The Dan Balcauski Hypothesis: The Most Important Part of Product Pricing is Who and How you Charge
In this episode of the Product Science Podcast, we cover Dan’s SVCS model for working through pricing and packaging, how to figure out what different customers value, and how to use the 3 common pricing orientations.
Holly Hester-Reilly
Dan Balcauski is the founder and Chief Pricing Officer at Product Tranquility, based in Austin, TX. He focuses on helping high-volume B2B SaaS CEOs define pricing and packaging for new products. Over his career, he has worked in both B2C and B2B companies ranging from startups to publicly traded enterprises.
In this episode of the Product Science Podcast, we cover Dan’s SVCS model for working through pricing and packaging, how to figure out what different customers value, and how to use the 3 common pricing orientations.
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Resource Links
Competing Against Luck: The Story of Innovation and Customer Choice, by Clayton Christensen
Demand-Side Sales 101: Stop Selling and Help Your Customers Make Progress
What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services
Questions we explore in this episode
What model does Dan use with his clients to work through pricing and packaging and how does it work?
- Dan uses SVCS (services) model. It includes segments, value, competitive alternatives, and strategy.
- Segments: Know which segments you are targeting and how they have different contexts and constraints.
- Value: How do the different segments value the product differently?
- Competitive alternatives: What are the different competitive alternatives that each segment is looking at? And what is the differentiated value that you provide over the competitive alternatives?
- Strategy: How do those first 3 play into a pricing and packaging strategy? How will we use price as a strategic lever to help us achieve our business goals?
How does Dan figure out which things different customers value?
- Dan loves to use Jobs-To-Be-Done to move from solution space to problem space.
- In a job story, he outlines what outcome a customer is trying to achieve.
- To determine what a customer is trying to achieve, Dan recommends interviewing customers and shares some favorite books on the topic: Clayton Christensen's Competing Against Luck, Bob Moesta’s Demand-Side Sales, Tony Ulwick’s What Customers Want.
What are the three primary pricing orientations that Dan teaches and how do companies usually develop their pricing orientation?
- Cost-based pricing is where a lot of companies stop. You need to understand your costs to set the floor on what is a viable pricing model.
- Competition-based pricing often comes next. Now companies are looking at what the competition and the market are charging and identifying where they are offering differentiation from the competition.
- Value-based pricing is only practiced by about 20% of companies, but is extremely valuable. It’s characterized by looking at the outcomes we create for customers and identifying how valuable those are to customers. It requires a value-focus throughout the company.
Quotes from Dan Balcauski in this episode
Make sure you're thinking about pricing early on, figuring out what customers value are willing to pay for, and then building the product around that.
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. I spend most of my time on what the price tag goes on and little time on what number goes on the price tag.
As soon as you get to value-based pricing, it's not just a pricing exercise. It's an entire go-to-market system. You need value-based selling, you need value-based marketing, you need value-based customer success. It's not just that the pricing team can go off in a room somewhere and do some calculations and, there you go, there's your price. But value has to be sort of a core aspect of the business and really justified sort of the whole way through the customer lifecycle, especially in subscription when you have a ongoing relationship with your customers.
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Transcription
Holly Hester Reilly:Hey. Holly here. Before we dive into this week's episode, I wanted to share some information with you about some workshops that we're running. Here at H2R Product Science, we love to teach workshops, both public workshops, private workshops at companies, and even an online workshop for people who can't come to see us in person. If you're interested in learning how to identify the right products and features to build and how to develop the support to do so with the product science method, come and join us. You can learn more at h2rproductscience.com/workshops
Hi, and welcome to the Product Science Podcast where we're helping startup founders and product leaders build high growth products, teams, and companies through real conversations with people who have tried it and aren't afraid to share lessons learned from their failures along the way. I'm your host, Holly Hester Reilly, founder and CEO of H2R Product Science.This week on The Product Science Podcast, I'm excited to share a conversation with Dan Balcauski. Dan is the founder and chief pricing officer at Product Tranquility based in Austin, Texas. He focuses on helping high volume B2B SaaS CEOs define pricing and packaging from new products. Over his career, he has worked in both B2C and B2B companies ranging from startups to publicly traded enterprises. Welcome, Dan.
Dan Balcauski:Thank you for having me, Holly. I'm looking forward to our conversation.
Holly Hester Reilly:Me too. So I'm definitely eager to dive in to the pricing expertise that you have. It's been a little while since we've had a pricing expert on the podcast. So maybe we could get started with just sort of a general approach, like what would you tell a product manager or a startup founder who's starting to think about pricing and looking to go and figure that out for something new for the first time?
