How to Transform Your Pricing Strategy with the Power of Value Conversations with Dan Balcauski

Randy Wootton (00:04):

Hello everybody. This is Randy Wootton, CEO of Maxio, and your host of SaaS Expert Voices, where we bring the experts to you to talk about what’s happening at SaaS today and what we foresee coming in the months and years to come. I am super excited to have Dan Balcauski. Did I say that right, Dan?

Dan Balcauski (00:23):

You did. Beautiful job.

Randy Wootton (00:24):

Awesome. As someone who has a horrible last name for pronunciation as Wootton, I’m always anxious about that. But no, it’s great to have you, Dan. What an incredible background you’ve had. We’ll get into that in a second, but primarily, I think we’re going to talk mostly about pricing and all the dimensions of pricing that you’ve experienced in your most recent role as founder and chief pricing officer. But before we get there, just going to your background, you started off in software.

Dan Balcauski (00:49):

That’s correct. Yes. I’ve been in software my entire career. But yes, I think specifically I started out actually writing code, which is a little bit different from what I’ve done.

Randy Wootton (00:57):

Right, as a software engineer. You started off as a software engineer, moved to product management, took a sabbatical, which we’re going to talk about in a second, and then you spent some time at Kellogg, so you were in academic [inaudible 00:01:09] for a while, and then you spun out and started your own gig. So you certainly have had an interesting background, so we’ll spend a little bit more time on that in a second. But yeah, let’s go there. Let’s talk about, so you started off software engineer and you moved to product management. What was the catalyst for that transition?

Dan Balcauski (01:23):

Yeah, well, like I said, I spent my entire 20 year career so far in software and started out more on the value creation side, building products. Ultimately, I became a lot more fascinated by how the products that we were building created value for customers and then how did those turn into dollars and cents for business, and ultimately that led me to pursue an MBA. Multiple times, intersections with Kellogg, it’s where I got my degree, and then now I also help teach there in their product strategy course. But when I was there, I was very lucky, got some of my foundational courses there in pricing, but also many other functions as you imagine a general MBA would be. And during my internship during a two year MBA, I worked for a very successful Silicon Valley startup on the B2C side and got thrown into the pricing world kind of off the bat with them where one of the questions on the CEO’s desk when I showed up was should they do a freemium approach? And so I didn’t know anything about that.

(02:28):

I spent part of the summer on several things I did working on with them, I gave them a recommendation, a TL;DR. I do not like freemium, I do not recommend it in general, but that kind of gave me my first taste of real world pricing exercise there. And then post MBA, went into product management, product strategy world. So still very focused on how do we create more value for customers? How do we understand the value we deliver for customers? Product management in general, I think this applies to many companies, didn’t own pricing and packaging that was owned by our product marketing department, but I have a strong view that product marketing and product management should be very close to the hip. They’re sort of dynamic duo, Batman and Robin, they’re a tag team, not one better than the other, but they just have different areas of focus in order to successfully bring, especially B2B software products, to market.

(03:20):

And they would get asked to do these pricing exercises for our products that they were looking at. They’re like, “I don’t know how to do this. Hey Dan, you’ve got an MBA, can you come help with this?” And so I got a lot of lessons learned. I tried to apply some more theoretical practices I learned of like, “Hey, if you were the brand manager for Minute Maid orange juice and you’re selling in a grocery store, how do you price that?” I realized very quickly some of those theoretical foundations don’t work quite as well at B2B software. So learned those lessons and yeah, went off on my own about five years ago now after the sabbatical you mentioned and decided to start a consulting firm and now I do all day is help B2B SaaS CEOs and their teams try to build profitable companies and get their product into the hands of as many customers as possible. So that’s the privilege I have today.

