. [3:01]
When it comes to pricing, most people start their conversations around what Dan calls “price level”, but he would rather spend most of his time on what the price tag goes on and little to no time on what number goes on the price tag. [4:30]
Pricing is multidimensional and there’s a lot of different things that it depends on. Your market dynamics, your cost structure, your company and product life cycle, your competitive environment. [5:44]
When starting a company, pricing is not your most important lever. Charge something, but you need to focus on making sure that you’re creating and delivering value. [5:57]
As you start to really look at your pricing, the first thing that trips people up is they’re not clear on two things: their goal and their pricing orientation. [6:07]
“If you’ve ever tried to optimize any system and you don’t have a clear goal of what you’re optimizing to, your chance of being successful on the other end are often going to be unsuccessful.” — Dan Balcauski
Dan mentions the 3 C’s of pricing: Cost-based Pricing, Competition-based Pricing, and Customer Value-based Pricing. Those will inform what are the inputs that you’re going to be looking at in your process. [7:00]
Firmographics would be things like company size, geography, industry vertical. Demographics, if you’re in a B2C market is age, gender, income, geography. [10:19]
“The foundation of modern marketing is segmentation, targeting, positioning.” — Dan Balcauski
In value-based pricing, you need to understand your costs and your competition. And with value-based pricing, that price is merely how a buyer and the seller divide value in a transaction. [14:34]
“If you can’t focus on the financial value, any talk about value to the customer is just noise.” — Dan Balcauski
Most pricing conversations should start as value conversations. [18:37]
To Dan’s point of view, there are four elements to software packaging: price metric, pricing model or monetization model, offer configurations or bundles, and price fence. [20:26]
Price metric is the unit of value that you’re charging customers for. Often that might be seats, API transactions, number of contacts in your marketing database, or amount of data you store on Dropbox. [20:33]
Pricing model or monetization model would be – is it a one time transaction, a subscription, a pay as you go utility model, or an auction? [20:50]
Offer configurations or bundles are often what we see as pricing, also sometimes called “tiers”. So good, better, best is often what you see in the B2B SaaS world, where you’ve got different offers that are targeted at different customer segments. [21:09]
Price fence is merely how a company charges two different customers with different prices for the same product. [21:55]
“If we understand the value, we can create those different elements of packaging in such a way that it aligned with that value and supports our overall pricing and packaging approach.” — Dan Balcauski
Discounting percentage could help you inform if your price is too high or too low. You want to be looking at your average selling price (ASP) and your median selling price. [23:16]
Dan recommends changing your pricing at least once a year. If your value is changing, it makes perfect sense to re-evaluate your price. [24:56]
Dan talks about the concept of freemium. [27:13]
Dan’s first foray into the pricing world was during his MBA internship, he actually worked for a very successful Silicon Valley company. [27:24]
Customer acquisition cost is your sales and marketing expense divided by the number of customers that you’ve acquired. [31:42]
In early stage, founders almost always owned pricing because they had to come up with something and there was no one else to do it. In larger, more established companies, Dan makes an argument that either product marketing or product management could own pricing. [34:50]
The problem with pricing is it tends to impact every single stakeholder and therefore everyone has an opinion about it. Any changes to it can get heated and uncomfortable and therefore, because there is no owner, the changes are uncomfortable to talk about it gets dropped. [36:00]
“If you’re in product marketing, you’re often really in touch with competitive analysis, understanding the strategic needs of the business.” — Dan Balcauski
Senior leaders have enough on their plates. They’re always looking for people who will actually step up and do the analysis and build the business case. So, going and taking the initiative is never usually looked down upon as long as you do it with the right political tact. [39:05]
Meet Our Guest
Over the last 15 years, Dan has managed multiple products throughout the product life-cycle from new concept incubation, product launch, product maintenance, platform transitions, and end of life. Dan has worked in both consumer and B2B companies, across consumer internet, mobile, IT software, and test and measurement hardware and software in addition to company sizes ranging from startups to publicly traded multi-national enterprises.
Prior to founding Product Tranquility, Dan completed a solo round-the-world expedition to 21 countries, a lifelong dream that involved several life-changing volunteering experiences and a new collection of friends and good stories. Prior to that, he was Head of Product at LawnStarter, a two-sided marketplace bringing the best lawn care professionals to customers across the US. He joined LawnStarter after SolarWinds’ $4B acquisition by Silver Lake and Thoma Bravo. At SolarWinds, he was a Principal Product Strategist where he helped form and execute product growth strategies across new and existing products, both on-premises and SaaS-based.