Dan Balcauski:Oh, wow. That's a big question. So the first thing I would say is first pricing should be part of the conversation from day one of the product development process. Too often I see companies that slot pricing and packaging right before a product launches in the go-to-market stage. At that point, you've invested a ton of resources into a product that you might not be able to successfully monetize. Instead, make sure you're thinking about pricing early on, figuring out what customers value are willing to pay for, and then building the product around that.The second thing I would say is that 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. I spend most of my time on what the price tag goes on and little time on what number goes on the price tag. Often when I talk about I do pricing and packaging, everyone gets very enamored with the first thing, and I think their eyes just glaze over on the packaging aspect. But the price level is much less impactful than how you're charging and understanding who your customers are, which customer segments you're going after, what they value, deliver, and the differences between them, that is really the key to your pricing success.Third point I'd mention is pricing needs to align with both your product and company strategy. So at a company level, you need to understand where you're going to compete and win. Your product strategy helps you understand how are you going to create desirable outcomes for your customers. If pricing has to align with both by understanding the value those outcomes create for your customers. So again, which customers are we going after and which outcomes are we creating and what is the value that's created there? And then how can the business capture value from creating those outcomes?As an overall model I usually apply with clients, I have a model called the services model for value-based pricing. It's an acronym. The services is SVCS. It was a happy accident. I didn't plan it that way, but seems to work. I'll note each item of the model and then we can dive in a little bit deeper on each.But first is segments. So understanding that not all your customers are the same. And all the product managers out there listening will feel this in their bones. But oftentimes executives or other departments don't fully grasp this. And you really can't have a rational discussion around pricing and packaging unless you understand that your customers have different contexts, different constraints, different things that they value. And you can't create a one-size-fits all pricing and packaging approach for an entire market.Similar to it's a failed strategy to go create a product that solves everything for everyone. I've never seen that work. Even worse is you do that and then CEO tells the CMO, "All right, go position this product we sort of built for an average customer," when the average customer doesn't exist, "Go position it for them and attract those customers." That's a failed strategy. The important part of segments follows into the two other points, which is now those different segments are in different contexts. Those will cause them to rank order different value drivers differently, which will cause them to value your product differently, thus the price that is acceptable. Combined with that, you have different competitive alternatives that are available to the segments. You might imagine, whether that's on an industry basis, you might have a industry-specific competitor. You may have competitive alternatives that are the status quo or a lot of software companies or competing with email or spreadsheets.You may have different competitive alternatives based upon certain players may only be relevant or available to the enterprise market while the SMBs are maybe using those email and spreadsheets. And so when we think about pricing, and again, this value conversation is core to pricing, your pricing power really only comes from understanding what is the differentiated value that you provide over that competition? The market will set the price for undifferentiated value. I often use this example of if I set up a lemonade stand and my neighbor sets up a lemonade stand across the street and they're selling lemonade at five dollars a cup. If I'm trying to price at $10 a cup, well the market price is five dollars unless I can prove I've got ginseng and niacin and some special other ingredients or my lemons or squeezed for the best lemons on the Amalfi Coast of Italy. What is my differentiated value compared to those competitive alternatives?If we think about those first three elements, the segments, value, competition, those all are, you think of it as the inputs to our overall strategy. So given all of the segments we could play, the competitive alternatives exist, the value that we could create for those different segments, again, are we best suited to play and win? How can we position ourselves in the mind of our target customer segments to make our differentiated value clear? And then we have to make all the decisions around the pricing and packaging aspects. So packaging, we can probably dive into a little bit later. But packaging has several different elements when it comes to SaaS as well as understanding how are we going to use price as a strategic lever to achieve our business objectives? So it's kind of the overall framework. Obviously there's many different directions we can go from there, but hopefully it gets us started in the right direction.
Holly Hester Reilly:Yeah. So just to repeat what I heard, it sounds like the services model is SVCS and it's segments, value, competitive alternatives and then strategy?
Dan Balcauski:Correct.
Holly Hester Reilly:Got it. So I think that sounds really clear and maybe makes it sound a little easier than it is. So tell me a little more. Do you have any examples you can share of a time when you applied this model to help a company set their pricing and packaging?
Dan Balcauski:So I think the quick answer is all the time. When we're thinking about segments, there's many different ways to think about customer segmentation, and we could have a very long discussion around different methods and criteria that you might use. And I've written extensively about this on my blog.
Holly Hester Reilly:I actually would love to have that discussion. So feel free to veer in that direction for a little bit if you want.