Randy Wootton (04:12):

That’s great, Dan. And from my background, I went to business school as well, and I remember going into product management initially and hadn’t had any courses in product management at business school. So I went and took a course, pragmatic marketing, which I think is a wonderful course. It’s grown and evolved since I took it 25 years ago. It has a great schematic and way of thinking about all the activities you need to do across product management and product marketing to bringing a product to market. And my first role as a product manager actually included product marketing as well. So it was a holistic role and you just kind of ticked through those different components and one of them was, to your point, around pricing and packaging. I had no idea what I was doing. But it has become such a valuable skill or perspective to have, especially in this market where you have contracting demand and increasing competition and everyone trying to figure out how to increase pricing.

(05:08):

I know broadly in the market we’ve seen data saying that SaaS solution providers have just used a blunt instrument raising their prices by 9%. I think Salesforce is the one that led the way and then everyone else has followed behind that to try to increase the revenue, but not doing it in a disciplined and focused way, feeling it just more like a blunt instrument, no matter who you are, you can get a price increase. So maybe we can use that as a starting point. I’m going to come back to the sabbatical because it’s super cool, but since we’re already getting deep into the pricing, maybe spend a little bit about some of the pricing. On your LinkedIn profile, you say, “I dispel B2B pricing illusions.” So what are some of the top two or three? You mentioned freemium, if we could go down that path for a little bit and maybe a couple other ones. What are the biggest B2B pricing illusions that you have encountered that you try to dispel?

Dan Balcauski (06:00):

Oh man. Well, this is a great setup because I could probably talk for the rest of our time on what are the different misconceptions people have about pricing. I’ll spare you though. I’ll name a couple and we’ll see if we want to dive into any of them with any particular vigor. I think the first one is, when I tell… I was actually having lunch last week with a business school colleague of mine. He’s the CEO of a company, very successful. It’s more in the services business, but he’s got a company about 150 people now. And we’re sitting down, he’s super sharp and he’s like, “Hey, so you do pricing. Is that a lot of elasticity analysis?” I was like, “No.” I was like, “It’s funny you say that because this is exactly what I run into every time someone hears that I do pricing.” It has almost nothing to do with elasticity analysis.

(06:46):

In fact, when it comes to SaaS pricing, most executives think that what you charge determines your success. They’re really focused on the number. In fact, who and how you charge determines your success. So most of the work I do is really helping people figure out what the price tag should go on and not the number that actually goes on the price tag. So I think that’s sort of the first major mischaracterization or thing that people get wrong about pricing. I think the second is there’s this really pernicious myth out there in the world that you can’t talk to customers about pricing, that you’re just not going to get useful information. And I just don’t think that’s true. If there is one thing that’s true, it says you don’t have a choice about whether you will have a conversation with your customers about pricing, you only really get to decide about when.

(07:39):

So usually when folks are putting that logic forward, it’s, “Well, we’re not going to be able to talk to our customer about pricing, so we’re going to make the first time we have a conversation with pricing when our poor sales guy is on the phone and we just launched this thing and they’re trying to sell it to a customer, that’s when we’re going to have the pricing conversation.” And I got to imagine, people don’t think that’s a great idea. So look, should you ask your customer, “How much will you pay for this?” No. And we’ve known that’s a bad pricing question for 60 years, and we’ve had really, really smart people, smarter people than I dedicate their entire academic and commercial careers to figuring out better ways to ask pricing questions to get reliable information, and so there’s much better ways to go about that, but I feel like that’s just definitely a mindset that folks have out there that it’s just not true and I’m having to come back constantly.

Randy Wootton (08:29):

Great. Well, we can come back to number one in a second, but just stay on that. When we were talking about this earlier, don’t be afraid about talking about pricing. I thought of talking with my teenage boys about sex and drugs. You’re going to have the conversation, you get to choose when to have the conversation because it’s going to come up or it’s going to be part of the reality at some point. So what are some of the questions you would coach CEOs or chief customer officers without hiring a professional to, what are some of the questions that you would encourage them to think about asking their customers or framing if they’re going to have a conversation about price?