Dan has a Bachelor of Science in Computer Engineering from Iowa State University and an MBA from the Kellogg School of Management at Northwestern University.
“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.” — Dan Balcauski
We’re trying out transcribing our podcasts using a software program. Please forgive any typos as the bot isn’t correct 100% of the time.
How do you price your product? How do you know you’re making the right pricing decisions and establishing a strategy that will resonate with your customers over the long run? Are you leaving money on the table? Keep listening as today, we’re going to explore product pricing and the multitude of facets that go into setting up your product’s pricing strategy.
This is the Product Manager podcast, the voices of the community that’s writing the playbook for product management, development, and strategy. We’re sponsored by Crema, a digital product agency that helps individuals and companies thrive through creativity, technology, and culture. Learn more at crema.us. Keep listening for practical, authentic insights to help you succeed in the world of product management.
All right. I’m really excited and intrigued to dive into today’s topic on the show: pricing.
Joining us today, we have Dan Balcauski, the Principal Consultant for Product Tranquility — a consultancy that helps high volume B2B SaaS CEOs to find pricing and packaging for new products. Over the last 15 years, Dan has managed multiple products throughout the product life-cycle from new concept incubation, product launch, product maintenance, platform transitions, and end of life.
Dan has worked in both consumer and B2B companies, across consumer internet, mobile, IT software, and test and measurement hardware and software in addition to company sizes ranging from startups to publicly traded multi-national enterprises.
He is also a Toptal-certified Top 3% Product Management professional, and also helps teach Kellogg Executive education course on product strategy.
Hey Dan, welcome to the show.
Good to be here, Michael. Thank you for having me. Looking forward to our conversation.
Likewise. And perhaps to start off for our audience, can you share an overview of how you got to where you’re at today?
Sure. So, I started my career actually building software. I got a computer engineering undergrad. Graduated high school at ’99, you know, thought as soon as I graduated into the .com mania that it’d be instant millionaire. Was not to be by the time I graduated university, but started it as a software development, but I found myself more and more intrigued.
You know, the, building the products was interesting, but I find myself more intrigued by how the products we were building created value for customers and then how that turned into dollars and cents for the business. So I moved my way into engineering management and product management. I went and pursued my MBA, and I ended up on product management and product strategy roles of increasing responsibility.
Different companies, as you mentioned in your intro, went off on my own about three years ago, and now I help companies primarily with pricing and packaging for new products. So it leverages some of my different experiences that I got a chance to fumble my way through as a full-time person.
So helping other companies not make the same mistakes I did and get to their value and profitability faster.
Awesome. Awesome. So today, what does your company Product Tranquility do and solve?
Yeah. So, as you mentioned in your intro, we focus on helping primarily High-Volume B2B SaaS firms with pricing and packaging for new products.
So companies will come to us for a number of different reasons. Mostly there’s a structural shift that’s happened where they’ve either created a set of new functionality that is, could be a new product or an additionally monetized, separate addon. They may be acquired another company and need to rationalize pricing and packaging across a product portfolio.
Potentially as companies grow, they start to target new customer segments that are beyond their core, and that requires updates to pricing and packaging. And surprisingly, recently, maybe not surprisingly to some folks who are listening, but actually, some folks have started to get very concerned about inflation.
I thought the software space would be the last companies to feel the effects of that, but your wage inflation is a real thing. Technical talent is at a premium. So some companies are starting to try to figure out how that impacts their pricing going forward as well.
Interesting. Yeah, definitely something that’s on everyone’s mind.
So getting into the topic of pricing perhaps we can start at kind of high level. What do people get wrong about pricing in this space?
Oh, I’ll just start here. 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. So, where most people start conversations around pricing is around what I would call “price level”. Should this thing be $10 a user, $20 a user, $19.95?
Those are all interesting, but I would rather spend most of my time on what the price tag goes on and little to no time on what number goes on the price tag.
Correlated with that is, it clear understanding of who is actually buying your product? A lot of conversations as it pertains to product development, marketing initiatives, and pricing get very confusing because oftentimes companies don’t have a clear view of the target customer that they’re trying to sell to.
And if you don’t understand that, it really muddies the waters for a lot of these conversations downstream from that.
Interesting. So you kind of mentioned a few things within there. Is there kind of any like clear-cut process to figuring out your strategy in the world of pricing? Is there like a step, several steps I can take, or is it just kind of something that you have to wait through and discover on your own?