Dan Balcauski:Yeah. So the first way people approach segmentation is what we call an a priori approach. So an a priori approach is basically fancy Latin phrase, meaning what came before. If we think about different ways we might cut up a market, there's already standard ways people think about slicing up markets. So in the B2B world, in B2C, we might use something like demographics, age, income, level of education, geographic location. Well, there's firmographics where we think about B2B as well. So these would be size of the company or industry or the amount of revenue that they have, also potentially geography. This is where usually companies start.However, for a pricing and packaging exercise, usually we want to go a level deeper and what we call a post hoc segmentation or basically after the fact. For post hoc, we instead take a zoom out for a second, we can think about a segmentation exercise as at the end of it we have to note two things. We have to know who customers are and what they want. And the question really becomes where do we start? In an a priori approach, we start with who customers are. But part of the problem there is that who they are may not often dictate that they actually want different things.I'm a big fan of jobs to be done. I know that people you've interviewed, you've probably covered jobs to be done at length, but one of the most important parts of jobs to be done is context. The fact that I'm a 40-year-old male living in Texas with a graduate school degree doesn't dictate my needs when I get on a bus or get on an airplane or am at the gym. It's that contextual idea that is crucial to understanding what I value. And so we really want to get down to that second layer of value-based segmentation based upon what is a customer's context constraints, what is a value to understand what our different customer segments are?But for the purposes of an example, we may just use the basic firmographic differentiation in between customer segments. So oftentimes companies will find themselves where they've got very clear SMB, mid-market or enterprise segments. And so going back to what I was saying before, where I was working with the client and the tools that were available to their SMB customers were much more limited. The SMB customers have a do-it-yourself type of attitude. And so the comparison was actually, hey, we're going to try to build this thing internally, or we're going to string it together with Zapier and Excel spreadsheets rather than go and buying a product. Whereas the enterprise clients had a much more, say, robust off-the-shelf solution that they could use. And so when we think about that, that changed the reference value of what the customers are doing. There's a certain inherent cost to doing it yourself versus the cost someone would outlay to buy it off-the-shelf solution. And then also the value drivers. What is the customer benefiting by choosing one of those alternatives over another? And therefore the differentiation for the client becomes different.Where if we think about the SMB customer who's stringing this together with Zapier and Excel spreadsheets and emails, maybe they have Johnny the intern who's updating a spreadsheet every week. The problem is Johnny sometimes gets sick, so maybe the spreadsheet gets out of date, which is a problem if that report is required for a weekly executive meeting. Sometimes Johnny might make an error on the report. Sometimes Johnny might accidentally make the spreadsheet available on the public web so therefore it violates the data security standards. And so in those cases we might talk to things like the repeatability, the consistency, the error free rates as value drivers.Versus if we're talking to the enterprise customer, obviously there's going to be a whole bunch of different check the box features. We're going to focus our value creation and value messaging and how we create our packages and discuss those at a different level with the enterprise client. Does that help?
Holly Hester Reilly:Yeah. So tell me more about how you find out which things are valued by the different clients.
Dan Balcauski:That's a great question. So again, I'm a big fan of jobs to be done. And in jobs to be done, we have an understanding of if we think about a job story versus many people in product management because of the ubiquitousness of Agile are used to user stories. User stories start with a persona. I want to do something. What we're doing with jobs to be done instead is we're, one, moving from solution space to problem space, which I think is an important step where in a user story we're usually using it to describe to engineering some interaction of an actor on a system to create some output within that system.Where at a job story, we're taking a step back and trying to understand, okay, our product may not even exist yet, but that doesn't mean the customer's problem doesn't exist. Going back to what I was saying before about my demographic variables as a 40-year-old male living in Texas doesn't necessarily dictate why I want something. It's more the context and the constraints that I'm facing. So we put those front and center. And then also in a well-written job story, we outline what it is that the customers trying to achieve. What is the outcome that they're trying to get?And so the best way to go about this is through talking to your customers directly. There's really no simple way to do that. And there's many, many people who have elaborated much more eloquently than I ways to do this. I highly recommend, if folks haven't listened, Business of Software Conference, Bob Moesta, who's one of the founders of Jobs to Be Done helped co-wrote Competing Against Luck with Clayton Christensen. And I actually just read his book, Demand Side Sales as well. He just gives an absolute masterclass on interviewing customers in a job to be done framework. Also highly recommend Tony Ulwick's work who wrote What Customers Want and ways to get customers to help them reveal their underlying needs, their outcomes that they're trying to get to.
Holly Hester Reilly:Yeah. I think those are really great resources to check out as well. And one thing that I'm just so happy to hear you say is how important it is to talk to customers and to do the interviews. Because I feel like sometimes when it comes to pricing, some people maybe have the misconception that it's a very analytical exercise and they maybe don't include all of the qualitative work that's involved. And so I think it's really great to talk about how you have both elements play a role in both decisions that we make in product, but especially in pricing, it matters to be doing those interviews, too.
