Will Your Pricing Scale as Fast as Your Company Needs It To with Dan Balcauski

Welcome to the B2B Growth Blueprint podcast, where we talk with entrepreneurs, founders, and leaders at B2B services, tech, and SaaS companies to learn the systems and processes they've used to create success for their business. We'll also learn from marketing and sales experts to provide insights to help you grow your business. I'm your host, Mark Osborne, and the podcast is brought to you by Modern Revenue strategies and their 10x ROI B2B growth guarantee. Schedule a free diagnostic call to learn the fastest path to double your B2B revenues in just 90 days. Hello and welcome to another episode of the B2B Growth Blueprint podcast. I'm your host, Mark Osborne, and today I'm very excited to welcome my guest, Dan Belkowski, Now, Dan is the founder and chief pricing officer at Product Tranquility. They're based in Austin, Texas, and he focuses on helping high-volume B2B SaaS CEOs define pricing and packaging for new products. So, Dan, welcome to the show.

Thanks for having me, Mark. Good to be here.

So, you have such a really interesting area of expertise because, you know, pricing and packaging is one of those really core fundamental Things that is you know key to success, especially as companies really start to gain traction in the marketplace. But so often overlooked. But I'm sure you didn't sort of you know spring out of the womb with all this expertise. So why don't you tell us a little bit about sort of your journey of how you got to where you are today with product tranquility and and what that path looked like?

Oh, au contraire, as a toddler, very. Concerned with the price of the juice boxes in the grocery aisle. Now, I've been 20 years in the software space, started as an engineer, moved into engineering management, product management. Early on, noticed that a lot of tech companies, including those I worked for, obsessed over building products and acquiring customers, but really neglected how they captured value. And this insight crystallized during an MBA internship at a successful Silicon Valley startup where I got asked to look at a freemium project that was on the CEO's desk. And among several things I did that summer, uh, through my research, I uncovered that popular pricing model only works in very specific and surprisingly rare circumstances. And today I help B2B SaaS CEOs transform pricing from a confusing liability into a strategic advantage, whether it's helping clients uncover millions in revenue through revenue leakage or helping them establish a pricing process that becomes their standard approach for future SaaS products and pricing.

Awesome. So much stuff to dive into there. And but I think it's valuable for our audience that maybe has never really thought about pricing other than, well, I sort of price to what the market will bear based on my knowledge of the space or a price to cover my costs based on sort of time and materials. Or maybe they've even sort of heard of the concept of I price based on the value that I'm delivering. But give our audience a little bit of a primer of the way sort of the most successful organizations think about pricing specifically within the way that they package and price and deliver their products and then make money.

Yeah. Well, I think the first big misconception when it comes to pricing Many executives think that what you charge determines your success. In fact, who and how you charge determines your success. So, I know in that arc of your question that you just told—

Yeah.

It's like, hey, we should price to what the market will bear. That makes pricing very one-dimensional, where we know from our day-to-day lives, we see countless examples where highly disruptive firms Completely changed what they're pricing on. So, I might be dating ourselves, but if we go back to the days of Blockbuster, you rent a movie, you get 3, you know, 2, 3 nights or 2, 3 days, uh, plus the late fees. Well, Netflix comes along, they say, hey, you could get 3 movies at a time, keep them for as long as you want. When you're done with those, send them back to us, we'll send you 3 more. So, they completely changed the way that they were monetizing that had nothing to do necessarily with the price point, but in how customers receive value. Because my enjoyment of that movie didn't change based upon how many days it was sitting on my, on my shelf. In fact, that could be a negative consequence because now we've got this ticking clock. And then, you know, I'm sure there's somebody who's still got an old Blockbuster VHS set sitting on their shelf because they're afraid to go back and get charged all the late fees that they owed them.

That's right.

So, that's really where the folks who really understand pricing well, which we spend a lot of our time on, is trying to figure out what are the ways that we charge it and who you charge. We all know that the value of a product changes depending upon our particular context.

Yeah.

Take the number one commodity ever, water. If you're on a road trip, You stop at a gas station, you want a bottle of water, maybe you pay $2, $3, no problem. That same bottle of water, if you'd been wandering through the Mojave for a week, you might be willing to pay me a couple orders of magnitude more than that for that bottle of water.

That's right.

Uh, or if that water is bursting from a pipe in your house, it probably has negative value to you. You'd be willing to pay a lot of money for an experienced plumber to come clean it up.