Dan Balcauski (09:05):

So I think there’s a few different things to keep in mind. So I’ll ask sort of the price framing question, but I think one, if I’ve been having a conversation with a CEO or executive team, like any research, you should have a defined objective. And usually with pricing, the first thing I find is that nobody is really aligned on objective because I can go out and ask a bunch of questions and get you a bunch of data, but if we don’t really know what our final aim is, it’s going to be really difficult to interpret or use that right? We’re going to probably ask the wrong questions, we’re not going to model it the right way. What do I mean by that? It’s like, are you as the CEO, and when I say CEO, I’m broadly referring to the entire senior executive team and the board, are you trying to maximize revenue? Are you trying to maximize profit? Over what timeframe? Are you trying to increase net revenue retention? Are you trying to increase your customer lifetime value? Your average revenue per account?

(10:01):

What is the metric that we’re really looking at? Because overall, let me say one thing first is that when we think about pricing and the price level, we’re almost always dealing with ranges, right? So I think that’s the first misconception I want folks to step away from is there’s rarely sort of one number that is the answer. I’m a super math nerd and I would love it if there was just a system of equations that we could just plug in and then out pop the number. But usually it’s something like, hey, we did this research. Customers would generally pay between $49 and $99 per user per month or per year, whatever it might be, and so now we’ve got a decision to make based upon what that market data. Do we price the lower of the range, the high end of the range, what are the different strategic considerations we want to take into account? What would it mean if we were at one end of the spectrum versus the other factors we might bring into bear? So that’s the first thing I want to just lay out there.

(10:56):

So the second thing is, there are many different ways that you can go have pricing conversations. I think in a B2B context, another misconception, something that I really work a lot with, is to help people understand the concept of value. And so when I’m thinking about what maybe folks would think of as pricing conversations, usually I want to term those in terms of a value conversation with the customer. So I want to frame that as a value conversation. Like, “Hey, I want to understand why you’re making the decisions you are. What is it about your organization or your situation, your context that’s causing you to look for a solution? What are those triggers? What are the other competitive alternatives you’re looking at? What does a product like this do? How does it fit into your operations and how does it actually help you increase the value of your organization? Does it help you increase revenue, decrease costs? Do you have a sense of how that is?

(11:54):

At the end of that, I might have a series of price-specific conversations, but I would say it’s going to be more like 75% of the conversation with the customer. It’s going to be focused on the value they get out of it and really understanding deeply their situation and their context before I get to understanding price because one of the most valuable things is not even the number I come up with, but having a really deep understanding of what is the mental model? Why does someone give me a number that they do because they’re comparing against a certain situation in a certain context? Value is subjective, it’s relative and it’s contextual, and so we really need to keep that in mind when we’re having these conversations. When it comes to very specific sort of price level tactics, there’s two general or broad categories that I would refer to. One is what we generally refer as direct questioning. So that’s where I’m asking you a question like, how much would you pay for this product? So prices directly in the line of question.

(12:47):

The other is indirect. So folks have heard of methods like conjoin or discrete choice. These are methods where pricing is the price of the option I’m asking someone to consider whether the purchase is tied directly to other features that are in a bundle that I’m offering them options to choose among. So therefore, price is just one of several different variables I’m asking them to make trades around. So in general, folks want some tactical, how do I go have a pricing conversation? There’s a pretty well-known methodology called Van Westerndorp Price Sensitivity Meter is named after a Dutch economist back in the seventies who invented it. It’s four questions. First one is, what price would be so cheap that you would doubt the quality of this product and wouldn’t buy it? Two is, at what price would this product be you consider this product a bargain and you would buy it? Third, at what price would this product be you’d consider it to be getting expensive, but you would still buy it? And four, what price would this product be prohibitively expensive and you wouldn’t buy it?

(13:43):

So why is that better than asking just the, “Hey, what would you pay for this?” Again, going back to this idea of prices as ranges. If I ask you how much would you pay for this thing, I have no idea if you’re giving me a high answer, a low answer, as well as when… In these conversations, I also, more importantly than the number they give me back, I usually want to ask why. “Hey, you said too cheap below this price.” “Oh, $10 a user per month. That would be too cheap. I wouldn’t buy.” “Oh, because I bought another product that was like that and it fell over and I would never buy that again.” Whatever. “They couldn’t support us and if we call up, they never answer our support tickets.” Whatever it might be, getting that customer’s mental model is very important. So we could have an entire conversation just on pricing analysis methods, but hopefully that gives your listeners enough practical tidbits to start the journey forward.