Dan Balcauski:Yeah, absolutely. There's both qualitative and quantitative. I think people get way too enamored with the quantitative. I think many of us got led astray, including myself early on in our Econ 101 courses in college or grad school, whatever it might have been. And they teach you about supply and demand curves and price elasticity. Price elasticity, to a certain extent, is kind of like the Sasquatch. Everyone's heard of it, but I don't think anyone's ever seen it in reality. So it's a very useful concept for economists. But I think people that go too far down that rabbit hole, especially in a B2B context, one thing I've learned is there's not one consistent pricing approach for all domains, we'll say. It's not necessarily industry-based, because SaaS goes across almost all industries at this point. But the type of pricing approach that I might use if say I'm pricing Airbnb or hotel nights or flights is going to be different than if I'm pricing fast-moving consumer package goods versus if I'm pricing B2B SaaS because each of those have idiosyncrasies that demand a different approach.
Holly Hester Reilly:Yeah, absolutely. So I would love to dive a little deeper into some of the nuances of working in B2B. I do a lot of B2B work myself, and I'm interested in, you talked about the firmographics, like the size of the company and the stage and the age. But what are some of the other characteristics that you see in B2B that have an impact on someone's context that influences what they need from a pricing and packaging perspective?
Dan Balcauski:Well, as it pertains to B2B versus B2C or just B2B in general?
Holly Hester Reilly:Just B2B in general.
Dan Balcauski:Yeah. Well, I think overall there's several different characteristics we have to think about. So one would be something like market structure. This goes back to the idea I mentioned of getting fooled in our Econ 101 classes where it's always some steel manufacturer or somebody making commoditized widgets. And we have sort of the monopoly case that we look at. So there's one person in a market, and then there's the case where they're just absolute commodity goods and there's absolute perfect competition. Oftentimes when we're in a B2B scenario, we're dealing in that messy middle we might call an oligopoly. There's multiple players. Differentiation is not easily transparent. And one thing we have to embrace is that our customers are not Homo economicus. Homo economicus is this actor in the economics textbooks.
Holly Hester Reilly:Right. The very rational actor.
Dan Balcauski:Yeah, perfectly rational, omniscient, knows everything about all the alternatives available to them, can make the absolute optimal decision. And that's rarely ever the case unless you're dealing with the simplest goods where we have different offers and it's incumbent on us to help our customers in that buying journey. I think that's another area where B2B and B2C very much differ is that the purchases in B2B tend to be much more considered. And this goes into so many dimensions. The buying process takes longer. The purchases are bigger, therefore more considered. There's more people in there. There's actually a full buying center. And all of those in B2C, if I go purchase Netflix, well, I'm the purchaser of Netflix and the consumer of Netflix. Very rarely is that the case in B2B where the buyer and the user is the same. There's procurement, there's internal champions, there's software lifecycle support staff.So if you think about it, if I'm buying a CRM like a Salesforce, I need to consider not only the sales people using it or maybe the VP of sales who realizes they need a new CRM, but also there's going to be a whole team of people who are responsible for integrating that system into other platforms, maintaining it, updating [your custom field records, making sure all that works on a day-to-day basis. So that complexity really expands. And how we think about understanding each of those members of the buying center, where they get involved in the process over this more considered lifecycle and the different value that they care about. If I'm talking to an end user as a salesperson or as a marketer, I'm going to be communicating different benefits than if I'm communicating to the financial buyer or to the person who has to be responsible for maintaining and integrating the system or to the procurement professional who I have to get this past the line. So each of those are going to have a distinct difference.Obviously, every industry or competitive set is going to have a set of characteristics of your competition. Are they peaceful or aggressive as it pertains to pricing? Or how aggressive are they in trying to undercut your purported value statements? Is there a specific cost structure that you have? In B2B SaaS, obviously there's variation because some companies also have services revenue, which changes margins. But usually we have a very, very low marginal cost and a very high fixed cost. It costs a lot of money to pay engineers to build the software, but the marginal cost of serving an extra user is nearly infinitesimally small. I mean, obviously there's other costs of supporting them, customer success, et cetera, that we would roll into that. So it's not zero by any stretch, but it tends to be more heavy on the fixed cost versus variable costs. And that can change how you might think about your pricing as well.And obviously as we're thinking about these considered purchases, the other thing we need to take into account is just the massive impact the internet has had on pricing, both in terms of overall visibility, but then how easy it is to go to a website like G2 or TrustRadius and get real feedback from other users that then increases or decreases my price sensitivity or how customers are thinking about the value I provide compared to my competitors. And so all of these elements sort of combine to a very complicated soup that we need to manage as we think about the B2B pricing world.