Right.

And so that same product is very different depending upon the context and the customer situation that we're in. So those are the areas where I think there's a lot of untapped opportunity for folks who really want to explore the different possibilities of monetization.

So there's, there's an old analogy that, you know, like Eskimos have 20 words for snow, or, and I use the example of, you know, before I, although I lived in Florida before I moved to California, I thought there were like 2 kinds of palm trees, but now I know there are hundreds of types of palm trees and even ferns that look like palms. And you're sort of expanding my mind in the same way about thinking about all of these dimensions related to pricing.

No drugs required.

Which is why expertise like yours is so valuable. But maybe for some product owners or business owners that are out there thinking about how do they even start to sort of organize this in their mind as they start to think like, where are there opportunities to improve their approach to pricing?

Well, it's a pretty broad question. So I think it really depends upon, you know, where are the opportunities that you see in your business? You know, one, Heavily overlooked area that I find myself running into with a lot of folks is like, what is the goal? What are we trying to accomplish here? Which is so obvious, but it often gets overlooked. Or if you find yourself in companies, you know, everyone thinks that they know the goal, but then you go interview the CEO, the CRO, the CMO, the CPO, they all give you a different answer of what the goal is, right? So, it's aligning on what the—

What are the goals that you see? Because the obvious answer is, well, to make as much money as possible. I think I know where you're going with this, but let's break that out. Like, what are different goals that folks might have that their pricing strategy might support?

Yeah, well, you may have what you might call like either category or P&L goals. So those would be like, hey, we want to increase market share. We want to increase top-line revenue. That's big in the software world, which is where I predominantly play in B2B SaaS because Traditionally, software has had an almost negligible marginal cost to serve.

Right.

Server storage and compute is pretty minimal. All your fixed— you have large fixed costs of engineering talent, but then you— that software, you just copy a million times. And then, you know, so is it on the top line or is it on the bottom line? And those can all have trade-offs, right? If I'm trying to get market share versus trying to maximize revenue growth or I'm trying to increase profitability, or a lot of times also in the public markets, you'll hear public market CEOs talk about Rule of 40. A lot of Wall Street analysts will use that and chart how do these companies compare as a Rule of 40. It's a blend of profit and revenue. And then you also have unit economic goals. So, am I trying to increase my customer lifetime value? Trying to decrease my customer acquisition costs? Am I trying to grow my net revenue retention? So, these are all— and that last one I mentioned especially because I think that one is highly important for folks that are looking at Their business metrics, we get a lot of play in the software world. If you're out of software, right, you have gross retention, which is you know you have 100 customers at the beginning of the year. You have 80 customers at the end. Okay, what did the that folks who were with you at the end like? What were their sort of revenue versus where you started at? But that misses out companies who expand with you, maybe grow through. upgrade package size or increase the number of seats that they're using or whatnot. And that net revenue retention number, if it's not moving in the direction you'd like, is often pointing to a pricing and packaging issue because you're not allowing customers to grow with you as they get more value out of the product.

Interesting. And so you juxtapose, you know, making money upfront versus making money over time, making money on the unit versus taking more share out of the marketplace. How do you see, you know, companies evaluate those different goals and then implement the right sort of pricing strategy to support them?

It could really differ, you know, company to company, right? I spend a lot of time in the, like I said, the software space. And so usually it's some either blend of sort of top accelerating top line revenue growth, increasing net revenue retention, potentially also looking at Rule of 40 growth stage software businesses. Aren't primarily focused with their gross or net profit numbers, or that obviously there's variability company to company. And so, you know, we want to look at, okay, do we have— where are the barriers to expansion? If we just look at something like net revenue retention, a lot of companies will have different Offer configurations. The good, better, best is pretty common in the B2B software world. So go to any any software page. You say, "Hey, this is the starter package. This is the team package. This is the pro package." And so we'll look at okay. Are most of your customers just in the starter? The the team and the pro haven't attracted the upsell. You know, is there a value mismatch there? that you've put too much value in your entry-level offer. Do you have a way for customers to expand with you within that starter package? So if I charge, say, per seat, very common if you're buying like a CRM, not always the best measure, but we could leave that conversation aside for the moment. Is the seat the right metric for them to expand and stay within that set of capabilities that you've defined in the starter pack? So As we go from that top-level sort of metric, we're trying to figure out what is the breakdown, what are the barriers that really drive that metric that we're not enabling in the way that we've priced and packaged. And yes, like of any of these situations, a net just jump 20% price increase could move that metric.