Randy Wootton (14:31):

Yeah, I think that was a lot. So maybe even backing up just a little bit to defining the objectives we were talking about, being clear on that, and that the primary ones are maximize revenue, maximize profit over what period of time. When I’m talking to the board, they say do both and as fast as possible. Do you find people able to be more explicit about one or the other of maximizing revenue or maximizing profit? How does that play out for you when you’re engaging people and they’re like me, like, “I got to do all of it.”?

Dan Balcauski (15:05):

Well, we could get into these simple economics and say that there is no simultaneous number that both maximizes revenue and maximize profit, assuming that your marginal costs are greater than zero. So as soon as you have marginal costs, that’s just math. So if someone ask you to do both, you haven’t walked them through the realities of a financial situation. One way that companies do approach it… It does happen. So I think one thing is, if I’m working with an executive team, it’s important to bring that conversation to the front because everyone may be thinking about optimizing something a different metric, and so you want to bring that conversation up and make sure that everyone, at least in that seat, either boardroom or executive suite, is on the same page for what you’re trying to optimize. I’m sure given your background, you’re very familiar with something like the Rule of 40. Well, Rule of 40 is one of these compound metrics and does bring these two together.

(16:11):

And I know there’s been a lot of, say, innovation around the Rule of 40 or conversation at least in the last 12 months where people are talking about weighting those things differently. And look, for any optimization problems, you can say, hey, we want to balance, but we’re going to weight revenue growth more. And so how that comes about when you’re then choosing the price point allows you to build your models and choose your range more in line with those goals. But yes, it is something that you at least want to have the active conversation about it. You don’t want to end up accidentally at the end just being like, oh wait, what were we actually trying to accomplish? That’s not going to be a good choice.

Randy Wootton (16:47):

And I think this plays out maybe two different conversations. One is, how do you want to price for prospects versus how do you want to price for customers? And you can use a table or some way of having a broad set of ranges, to your point. But I think for current customers, the tension is often between gross retention and net retention and what’s the price that they have and the value that they’re receiving today with the product, and you go through a negotiation, especially in a world where everyone’s saying cut back on software spending. So everyone is having what I call contested renewals. People are coming in and saying, “Hey, I need to pay less.” And then you have to think about, as a company, well, are you going to preserve that customer even if there may be a contraction? Versus, you’re trying to drive NRR through either selling features or across divisions or adoption of new modules, or for us, our pricing model is based on the trailing 12 months of revenue. It’s, well, do you introduce a new tier, a new increase in price?

(17:50):

So that NRR versus gross retention I think leads you maybe to think about customers in different segments, in different cohorts in terms of those that are under priced compared to market, how are you going to bring them up to market? Those that are overpriced, are you going to back off a little bit in terms of your expectations? So I think that’s where we have the conversation, at least that I know at the board meeting is, if you want me to drive NRR and I’m going to go out with new aggressive pricing, that may have an impact on gross retention, and let’s be really clear about that. So how do you isolate the experiments to get data to inform your strategy?

Dan Balcauski (18:24):

Yeah, a hundred percent. And segmentation falls heavily into the methods that I work with because you’re absolutely right. Your existing customers, their realized value and their perceived value is going to be very different than a net new customer, and how do we manage existing customers versus net new customers with a price change, with a price increase? Those are very important questions and we think about handling those in different ways, so I definitely approve of that way of thinking about it.

Randy Wootton (18:53):

And then just, you were talking a little bit about rule of 40 versus rule of X, or the new way of thinking about rule of 40. I think Bessemer came out in January with their rule of X, which gives you a multiple on top of your growth rate. So your ARR growth rate versus your EBITDA margin. The rule of 40, for those who don’t know, you can go find a bunch of information on the internet, but it’s the combination of those two factors, how fast are you growing and how much margin are you churning off at the EBITDA level? And that should equal 40. So if you have 10% growth and you need 30% EBITDA, if you have 40% growth and you need 0% EBITDA. So it’s a broad tool and I’ve had a lot of debate about what size company it’s relevant for, et cetera, and there’s a bunch of research. But Bessemer actually showed that the driver of value in terms of shareholder value is tied more to the ARR growth rate and they have a new way of thinking about it.