So, pricing is multidimensional and I will say it really depends, there’s a lot of different things that it depends on, right? Your market dynamics, your cost structure, your company and product life cycle, your competitive environment.
When starting a company, I’d say, yeah, pricing is not your most important lever. Charge something, but you need to focus there on make sure you’re creating and delivering value. As you start to really look at your pricing though, I think one thing, the first thing that really trips people up is they’re not clear on two things.
One, what is the goal? What are they trying to achieve with their pricing? Is it maximizing profit, revenue, market share, gross margin? There are some of those goals that I just mentioned that I prefer over others, but if you’ve ever tried to optimize any system and you don’t have a clear goal of what you’re optimizing to, your chance of being successful on the other end are often going to be unsuccessful.
So getting executive alignment about what is it that we’re really trying to do is sort of step number one.
I would say the second thing, and we may touch on this a little bit later is what I refer to as your pricing orientation, which is the entire philosophy of how price is set in your company. Pricing and packaging approaches are designed.
So usually these fall under the, what we call the 3 C’s of pricing of: Cost-based Pricing, Competition-based Pricing, or Customer Value-based Pricing, is those will inform what are the inputs that you’re going to be looking at in your process. But normally when I sit down with companies, I’ve got a four-part model that I use.
It’s got four parts. So I’ll just name the four parts so we dive into a little bit. So, your customer segments or segments, the value you create, the competition or competitive alternatives, and then finally your pricing strategy. So if you think about those, the first three, those are sort of the inputs that filter into the final part, which is your pricing strategy.
So that customer segments are important, as I mentioned before, because your entire market or in the customers you sell to today are not homogenous. And the faster you realize that, the easier this exercise becomes. The reason why that’s important is because different customers will have different value drivers, will change how they value your product.
So that goes into the value aspect of that, of the model. And then competition is important because the difference between your competition and the value you create. One, the different customer segments may have different competitive alternatives.
They may use, whether that’s the startup down the street, a entrenched enterprise customer, or a lot of companies happen to be competing with spreadsheets and email, not necessarily, you know, another named entrenched incumbant. And your pricing power really comes from your differentiated value with your competition.
So understanding the value you provide for customers, how that maps the segment, as well as the differentiation from the competition that you’re, those customers are evaluating against. And then again, that all filters down into your overall strategy.
Interesting. So we talk about like customer segmentation, for example, curious what your thoughts are on how that impacts pricing, but also coming at it from you know, a lot of our listeners are product managers who are figuring out user personas and user types.
Is there a difference in looking at your customers versus say your users of your product? We’re looking at customer segmentation and pricing.
It’s a great question. So when we talk about market or customer segmentation, I tend to use those interchangeably.
So you can do segmentation on your existing customer base, but normally I recommend you look at your potential market as well because that will help you give a sense of the overall terrain. What is available to you? Not only what you’re currently acquiring today. So it would be more comprehensive. I do use a distinction between users and customers.
I refer to users usually if you have like a free product and they’re not paying you, those people are just users. If you’re on Facebook, you’re not paying Facebook, so you’re just a user. Their customers are actually advertising agencies or advertise, people who are advertising on their firms. So that’s their customers.
When we’re thinking about segmentation’s impact on pricing, this is important. Again, going back to understanding the different value drivers that those different segments have for your product and why they value your product. Another thing people tend to get wrong when they either approach pricing in general or segmentation specifically, people have a very difficult time seeing past, but firmographics or demographics.
So firmographics would be things like company size, geography, industry vertical. The demographics, if you’re in a B2C market is age, gender, income, geography again. When it comes to pricing, those may be good places to start and actually we’ll usually start there with clients, because it helps socialize the idea of segmentation and the fact that all your customers are not homogenous.
Look, a sales guy knows this, that you’ve talked to a salesperson. They have a sense of when they get on the phone, who’s a good prospect, who’s not. Your customer success representative as well, they understand which customers are going to be successful with the product which aren’t, given different situations.
So it’s helpful to bring that from the frontline people up to the executive team so that they understand that. But then when we get down to your brass tacks on the segmentation exercise, we want to focus on is understanding how those different segments differ in terms of their customer needs or customer values.
So why is this important? You know, modern marketing is, it’s just drilled in my head during business. The foundation of modern marketing is segmentation, targeting, positioning. So understanding the different segments exist in your market, figuring out which target segment you’re going to serve, and then how you’re going to position your business in the minds of those potential customers to demonstrate your differentiated value with that particular market. Pricing is a function of your positioning.