Yeah.

But there's often a lot more Nuance to how you approach that type of decision. Does that help?

Yeah, for sure. And so other than just, you know, jumping up the price, how do you guide people in thinking through that nuance so that they're sort of making those right choices?

Yeah, so when companies, like I said, they start where they try to figure out this area, they often face a couple of big problems. So one, they don't know who their customers are. They don't know how their product helps customers. They can't explain why their product is special, and they forget that pricing is more than just picking a number. And so I, to solve this problem, I saw it so often, I ended up creating what I call my services model. SVCS acronym stands for Segment Value Competition Strategy. So let's break that down quickly. So the first 3 elements. So segments, so who are your customers? How are they different from each other? What do they need? I used that example before of you going to the gas station versus you walking through the Mojave. Very different, you know, actually same identity but different context. And that context tends to matter quite a bit to how you perceive value. And that leads to the second part, which is V, value. Like, how does your product help customers? You know, why is it important to them? C, competition. What other choices do they have? We often see that different customer segments Maybe there's an old joke in software that most SaaS just replaces interns and spreadsheets to a certain extent, uh, with most workflow software, right? So on the low end, maybe there is no, you know, direct sort of competitor on a Gartner Magic Quadrant or whatever that your folks are using, but they're— but those are relevant competitive alternatives. Maybe at the higher end for some of your larger customers or larger prospects, they're using a more entrenched, you know, competitor that is purpose-built for that solution, right? So, and, and that differential, that differentiated value will be different for those customers. So those first 3 elements can be considered inputs to the overall pricing process because your pricing power ultimately comes from that differentiated value you create for a particular customer segment beyond those competitive alternatives that are available. So, and then those 3 elements filter down into the final piece, which is The final S strategy. So how will you sell your product to the right customers? So a strategy I use in the Michael Porter sense of the word, it's about making trade-offs. Like we can't make everyone happy, so we need to choose like which customers will we focus on? Like how will we show that our product is the best choice and how will we package and price it so make it easy for them to buy? So at the end of that, obviously we have to put a number on it, but it's about much more than picking that number and making those real definitive strategic trade-offs of these are the folks who we're best suited for, this is how our product delivers them differentiated value, and then making our offer in all of its entirety of price metric, price model, offer configuration, and ultimately the price to value that they're going to pay align with that.

Yeah. So what are some of the There's so much here. I'm not even quite sure where to go next, but thinking through from just sort of the mindset of someone that has built products and then looked at sort of pricing them from a value perspective, but not necessarily segmenting before thinking about that value and thinking about the context that they're in. And then also that sort of particular the strategy that you're trying to achieve with that. For folks that today are just sort of like, well, my strategy is to make more money, how do you guide them through thinking, well, what should your strategy be in terms of should they be thinking about more retention and longer lifetime value versus taking more share out of the marketplace? And I've got some models that I'm sort of bumping around in my head that I'll ask you about, but I want to sort of open it to you first if there's some sort of standard approaches there.

Well, maybe I'm lucky, but I rarely get such a blunt answer of folks coming to me and saying, what do you want to accomplish? Like, I want to make more money. That's definitely part of the conversation. But there's often a few different ways we'll look at it, right? There's some sort of challenge going on in the business. There's some sort of outcome that they're looking to achieve, and that can—if we think about outcomes—I want to separate that from the KPIs that we were just talking about, right? Yeah. So outcomes are: look, right now we have a set of four products that are. Completely independent of each other. It's causing our product team to optimize for their own little fiefdom.

Right.

So instead, what we want to do is combine those such that we can go to market with a, with a combined offering and then have upgrade paths that make sense versus trying to put all of this sparse wood behind way too many arrows, right?

Yeah.

We want to consolidate that. Or we have really long sales cycles and our sales folks have to have 3 to 7 calls just around pricing because it's so confusing or it takes so— given the way that we price, we have to get to the very, very end of a long multi-month discovery process with very technical people before we can even give them a reliable quote because our pricing is so embedded embedded to the way that they're going to deploy our technology. And so we'll listen for those outcomes, right? That's usually where it starts. And then from there, okay, what is getting in the way? Like, what have you done to solve it? And we'll also talk about, okay, look, if we solve this, what would that do? Like, okay, are you trying to increase your customer LTV? Are you trying to increase win rate against Some competitor. So what we're trying to do is just decompose that into a little bit more of a structured process to try to understand what is getting in the way. Is it this price metric that they're using? So we haven't gone through all the breakdowns of packaging, but I hinted at a couple of times. Price metric is simply the unit of value I charge the customer for. So is it per seat in that CRM example? Is it per API call?