(19:45):

So I do think, again, thinking about, are you driving for growth? So maximizing revenue or maximizing profit for B2B SaaS companies, series A through series D should probably mostly be focused on maximizing ARR, which then drives shareholder value. You can see it in all the multiples, et cetera. But it’s a robust conversation. I know with our board, one of the things we’ve done is we said, hey, what do we want to be in terms of size of company in the next three to five years? We’re effectively owned by a PE firm. Well, it’s Battery Ventures, but within their PE discipline, and there’s an expectation in terms of the return on the money they invested in the company. And so how do you structure your business to deliver on that profile? Then comes down, at some level, down to a pricing conversation. How many customers can you get at this price and does that price cover your costs or what’s the profitability assumption if you’re trying to drive EBITDA? So all of those big conversations about ultimate transaction resolve down at some level to a pricing conversation.

Dan Balcauski (20:49):

Yeah, I could not agree more. Happy to explore any direction of that.

Randy Wootton (20:56):

Well, good. So that was just bucket number one around defining objectives, getting aligned with the board, the different tensions you have and making sure everyone’s driving against the same vector. The other one I think that you were talking about is this idea of framing value, transforming the pricing conversation to a value conversation. That feels to me like that’s something that the best salespeople do in the actual sales motions. So when they’re doing the discovery calls, they go out and try to figure out the pain, what are they trying to solve, the opportunity, if there’s specific events that are triggering it, what are the alternatives that someone would be evaluating? I know with our product in particular, people are comfortable. If they’re using rev rec, they might be doing that in an Excel file versus moving over to a Maxio system that gives you the rev rec and the reporting.

(21:44):

How do you think about the understanding of value for prospects and customers and leveraging sales teams to get that input? Because you’re one person going out and doing the interviews, but if you can get the input from the sales team, 10, 20, 30 salespeople that are having these discovery calls, what would be a recommendation, if you have one, for ingesting the data broadly?

Dan Balcauski (22:08):

Yeah. So this is a great question because there’s often a… I mean, one of the things that I am dealing with in a lot of client situations is just a lack of general process or ownership. One thing that you said is really important, which is, every day those sales folks are having to have a value in price conversation. The question is, are they having to start from scratch because the rest of the business hasn’t supported them in a structured way? So we could have a longer conversation around who should own pricing overall. I generally don’t believe it should be sales. There’s many reasons for that. It’s sort of like putting a Dracula in charge of the blood bank. But if I was to say that… Look, they are an incredibly important stakeholder and they have a lot of experience, just like you might go through some baseline sort of ROI calculation or your product management team might do some sort of risk reward, total addressable market analysis, but at the end of the day, you also trust your product team that they have some sort of spidey sense, they’ve talked to enough customers, they really know what’s important even if they can’t sort of finally justify every last bit of it.

(23:26):

Sales and pricing is the same way. They’ve just had so many of these conversations, they just have a spidey sense of how customers may react, how customers describe the situations that they’re in. So you want to make sure to definitely bring them in. And for any pricing engagement, sales should definitely be in the room, should be in the core team who is looking at it. Should they own the final decision, should they own have full legitimacy up to a hundred percent, no questions asked discounts on any deal? We could have those conversations. Generally, I don’t think that’s best practice, but absolutely, you want to make sure that they are brought in and that everything from what are the competitive alternatives? Do our arguments against how we have differentiated value over the competition, do those make sense? Do customers buy them? Do we support them effectively? Do they resonate? Or do we say it and every time the sales guy says it, he gets laughed out of the room and they’re like, “Yeah, the last 10 guys told me that. Prove it.”?

