Ep#155 B2B SaaS Pricing with Dan Balcauski

Host: Jon

Hi everybody and welcome to the Jon Myer podcast. Today's topic is B2B SaaS pricing with Dan Balcauski, who's the founder and chief pricing Officer at Product Tranquility. Dan is based in Texas and he focuses on helping high-volume B2B Sass CEOs to find pricing and packaging for new products. Please join me in welcoming Dan to the show. Dan, welcome.

Guest: Dan:

How are you doing, Jon? Good to be here. Excited for our conversation today,

Host: Jon

Dan. This is going to be awesome because being that I have a lot of questions myself, I think the audience is going to get a lot of information on this. Our topic today is B2B SaaS pricing. How about a little backstory on yourself?

Guest: Dan:

Yeah, well, I'll give you the truncated version. Happy to dive into any details I missed. I've been in software my entire 20-year career at this point, I started more on what I call the value creation side, actually writing code as an engineer, and decided that wasn't the ultimate path for me. The software didn't care how mad I got at it. It still wouldn't run my program, so ultimately found myself in engineering management and then pursued an M B A to learn more about how to create value for customers. I found myself on the engineering side. It was very intriguing building high-technology products, but I became much more interested in how the products we build create value for customers and how that turns into dollars and cents for the business. And so post-grad school ended up on the product management, product strategy side of things.

Guest: Dan:

I should mention that I got thrown into the pricing world during my business school classes, I didn't realize this until much later. I was quite lucky, realized later that most business schools don't have classes in pricing, and I was lucky enough that mine did and got thrown into that side of the world early on in my internship during my M B A program worked for a very successful Silicon Valley startup where kind of on the CEO's desk was a question to whether or not they should pursue a freemium approach. TLDR I do not recommend freemium for folks. So that was ultimately my recommendation. I worked on that among several other things that summer and then worked at different levels of seniority on product management, and product strategy areas for several different companies. Ultimately decided to go off my own about four years ago, and now all I do is help, as you mentioned in your intro, high volume B. B SaaS CEOs define pricing and packaging for new and existing products.

Host: Jon

There is a lot to unpack. Now, I don't even know where to start because here's what I'm thinking. I want to ask you. I got a product or service and I have a number of them, and I remember sitting there putting out this thing. I'm like, okay, I'm going to offer customer case studies, podcasting, whatever. It's like, what the heck do I charge for this? How do I charge for you versus this person and everything? I mean, Dan, how do I get started?

Guest: Dan:

Yeah. Well, there are so many different areas to go into when it comes to this topic. I think I have a model that I use to help clients through this exact set of challenges. Ultimately, what we need to start with is helping understand what are the different customer segments that exist. So customer segments are critically important. No average customer and there's no average product. If you build an average product, it wouldn't be valuable useful, or differentiated for anyone. So I think two, often we lose sight of this and we immediately want to go to think about our product, our features, but we need to put the customer at the center and understand that each customer and the context that they're in is going to create different outcomes, different barriers, a different context that causes them to value product differently, presents them with a different set of competitive alternatives.

Guest: Dan:

And then we had a set of trade-offs on our end to decide, okay, given that's the landscape that we're playing in, how are we going to use that information to strategically choose the different elements of packaging that we'll get into, or ultimately the price level that helps us drive the customer's business. And so all of those elements I mentioned, I use a model, all those elements go into what I call my services model for SaaS pricing. It's services stand for the VCs. So segments, value, competition, and strategy, those being the elements I just outlined. So hopefully that gives you a little bit of a handle on where to start. Each of those elements we could probably spend multiple hours discussing, but I'll see where you want to go from here.

Host: Jon

I want to understand, and I'm thinking my audience the same deal. They're listening to you and they have this unique product, they have this unique service, and we won't touch on the free stuff yet because I have some questions about that. Not only is this free or should I add this just as a bonus thing, but okay, so I've got a product or services I've identified and looked at my audience, my target, where I'm at, where I'm the value is for that. Is there more work for me to do to identify the right pricing?