So if you ignore all that and just try to dive right into pricing, you’re going to be at a very tenuous position, because you’ve got no foundation on which to have a conversation. And this happens a lot in product management where a lot of arguments in product management happen, you know, at the feature level.
A lot of those are not because any one feature is better or worse on its face, but there’s not a agreement within the business of what customer are we serving and what is the relative prioritization of those customers and different, then different customers have different needs.
And therefore we could have a very unproductive debate at the level of a feature about which is more important because nobody’s had the higher-order conversation and had us agree on which customer we’re serving. And so you heard this guy say they got pricing where if you do this foundational work at the beginning, you short circuit or at least makes those conversations much more manageable because now you have a common framework around which to bucket those different areas of opinion.
Yeah. Yeah. Yeah. I definitely, that definitely resonates. And, you know, I think, you know, you mentioned like you got to have those higher-level conversations, but those higher level conversations I think in a different way, need to have the intentionality and kind of getting into the weeds of what you might do at a feature level conversation so that you can then be empowered to get into the feature level conversations on the back of that.
Something I’m really curious about and I, you know, there’s, there’s so much out there on it. And honestly, despite seeing all this stuff out there, I’ve never quite seen an answer on it, is value-based pricing.
What is it, how we work out the value? Yeah. What is your stance on value-based pricing, any opportunity or challenges there?
So value-based pricing is one of what I was hinting at before is what we call one of the 3 C’s of pricing. So everything in marketing has, you have to have the 4 P’s, the 3 C’s, the STP. So marketing is big on our acronyms. The 3 C’s of pricing are cost-based pricing, competition-based pricing, customer value-based pricing, because of course we need that C, usually just refer to it as value-based pricing as you refer to.
I am not going to sit here and say that if you are doing cost-based pricing, you’re a bad person or a bad company, and you need to change your ways immediately. It’s a journey. It’s often people start in that order and progress to more and more, it advanced sort of methods or orientations.
The reason is because at each level, you know, you do, even in value-based pricing, you need to understand your costs and your competition. You need to understand those incredibly well. So value is this sort of North Star, like, yes, we should be marching in that direction, but the idea is fundamentally with value-based pricing, that price is merely how a buyer and the seller divide value in a transaction.
And so at a deep level, if you understand the business impact that your product or service is having on your customers, you are in a strong position to be able to build a logical argument. How the outcomes that customer is going, are going, is going to achieve is, you know, well merits the price that you’re going to charge.
But it’s, again, it’s a progression and it’s not for let’s say the faint of heart, because it requires a significant organizational alignment and shared philosophy among the organization from your marketing, your sales, your customer success, your product development to really pull off the value-based pricing.
So I think that second question you sort of asked in there was, you know, how do we sort of understand what value is or how do we get to value and value-based pricing?
So understanding value comes down, comes from a process, and that’s really at a base level, asking your question, asking your customer questions about their business. I tend to take a very Jobs to Be Done approach, so I didn’t invent Jobs to Be Done. It has many famous fathers, Tony Ulwick, Clayton Christensen. Even back to Ted Levitt who was famous famously said, “Customers don’t want a quarter-inch drill. They want a quarter-inch hole.”
So really understanding what is the end outcome that customers are trying to achieve and the struggles they’re currently facing. The trick in these conversations, when you’re talking about it, I’m trying to understand it from a pricing perspective, maybe less so if you’re looking at it from purely a feature perspective, is trying to drive the discussion to a dollar sign.
So if you can’t focus on the financial value, any talk about value to the customer is just noise. So really we’re trying to understand, “Okay, this is a pain point.” You know, we do our product management due diligence of understanding what different customer pain points are and their relative rank order.
But then we want to take that conversation another step further and really understand why. Okay, if we solve this problem, what does that do for you with your, and your business? And I use you and your business intentionally there. So understanding what is the dollars and cents impact as you’re helping them increase revenue, decrease costs, increase optionality, decrease risk.
All of these are tangible economic benefits for the business, but then also, you know, with Jobs to Be Done, one nice thing about the framework is, you know, those are very sort of functional aspects, which, you know, with Jobs to Be Done there’s three types of jobs.
Functional is one, but also we want to understand what are the emotional jobs that we help people do in their lives. So emotional jobs are if I’m selling in a B2B context, yes, there’s going to be some functional efficiency gain or increase in revenue. But I’m selling to a person.
