In our latest episode, we're thrilled to feature Dan Balcauski, Founder of Product Tranquility, as we navigate the world of SaaS pricing models.
About Dan Balcauski
- Started his career in product management at National Instruments, based in Austin, Texas.
- Ascended to the role of Product Strategy Principal at SolarWinds, a SaaS company serving DevOps and IT professionals.
- Made a significant shift to B2C, leading product at LawnStarter Lawn Care.
- Boasted a successful freelance career as a product manager, earning a place in the top 3% of PM professionals worldwide on Toptal.
- Imparts his industry knowledge as a program leader at Northwestern University, where he teaches product strategy.
In 2019, Balcauski launched Product Tranquility, a venture dedicated to assisting B2B SaaS CEOs in defining pricing and packaging for their products.
A Personal Adventure
What sets Balcauski apart is his remarkable spirit of adventure. Before starting Product Tranquility, he embarked on a personal voyage as an independent travel consultant, planning and undertaking a global expedition through 21 countries. This extraordinary journey demonstrated his fervor for continuous learning, during which he acquired new skills ranging from digital marketing and Spanish proficiency to kiteboarding and Argentine Tango.
Join us as we dive deep into the insights and stories Balcauski brings to the table.
Value-Based Pricing
In our engaging chat, Dan Balcauski brought up some crucial insights regarding the struggles businesses often face while setting up pricing in the SaaS industry. There's often a lack of structure, leading to heated debates rather than an organized approach. To combat this, Balcauski introduces the 'Services' model.
Key Challenges in Pricing:
- An unclear target customer profile: Companies often struggle to understand exactly who they are serving.
- Poor understanding of how they create customer value: Businesses might be unclear on the unique value they deliver to their customers.
- Unclear product differentiation: Companies often grapple with distinguishing their products from others in the market.
- Underappreciation for the depth of decisions in pricing and packaging: Many overlook the vast array of factors impacting pricing, focusing only on surface-level elements.
The 'Services' Model:
The 'Services' model stands for Segments, Value, Competition, and Strategy, and was designed to address these challenges.
- Segments: Understand the specific context and constraints of your customer segments, as they dictate what they value most.
- Value: Recognize how each segment perceives value and rank orders value drivers, influencing how they value your product.
- Competition: Be aware of the competitive alternatives each segment has available. What would they use if your product didn't exist?
- Strategy: This comes in the Michael Porter sense of the word. Strategy involves trade-offs; you can't be everything to everyone. Decide who you're going to target, how you position yourselves in their minds, and how you'll balance the different elements of SaaS packaging. This includes price metrics, price models, offer configurations, etc.
The combination of these four components informs the price level you set, helping your business achieve its objectives. The 'Services' model ensures a more thoughtful, strategic approach to pricing, moving away from arbitrary decisions.
What is value based pricing?
Dan Balcauski clarified the concept of value-based pricing and distinguished it from other terms like value metrics and price metrics.
Value-Based Pricing
Value-based pricing, at its core, concerns how value is divided between buyer and seller in a transaction. This notion dates back to Adam Smith and the concept of trade, where specialization and trading lead to overall improvements for everyone involved.
“...goes all the way back to Adam Smith with trade, right, you've got the butcher, the baker, and the candlestick maker, they don't all try to, you know, bake their own bread and cut their own meat, etc. Because it's better if we all specialize, we're all better off if we specialize in trade, right.” - Dan Balcauski
Value Metric vs. Price Metric
- Value Metric: Using a 'Jobs to be Done' framework, the value metric is how customers measure the effectiveness of your product in achieving their specific outcomes. These outcomes could be economic (saving time, decreasing costs, increasing revenue), emotional (reducing anxiety, boosting status), or social (contributing to causes like climate change, equal rights, education, health care).
- Price Metric: While value metrics focus on the customer, price metrics focus on the product. The price metric is the unit of value for which the customer is charged concerning the product (e.g., number of users, API transactions, gigabytes of data transferred, etc.). Ideally, the value metric and price metric should be correlated, meaning that the way customers derive value from your product should inform the units by which you charge.