Guest: Dan:

So I think a lot of this discussion hinges on I think where you are as a company in terms of your stage and maturity because I'd give very different advice to a company that is just starting. Ultimately, in the earliest stages say, I'll use the term product market fit, even though I don't like it, but it's commonly sort of thought of. If you think about early stages, pre-product market fit pricing is important, but it's not necessarily the issue that's going to kill you. You should be thinking about things like your unit economics. Are you upside down? We're not selling $20 bills for $10. You're going to go out of business pretty quickly, but ultimately you're not trying to optimize revenue. This could be very different for a Fortune 500 company where their planning horizon for market success might be 10 years.

Guest: Dan:

They may have, you're working on pricing Cheerios or Coca-Cola. It is not the first time you've had a team of people looking at pricing, right? You're trying to eke out an extra 0.2% of EBITDA next quarter or next year which looks very different from you're just starting the garage startup company. And so I think one of the things that we want to think about, and so I'm happy to talk about either end of that scale, I tend to play mostly in the middle, what I call this scale up B B2B SaaS companies. So kind of in the 20 to a hundred million dollars range, and at the earliest stages, one of the things we want to think about is one of our goals because people will often ask me, Hey, I want to optimize my price, but optimization is a meaningless question without an objective.

Guest: Dan:

It is like, are you trying to optimize your revenue? Are you trying to optimize your profit? Because ultimately, if we just think about something as simple as your price level, there's not a single number that is optimized for both of those things simultaneously. So often the company is just confused in terms of what are you trying to optimize. Because we have to understand, as an old saying, if you don't know where you're going, any road will take you there. There's no robust answer to the question of how to price this thing unless I align with my objectives. The other thing I think is early on that we want to get a handle on is something, I don't talk about a huge amount in these formats, but is the idea of price positioning. So price positioning. We'll use an example of a market that maybe most of your listeners would be familiar with.

Guest: Dan:

In us, we've got the auto market, and so I've got different kinds of cars, all sorts of different models, but let's just say at a very high level, I've got your entry-level car. Your value player is maybe your Toyota Corolla, and you've got several cars that compete in that space, and then maybe you moved your market or average opportunity, which is your say, Toyota Camry. And then above there, you may have your premium segment of your market. You've got your BMW, your Mercedes, your Lexus, your Tesla Model S, and then above that we've got a luxury price point, right? We've got Bugatti, Lamborghini, your Tesla Roadster, all the cars that I'm sure you've got parked in your garages, Jon. So yeah, they're all back. Why do we talk about that? Because I think we talk about pricing, we can get down in the weeds and talk about, okay, price testing or pricing research, but there's a strategic element of price that we really at the earliest stages need to take into account.

Guest: Dan:

Southwest Airlines didn't get to their price point because they did a bunch of market testing. They said, look, this is the price level. This is the competition we wanted to be compared against because actually, it's not just other airlines we're going up against, but we want to be competitive with you hopping on a bus and taking a Greyhound or other cross-country point-to-point route via your car or a bus. Similarly, when Toyota decided to move upmarket and compete in a premium segment, they decided to create the Lexus brand. And it's like you've got these strategic decisions that then give you sort of these ranges. And I think that's one of the elements that maybe is sort of continued iteration is we're always looking at, okay, defining this question, this broad question of how do I price in terms of, okay, what given the objective I'm trying to achieve, how do I start thinking in terms of narrowing down my potential ranges? So now I'm competing in a premium segment. I invite this set of competitions. Now, if I'm BMW or Mercedes or Lexus, there's a defined set of competition. I'm not necessarily trying to attract market buyers or comparisons to the alternatives of the other value segment. So that's one sort of strategic element that we just take as given. But if you're more early stage, it's something that maybe just goes unsaid more often than not because people don't think of it as a decision. If

Host: Jon

Dan, if you're playing in the medium right in the center, then I would kind of assume that if I already have a product or services and I have a pricing or a range of pricing that I'm working with,

Guest: Dan:

I think way too often executives get very much wrapped around the axle on what is the price level. In SaaS pricing, what you charge doesn't determine your success. It's who and how you charge. So one of the things we touched on already was this idea of putting customer segments and customers at the front of the process, really helping to understand who are you going after and that helps understand the entire competitive market landscape that you're playing in. But all this discussion around price level, especially in the B2B space, I think it talks to the very tail end of the process. Ultimately, yes, you do have to assign a number, but especially in a B2B scenario where there's discounting, there's individual deal level pricing that happens, that number is honestly the easiest to change both in your business systems and on a deal level.