Right.

If I go to McDonald's and buy a hamburger, it's per hamburger, right? That is the unit of transaction. I'm not paying per pickle on the hamburger or per ounce that the cooked—

Per calorie.

Yeah, per calorie. Maybe it should be, right? We think about different ways to incentivize behavior. I mean, gym memberships do this, right? I mean, there's a lot of gym business models work on signing a bunch of people up in January who they know are not going to show up the rest of the year. And if they all do, they're going to be in trouble because there's not going to be any space on the machines. And so, these are— these could be very conscious decisions. Or you have other gyms who are like, we're going to charge you so much per month that it's going to hurt your soul if you're not here 5 times a week because the price per, you know, if you're only coming once a week, like your price per visit is going to be astronomical and that's going to hurt, you know, less than you actually coming to the gym and getting your workout in. Right. So, price as a motivator for that. And so, We want to look at what that particular situation is, right? Is it the fact that, hey, like customers aren't expanding with us, aren't growing with us, right? We don't have a, like they get stuck in our either lowest tier offer or we should see more migrations or they're not buying additional add-ons. And so what we're trying to look at is, are they, where in that situation are the levers that we can help move them? Does that help? I know because we're talking like at a very high level too.

It does, but it also sort of like starts to suggest things like early stages of the market when you're trying to establish market dominance, you're better off, you know, with a pricing structure that's less about maximizing the value per sale and more about maximizing your market share so that you can take more market share And then as you establish yourself as the category leader or the dominant player, you can then start to drive up your margin on those sales. Likewise, businesses that are in, you know, maybe preparing for a recapitalization or some sort of exit scenario like to be able to demonstrate more recurring revenue and less customer concentration. So building lifetime value and maybe even building the lifetime value of their mid-tier customers helps to look like they have less concentration with their top customers and starts to look like they have more, you know, sort of revenue continuity, which makes the business more attractive to potential acquirers and things like that, which, you know, essentially the same business could have different, you know, sort of 5-year goals and would choose different pricing approaches based on that.

Yeah, that's 100%. And to a certain extent, what you outlined at the beginning there was a lot of the venture-funded playbook, you know, in those especially consumer markets. B2B markets less so tend to be winner-take-all, uh, just because businesses are savvy and they don't want anyone to own an entire market. And so, right, right, even if you like, you get to Salesforce gets to a certain size and everyone's gonna be like, ooh, like if everyone keeps giving them money, like they're gonna be the only game in town and then they're really gonna get aggressive with us. So, you know, and not to pick on Salesforce, a great company, but you can pick any number one of those. That's the reason why there's 3 major cloud providers, right? There's almost 3 major players for B2B across every industry, but in consumer almost certainly, right? And that's a lot of that of like, you know, that was, That was why we all were beneficiaries of VC-subsidized ridesharing for about 10 years, 2010 to 2020, because the VCs all thought, you know, either Uber or Lyft is going to win. It's going to be winner take all. And we're going to funnel billions and billions of dollars into, you know, just attracting, you know, the most people on, you know, and there's obviously there's network effects in those businesses. Those— that logic does— Yeah. Break down a bit on B2B. I won't go into my freemium rant here. I've covered it elsewhere. I'm happy to if you want, but like freemium, as I hinted at in my intro, is one of these areas that I think in B2C can make sense when you have very, very large TAMs of potential users and very, very low marginal cost to serve. In B2B, those tend to not work as well, and I generally recommend folks steer away from them. But I think the other thing you pointed out is just Different growth stages merit different approaches to this topic. So, you know, if I'm, if I'm early stage company, so say sub $10, sub $20 million in revenue, my biggest problem is not pricing and packaging. It's, does the thing I am creating create value for others? Does it actually solve the problem? And then it's usually the next question is, about distribution. Like, okay, I've got a couple of— I've closed 10 accounts and they're really happy. How do I go find 10 more of those folks in a repeatable fashion that doesn't cost me my entire bank account to go acquire the next 100, right?

Right.

Because I need to be able to build that revenue flywheel. So at that point, it's really about keeping pricing simple. I highly recommend you charge something. Value is the pleasure, price is the pain. You're not really getting valid market feedback if you're giving something away, but keeping it simple so you're not adding friction to the process. You'll focus on creating, communicating, and delivering that value. Continue to sort of test and learn. As you get into the growth stage, this is where your pricing and packaging becomes much more of a lever. You can implement a more sort of formal process where you're running more elaborate experiments, research, doing more advanced market segmentation. Look, you're an early-stage company, got 10 customers. You could go run market study if you have 10 customers and get a market segmentation, but you're going to be missing like, okay, what do we know about the people who we've acquired versus what's out there in the market, right? So you probably have a— you're gonna have a learning journey along the way. Then you also have a more mature product at a growth stage. That's where it then makes sense to really start focusing on creating additional tiers and add-ons. That's another area where, you know, I've had plenty of conversations with prospects where they'll say something along the lines of, hey, like, we kind of have an all-in-one offer. That's how we started.

Yeah.

Customers loved it. We— they kept on asking us for more. We kept on delivering more. All of a sudden, we wake up one day and We're spread across four different Gartner categories because we've grown this single offer beyond that, and now we have to really think about dividing it up much more intelligently. And things like bringing in add-ons, getting much more intentional about what those should be. You don't want to make those decisions too early at the beginning. I definitely recommend you have it. Segmented offer, at least two packages. I see early stage customer companies try to pretend like they're late stage by creating three or four. But you know, it's like you're taking like a little tiny pie. If I if I gave you a muffin and you try to slice it into four things, you're like you know like here well this you're like well well that's not really incrementally enough for me to really care. And so the product maturity gets. Larger, or the, the surface area gets larger of the product, all of a sudden, okay, now there's ways to really think about, okay, slicing this up in a, in a clean way such that these align to the different, uh, customer segments. And then you get to maturity stage. You're at Salesforce of the world, or you're at Coca-Cola or JP Morgan stage. You've run through so many pricing processes at this point, it's about like, can we eke another 0.5% of EBITDA out of tuning our pricing, right? And, you know, then you have different challenges, right? So at the early stage, it's all wins all day, but you don't have as much surface area. At the other side, you have the wins are much harder to come by, but then you have also a bunch of risk from irritating all your existing customers when you go make a change. So, you know, there's no perfect world. It depends on what stage you're in.

So interesting. So, Dan, you've really done a great job of, as I said, expanding my mind, and I'm sure our audience as well, and the way that they think about, you know, how they get strategic about the pricing and the segmenting those different customers, thinking about the value they're delivering in the context that those customers are operating in. So you're such an expert, we could spend all day exploring some of these topics, but I got to be mindful of your time. But Before I let you go, like, give us the pitch a little bit. Like, what kind of companies do you work with to untangle these problems for them? And what are the types of things that you help them do?

Yeah. So, well, I appreciate the opportunity to be here, Mark. Happy to connect with folks on LinkedIn. It's probably the easiest way to get a hold of me. So, just let me know you heard me on the podcast. And, you know, we, as I mentioned at the top of the show, focus on B2B SaaS companies. And anything from, usually what's happened at that sort of growth stage is there's usually a transition where the company has now often become, if not only multi-tier, but potentially multi-product, either organically or inorganically. And that requires a reimagining of how they're coming to market with pricing and packaging to sell things seamlessly. So oftentimes, you know, that's a big problem, or they've grown beyond their initial customer segments such that the new segments they're serving, the way that they had price and value aligned for their original customers doesn't align with the new customers that they're, they're trying to acquire. So we'll help them work through that and work on both an advisory basis as well as helping them in the weeds, building out the hypotheses, doing research, bringing that back in, helping them refine the hypotheses in order to get a new pricing and packaging into the market.

Fantastic. Well, Dan, Product Tranquility, thank you so much for taking the time to join us today. I really enjoyed our conversation.

Me too, Mark. Thank you.

All right. Talk to you soon. Thank you for joining this episode of the B2B Growth Blueprint podcast. We hope you've gained insights to grow your business. If you enjoyed this discussion, please rate, comment, like on your favorite platform, and share to others who will find it useful. Do you know a CEO, founder, or leader at an early-stage B2B services, tech, or SaaS company who would like to be a guest and share their story? Send us a note. Let's schedule a conversation.