Ep 285: Scaling A SaaS Company With Corrective Pricing with Dan Balcauski

Jaryd Krause:

How do you actually know if what you're charging for in business is actually going to help you scale? Hi, I'm Jaryd Krause. I am the host of the Buying Online Businesses podcast, and today I'm speaking with Dan Balcauski. He was the founder and Chief Pricing Officer at Product Tranquility, based in Austin, Texas. He focuses on helping high-volume B2B SaaS CEOs find pricing and packaging for new products.

Over his career, he's worked in both B2C and B2B companies, ranging from startups to publicly traded entrepreneurial enterprises. Now, in this podcast episode, Dan and I talk about how we actually got into pricing SaaS products and the three main levers to scaling a SaaS business. We also discuss why pricing really doesn't get enough attention in the marketplace.

We also talk about how to know if you're overcharging or maybe undercharging for your products. And also, how to work out what the willingness-to-pay equation is for a customer. And he also shares some of the common pitfalls that people get wrong about pricing when they're trying to price their product. Now, there's so much value in this podcast episode.

This is not the only way that I can help you for free. Obviously, I help people acquire companies. If you're looking to buy a business and you don't have my due diligence framework, make sure you get it. It's free. You can download it at buyingonlinebusiness.com for just free resources. It's what I've used. It's what my clients have used to help us save millions of dollars and make millions of dollars through buying online businesses.

Let's dive into the pod.

Dan, thank you so much for coming on the pod. Welcome.

Dan Balcauski:

It's good to be here, Jaryd. Thank you for having me. I am excited for our conversation today. Jaryd Krause:

Yeah, me too. Now, how did you get into, I mean, from, I guess, going from school to now what you do as a career of helping people price SaaS products?

Dan Balcauski:

Yeah, well, I think if there's one thing that's definitely become clear over my career, it's that nobody knows what the future will hold. And I feel that the rate of change is accelerating ever more for folks who are in school today to try to figure out what they're going to do. So I can't say that I had some obsession with the price of juice boxes when I was five years old and just knew I was going to get into the world of pricing.

I've been in software my entire, basically 20-year career at this point. It started out more on the value creation side and value capture side versus an engineer than engineering management. Ultimately, I became much more fascinated by how our products created customer value and turned into dollars for the business.

Getting an engineering job was just like, Oh yeah, we build these features, and then people pay us for them. And no one could really answer the question, like, yeah, but why? I mean, they could also build the software or the thing and just do it themselves. How does this make sense? And ultimately, the interest led me to pursue an MBA, and I didn't realize it.

Then I was quite lucky with the school I chose. It was known for excellence in marketing, but I didn't find out until very recently that very few programs in the U.S. graduate business degrees—I may have an international audience, so I don't know how widespread the terminology is—but very few of those programs have classes in pricing. And I received my theoretical grounding there.

And then I got thrown into the practical side of that right away. During our two-year MBA program, we had to have an internship. So I did an internship for a very successful startup out in Silicon Valley. And the question on the CEO's desk was about a B2C application developer. They were like, Hey, we're looking at doing a freemium offering and we're trying to figure out if that's a good idea.

Can you look at that? So among a couple of different projects that I had for them that summer, that's one thing I spent a lot of time looking at. TLDR, we might get into it later if you're interested, but I hate freemium. I do not recommend it. It was my recommendation to them after looking intensely at the question.

So that was kind of my first foray into the world of pricing. And post-business school, I spent a good amount of time in product management and product strategy roles. So intensely focused on how we create more customer value, but not necessarily the monetizing side of it, because that was technically owned by product marketing. But I got pulled into those conversations because the product marketing folks were like, well, I don't know how to figure this out either.

So we made a lot of mistakes along the way, and we may touch on this, but pricing across domains is quite different. And so some of the rules I learned for orange juice in the grocery store didn't necessarily translate to pricing business-to-business software.

But now I went off on my own about five years ago, and now I have the privilege of helping CEOs and their executives build more profitable companies and get their products into the hands of as many customers as they can. So, I'm very privileged to have made that transition. So I guess probably a lot of luck and chance in that story is probably the short answer to it.

Jaryd Krause:

Yeah, I think that most of our stories in terms of entrepreneurs and even in life, you know, have a luck component to it.

I'm a big believer in luck as an acronym: location, understanding, connections, and knowledge. And if you have those four, you know, in the right place, you understand the opportunity, you have the connections, and you have the knowledge to execute, then, you know, luck can play into your favor with the skills that you have acquired and the place that you put yourself in.