Guest: Dan:

But what's difficult to change and what's most impactful is all of these other elements of how you charge what we call your packaging in B2B SaaS. So elements of packaging, I think of them in four types, which are your price model, your price metric, your offer, configurations or bundles, and then your price metric, price bundle, office configurations, oh, and price fences, sorry. And those elements are really important because ultimately those are what help you tell your value story I think we get caught around when we start talking about price level a little bit too much. We've got that strategic element, as I mentioned, the price positioning, but then all of those elements of packaging are really what's going to help you tell your value story and communicate your value story. Because what you don't want to do is you're having a conversation, say your salesperson is in the room talking to a prospect, and they're talking all about the customer, the problem they're trying to solve, the customer's looking at the product like, oh my God, this thing is the best thing to sliced bread.

Guest: Dan:

This is going to help here, it's going to help Here. I see this is how I help use it. And then all of a sudden the conversation turns to, well, how do you charge for this thing? What's this thing going to cost me? And the conversation at that point, you imagine the salesperson who has to go, well, here's how you have to understand about how our products architected the backend and we use a w s and Azure and a multi-tenant, blah, blah, blah, and all of a sudden the customer's eyes glaze over because all of a sudden you're talking about your product, not the customer's problem, but if the way you price, how you charge the price metric and how it scales aligns with how the customer gets valued, you're selling a marketing automation platform. Oh, how is this in price? Well, it's this much per account that you have in your system, so as the number of accounts that you're servicing grows, that's how the pricing scales, right?

Guest: Dan:

It's like, oh, we were talking about sending emails to customers, and all of a sudden it's like, okay, yeah, the number of contacts, number of organizations I have in the system, that makes sense. It has nothing to do with the number of, you could imagine back in the day, you and I, maybe old enough, at least I was, I'm not going to make a judgment, but you may remember back in the day, perpetual licensed software, a lot of it, but especially the enterprise B2B world, but priced by the number of CPU cores or things like that, and you're just

Host: Jon

Like VMware was known for it. Sorry, a little plugin for VMware. But I think one of the things when you start talking about architecture and not their problem and your example, all I'm thinking about is this is too expensive for me. Great conversation. I'll see you.

Guest: Dan:

Yeah, yeah. So you don't want to, you hear that? What's the record? Skip in the, yep. Just like all the wheels fall off because all of a sudden it's now about, it's no longer about the customer's problem. And so I think one of the things we want to help folks your audience understand and as well implement in their businesses is look that ultimate price point, you've got a lot of flexibility and I think it gets way too much analysis. And look, ultimately that's where a lot of clients start when they come to me or any sort of conversation around pricing should this be $20 users, should be a hundred dollars users should be 29 95. Should I price it in fives to nines? Look, I love those conversations. They're super fun. But ultimately, I think you're starting at the very end of the process and there's a whole bunch more area that is even more important to nail because also it's going to be impactful for that conversation and it's going to be much more difficult to change going forward. So it's very important to get that correct up front.

Host: Jon

When customers come to you, what are some of the first questions you ask them to get to know 'em more and understand their pricing or services and what approach you should take?

Guest: Dan:

Ultimately look for any pricing change. I'm going to start with what are they trying to achieve. Pricing is simple, but it's not easy. So ultimately, any pricing change when we go into it, we have to understand what is the expected change in revenue. What's the expected change in costs? So most folks aren't coming to me when those variables are within a pretty understandable range of values or there's very little risk of the decision. You're not coming to a consulting firm if you are just debating a 5% price increase, just go change the pricing by 5% and we'll be done with it. Where folks come to me in our firm is there's something more structural going on. So there are elements of we are grown beyond our initial target customer segment and the new segment that we're talking to. Our pricing packaging doesn't make any sense. It doesn't align with the value that those customers get out of the product or things like we are starting to experience incredible headwinds from the changing macro environment, especially if you've got a misaligned pricing metric.