Holly Hester Reilly:Hey, so I'm going to interrupt us here for our first ever sponsor. It's Productboard, a software for product managers. In previous episodes, we introduced you to Sophie Lalonde, crew product manager at Productboard. She told us about getting a hypothesis wrong and going back to iterate on it. I asked her how she got the space to do the iterations, and here's what she said.Sophie L: First of all, you have to say goodbye to your ego sometimes. That's really, really important. The second thing is beta is space. You have a beta, not because it's a check mark, not because it's just one step, but it's because you're trying to really challenge your assumptions and you're trying to figure out, did what I build solving the right problem? Is it solving the problem well? A lot of people use beta as a way to just say, okay, we've gotten that step done, now we can go launch. It's like, no, no, no, that's a time to really ask the hard questions. And when you get further in your career, and you can go to the executives and say, "I think I was wrong in this assumption." You start to sound actually more smart. It feels like you're saying that you made a dumb decision 12 months ago. But in reality, that is what business is. It's trying to learn. Everything is a bet. Everything's an experiment. And so the faster you can learn and the faster you can pivot towards the right direction, the better off you're going to be in your career.
Holly Hester Reilly:I love the lesson Sophie shared here. Listen to future episodes to learn more about Sophie and how she uses Productboard in her work. For now though, back to the interview.Yeah, that's great. That's a lot of good nuggets to chew on. So then I guess another area that I want to pick up on, going back to that services model you had, segment and value. And I feel like we talked decently about those, but let's dive in a little bit into competitive alternatives. How do you think about that?
Dan Balcauski:Yeah, so I guess from what dimension?
Holly Hester Reilly:The two dimensions that come to mind for me are the value differentiation as you compare to the others in the competitive landscape, whether any differences in your pricing are actually a competitive differentiator in themselves.
Dan Balcauski:Well, I think there's something we haven't talked about yet, which is one of the first things I will talk to clients about is do you have a preferred pricing orientation? A pricing orientation, we can think about as how is pricing done around here? What are the inputs that we care about? And generally we think about basically three primary pricing orientations. There's cost-based pricing, competition-based pricing and customer value-based pricing, often referred to as value-based pricing. But if we said that, then we wouldn't have three Cs and marketers love our four Ps and our three Cs and all those handy acronyms. And I think of them as a journey, as a ladder. I think some people will come and say, "Well, if you're not doing value-based pricing, you're wrong and evil and you should throw everything away." No, it's a journey. I think value-based pricing is this north star. It's a goal never to be reached, but helps us understand how we fit in the market, how we deliver value to customers.But you're going to start with cost-based pricing often. And this goes back to I think your initial question on if you had advice for a startup founder or product manager thinking about a new product. It's like, well, first of all, at the very beginning, I need to be able to understand, okay, do we think that the thing we're building has value for people and will they be willing to pay it? Because I have to make a pretty significant investment decision based upon that.But once it comes to, okay, the things already been built. Your fixed costs are sunk, not important anymore. Now I need to make sure I can keep the lights on. If our goal as product managers or as company leaders or as companies in general is to have an impact on the world, create satisfied customers, our ability to do that, we could only do with profit. So you're not going to be around to help those people very long if we can't keep the lights on. And so you really need to understand your costs. And I think that's one mistake as people go through this journey of pricing orientations, they really lose sight of, oh well, yeah, we used to do cost-based pricing, but we don't need to worry about our costs anymore. It's like, no, no, no, you do. That's the floor on what is viable, otherwise you're going to be running out of business pretty soon.
Holly Hester Reilly:Yeah.
Dan Balcauski:So then we go to competition-based pricing and competition-based pricing, when you think about the disadvantages of cost-based pricing is that it's a very insular view. You're naval gazing. You're like, oh, what is my costs? But your customers don't care about your costs. They care about their problems. So justifying your price based upon your costs is you're living in an alternate reality. And so then we go to, okay, what is the competition in the market charging? Where do we feel that we create differentiated value? And when I say differentiation, that could be positive or negative differentiation. And that's not necessarily a bad thing. There's a lot of successful companies, Orion Air, the airline in Europe made a very successful business by unbundling a lot of things that people didn't care about. Like, oh, you want checked bags, you want extra luggage, you want snacks on the plane and you want extra leg room?So those would be negative differentiation if you're looking against more of a full-service airline carrier. But that's the market position that they've decided to enter. And so their whole go-to-market is based around that differentiation. And so understanding that.When we get to value-based pricing, we're really starting to look at what is the differentiated value that we create? So when I look at competition-based pricing, the difference between that and value-based pricing, we can think of as, I could go look at what everyone is charging and say, "All right, I think we're at some level of discount or premium to these other people." But the problem there is it can create this herding mentality where everyone's sort of just averaging to whoever the leader in the market is. Or maybe slightly like, I'm coming out with a CRM. Salesforce is the number one brand, so I'm going to be at some 20% discount to Salesforce, so not very advanced.When we get to value-based pricing, we're actually looking at a much more granular level of what is the outcomes that we're creating for customers and how does that differ between what the competition provides and what we provide? So it's a much more nuanced view of value-based pricing. And I think why value-based pricing is so hard, I've seen some numbers, it's hard to get very good data on this because obviously people don't shout from the rooftops that they do value-based pricing. But I think only about 20% of companies actually adopt value-based pricing. Because the problem, as soon as you get to value-based pricing, it's not just a pricing exercise. It's an entire go-to-market system. You need value-based selling, you need value-based marketing, you need value-based customer success. It's not just that the pricing team can go off in a room somewhere and do some calculations and, there you go, there's your price. But value has to be sort of a core aspect of the business and really justified sort of the whole way through the customer lifecycle, especially in subscription when you have a ongoing relationship with your customers.