So, and there's, I know people that have just, you know, and I've had things in my life, investments in my life where I've just been like, damn, that was actually like, I thought it was going to be good, but I didn't think it was going to be this good, you know, in the opposite way as well. It's not always roses.

Dan Balcauski:

Definitely not all roses. And yeah, we would be painting a false picture if we said otherwise. Those are for the course creators. We'll leave it just like everyone's going to be millionaires overnight.

Jaryd Krause:

That's me. I'm the course creator. But I like to be pretty realistic with what I say. And I think that's where I get a good reputation to trust in the marketplace.

Dan Balcauski:

I meant all the other ones.

Jaryd Krause:

Thanks, Dan. No, I do agree. There are so many people who are just selling products and dreams. And it is a shame. And I also came across a pricing thing when I first started in my business, like, How much do I price my course? How much do I price this product?

And eventually, over time, it changed based on my understanding of value—the value that somebody's going to get and what they would be willing to pay. But first, I want to ask: does pricing get enough attention when it comes to these sorts of products?

Dan Balcauski:

Absolutely not. I think the stats that I've seen are, you know, so in the U.S. Fortune 500 and S&P 500 companies are the largest corporations out there. And I think less than 50% of them have an official pricing function in their organizations. And we're talking about the most advanced organizations in the world for the most part.

And the story doesn't necessarily improve as you get smaller and smaller. So I had a conversation once with, at the time, a prospect who eventually became a client, but it was a CEO, a Silicon Valley unicorn, you know, minted with, you know, this crazy valuation. And we're talking about doing a pricing project together. And it just so happened that during the time that we were talking, he had to take a break for three days from our conversation to go run a three-day executive off-site.

So the CEO of a company got all of his executives in the room for three days; we're talking about strategy and metrics and yada, yada. Come back the next week, and I go, Hey, how'd the off-site go? Oh, it was great. It was amazing. We got all these things sorted. Great. How did your conversations over those three days affect our project and this pricing initiative? Oh, we didn't talk about pricing.

You had the most expensive meeting in your company, all your senior team in a room for three days just hashing out all the problems in the organization and trying to figure out what your plan is. And you didn't discuss one of the only three growth levers your company has. Now, that's not the case.

He did talk about pricing. He just didn't realize he was talking about pricing. I'm sure they talked about win rates, annual contract value, churn and retention rates, net revenue retention rates and the length of sales cycles. And those are all metrics that pricing affects, but he didn't really sort of understand that. And I think it's all to, you know, not to single that person out at all, because it tends to be something that's very common.

And, you know, I think there are really only three ways to grow a SaaS business: acquisition, monetization, and retention. And acquisition just gets all; it sucks all the oxygen out of the room for the most part. This is like, how do we get more leads? If I get more leads, we can sell more, and we can grow.

And yeah, look, absolutely. Acquisition is certainly part of the mix. I'm not saying to ignore it. But if you're going to just totally ignore these other two things, it just doesn't make any sense for retention and monetization.

They're huge opportunities, huge levers. So I think it spans industries and spans companies of all sizes. And I have rationale and theories as to why that is. But yeah, just generally, the answer is no. This does not give them attention.

Jaryd Krause:

Yeah. So they're the three levers that you mentioned before: acquisition, monetization, and retention. Now, when it comes to pricing, that plays a part in all of those levers, right? Acquisition and having the right price can be objections as well. But is it more prevalent in monetization and retention?

Dan Balcauski:

Yeah, it's a good question. And there's a little bit of potential clarification there. So when I'm saying acquisition in that sense, absolutely. Like your price can affect your retention rates, it can affect your closed wins, your win rates, et cetera. So yeah, it's involved in retention.

But if we go to Business Economics 101, the revenue I generate is equal to price times quantity. So when I say acquisition in that little snippet of acquisition, monetization, and retention, it's like, well, everyone's just focused on the quantity. How do I just get more people in the door and sell them more copies of the thing versus the P, which just goes ignored? Like, okay, well, the P is just what it is.

It's like, really? Was that just handed down on a stone tablet to you? The P is the price, right? P being price, yeah. P times Q is price times quantity, right? Being equal to your revenue. Now, quantity is also affected by whether those customers stick around and subscriptions have reminded a lot of businesses that, yeah, that's really important because the ultimate lifetime value of the customer requires that they stick around and pay you sort of year after year, right?

So that quantity quickly swamps the revenue from those existing customers, quickly swamping any new business that you can bring in. And so that becomes a really important lever for continuing growth because, yeah, if you can acquire them but they don't stick around, you've got a seriously leaky bucket, and that's not a viable long-term business. It's definitely in the software world.