Guest: Dan:

So pricing metric would be something like charging per user or API transaction or amount of data stored. So you see this data stored would be like for Dropbox for example, or AWS is going to charge you for how much computer time you use on the EC two instances, and it scales with that. Well, if you've got a business that relies on seed expansion to grow well in an economic environment when people are removing seats because they're lowering headcount, unfortunately, what was a nice tailwind to your business is now a headwind. And in a rush to gain market share during heady days of expansion, expansionary economic times, folks have started to realize like, oh, we added all this additional functionality. We didn't have any conversations about monetizing it. And so not only are people not adding seats, they're removing seats, and we've given them such powerful tools that the people have left can do more with less so sowed the seeds of our demise.

Guest: Dan:

And so the question kind of starts around what is sort of those contexts and then trying to help them understand, okay, well what does good look like? What is the other side of this, right? Because ultimately we don't want to make no bones about it. A packaging change can be pretty disruptive, so we want to make sure, look, on the other side of this, we think that there's a good return. So we're looking at where's this causing friction? Is there current pricing and packaging? Is it extending sales cycle times? Is it keeping conversion rates down? Is it preventing you from increasing things like net revenue retention or keeping a lid on that growth? And so ultimately that's kind of where we start is helping understand what are all the factors that they're hoping to achieve. And then as we break that down, we're looking at what are the different elements that we can attack given the different levers I laid out previously.

Host: Jon

Well, Dan, what are some of the things that people get wrong about pricing?

Guest: Dan:

Well, I already mentioned one, which is the focus on what you charge instead of who and how you charge. I think another one is ultimately really you don't have a choice of whether or not you will have a pricing conversation. You'll only really have the choice of when you will have a pricing conversation that ultimately, I think too many. This could get into a little bit more of a philosophy element because in, I think product managers have a really hard job, and I think the function has grown a lot over time in terms of its maturity, but too often pricing is not taught as an element of the product management curriculum, whether it's a boot camp or other formalized training because it's very different to ask a customer, Hey, do you want this feature? Versus do you want this feature for $10? Because those activate two very different parts of your brain work those questions.

Guest: Dan:

And so I think there's an aspect of the product management and product development process where we need to think about putting the pricing conversation at the beginning, or at least having it involved from the beginning because somehow I've seen the slides that have this in terms of talking about a go-to-market launch plan. Somehow pricing and packaging got slotted in at 60 days pre-launch. Someone decides what pricing and packaging should be, and then you're struggling. And that's why I get a phone call and people are like, oh, well, I looked to the left and looked to the right and nobody ever asked anybody about pricing. And I was like, well, you guys spent how many millions of dollars on r and d to build this product, and nobody asked the customers would they'd be willing to pay for it. Again, in the most helpful way possible.

Guest: Dan:

Ultimately, we should all be building products that people want. And so one of the ultimate, and look, we could have a very nuanced debate as well, because the easy answer to this is like, well, people never say what they'd pay for something. It's like, yeah, yeah, okay. Researchers in this space have known that for 60 years, and we've developed a whole bunch of techniques to get around that, and we can go down that rabbit hole if you want. I think that's the easy response to this. But ultimately, we all have this ability to make trade-offs in how we think about our purchase decisions and what we will do. And while the absolute numbers at different levels may not be God's truth, the bedrock, at least we'll have had a conversation and we can understand relative ranges and have relative ranges of certainty around it. But if we never ask the question, we're just guessing.

Host: Jon

Well, asking the question from the beginning, I want to touch on the features that you were kind of talking about like they're developed. They spend all these millions of dollars for features and never ask the customer if they want 'em. Is there a balance between adding features for customers that are included in their current pricing or adding and charging money on top of it? Do you help customers with that? Do you help them understand that, Hey, listen, you should have asked this question in the beginning, you didn't. Now you have or you have these features, I have 10 new features, I think we should charge a customer. No, we should give five to them for free. How do you balance?

Guest: Dan:

Yeah, so ultimately, look, it depends. So there's going to be a bunch of different scenarios depending upon the level of due diligence done to that point, a lot of it comes back to one fundamentally is the company in a position where they're regularly having that conversation? Because my experience has been that that's not kind of par for the course. The default tends to be that product management is going and creating value. Marketing is focused on mostly performance marketing, customer acquisition sales is looking at selling what we've got and the existing, if anything, trying to put downward pressure on pricing and no one's minding the store in terms of additional monetization opportunities. So I would be very happy in a company where at least that conversation is being had. So that being said, a lot of it comes back to something I already mentioned, which is, look, what was your hypothesis when you went into this?