Holly Hester Reilly:Mm-hmm. Do you have any examples of a good value-based pricing model that's out there that our listeners might know of?
Dan Balcauski:That's a great question. So this is not a technology example, but one example that I absolutely love is Evian the bottled water company. So Evian, they charge about three cents an ounce for bottled water, which is an incredible price premium. It's about a 3X price premium over something like Poland Spring, which is about one cent an ounce. So they've already got a significant price premium there. And if we think about most Americans, I bet a blinded taste test with the tap water that comes out of their faucet probably wouldn't be able to make a difference. They are about a 1500X price premium over the tap water that comes out of your faucet the standard American home.Evian created a new product called Evian Facial Spray. Evian Facial Spray is a spray that if you put on color cosmetics in the morning, as you get into the afternoon, those color cosmetics fade. And so Evian Facial Spray is water with a little bit of aerosol and you spray it on your face and it revives your color cosmetics. And there's a group of customers or other competitors that do something similar, supergroup] and a few others. I'm not an expert in that market, so I don't remember all the competition.They were able to charge I think a 70 or 80X price premium over the price that Evian charges for bottled water because they shifted what the value meant. It's not just water with an aerosol, the value is reviving your color cosmetics. So the change from that customer's perspective is, okay, is this worth my time, the extra material to put on another coat, another application of cosmetics in the afternoon? And so if you think about that price differential, if I had tap water versus just Evian bottled water, I could have Evian bottled water, maybe fill up a cup, I could fill up my entire bathtub of Evian bottled water. Take that same comparison of a cup of Evian Facial Spray water, I could fill up an Olympic sized swimming pool of Evian Facial Spray water.So again, in shifting how we think about the value, again, the product effectively did change. It's slightly different packaging, it has a little aerosol, but it's effectively water. How they were able to shift the value conversation was just masterful. And I bet for everyone listening, your product is probably much more complex than water. And so that's really where the power of something like value-based pricing can come in. It's like, look, do we really understand what our customers need and what they're willing to pay for, even though it might be in a slightly different context than what we've been selling. We sell these bits. Okay, but the customers aren't buying your bits, they're trying to achieve some outcome. Are you focusing on the right outcome? Because there are potential extreme profit opportunities in those other spaces.
Holly Hester Reilly:Yeah, that's a really interesting story. Also makes me wonder if I should be spraying water on my face. So why don't we go back to the topic of the competitive differentiation and answer the second question I had about whether there is something interesting where pricing can be its own competitive differentiator.
Dan Balcauski:In general, I caution against using price as a competitive weapon. The reason is because pricing is a zero sum game where you are very likely to end up in a price war. It's very different than most other arenas that we play in. And so the idea is that one of the tools we'll use in the pricing world is what's called a price value map. So there's a general category of tools in the marketing world called perceptual maps that help us understand sort of the layout of a competitive landscape and where we play. Price value map is an example of a perceptual map. This would work better in a visual medium, but to explain it to your listeners, we've got a simple two axis, which is perceived price and perceived value. We can think about many markets that have different players on that map.So let's take the automotive market. So I may have entry level player like the Toyota Corolla. May have an average player like the Toyota Camry. Might have a premium player like the Tesla model S or a BMW or Mercedes-Benz. I might have a luxury set of players like Ferrari, Lamborghini, Bugatti. And at each of those stages, you can imagine those companies may all line up along sort of a diagonal line as they're increasing perceived value for perceived price.When we think about the very low cost players in a market, there's usually only room for one. If we go across industries, super low-cost airline, usually only one player. If we think about retail, there's maybe Walmart. If we think about pretty much any of these type of player... In the grocery, it might be Aldi for example. So the important part about those businesses is not that they have sacrificed profit, but that they have some sustainable cost advantage that allows them to achieve a profit margin as good or better than other players on that map at different locations. But there's usually only room for one sort of ultra low cost player.So I guess the advice would be look at your market. Is there already an ultra low cost player? And again, for SaaS, I like when you reiterated my services model, use the term competitive alternatives because I think if we say competition, that slots us too easily into this idea of other commercial off-the-shelf tools where competitive alternatives is a broader definition sort of in the jobs to be done of. There might not be any tool in that space, but customers are still having this challenge and they're using something to try to get it done today, whether it's email or spreadsheets or some sort of pen and paper system.So when we think about using, if we adopt that sort of low cost position, that implies, going back to my statement at the beginning where your pricing has to align with your overall company strategy. There's an entire set of organizational dynamics at play where Walmart is incredibly well known for its procurement practices and squeezing the absolute most out of its suppliers. That doesn't happen by accident. That happens because their operational systems are tied to their value proposition. And they know that they have to ring out all the absolute excess because they need to still be able to make a profit at that low price. And so that's how those systems work.Where it gets very dangerous is if you're in the market player or the premium player or the luxury player market trying to use price as a weapon, you may have a short-term benefit, but this is often not well considered when people have this conversation. You need to put yourself in the shoes of your competition's CEO. What are their options when you do that? All of a sudden they're going to start losing share. And their only option is to respond in kindness is to lower price. And in that case, all you've done for both is to sacrifice profit to both end up at a lower price. Consumers win, this is the economic 101, the competition is good. But we want to make sure that we're considering competitive reaction when we try to use price as a weapon.