If that person, if I’m selling a marketing tool, for example, that marketing manager may be able to do their job much better and they’re looking at a promotion or they currently are managing 5,000 spreadsheets across a bunch of interns and the amount of anxiety and load on them is going to be reduced.
So that’s where area like Jobs to Be Done is very helpful as it helps make sure that we focus not only on the functional aspects, but the emotional drivers that a company, that customers have on our product as well.
Interesting. So I imagine it’s like kind of all these inputs, all these considerations are the things that go into figuring out what an effective price?
So at this point, one, well, I think one distinction that is helpful is it, most pricing conversations actually, should start as value conversations. So, where folks tend to go is the other way, as I mentioned before, where folks come to the conversation, right? Focused on that, you know, is it $10 price point, is it $20 price point, is it $1995?
That is only valid if you are in a, you know, incredibly competitive market where there’s almost very little differentiation between you and your customers. I actually really dislike the term commodity because I think it gets thrown around too fast by people who sort of give up. It’s sort of, it’s sort of waving the white flag on, we provide any sort of value that our customers care about. If you are going to say that your product is a commodity.
I was looking at example the other day where, you know, gold is literally a commodity, but you know, if you’ve ever watched like daytime CNN or Fox News, there’s commercials for people who are having you like invested gold, right? And their whole thing is, oh, you get a minted coin and, you know, we get next day delivery and, you know, it comes with a certificate, right?
So even in a pure commodity, like gold, people have found a way to differentiate. So it really is the focus on value first, the price level conversation comes at the very end. And even before there, we really haven’t talked about packaging. The packaging aspect, you know, once you understand the value is much more important to that overall conversation than the price level.
Can you talk a little bit about packaging and how you approach it from a software product perspective?
Yeah. So in my point of view, there’s really four elements to software packaging. So it’s your price metric. So that’s the unit of value that you’re charging customers for. Well, often that might be seats, it could be API transactions, number of contacts in your marketing database, amount of data you store on Dropbox, right? That’s your price metric.
The second would be your pricing model or monetization model. Sometimes also you’re just your business model. So that would be, is it a one-time transaction? Is it a subscription? Is it a pay-as-you-go utility model? Is it an auction? If you’re Google, your pricing model is dynamic auctions where they’re selling ad inventory.
The third aspect of pricing is your offer configurations or bundles. So these are often what we see as pricing, also sometimes called “tiers”. So good, better, best is often what you see in the B2B SaaS world, where you’ve got different offers that are targeted at different customer segments.
This is also an area where customer segmentation is incredibly important because when you’re creating those offers, they ideally should be matched to specific customer segments. Because that makes the entire customer acquisition process much more efficient because then customers can self-select to do it.
Your sales with a couple of qualifying questions can direct to customers to the right configuration for them.
And then fourth is we call your price fence, or sometimes also for twos, your price structure. So price fence is merely how a company charges two different customers the same price or different prices for the same product, rather.
So we see this all the time, where if I go to, I go take a bus, for example. I pay one price, a student with their student card pays another, a veteran or a senior disk, senior citizen with their discount pays another price. Or if I go to a a matinee showing at noon on Friday of the theater, I’m going to pay a different price than if I try to go to the same movie at 7pm.
And so these four elements all pertain to the overall packaging of a SaaS product. And the, again, the ideal is if we understand the value, we can create those different elements of packaging in such a way that it aligned with that value and supports our overall pricing and packaging approach.
It’s interesting. You know, as you talk about like all the details and all the things that go into this, once you’ve set your price and your packaging, are there metrics that you’re using to track the success of these? Is there any kind of stuff that goes in on like, we’re set, go, now it doesn’t resonate with the market.
Is there anything in that space that we should be paying attention to?
Yeah. So one thing you want to be looking at is your discounting level. Discounting percentage could help you inform if your price is too high or too low. You want to be looking at your average selling price, your ASP, and your median selling price.
So especially the B2B context, you want to be looking at those together because if you have very large or very small deals, you know, those can swing your average. And so you want to understand how those are you know how your overall selling price, hopefully, it’s trending up, but making sure you’ve removed the noise from there.
Understanding what is the volume sold. So before I was mentioning like a good, better, best tier. If you’ve got, say you’ve got good, better, best, you know, there’s no hard and fast rules. Some quick ones I’ve, I’ve heard is like 25, 50, 25 for example. So 50, your most popular tier is going to be your middle one. That’s for a set of psychological reasons.