Guest: Dan:

What is your goal? What are you trying to do? You've gone and built 10 new features, which was the goal because we thought these would be a brand new or a new offer, they would justify an enterprise offer configuration if we bundled them in. So a lot of it's going to depend upon what are your goals. This is the flip side of what I just mentioned before. So CRM is an example. If you're buying Salesforce, it's traditionally sold on a seat basis. That's that situation where clients have gotten into in the past where they didn't have the conversation, they just ad features, ad features because this idea of, Hey, we just want to grow, get market share, add value, make it a no-brainer for customers to want to go with us, and then they end up in a sad situation when the economy turns where they realize like, oh, we've now created and shipped all this value that we've never monetized.

Guest: Dan:

It's a little bit difficult to put the genie back in the bottle. This is one of the arguments against freemium. I have many arguments against freemium, but this is one of them because it's very difficult to put the genie back in the bottle if you're doing your product management job correctly. You probably built the most important functionality first and then you gave it away. So now turning around and trying to say, oh, now we're going to charge for it. It's not impossible, but especially if you have a purely free product, you're going to have some backlash, but you've also taught the market that it wasn't worth anything. So I think that the other thing is that you've set value and price are incredibly related. They're not the same thing. We could go into that discussion if you want, but ultimately we do help educate the market on what our value is by the prices of things we set, which is why pricing too low can often be a negative signal.

Guest: Dan:

It's like we think, oh man, I'm going to price this low and I'm going to win. Market share depends on what market you're in. If I'm in a B2B deal, price is usually not the dominant decision factor. In fact, for most studies I've seen it's somewhere between the third and the seventh most important factor. The buyer on the other side of that table, is worried he's going to lose his job if he recommends your product and it doesn't work out or the company doesn't get the value or you never get it implemented, or there's some other issue, there's a bunch of other risks that's involved. You having a low price is just adding to the risk side of the calculation. It's not necessarily a net benefit. He's just worried like, oh my God, at this price, is this company going to be around in a year? Yeah, we That's

Host: Jon

Very true. That's a good statement. I mean, you think about it. Here's how I think about it. At an enterprise level, you're in B2B, nobody's looking at the price until you submit it. They're looking at the product and be like, shit, as an engineer, I am recommending this product, or I'm recommending this product. And you're saying, oh, it's only for a thousand. I'll give you a discount of 500. And you're like, okay, that's not my concern. I would happily pay a hundred thousand. But you know what I mean?

Guest: Dan:

Absolutely.

Host: Jon

Dan, let me go back to the free a little bit because I have some questions on that and I'm thinking it from a SaaS product point of view, there's a certain portion of a free product that you can utilize up to a certain amount. Somebody like you can do X, Y, and Z, and after that it costs for any of that, does that fit under your concerns against free? Does that fit under your concerns?

Guest: Dan:

Yes, that fits under my concerns. Why? So ultimately free. So the better answer, anytime anyone's saying freemium, the better answer is an almost universally free trial with a couple of limited exceptions. So the idea of free trial and freemium are very related. So we didn't talk about different types of value in this conversation, but very quickly, the idea of having a free trial or freemium increases a customer's perceived value of the product. And because software is what economists determine experience good. So an experience is good, and your value perception changes as you use the product. And so you run into, this is not just software, but you imagine you go get a haircut or you go eat at a restaurant, a lot of those, you say a new haircut or a new restaurant, unless you go to McDonald's, right? You pretty much know what you're going to get upfront.

Guest: Dan:

But you go into a new restaurant, you go and get a haircut. We can't judge the fact there are goods. They're called credence goods that, even after we've consumed the product, we can't judge the effectiveness. If you've ever hired a lawyer, I mean maybe a really bad lawyer, you'd be able to tell, but you're like, I don't know. I dunno if I could tell a good lawyer from a great lawyer, honestly, I pay all this money. And it's like, I don't know. Did you get your money's worth? I have no idea. But software falls into this category of experience good where a perception of value changes. And so look, a free trial hits the lizard brain in a way that no matter how good your marketing team is with videos and white papers and webinars and podcasts, it just doesn't click for you until you see your data in there. You're like, oh my God, now I get it. You have that aha moment, that activation moment that we talk about in product management a lot.