Holly Hester Reilly:Okay. So I know we had chatted a little bit before about pricing strategy and what that word means to you with strategy being the last element in your services model. Tell us a little more about what you mean by that.
Dan Balcauski:Setting a price point is best thought of as selecting a target price from a feasible range based upon the sum of your positive and negative differentiation that you create. So we didn't really talk about the value cascade, but at a core level we have the sort of reference price. So I use that lemonade stand. I've got that five dollar lemonade across the street and I'm trying to sell a $10. And I say, okay, I've created some differentiated value by the lemons that I put in or the presentation I put a little smiley face in your lemonade, whatever it might be, ala Starbucks. So where we're going through this, we have a set of possible prices that we could choose. There's no optimal price. There's prices that work at prices that don't, and we need to figure out, out of a range of prices, where are we going to play?And so we need to think about how are we going to intelligently set that price level from a viable range of options? And this is where pricing strategy comes in. So when we talk about pricing strategy, there's really three that are available. There's penetration pricing, there's neutral pricing and skimming pricing. And you can win with any strategy. But like my Walmart example, you need to have all of your operational systems, your organization aligned behind executing that strategy. It's very bad if you're like, we're going to be penetration in this quarter and then we're going to be skimming next quarter. It's like, no, the companies that have done it very well have picked a strategy and have stuck with it and have aligned the rest of their organization to that.And so when you think about, for example, penetration strategy. So a company like Amazon I think captures penetration strategy. They've decided that they're going to make price a driving factor in a purchase decision and establish a dominant market leadership position. Also has the add-on effect of potentially deterring competitors. However, it requires this significant cost advantage. And you need to make sure that there's a relatively low possibility of a competitive reaction. And you want to make sure because that will have the negative side effect of sparking a price war. If we think about something like, on the opposite side, a skimming strategy, this is something that Apple I think has executed very well against. I remember all of the articles from 2012 to 2018 talking about how Apple was going to get their lunch eaten by Samsung and all of the Android high-end competitors and that Apple really needed to lower its pricing. Well, they refused. They came up with a very intelligent way of releasing the newest iPhone, and then they created basically lower offers through their older versions.So if I have the iPhone 11 just comes out, iPhone 10 then becomes my next barrier down at a lower price point to provide some protection. But they're still able to protect or create those premium prices. And this is an ideal strategy when you want to maximize revenues from the high end of the market. But the danger, again, as it pertains to all those articles, is that it potentially leaves room for low end disruptors.And then something like a neutral strategy, I think somebody like Microsoft has executed very well against. And that's when you want to take the focus off prices like you're in a mature market or a later stage of a product cycle. It's really good if you're in, for example, a slow growth market when you're competing against a prominent market leader or when neither of the other two options is available to you.
Holly Hester Reilly:Mm-hmm. Okay. So I am looking at the time and thinking we're probably coming up towards the end. Before we get there, I do want to go back and ask you a little bit about how you gained all this knowledge, because I usually do ask people to tell a bit about their story or their journey. So how did you first become so interested in pricing?