But also if you’ve, if you see a dramatic deviation from that, like, if everyone is buying your most expensive tier, it probably means that your two lowers, one probably means your, your high-end tier is priced too low. And then also means that you’re too low tier probably not showing enough value. So there needs to be revisited or it also making sure that, you know, if any of those are zero, were really low, right? We don’t want to have shelfware. We don’t want to have a package that’s just there for show on the shelf.
Yeah, you know, that makes a lot of sense. You know, as you’re seeing those things and maybe some of the differences in those deviations comes to mind, how often should we be changing your pricing once it’s set?
Yeah, there’s not a hard and fast rule. I would recommend that folks do it probably at least once a year, at least review and revisit their pricing. The thing is, you know, for your audience right there, product managers are constantly evolving the value that their product brings to market.
Building new features, you know, doing research. The question is like, if your value, again, going back to this point of understanding your value, if your value is changing, it makes perfect sense to re-evaluate your price. But if you don’t think in that way, you’re like, oh, well the price is just the thing we charge and then we just add more value to it, but they should be, have some relationship to each other.
So every time you’re building a feature, you know, and this is not to say you’re raising price every time you ship a feature. That’s, I would not recommend that either. That’s a different extreme, but there are things that people, you can do, right? Evaluate new addons, looking at localizing pricing, revisiting your discounting policies.
You know, changing your packaging tiers, right? These, there are different elements that could be revisited on a periodic basis that don’t just involve, you know, constantly changing the price level.
Yeah, no, it is, it’s really interesting. I mean, in one of the other kind of areas that starts to come to mind just about the connection between pricing and value as well is the concept freemium.
As you have probably seen and a lot of our listeners have seen, there’s this last couple of years, this influx of new apps and like really top-line apps, particularly in the I guess you would call it kinda like the B2B space of apps that are serving professionals, but they’re more consumer and they come out and they’re like they’re free for like, there’s no pricing roadmap.
But you know, they in, some of them do eventually starts to charge. And I’m curious, like, is freemium a good idea? Is this kind of wave of products that we’ve been seeing in the last couple of years, is that a strategy that is a wave because it’s been catching on and there’s value to it? Or is there a cautionary tale involved there as well?
So I, I love freemium in as a one of the monetization models. So as I mentioned before, like a transaction or a subscription or pay as you go or auction or dynamic pricing. I skipped over this in my intro, but my first foray into the pricing world, I, during my MBA internship, I actually worked for a very successful Silicon Valley company.
And they had, they sold apps and they went to market through for major go-to-market partners. And one of their go-to-market partners was trying to become the, or wanted to have the position themselves as a low-cost player in the market. So they forced all of their partners to have a freemium offer. So when I showed up, the problem on the CEO’s desk was, Hey, we’ve got to make a freemium version of our app for this partner, should we do it for all of ours? Go, figure this out.
So it was one of the things I’ve worked out among several other things for them that summer. Generally, I found that freemium is a terrible idea. So most objections or considerations that people suggest freemium for could be better answered with a 14 to 30-day free trial instead of freemium.
The free trial and freemium are closely related. The software is what economists would term an experience good, which means that the end-user customers perception of value of that good changes as they use it. So there’s a very good argument, right? As much as, you know, your marketing team may be amazing and create really informative landing pages and videos and white papers.
There’s another level of understanding when you finally get your hands on the product, especially a complex B2B product, and actually take it for a test drive. So in that case, what a 14 to 30-day trial has advantage over freemium is there’s a very clear marketing motion because there’s a timer that says, “Here, you’re going to experience the full value. And at the end of that, if you’re not on board, we could both part our ways, no hard feelings.” Right?
Oftentimes, you know, there’s ways for sales guys to extend or gals to extend the free trials with keys in case the end-user needs more time, they have a more complex setup, et cetera. Freemium has a bunch of problems. And one of the bunch of reasons I don’t recommend it.
It’s challenging to move customers from free. This is a big problem because anybody who’s been on marketing or growth side knows how hard it is to acquire new customers. So you’ve got this potentially massive pool of free users who, you know, the marketing teams looking at, being like, well, look, we should just try to convert this group over.
That’d be way easier than go and buying more in addons on Facebook or Google or all the work we’re putting in the SEO. The problem is that, best-in-class conversion of those free users about 1% to 3%. So you need, by definition, you need a massive market, like you need millions of customers in order for that, or potential customers in order for that to work.