Jaryd Krause:

Yeah, absolutely. Yeah, retention is so critical. I want to kind of circle back to retention, but the big question that I have on my mind here is: how can you sort of know or determine if your pricing of your product needs to be changed, optimized, or fixed? I know that's a big question, right?

There's a lot of data that you're probably going to have to look at, analyze and come to an educated conclusion. So I guess we open up that can of worms. How do you know if your price is not going to help you grow?

Dan Balcauski:

Yeah. So there's no sort of magic number for this question. So I think I would probably be looking... I'd be looking at a few things, right?

So one is, you know, especially, again, for your listeners, you know, I focus almost entirely on business-to-business software, B2B SaaS. And so, you know, a lot of the lenses and the type of metrics I talk about are going to be specific to that type of audience. And so, you know, one of the big things in the subscription world is this idea of net revenue retention.

So, you know, I've got my gross retention. So I brought on 100 customers at the beginning of the month and at the end of the month. 90 of them have stuck around. So I have a 90% gross retention rate. But during the course of that month, some of them may have expanded their usage. If I have a seat-based model, for example, like CRM or Salesforce, some of them may have added sales headcount.

And so they bought more seats. Some of them may have reduced their sales headcount. So they've reduced seats. So there's going to be expansion and contraction. So in terms of the number one sort of metric I want to be looking at, which is like the net revenue retention metric to understand, is my pricing really sort of aiding me in my growth?

Beyond that, the questions, or the things I might look at, are really going to differ from stage to stage. So in general, if you're really early on, I like this mindset or concept that you have to learn before you earn. It's not necessarily the most important to maximize your pricing to generate the most revenue or profit possible. You want to be sort of looking at the long term.

And I found earlier-stage companies really have a lot of big question marks around: are they delivering value? Is the product actually there? Do they have a distribution engine that they can repeat? Can they find customers?

And look, pricing is going to be part of all those conversations in terms of how it's going to come up at least once during a deal because you have to send somebody an invoice or have them swipe their credit card. But it just has to be sort of not terrible; if you're at a little bit later stage of the company, you've got more product maturity. There's many more levers within the pricing and packaging world that become much more important. So I want to look at that net revenue retention.

And then I want to say, Look, is this helping us meet our goals? Has our value proposition changed? You've mentioned very clearly earlier that you got a better sense of the value that was delivered. You get a better sense of your market and their willingness to pay.

Do you feel like you've got something that's really valuable compared to what you're charging? And you might get that back from metrics you might look at, like if you're not seeing any deals lost because the price was too high. That's a strong signal. We should be seeing in our CRM that we're losing some deals to price. If that percentage is zero, you've got some headroom. Is that information coming through other avenues?

If you're running win/loss analysis or you're running churn studies, is price getting brought up as something? it's going to be a balance, right? Is it getting brought up enough where you're like, Okay, yeah, that feels like it's in the right place? There's very few sort of absolute rules of thumb. I'd like to see about a third of deals getting lost to price, right?

So if it's higher than that, maybe too high; below that, too low. But for those earlier-stage companies, it usually has to be at a point where it's not so confusing, especially with software. Because I think one thing that's odd is a blessing and a curse in the software space. It's very easy in the software space to create a three-armed sweater. If you went into the clothing store, you went into H&M or whatever, and you saw someone trying to sell you a three-armed shirt, you'd be like, What was this person doing?

Fashion gets weird. Don't get me wrong. But you have to really go out on a limb. In software, it's infinitely flexible. So you just have to not be paying attention. All of a sudden, you've got something really unwieldy. With software, a lot of times it's like, Look, does the whole way you've constructed the offer or the set of offers even make sense? You could find it really confusing and difficult to explain. And it has really nothing to do with the number next to the dollar sign.

It has everything to do with how you try to say, like, okay, you pay this much if it's the second Tuesday of the month and the... the moon is aligned with Sagittarius, right? You're like, your salespeople have to go on this long description. All of a sudden, the salesperson or the prospect is like, I have no idea what you're talking about, right? This is just confusing.

Every other confused customer doesn't understand what I did Where I spent a large amount of time in the software world, it was helping people with the elements of packaging. Because when it comes to SaaS pricing, I think that is a big misconception. Most people think that what you charge determines your success. In fact, who and how you charge determines your success. Jaryd Krause:

Who, not what you charge, but who and how you charge. So I like that lens because you're not thinking about just the business making money or the product first. You're thinking about your audience and who you're selling to and serving. Does that make sense?

Dan Balcauski:

Absolutely. Yeah. I mean, that's one of the major levers. Pricing has two foundational relationships. It's got a relationship to volume. Anyone who sat through Econ 101, either in high school or, you know, undergrad, understands you saw a supply-demand curve at some point.