Outcome-Based Pricing
The question of charging based on actual value delivered, like a CRM charging based on deals closed every month instead of the number of users, led to the discussion of outcome-based pricing. This model aligns the vendor with the customer's success, creating a 'pure' form of value-based pricing.
While this approach is theoretically appealing, Balcauski explains it doesn't always work in practice. Exceptions include companies like Stripe, which directly participates in the payment flow and therefore aligns its success with its clients' success.
Outcome-based pricing may not work well for companies outside the flow of the success metric. It can lead to complications in reporting and potential conflicts, given that what is considered 'success' may not be clearly defined or could be interpreted differently by different parties. Therefore, while enticing, outcome-based pricing requires careful implementation to avoid straining customer relationships.
Bundling and Unbundling in Pricing Models
**Bundling, Unbundling, and Usage-Based Pricing**
Bundling and unbundling, while seemingly contrary, are not in tension with usage-based pricing. These concepts represent different dimensions of product packaging that can evolve independently. According to the Silicon Valley CEO Jim Clark, the only two ways to make money in business are bundling and unbundling.
The history of the PC industry illustrates this with the evolution from monolithic providers like IBM to the unbundling of the operating system from the CPU architecture (as seen with the Wintel monopoly), and then back to bundling via Apple's integration of software and hardware. Dan highlights that such industry transformations often occur cyclically and are influenced by broader market trends rather than by single companies.
The Nuances of Pricing Metrics
Pricing metrics, while essential for defining a product's price, can either aid or hinder a company's competitive positioning. The choice of pricing metric depends significantly on the market context and should ideally align with the customer's business needs and the perceived value of the product. Innovative pricing strategies, like Rolls Royce's "power by the hour" for jet engines, demonstrate how such metrics can mirror customer value, thereby streamlining the buying process.
However, such innovative strategies may require substantial resources to educate the market about the change and may be more successful if driven by industry leaders or highly innovative products. Finally, Dan advises caution when attempting to be distinctive with pricing metrics, as this can result in increased effort to justify the difference to potential customers.
AI and Pricing for Solo Travelers
The final part of the interview revolved around a hypothetical AI application designed to assist solo travelers, with features like tracking reservations, making dynamic dinner reservations, and offering real-time travel updates. The proposed monetization strategy is a freemium model, with added features for premium users.
In response to this idea, Dan expresses concern about the target audience of solo personal travelers due to their potential limited spending power. He urges the developers to consider different customer segments thoroughly, understanding their specific needs and the context in which they'll be using the app.
The importance of understanding customers' contexts is emphasized, using the example of airlines, who vary ticket prices based on the nature and timing of travel. Understanding these distinct customer segments and their unique value drivers can guide pricing decisions effectively.
In addition, Dan encourages the consideration of competitive alternatives from a 'Jobs to be Done' perspective. Instead of focusing on similar apps or startups, the developers should consider what the target user is currently using to solve their problem if the proposed app didn't exist. By understanding these competitive alternatives and their inherent limitations, developers can better define their product's differentiated value and devise a pricing strategy that accurately captures this value.
Episode Recap
In this intriguing episode, Dan Balcauski offers his deep expertise and unique perspectives on the world of SaaS pricing models. We delve into various aspects, ranging from the 'Services' model to value-based pricing, outcome-based pricing, bundling and unbundling, as well as the exciting realm of AI in pricing strategies. Each topic comes with a host of insights and stories from Dan's vast experience, illustrating the depth of his knowledge and his ability to communicate complex ideas with clarity and impact.
Balcauski's unique background, blending his passion for product strategy and global travel, sets the stage for an engaging, insightful conversation that leaves listeners with a wealth of valuable takeaways. Whether you're an established SaaS CEO or a budding entrepreneur, the wisdom shared by Dan Balcauski is sure to elevate your understanding of pricing and packaging in the SaaS industry.
Listen to the full episode now. And don't forget to follow Dan: