Pricing is Simple, But Not Easy. Dan Balcauski Answers Hard Questions

Arman Eshraghi, CEO and Founder of Qrvey, hosts a podcast, “SaaS Scaled.” Our latest episode featured Dan Balcauski, Founder and Chief Pricing Officer of Product Tranquility, a consulting firm in Austin, Texas focused on helping high-volume B2B SaaS CEOs define pricing and packaging for new products. You can watch or listen to the podcast, we’ve also covered some highlights of their discussion below.

What do people often get wrong about price?

“I think the number one thing that I see time and again with SaaS pricing is that most executives think that what you charge determines your success. In fact, who and how you charge determines your success. I can’t tell you the number of conversations that start with, ‘Hey, we’re trying to figure out what to price this product. Is it $19 a user? Is it $29.95? Should our price end in fives or nines?’ And look, I love those conversations. They’re super fun and interesting, but they’re totally focused in the wrong area. That would be what we call the price level. “Much more important is who you’re charging. What’s the ideal customer set that you’re going after? Because there’s no average customer. There’s no average value. Everyone has a very specific context, and therefore will value your product differently. So, you have to be very clear about who you’re going after. Who are we pricing for? You should never ask what is the right price, but what is the right price for who? If you don’t fully complete that sentence, the question is somewhat meaningless. And then how we charge, including all the elements of packaging. But my general advice is, I would spend most of my time on what the price tag goes on and much less, if no time, on what number actually goes on the price tag.”

Are organizations dedicating enough time & attention to pricing? 

“Absolutely not. There are only three ways to grow a SaaS company:

1. Acquisition
2. Retention
3. Monetization

“Acquisition gets all the play, I think over and above retention and monetization for sure. And I think that may be shifting a little bit with the macro environment where folks are realizing that some of the net new acquisition is tapped out.”

The art & science of pricing

“New business is hard to come by, so people may shift a little bit more to retention. And then monetization is often looked at as this black box magic voodoo. And there are many reasons for that. I think there’s a misperception. People believe monetization, or pricing and packaging, is this art. Well, it’s an art and a science, but it’s much more science than it is art. You need both. “We need the elements of understanding economic theory and how people make decisions. But then also there are aspects of psychology. We know this as good marketers. “Also, I think the problem is that poor pricing is not as obvious on the P & L as other aspects. You can see bills from vendors and work to reduce spend. But what’s not showing up on the P & L is if you’re charging $20 per seat, but you should be charging $200 per seat. That 10X of revenue that should be appearing, no one’s getting a bill on their desk saying, ‘You missed out on all this revenue this month because you’re massively underpriced.’ It’s an invisible sort of opportunity cost.”

What attributes determine good pricing?

“Pricing is a journey. It’s a process, not an event. There are a couple of ways I think about what effective pricing looks like. Ultimately with effective pricing, and again, I use this to encompass all of pricing and packaging, effective price really helps you capture fair value for the value you deliver to customers and maximizes your company’s long-term profitability.  “One of the ways philosophically to think about price is that it’s really how a buyer and a seller divide value in a transaction. We’re going to create 10 units of value. I’m going to take one of those units as the seller. I’m going to give you nine and you feel happy in that transaction. So, this is one way we think about pricing. Ultimately, I think there are a few characteristics of good pricing. 

1. Fair
2. Consistent
3. Transparent

“Generally, I really dislike the idea of A/B testing pricing, especially in B2B. This is one of those areas where the B2C concepts are brought over into B2B and are just a terrible idea. It violates all three of those fundamental good principles of good pricing. “What do I mean by fair? 

• Price and value are in line
• We share value in a balanced way
• It’s not a zero-sum game where I win, you lose

• Ultimately, the cardinal rule of fairness: Don’t increase your profit at my expense

“Consistency across:

• Time
• Different customer segments

“Transparency:

• It’s clear how we set prices”

Should companies be fully transparent & publish pricing on their website?

“It depends, but I will tell you what it depends on. Stats on this are difficult to come by. The best stats I’ve seen have, unfortunately, a little bit of an error range, but about 50 to 75% of B2B SaaS companies have public pricing and packaging. And I saw a stat that SaaS unicorns are twice as likely to publish their pricing as non-unicorns. “A couple of bad reasons I hear for not publishing pricing:

• We’re afraid our pricing is too high or too low
• Our competitors will get easy access to our pricing information
• Our pricing doesn’t represent our actual price because we discount so much

“Those reasons signal there are other significant issues to resolve for your company.”  Dan next described scenarios where not publishing pricing might be appropriate, including:

• Competitive pressure
• Complex packaging that requires a salesperson to walk through
• High difference in willingness to pay between segments
• A small addressable market

What’s the right way for companies to raise prices?

“This is a deep topic, so I’ll give you the overview. I think pricing is simple, but it’s not easy. For any change in pricing and packaging, we need to evaluate just two things:

1. What is the difference in expected revenue?
2. What is the difference in costs incurred?

“I think at the highest level, we always need to keep in mind, what is our goal as a company? What are we trying to achieve? And then go through those two simple questions. “There are a few scenarios where you might be in a good place to raise prices.

• Prospects don’t push back on pricing at all
• Customers actively tell you how cheap you are
• You have demonstrable proof of a very high return on investment”