They're like, okay, like, you know, price changes with volume sold. Okay, I get that. But much more important for the software world is price's relationship to value. And so that value is going to be different depending on the customer and their situation with them. And so, and can you, and just in general, tech companies do a really crap job at communicating value.

We tend to spit all of the feature specifications at people, and people are like, okay, I don't know what any of that means, and I feel dumb for not knowing what it means, so I guess I'm going to go away. You don't want that to be the case, right? So the relationship to value and understanding that value are incredibly important.

Jaryd Krause:

So that's value-based pricing, as you would call it, right? So how do we work out the value, you know, of, you know, yeah? I mean, there are, you know, people who are just going to go. Yeah, this is how much I'm willing to pay.

Is that one of the metrics of, like, like you said, there's, I guess more of those metrics might be, you know, a third of those people saying no to the product or purchasing it where there's two-thirds would say yes? Like, is that one of the, you know, how, how do we, how do we determine, you know, value?

Dan Balcauski:

Yeah. There's so much that we could unwrap in this simple-sounding question. So let me, let me maybe back up a little bit, and kind of just set the context for what we mean by value-based pricing, what I mean, at least by value-based pricing, because I think it's one of these things that is not coherently defined across the, even the pricing expert space.

So God forbid you're a non-pricing expert and try to go into this world. The way I think about value-based pricing, I call it a pricing orientation. And there's really kind of three pricing orientations. There's cost-based pricing, competitor-based pricing, and value-based pricing. And I say them in that order because I really view them as sort of a ladder or pyramid. You don't get to advance; you kind of get to go to the next stage until you sort of understand the rung before you.

So why is it? Why is it orientation? And orientation really helps us think concretely about how pricing is done around here? What are the inputs that we take into account when we're thinking about our pricing? And so I think the default that everyone goes to, especially if you're selling physical goods, is, Hey, I made a widget. It cost me a dollar to produce and I'm going to sell it to people for $2.

And it's like, there's some relationship. It's like, if you're trying to sell that widget for 50 cents, you're not going to be in business very long. So we all kind of get that at a base level and be like, okay, businesses need to make a profit because they've got to fund all their operations.

And then they have some left over for the risk that they took, et cetera. So there's some relationship to cost. And so you've got to sort of understand your cost. That only really sets the floor. And also, it doesn't really—like, your customers don't care about your costs. Like, your costs are your costs.

Like, that's your problem. The customer has a problem. They don't care about your problem. Very few people in the world, maybe your mother, care about your problems, but besides that, nobody else cares. The costs are your problem. And so then we need to think about, okay, well, we're in a market, so therefore there's competition.

Customers—maybe they're not fully omniscient. They don't know everything, but they're not stupid. They're in a grocery store and they see they're at the... buying laundry, detergent, whatever, and they see that there's options. So you have to know and be aware of what you're being compared against, right? And so this is like where we start to take the market perspective of, oh, what are the other ways that customers could get this job done?

And sometimes it's direct competitors; sometimes they're indirect. In the world of B2B software, a lot of B2B SaaS tools replace email and spreadsheets. And Johnny the intern—it's like, Hey, Johnny the intern, sometimes he gets sick. Sometimes Johnny, the intern, puts the Google sheet on the internet and exposes all your customer data. But maybe that's what you're being compared to.

You have to know it's not just this other B2B SaaS company down the street. There's a human process that you're displacing. But I think that's where I think a lot of folks kind of stop there because the competitor-based, it's very easy to be like, well, I'll just charge whatever the competition is charging. And that, I think, puts you in a very dangerous game.

So I think for two reasons. One, I would say going back to what I was talking about before, where there's only really three ways to grow your SaaS business, you would not think about, Hey, I'm going to give my closest competitors control over my customer acquisition strategy.

I'm just going to let them run my Google strategy. Keyword bidding process and I'm going to let them run my SEO and my social media. Wow. But yet, when it comes to pricing, it'd be like, Oh yeah, well, they must have figured it out. We're going to get it; we're going to, and we're just going to follow what they did. It's like, you would never think about that for your acquisition. But you know, when we just look at competitors or just copy them, it's effectively what we're doing.

And if you know that you've been around business long enough, you probably know that your competitor doesn't know what you're doing. That's why you're in business. You think you could do it better than them. So why are you following why Why are you following their lead?

Also, there's a giant risk inherent in that. Because every pricing and packaging decision is a trade-off. And that trade-off is meant to achieve some objective at the expense of another, at something else, right? It's like, we can't be everything to everyone. We need to choose. And so what you're doing when you adopt that and be like, Oh, well, they have these three bundles. This is what they charge. This is what's included in each one.