Guest: Dan:

That being said, free forever is generally not a good idea. It causes all sorts of problems. So number one, I think this idea that these free users, and we're talking about free, this distinguishing users and customers becomes important because customers give you money, free users and paying customers the idea that your customers are the same as these free forever users. I just haven't seen that be the case because ultimately what I see is a lot of like, oh, well, at some point, these people will grow into real businesses. Well, I've seen a lot of it not be that where you have these B2B SaaS companies and the people using the free side are like families using it for personal use, and it's like, I guess maybe dad at some point will quit his corporate job and become an entrepreneur and then have a hundred person business and then become part of your I C P, but that's a long road and you probably got other things that you could focus on.

Guest: Dan:

In the interim, it causes a lot of internal problems because it's difficult to acquire new customers. I get that all CMOs and growth marketers out there work hard every day, and you have this mirage of free users that you think, oh, well, we can just go add this one more feature to the product, tweak our onboarding, throw a couple of different, whatever it might be, whatever tactic number 57 you think is going to finally move that cohort. It's just rarely the case. Best-in-class freemium companies convert about one to 3% of their users, which also means that you need a massive, massive market for it to make sense. In a B2B case. Keep in mind the context that I'm coming from all the work I do these days is b2b. So b2c, if you're in consumer, maybe you have a little bit better of an argument.

Guest: Dan:

I still think there are problems there, but I think the track record isn't as pristine as some people would make it out to be, it's one of these tactics I think is maybe in b2c, it works. Well, bringing it over to B2B is just not a great idea, but a free trial is a great idea. This other element, again, having been a product guy for so long, I think not only about it from a pricing perspective, but thinking about it from a customer experience perspective because I think it's very easy to get in this swan song of $0 marginal cost to serve. Well, yeah, but that's only the case if you're not supporting these customers, these users. So what do you want your experience to be? On the free side? These people have a problem. Could they call someone? Can they email somebody? A lot of the people will be like, well, no.

Guest: Dan:

It's like, well, I don't know. That's not a great experience. I don't have a very high view. Do you want me to eventually buy it? Isn't that the whole strategy? I have a great think a lot about your company for you just to be like, ah, I don't care about your problems or your bug that you found. I can't get anybody to talk to you versus a free trial. Well, look, we're rolling out the red-carpet sales teams at your beck and call. Oh, what do you need, sir? Let me see if I can get an engineer on this call to get that software working the right way for you because tomorrow is good for you. We'll get a call, whatever it might be. So just from that perspective, I think just the strategy isn't well thought through. And so look, there's a couple of very limited areas where the freemium approach works.

Guest: Dan:

One of them, which is you and I are both podcasters. I use Buzzsprout, I'll give them their pricing packaging, could use some work, but they do have a freemium option. And one of the reasons why it makes sense in their case is for anyone who hasn't started a podcast before. So you have to go set up all of your connections with RSS S feeds with Apple and iTunes and Spotify and Google Podcasts, et cetera. So with some of those, there's a very lengthy registration process that's undefined on behalf of those when they're going to recognize. And so look, if you're in a seven-day free trial, God knows if Apple's going to get back to you within that seven-day window. Also, there's a bunch of pre-work I need to do to make sure the podcast is ready to go. I might not start producing episodes for a couple of months in that time.

Guest: Dan:

I'm not a qualified lead. Maybe I've got a two-minute trailer just to make sure just to announce to the world that my podcast exists and make sure the RSS feed and my website's set up, but I'm not generating revenue or anything. So in that case, do I want to have a sales team extending me free trial keys? This argument also applies in a lot of the p I developer world. You may have a product that's just for developers. Those developers are going to have to use your product in 3, 6, 9, or 12 months just in staging or development. They're not rolling that out to production. And so in that case, they're not a lead yet either. And you don't want to have a sales team constantly have to extend free trials. You just have a free version of the product that no one would ever be stupid enough to roll into production because it would just fall over and make their whole production system not work. But in that case, that's where kind of a free trial or freemium approach, limited free option could work.