Dan Balcauski:Yeah, I mean, well, when I was five years old, I was really interested in the pricing of juice boxes. No, that's not correct.No, I've been in technology my entire career. I started off building software as an engineer. I eventually went into engineering management and product management. When I was an engineer, I thought the problems we were solving were interesting, but I was much more enamored with how are we actually creating value for customers and how is that turning into dollars? Why are people paying us for this? It was kind of a mystery to me. And this eventually led me to pursue my MBA. I was very lucky when I was there, I apparently found out later that only a few business schools actually have pricing courses. Now, I will caveat that by saying that some of this pricing foundation work, while it was helpful, also ran into some of the traps I was talking about earlier where it could be very theoretical and/or you may learn methods that don't apply in every domain. So I had my fair share of mistakes as I sort of tried to apply that in jobs down the line.But I got first kind of thrown into the official pricing role outside of the classroom during my MBA internship. I worked for a successful Silicon Valley startup as an intern. And problem on the CEO's desk when I showed up was they went to market selling apps through for major go-to-market partners. And one of those go-to-market partners decided to occupy the low cost position in their market. And so they had a mandate that all of their app partners have a freemium version of their offering. And so I spent that summer and among other projects I helped them with, but good focus to that summer was helping him determine, okay, well, we have to make this change for this one partner. Should we have a freemium offering for the rest of our partners?And the short answer is no. TLDR. I do not recommend freemium. That might be a whole other podcast, we could talk about that. But that was sort of my first step into the freemium world and pricing. And then when I went into the world of product management after grad school, it was one of these things where pricing was officially owned by product marketing. And we didn't talk about this, but I think it's generally the right place for pricing to live. I think product management can own it except for all of the realities of they're just slammed with so many other priorities that you really don't have the time and attention to give it the rigorous thought it needs. I think product marketing is the right partner, the right place in the organization. They understand the messaging and the value creation for customers, the competitive landscape, et cetera.But it was one of these things where oftentimes if there was a pricing issue, everyone else was sort of looking around being like, "I don't really know what to do about this. Could you help?" And so got experience doing that.Specifically, one of the first products I inherited when I first got into product management, it had many classified product issues, but one of it was there was significant legacy problems from a bad pricing and packaging decision. And so it really didn't fit with our go-to-market models. So I talked before about pricing really needs to align with your company strategy and your overall go-to-market strategy. And this was like hit a football with a baseball bat. It did not work well. And so one of my very first product management challenges in the real world, I had to plan, pitch, and execute a repricing and repackaging strategy for that same product. And so just one of the benefits of working at that company was it operated very much like a private equity firm in the fact that we were constantly acquiring other businesses at 10 to 50 million in revenue. So I got to see a lot of mistakes from early stage companies and sort of what not to do. So kind of built my understanding there and decided to go off of my own three years ago and been doing it ever since.
Holly Hester Reilly:Awesome. That sounds like a good learning ground with the acquisitions and the constant sort of companies coming in with new stories you get to absorb. So what do you recommend, if any of our listeners are interested in learning more, diving deeper into the world of pricing, where should they go?
Dan Balcauski:Yeah. Well, I'd be remiss if I didn't mention my blog. I blog pretty regularly at
. So happy to try and demystify the world of pricing and packaging for folks there. As I mentioned to folks, I will tell you all my mistakes so you can go off and make all new mistakes. Don't make the same mistakes I did. But if people are looking for books or other resources, I highly recommend if you get a chance, there's a book called Price to Scale by a guy named Ajit Ghuman. He's now a senior director of pricing and packaging at Twilio. We did a webinar back in July. He's really good and his book is very pragmatic. His background is a product marketing, and so he takes a very product marketing lens, which I think is very valuable.I think there's definitely a couple of different camps in the pricing world. Some folks are very, you open up the book and all of a sudden there's calculus on page three. From a theoretical level, his doesn't have any calculus. So very understanding your customers, understanding your segments, very pragmatic from that point of view. So I think your audience would really resonate with that. And then the other book I'd normally recommend to folks is a book called Monetizing Innovation. It's really good as well.
Holly Hester Reilly:Awesome. All right, great. And if people just want to follow you, aside from your blog, where else can they find you?
Dan Balcauski:Yeah, I'm happy to connect with folks on LinkedIn at Dan Balcauski. Just if you message me, just say you heard me on the podcast so I could separate it from the rest of the LinkedIn spam.
Holly Hester Reilly:Awesome. That sounds great. Well, thank you so much. It's been a pleasure, Dan.
Dan Balcauski:It's been so much fun. Hopefully it was valuable for your audience. Thank you for having me, Holly.
Holly Hester Reilly:Hey. Holly here. I hope you enjoyed listening to this week's episode as much as I enjoyed making it. I wanted to share with you that at H2R Product Science, we run lots of workshops and we'd love to have you join us. We teach the product science method, a step-by-step process for evaluating product opportunities and laying the foundations for high growth product development. We help product leaders and startup founders identify the right products and features to build and develop the support to do so. We do this at private workshops. We also do it at public workshops, both in person and online. If you'd like to learn more, check it out at
h2rproductscience.com/workshops
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