They’ll products like Zoom, you know, when COVID happened, we all became part of Zoom’s Tam, right? Every single person on the planet who needed to attend work remotely was a potential Zoom customer. So in that case, it worked. Also, Zoom had a very it’s as almost a viral loop in terms of how people use it, because you invite other people to those meetings, they’re used, they’re now using zoom, they’re getting intro to it.
But going back to this, it’s hard to move people from free. So again, you’ve got very low conversion even if you are successful and you run into what we call the “Penny Gap”. So if I’m moving from free to even one penny, that’s an infinite increase in price. And I might as well start my entire marketing motion over again, because it’s the amount of energy, activation energy it takes to move someone over that is incredible.
It also creates an internal momentum tax on every feature. So basically now when you put out a feature, you have to have this conversation of, does this go on the free side? If not, or do we put part of it on the free side? So that won’t show up on the income statement or balance sheet or any engineering metrics. But now as a business, you’ve forced your product and engineering team to have that discussion every single time, which I don’t think is helpful.
And I think the argument that’s put forth, and other arguments put forth is that it lowers your customer acquisition costs. And I just don’t think that’s the case. So for those of you who aren’t aware, customer acquisition cost is your sales and marketing expense divided by the number of customers that you’ve acquired.
So if you are now using engineering resources as part of your marketing engine, I’ve never seen these companies who claim a more efficient customer acquisition costs. Also say, oh, and now we’re also allocating whoever 25% of our engineering budget as a marketing expense. It’s just like, oh, it looked like our marketing expenses got more efficient.
So I think it was just playing games with the income statement at that point. I think there are specific.
Oh, no, I was just gonna say it’s really fascinating. You know, it’s a, I’ve had these debates before collaborating with clients on building products and it’s always been lacking the context of all these things you’ve talked about is usually, does free makes sense? Does it not? And so this is really fascinating. Yeah.
There are, like I mentioned with Zoom, there are some specific contexts where it can make sense. So I think one example, another example I would use is like Slack, because a tool like Slack doesn’t, if you show up to a party and no one’s there, that’s the worst party in the world, right? So Slack has the same problem where the product itself is not useful until you get massive early adoption.
So a product like Slack, I think it could be an example. Some developer-focused products where potentially, if I’m a developer and I need to use the product in like dev or staging, it might be for six months or a year while I figure out if this thing works and then we’re trying to build it and I’m not actually getting any revenue from it.
You know, I may have a free version that is suitable for those environments that, you know, I don’t have to have a sales guy continually issuing a free trial extensions. It’s just like, Hey, when you guys are ready to move into a production environment, then you’re going to need to upgrade to our actual tier.
So there are a couple of excuses that, you know, do make sense, but it’s very much on a case by case basis. I usually lead with, “Okay, all of your problems can, you should just do a 14 to 30 day free trial.” That if, you know, that it’s we’ll go from that conversation from there.
Yeah. Yeah. It’s really interesting that you mentioned like the specific example of Slack. So that’s one that’s talked about in Andrew Chen’s recent book, The Cold Start Problem.
But coming out of the, kind of the free, the freemium perspective, it is, it’s very much get a critical mass of engaged employees within an organization so that the sales conversation would be had, because otherwise there’s no value if Slack is just going in and selling to an organization with no engagement whatsoever and maybe half of the enterprise is using Teams.
There could be all sorts of challenges on the backend of that. One of the things I just kind of, as we get closer to wrapping up here you know, who is responsible for pricing decisions? I’m a product manager who sees opportunities or challenges as I’m working on building out these features and shaping the product narrative.
Am I the one who just makes these decisions? Is there somebody else within my organization? And how do I go about approaching that?
It’s pricing responsibilities are spread all over, unfortunately. It’s not by my decision, but that’s just how it tends to be. So in early stage, founders almost always owned pricing because they had to come up with something and there was no one else to do it. In larger, more established companies, I make an argument that either product marketing or product management could own pricing.
And usually I defer to product marketing, mostly because although product management is in an excellent position to do so, they’ve got so much other things on their plate that usually it’s becomes item number 53 on their priority list. And so we’ll not get the attention that it deserves, but product marketing and product management are both in a very strong position in terms of their strategic view in the company.
Understanding what are the strategic objectives the overall positioning of the company and the product in the marketplace. The in-depth research that they’re doing with customers to get the insights that they need out of those value conversations. So I think that it really is beneficial to have either of those to own it.