So we're just going to copy that. Well, like, they have certain capabilities, certain assets, certain IP, and certain people. Certain costs that might actually be different. Certain costs, right? Yeah, they're different from yours, right? So you're just going to inherit all that without understanding what's behind the scenes, right? Correct. So we need to have that, and at least then we're a little bit.

It's not just something you can kind of do in your pricing organization and then just, hey, the pricing people went into a room and calculated this, how much value, and then it's like, here you go, sales guy, like, sell this because this is our value. We all know what happens when the buyer's like, Yeah, that's interesting that you say you can make me that much money.

Like, prove it, show me. And then they'll be like, No, I don't know how to do that. Would you like a discount? So it really needs to be supported throughout the whole organization to be successful. And just like many folks, companies are not that mature yet in their journey.

So I think it's a sort of aspiration. It's a North Star to be, you know, to guide us, never to be reached. But I think, you know, it's important, even at the earlier stages, to at least have those types of conversations with your customers where you really understand how you're helping them improve their business.

Jaryd Krause:

Yeah, absolutely. When you say that and talk about the difference, the lines can be a little bit blurred between pricing for B2C versus B2B. B2C, it seems like it's more about how it makes you feel; it can also be about how it makes you feel, which can also be like a placebo effect.

I know that with other products, B2C's value versus B2B seems like an analytical comparison, but what's the ROI that I'm going to get if I switch over to this product? Would you say there's some holes in what I've just said there?

Dan Balcauski:

No, I think that's well put. So one of the big frameworks, so there's a couple of, I stand on the shoulders of giants. Let me say that there's a couple of frameworks that I did not come up with but that I use regularly. And one of them is what's called jobs to be done. And it has many fathers.

Tony Olwick is one who's particularly prolific in this space. He's got a great book called What Customers Want. I highly recommend it, but it goes all the way back. There's a Clay Christensen who has now passed on. It was a pretty famous marketing professor at Harvard Business School, Ted Levitt, who was also a famous professor at Harvard Business School back in the 1960s.

Ted Levitt has the quote attributed to him that says, I think it's like, customers don't want a quarter-inch drill, they want a quarter-inch hole. So this is a lot of understanding customers' jobs to be done. They're trying to achieve some outcome. And so they're very problem-focused.

And we try to come there with our solution and say, Hey, is it looking at our solution without really understanding, like, what is the outcome the customer's trying to get? And so jobs to be done put this in really stark relief and what you are implying is that there is a framework for the tasks to be completed. There are three different types of customer jobs. So let's briefly break down functional jobs, emotional jobs, and social jobs.

So a functional job has a functional outcome, usually increasing revenue, decreasing cost, decreasing risk, and increasing optionality. Emotional jobs have some sort of emotional benefit for the end user. So increase status, reanxiety, andiety, and have better knowledge, right? So the idea of being more confident and being able to achieve something is something, right?

And then the social jobs, if we are in a particular relevant position, if you're in government or an NGO or nonprofit where, you know, we are as humans, not only for ourselves, but we're very pro-social in our behaviors. And so there's also things like increasing access to healthcare or citizenship, voting rights or, you know, whatever it might be, that are for a broader sort of social good, right? And those are all different ways to measure value.

I think what you're pointing out, which I believe is true, is that in B2B markets, functional jobs dominate. Now there's still emotional work and I think this is a big unlock for marketers who really understand this, where emotional jobs are important, especially if you're in a sales context for B2B.

There's an old cliche in the US that says no one ever got fired for buying IBM. Well, that's important. If you're on the buying committee for a major piece of hardware or software for your business, there's real social risk and status risk to putting your name and saying, This is the product that this commend we go with.

Right. You're not necessarily writing the check. Like, you know, what the price is, you know, one way or the other, like the company's writing that check. But at the end of the day, if that product doesn't work, everybody looks at you and says, Hey, Jared, like, what happened during the evaluation process?

The product stinks, you know, and you might get it, you might lose a promotion, and you might lose your job, right? And so those emotional jobs are important. But I think we can contrast that with the last time you ever saw a perfume ad. It's usually some beautiful woman or beautiful man dancing in a very luxurious environment. There's no; maybe somebody says some words in French that you don't necessarily know what they said.

It's very ambiguous. And at the end, you know, it says Dior or, you know, Dolce and Gabbana or whatever, the new scent. And you're like, What does that smell like? I have no idea. I have no idea what that thing is, but you know, they were, it was, it was all a very emotional advertisement. Right. And you know, if you're, if you're at all a sports fan in the U.S., you have to sit through television commercials.