Host: Jon

I think you summarized my experience working in an enterprise. I was literally like the engineer, Hey, I need, I would just want to test out your product a little bit. Yeah, yeah, sure. Here's a key for you. Yeah, the 60 days are up. Can I get another one for that? I swear that was my experience.

Guest: Dan:

Yeah.

Host: Jon

So Dan, let me switch gears. Before we wrap things up. I want to talk about value and pricing.

Guest: Dan:

Oh, just a quick light topic on value.

Host: Jon

Yeah. Yeah. I mean, I'm talking about, we've got 10 minutes, so that's why I said wrap things up.

Guest: Dan:

Okay,

Host: Jon

Let's talk about value.

Guest: Dan:

What do you want to know?

Host: Jon

I'm leaving the door for you, man. You're educating me. What are you defining as value?

Guest: Dan:

Yeah, no, that's a great question. So I deal with a lot of education around value because it's so foundational to pricing. I fundamentally believe that intelligent pricing management comes from intelligent value management, but we can't discuss either if we don't have a coherent conversation about what value is. So I use a framework that I didn't create but came from a gentleman named Tom Nagle. He wrote one of the seminal books on pricing. It's the Bible of pricing called the Strategy and Tactic of Pricing. It's in the sixth, seventh, or eighth edition at this point, really quite intense of a read. But if you want to do some serious work in this space, highly recommend it. He created something called the value cascade. And so if you think about the value cascade, cascade is another term for waterfall. If we think about a series of bar charts where every sort of bar is slightly lower than the next, that's the visual you have in mind.

Guest: Dan:

And on the left introduces this idea of what's called use value. And so use value is the sum of all benefits that you may get from a product. So when we think about using a product, there are different types of value drivers that we get. And I think another framework that I layer onto this is called Jobs to Be Done. And so oftentimes in the business world, the B2B world, we think about functional value drivers. So these are things like, it's going to help make me money. It's going to save me money or save costs. It's going to reduce time, it's going to reduce risk, reduce operating capital, and increase compliance. Those would be sort of functional benefits, functional outcomes, jobs to be done don't leave us there. There's a whole other two classes of emotional jobs that have two subcategories, which are social jobs and personal jobs.

Guest: Dan:

So personal jobs are jobs that help us create an emotional outcome. So we think about this in terms of the value of what's the value of a Rolex versus a Timex. Both keep the same functional time, but one is going to signal something about your status to others, and that's an emotional benefit, and that's what most luxury goods are competing against is some type of emotional benefit. This happens a lot when we think about how heavily commoditized college football season just started. I'm a big fan. I don't know how many commercials for car insurance I just watched over the last weekend because it seems like every other commercial is, car shirts, and I don't know anything about Progressive or Nationwide or any of these other policies. All of 'em are just make me laugh. Why are they all trying to do that? Because they're trying to make insurance funny.

Guest: Dan:

And some of 'em are good at that, and some of 'em stay away from mayhem like me. Exactly. Exactly. So you see that in heavily commoditized markets, right? But they try to compete more on an emotional benefit, right? Coca-Cola is trying to convince you that Coca-Cola equals happiness. And De Beers is trying to convince you that diamonds equal forever love. But then also there's this idea of a social job. So the benefit of humans is not that we are not just out for ourselves, but also we do things that are pro-social and have social outcomes. These would be things like advocating for access to better healthcare, better education, environmental goals, and whatever, suffrage for traditionally disenfranchised groups. And so those things also have value. So this is all rolls under what Nagel terms as use value. So this helps us frame value in a very concrete context, but the story doesn't end there.

Guest: Dan:

The next step of the value cascade is what's called exchange value. And exchange value is important because use value helps us understand at a detailed level what the benefits are and how we should think about adding different types of benefits together. Ultimately, use value is never relevant for a pricing exercise because we live in a market economy. And so the fact is, is that a large proportion of the use value in your market already has a market price associated with it. So I'll use this example. It's been fun. So imagine we got the cast of Gilligan's Island. For those of you who maybe don't remember Gilligan's Island, we'll use Elon Musk. Unfortunately, these poor folks were trapped on a desert island for many, many years, and one of them on there was a millionaire, probably a billionaire, Mr. Hall. So we'll just say that.