I think finance, any of the, going around the executive table, you know, each, the problem with pricing is it tends to impact every single stakeholder and therefore everyone has an opinion about it. And therefore, any changes to it can get heated and uncomfortable. And therefore, because there is no owner and ever all the changes are uncomfortable to talk about, it gets dropped.
I do recommend all the different stakeholders are brought together for a pricing committee, but that, you know, product marketing or product management leads that committee. Your finance is very helpful in terms of, you know, they’re obviously, you know, focused on, you know, gross margin, burn rate, making sure that the, they could tell the investors a good story, right?
Sales has their objectives with quota attainment, but I think both of those organizations aren’t in, they aren’t in that close contact with customers from a deep insights perspective that’s necessary to maintain the long-term profitability of the, you know, the pricing and packaging initiative.
So working through solving those problems, you know, as a product manager or product marketing specialist within the organization, what point should I be bringing in a dedicated pricing expert to help navigate those types of conversations or pricing decisions?
Yeah, so, you know, most, I think I saw a statistic that it was only, I think 50% of IPO, stage companies had either dedicated pricing people or teams.
So I, you normally don’t see sort of a full-time dedicated pricing person until you’re north of like 200 million in revenue. Until then, you know, again, if there’s, tactical projects, you know, in that domain, right? Product management or product marketing can, you know, readily assist those. What are the objectives I’m trying to help with my companies?
I’m trying to blog pretty regularly on this topic to help demystify the world of pricing for folks who are, you know, in the line of fire every day, right? It didn’t have this early responsibility, you know, now they’re having their turn. Right? So, so hopefully we can short circuit that a learning curve for a lot of folks.
But if you are, you know, again if nobody’s sort of owning it, right, there’s always an opportunity when you’re shipping new products, right, to introduce the conversation. Should this thing be separately monetized? Does this effect sort of our value proposition in the fundamental way that we should be looking at changing our, you know, pricing and packaging to accommodate that?
You know, if it’s a separately monetized addon or a change in your tiers. I think there’s always those opportunities to bring those conversations up. And again the who sort of owns it de facto is often less important than who steps up and actually does the work.
Right? If you’re in the product management space, if you’re in product marketing, you’re often really in touch with competitive analysis, understanding sort of strategic needs of the business. So my point of view is, senior leaders have enough on their plates. They’re always looking for people who will actually step up and do the analysis and, you know, build the business case.
I don’t know anyone if they’re in that role, they’re looking for growth any way they can, cause it’s hard to come by. So going and taking the initiative is never usually looked down upon as long as you do it with the right political tact, I would say.
Yeah, I love it. I love it. Well said. Awesome. Well, before we wrap up, I’d love to run through some quick lightning round questions, if that’s okay?
Oh, I’m excited. Let’s do it.
All right. Which of your personal habits has contributed most to your success?
I think meditation and working out, like both are like flossing for your brain.
Oh, that’s so good, flossing for your brain. That is a quote I will carry with me forever.
What’s your favorite tool, not including floss, that you use regularly?
I’ve gotten really into Grammarly recently, which is super nerdy, but as I’ve had to write more. I’ve, it’s been an absolute godsend. We’ve come a long way since Clippy.
That’s awesome. Yes. Yes. Yes, we have. Now we pay for Clippy in the form of Grammarly. It’s a great tool.
And then the last question, for someone at the start of their product journey what is one piece of advice that you would give them?
I’m gonna cheat and give a couple. So one, talk to your customers. Please, for the love of God, talk to your customers. It clears up so much confusion.
And the second I would say is the real world is way messier than the books and articles on product management make it seem. So if you’re in a company and you’re reading, whatever it is, and it doesn’t seem to be a fit because there’s X, Y, Z constraint that is not addressed, you’re not unique. That’s how it is. So don’t be depressed about it, but you find a way for it.
Agreed and very well said. That needs to be said a lot more in our space.
All right, Dan, thanks so much for coming on the show. At least for me pricing has certainly been demystified today.
Well, I appreciate that, Michael. I enjoyed the conversation. Hopefully, it’s valuable for your listeners.
I think it was. And for our listeners, you can find out more about Dan’s work in his blog at producttranquility.com.
Again, thank you so much, Dan, for joining. Thanks, everyone for listening. Be sure to leave a review of the podcast on your platform of choice, and also be sure to follow and join our community at theproductmanager.com if you’re not doing so already. Thank you!