All the insurance companies here are, I guess, the only television advertisers left. they all try to be really funny. They just have really funny ads, and they don't talk at all about what their policies are or the prices or, you know, because, to a certain extent, it doesn't matter.

It's all insurance. I mean, I'm sure there's some insurance. Please, insurance people, don't write me any letters if you hear this. But, you know, the functional benefits are all pretty much the same. So they try to make this emotional connection. Coca-Cola tells you that a Coke equals happiness. Have a Coke and a smile, right? It's family cheer. So you're right. But I think that there is an opportunity for marketers to not forget about the emotional outcomes that people care about in the B2B market.

Jaryd Krause:

Okay, cool. That's good to hear. That's really good to hear. So I guess when people sit down, you allude to this before, where this expensive meeting happened for a client of yours and they didn't talk about pricing or he perceived he didn't talk about pricing.

What are some of the things where people just completely butcher the process of getting pricing right? What are some of the things they just do completely wrong when they're thinking about setting a price?

Dan Balcauski:

Yeah. So I think a couple of things come to mind. So one is that I would go back to what I said earlier, which is that there's all this focus on the number and the price level rather than really focusing on how you're charging. So in the world of SaaS pricing, that would be like the pricing meta.

There are four elements to what I call SaaS packaging: pricing metrics, pricing model, offer configurations, and price fences or price structure. So really, having the conversation focused on the charge aspect versus the number.

And then, look, at the end of the day, we've got to put a number on something. But if I were giving advice to folks, I would spend the vast majority of my time on what the price tag goes on and very little time on what number goes on the price tag. Right. The other thing I think that folks get wrong or maybe just avoid, is that there's a meme out there that you can't talk to customers about pricing.

And I just think that's flat-out wrong. In fact, as a business owner, you don't have a choice about whether you will talk to your customers about pricing. You only have a choice about when. So the question is, is this the first time you talk to your customer about pricing when the poor sales guy is having to quote a price to a customer after the product is launched?

Is that really what you want to be? Because the price is going to come up. And so there's this idea that, like, oh, until it's launched, until sales is talking to people, we can't get any insight into our pricing from customers. And it's just absolutely not true. Look, there are absolutely better and worse ways to go about that conversation.

But I think you end up in it's interesting because I think you end up in a couple of different camps. So let me know if there's any folks who have ever been in like a design space, right? Like, so you're designing a webpage, for example. I know a bunch of user experience researchers and designers who would just laugh me out of the room if I said, Look, I can't show a customer a static view of a webpage or a static view of a web app and get any useful feedback.

Because it's not a live system. And so they're just not going to know what to do with it. It's like, no, that's absolutely not true. Right now, I bet you there's simultaneously 10,000 user experience testing sessions going on around the world where folks are doing exactly that and they're getting feedback.

I think the other thing that happens is just sort of this disbelief that you can't do it. And I think the thing that happens is that people sort of don't necessarily think that they can get; I can't get like a hundred percent accurate to the, you know, scent pricing information. So therefore, I'm not going to get any data and I'm just going to go with what I have in my gut.

So I think the people I feel like they go from this extreme of, well, if I can't get laser-guided absolute precision, like, It's worth whatever I just dreamt up in the shower this morning. I'm sure that there's a sweet spot between those extremes. Absolutely, willingness to pay and understanding that number.

Willingness to pay ultimately is an outcome, and it's an outcome based upon your desire for the product, and that's going to be subjective. Are you in the buying process right now? Is your need acute? If you're going to buy a bottle of water when you go to the gas station next time, how much are you going to pay for that? $2.

But if you've been walking through the desert for a week, your willingness to pay is going to be significantly different than if I show you a one-slide product concept and say, We have a properly formatted set of willingness to pay questions.

I don't just say, What would you pay for this? Which is a terrible way to go. I highly recommend you never ask the question that way. That's going to be different than... One dollar for everything. Yeah, one dollar. I'll pay one dollar. That's going to be very different from a 30-minute call with a salesperson who's running them through a demo and trying to understand the specific needs of the customer.

And that's going to be very different than a seven- or 14-day trial where they've got the software in their environment; they've got it loaded. They're going to have a different perception of value, right? And look, there's ways to think about how we get pricing information from all those contexts. Right. And so I think it's a bit of that.

I think that's probably one of the biggest fallacies: it's impossible to get absolutely precise data. So we're not going to get any data at all. I think people can get a lot more precise data than they even think they can get, which is probably one of them.