Guest: Dan:

Elon's trapped on a desert island. So Elon's trapped on a desert island, he's made friends with a volleyball, he's going crazy. Eventually, a ship captain shows up. So the question is, how much should Elon pay the ship captain to get off that island? The answer is all of his money, plus all the money he can beg, borrow, and steal once he gets back from the island because his dollars are doing him no good perpetually on that island. But let's assume ship captain number two shows up ship captain number two says, Hey Elon, you don't have to pay me billions of dollars to get off here. I'll do it for a cool million. Okay, now there's a market price. So all of the other intangible value has now become tangible. And now ship Captain One has a decision to make. He can say, I'll match that price.

Guest: Dan:

I'll bow out of this entirely. I'll match that price. Or maybe I can get 1.1. Hey Elon, you should come with me. I've got a catamaran. It'll be a smoother ride. You can use my ship captain's quarters. I'll serve you meals every night. You'll have a more enjoyable experience. By the way, I've got a mariachi band here. They'll have entertainment for us and as much alcohol as you can drink. And so now what are they doing? They're talking about there's the market price, and now the ship captain is talking about differentiated value. And so he's being very explicit around this is the benefits above and beyond what you're going to get with this other person. So there's the market price, plus I'm going to sign a price of 1.1, an additional hundred dollars of differentiated positive value. And there are more nuanced ways to have that as well.

Guest: Dan:

And then the third aspect of the cascade is what we call perceived value. So ultimately, humans are not spreadsheets. We're not calculators. We, the world are way too complex for us to individually tally up every possible value driver when we're making a decision. And look, there's a more nuanced conversation we can have as well of how if you're on the sales side, you're doing sales enablement, there are ways to help tell that story more effectively. But as buyers, we are not a lot of times, let's use a CRM example. Your VP of sales told you as a director of sales, Hey, we need a new CRM. Can you go shopping? So what do you do? You don't go evaluate every single product on the market and set up demos with everyone and document every feature and make this your life's work.

Guest: Dan:

You go ask a couple of buddies what they use. Maybe you go to G two or Trust Radius or one of these other review sites. You get some shortlists. You figure out like, oh, well, I went to whatever Salesforce's website, and it said on there that JP Morgan and Disney and Sony use theirs, right? You use logo gardens, right? Use some social proof, and get some custom testimonials. So all of these things are shortcuts, not because humans are lazy, the world's too complicated. And so although we'd like to have this rational economic mind, ultimately we can only deal with so much complexity. And so I think where perceived value is incredibly important is our ability to influence perceived value as marketers is a lever that I don't think is fully realized, right? So there's that element, and ultimately, perceived value is the only thing that drives willingness to pay. So the value cascade ties together this world of value being very precise about what each step of value means. Leading us to an understanding that, okay, willingness to pay is fundamentally driven by customers' perceptions. Perception is at most what the sort of exchange value is going to be, exchange value at most, what the use value utility is going to be.

Host: Jon

Dan, that was a tremendous explanation of that because so many questions popped into my head that I didn't even have time to ask. Not only the value, the first person to market sets the value, but the second person to market, then the market pricing and everything changes. How does that work? How do you compete? The differentiating factor is you may not have the first thing to the market, but what are your differentiating factors out there that allow you to set yourself apart and why are you better than the other person and able to charge more? Those things are all going to come into effect. Dan, I got to wrap things up. I think we have to come back on. We got to dive more, not only into this, but some other topics. What do you say?

Guest: Dan:

I would love to, it'd be great, Jon,

Host: Jon

I've got so many questions, man. I know we were just, so this is the whole thing about doing these types of podcasts to have just natural-style conversations. Dive into it wherever the questions go for everybody. Let me just reintroduce, Dan, and wrap things up and I appreciate it. So, everybody, Dan Balcauski is the founder and chief pricing product Officer at Product Tranquility. Dan, thank you so much for joining me.

Guest: Dan

Thank you for having me, Jon. I appreciate the

Host: Jon

Time. Alright, everybody, this has been the Jon Myer podcast. Don't forget to hit that, like subscribe and notify because guess what, we're out of here.