Jaryd Krause:

And how, how, how, how would they go about that? I guess, because I mean, it would be, I would, it would be a great, you know, it'd be nice to just, it will, it's not the best way to go. It's like, like you said before, you have a sales call or a conversation with somebody. It's like, this is what this can do for your business. It'll probably save you this amount.

How much would it be worth to you? And they say, you know, $20 a month when the product costs you $100 a month, whatever it is, or $300 a month more. So how do they get this data that can actually set them up for success?

Dan Balcauski:

Well, that's useful feedback. I don't want to let that slide because that's useful feedback. If you talk to people... And they tell you that I would pay X and your costs are Y and X is much, much less than Y. Like you don't have a viable business. Go stop what you're working on right now.

Well, it's an interesting point. There's a whole domain that folks probably don't even realize exists. It's called value engineering, which is the fancy term for it. It really starts with the premise that we will only build what customers tell us they're willing to pay for. And there's a whole set of science and art behind it.

But it puts the customer and what they are willing to pay for at the front of the development process, which is, I got to say, a much better approach than what I tend to see a lot of software companies do, which is that customers told us they wanted this thing. We never talked to them about price. So we went and spent millions of dollars developing it.

And then they called me and said, Hey, Dan, we're supposed to launch this thing in two months. Pretty much, we're in beta. It's pretty much already built. We're trying to figure out how to price it. I go; no one has had that conversation yet. Like, you guys just invested millions of dollars in this thing. What if they come back now and say, I will pay you $2?. And you're like, we spent millions of dollars on it.

We thought they were going to pay a thousand. It's like, you could have had that conversation with a couple of mock-ups. Like, nine months ago and saved yourself nine months of development time and millions of dollars. And this is the reason that 90% of startups fail. So I was only pulling your chain there, but I run into that situation more often than you think It's like, man, if you ask someone those questions and they tell you way less than you were expecting, that is incredibly useful information.

If you ask it at the right time and have... the course of action that you can then figure out, like, okay, does that mean, A, this is the wrong customer? B, maybe our methodology is wrong and we just didn't describe the product correctly, right? Because, I mean, look, companies have that a lot. We're like, Hey, messaging is wrong and people don't get it. If I just sit here and be like, confuse you, and then I ask you how much you're going to pay for something you don't understand—tand, that'dthat'd be very real. Yeah, that's not valid data. Right. So, there's an art to this, but you know, or maybe it says, Hey, if we want to actually go forward with this product, it's got to be significantly cheaper.

And I think actually one of the best examples of this—give every—a relatable example is what Elon Musk did with Tesla. So, you know, when he came out with the original Tesla Roadster, he identified a market that really cared and was willing to pay for the characteristics that an all-electric vehicle could offer, which was the Tesla Roadster.

He thought that for $250,000 or, you know, it's up there at range, he could beat off the line all of his friends that had Lamborghinis and Ferraris, right? He didn't care about the nationwide cthe Can I fit? it to the grocery store and fit my groceries in there? And, you know, like, all these other, oh, is there a dealership near me that I can go kind of poke around? And Elon was also smart and said, Look, manufacturing cars at volume and scale is really hard.

And it takes a lot of time to build up that competency to mass-produce vehicles. It's one of the most complicated—for sure, the most complicated—consumer items. But even in the B2B world, it's like, I don't know, there's like 200 microchips in there. you know, all this is like technology, especially when you're talking about EVs, which are, you know, unproven. And so, and then, you know, at a fairly high price point, low volume, and then eventually came out with something like the Tesla Model S, right?

Still a premium luxury vehicle, not, you know, not ultra luxury, like a Ferrari Lamborghini, but still at a, you know, starting base price, like 80,000 US, right? And with options that can go above six figures, a little bit higher volume. But again, like, expanding a little bit more of the market and then finally getting to something like the Tesla Model 3. And so he really knew ahead of time, like, how can I price in line with what the expectations are going to be, my costs to support and deliver that, and then use that going forward?

I think we can take the shortcut in the software world, which is that our original cost to sell is so low to support. It's like, oh, there's a database call and some compute on AWS and so we get to kind of skip a lot of those. But when you're selling cars, you really have to know how you're going to produce them, what your costs are, and how that's going to change over time.

So keeping that in mind, I think that's a really good example of understanding your price positioning strategically and using it to really drive and be part of your strategy upfront, like how you're going to go and build a business over time.

Jaryd Krause:

Absolutely. I believe what I say to people that... I typically tell people to acquire businesses, but if they have something they're super passionate about and there's a product or service that doesn't yet exist based on a need for something that a market really needs, don't just create the product and then hope to sell it.

First, get the audience to create the product together based on what their wants, needs, fears, frustrations, and desires are. and then you can reverse engineer it and build exactly what they want when you have that audience in front of you and then you sell it to them. It's a smarter option.

Dan Balcauski:

And I don't want to leave your listeners hanging because I know in there you asked me a question about, like, how do you get a sort of willingness to pay data? And so there's, um, there's a bunch of different techniques. Um, let me give you just a quick lightning round.

So one of them is you. You can just talk to your customers, right? And so you have a conversation around the value you're creating, how this product is involved in their business, what that means to them in terms of how much it would improve, talking to them about other alternatives they've tried or currently have in place, getting insight there, and then talking to them about willingness to pay questions.

In terms of whether I was in a qualitative conversation, meaning I was in a direct conversation with a customer, one of the common techniques that we'll use is what's called the Van Wessendorp. It's named after a Dutch economist who came up with it in the 60s or 70s. But there are basically four questions that you ask. At what price would this product be so cheap that you would question the quality and wouldn't buy it?

At what price would you consider this product to be a bargain and would you ? At what price would you consider this product to be getting expensive but would you buy it? At what price would this product be prohibitively expensive and you wouldn't buy it? You could use that in interviews or you could use it in a more quantitative survey that you can send out to customers or people who meet the profile of your customer.

And then there's what we call a direct questioning method because I'm actually directly asking about price. There's a whole other class of research methods around pricing that are broadly talked about as indirect methods. So if anyone's ever heard the term discrete choice or conjoint, those are in that category where I am looking at trading off sets of features together with price.

So imagine I'm going and shopping for a new laptop and there's certain features like the screen size, the display of the screen, the amount of memory, the CPU speed and the brand, right? And each of those, I'm given a set of choices that each have a price point and I say, hey, for each combination, which of these different products would you choose? Usually none are; I wouldn't choose any of them as an option.

And you run customers or market participants through that and you can get a very good sense of the type of capabilities they're willing to pay for and how much they value those individual capabilities. So that type of research can be really valuable, especially if you're in B2B. You don't see it as much in B2B because just some of the limitations of the methodology make it a little bit difficult because B2B products tend to ramp up the complexity in significant amounts.

Just for pragmatic reasons, it's useless. But if you're in B2C, you're selling smartphones, laptops, digital cameras, and TVs; those are used an incredible amount in there. Or even some of the simpler, I'm sure Netflix, etc., B2C-type subscriptions use those methodologies more—a lot, right? And so they're thinking about, "Hey, we're, we're thinking about, you know, uh, releasing a new smartphone with, you know, I don't know. It seems like the smartphone makers are going the same direction as the razor blade manufacturers—the razor blade manufacturers are like, let's add more blades. Right?"

The smartphone makers are like, "Yeah. So like the next iPhone, I'll have 20 cameras or if we've got 20 cameras on there, how would it, you know, how our market share change?" And so you could run very advanced analytic simulations, uh, with that type of data as well. So, um, hopefully that's useful, uh, for your audience. Um, so there are structured ways to go about those types of questions to, you know, remove as much bias as you can, uh, you know, as you're trying to get that pricing insight.

Jaryd Krause:

Absolutely! All under the umbrella of having a good conversation with the market and your customers, and talking to your customers. Yeah, a raw, honest conversation. Um, they're going to give you direct feedback. If anything, like I like to tell people that I didn't actually grow my business; uh, the market did and my customers did because they told me what I wanted.

What they wanted, I just gave it to them for the price they're willing to pay. And I can't take all the credit for it because it's just asking the right questions at the right time to the right people. So, Dan, this has been a great conversation. Thank you so much for coming on. Where can we send people to find out more about what you do?

Dan Balcauski:

Yeah, I'm happy to connect with folks on LinkedIn, Dan Balcauski

. So if you send me a note, just attach a message and let me know what you heard on the podcast so I can separate it from all the other LinkedIn spam. Also, I try to blog pretty regularly on my website, ProductTranquility.com.

And also, I have my own podcast and I'm in the midst of recording season two of SaaS Scaling Secrets. So I interview CEOs of scale-up B2B SaaS companies. So you can also check me out there, wherever the podcasts are found. And so season two should be coming. Well, yeah, I'll let the release date be undefined at this point.

Jaryd Krause:

Don't put too much pressure on yourself, Dan. But yeah, awesome, guys. I'll put those links in the show notes, Dan.

Again, thank you so much for coming on. I really appreciate your time.

Dan Balcauski:

Yeah, thanks for having me, Jaryd. I really enjoyed it.