(24:31):

And then they’re stuck and all they’re left with is a discount lever, and you don’t want that to happen either. So I absolutely think you should bring them in. I think the more that you can make sure there’s a consistent conversation happening between… Sometimes, depending on the organization, but sometimes it might be the product marketing team that maybe owns the strategic pricing levers, they’re having regular one-on-one conversations with sales folks, sometimes it might be at the level of the strategic pricing committee where there’s sales representation and then maybe there’s a deal desk, so that deal desk focus seeing every sort of deal come through and requests for discounts by customers in different segments or different geos or different special situations. And so we’re making sure that we’re bringing that back into the organization. There’s an entire process element. It doesn’t necessarily get me out of bed in the morning, but actually the larger you get, the more important it is for this because pricing is painfully cross-functional.

(25:22):

You can’t just have a single product manager or product marketer or the CEO just go into a room and say, “Hey, here’s what we’re doing.” It’s going to affect everyone in the business. And so yeah, setting up those information flows back from the front lines into that strategic planning is incredibly important.

Randy Wootton (25:39):

Yeah. That was actually the third bucket of best practices when we did our pre-brief. The first one, which we might come back a little bit because I think we glossed over it, was the, it’s not about what you charge, it’s about who and how you charge. Number two was, don’t be afraid to talk about pricing, which we went down the path. And number three was be deliberate about pricing governance and answering the question, who owns it? What is the forum for the conversation? I know in our experience, I remember when I came on board again because our pricing and our model is tied to revenue, our customer’s revenue, and we have two different types of products, we have a billings tool primarily, and then we have a rev rec reporting tool. Well, how does that pricing work and what’s the value if it’s not tied to number of invoices being sent? The general partner, Chelsea Stoner, said to me when I first started, “Randy, one of the things they find across their port cos is that people don’t get pricing right.”

(26:34):

And so when they buy a company, it’s a major area of focus over the first year or two is to redefine the pricing. And honestly, even in the first three months we launched new pricing, we were trying to do an integrated pricing model. Classic Salesforce where I had been before was you had your bronze, silver, gold packages and you would graduate people up, and I was all about making that happen, and we launched it and it didn’t work. It didn’t resonate in the marketplace, and so we had to bring that back in. And for our initial pricing work, we had used a consultant, we actually used two to come in and help evaluate the market, give recommendations on what the competition was doing, go do the interviews for processing customers and how they wanted the pricing. So we had had professional feedback, but I personally didn’t have enough experience in this market to be able to apply judgment to it, and I think we missed.

(27:28):

But then it came back and Chelsea was like, look, in their experience, they like consultants to come in and provide advice on a periodic basis, but there needs to be a commitment in the ELT in particular, to your point, about cross-functional alignment on pricing, and the team needs to build the muscle of pricing. So we’ve started a pricing council which meets once a month, and it is to bring together the information across multiple products and situations for both prospects and customers on what’s working, what’s not, how do we want to rev it? Because every time you rev it, you’ve got to train your team, you got to get instantiated in Salesforce, you have the tracking and reporting. So it’s a major lift if you’re going to be instantiating the pricing construct versus just experimenting. So I think to your point, having a pricing council where it’s the executive team owning it, it’s often the CFO who, at the end of the day, I think…

(28:24):

CEO owns it at the highest level, but CFO has to own it because there are business model implications, back implications, back to your point around are you solving for revenue or profit? If you understand our unit economics, are you willing to price and subsidize customers early on because of lifetime value over time, you’re going to have price? So I think the CFO has to chair the pricing council. We’ve ended up getting a wonderful gentleman join the company, one of the, call them operating partners, executive in residence of Battery who has a deep background in monetization, and he’s come on board and has started a whole nother set of conversation, the segment approach that we talked about, the different products that we have, what are some of the recommendations? And it’s been a really fabulous to have someone embedded who has background and experience in pricing and monetization to help inform the conversation we’re having as an executive team.

Dan Balcauski (29:18):

Yeah. There’s so many threads you open up there. So one, I want to go back to something you said at the beginning of that, which was, Chelsea is absolutely right. I haven’t met her, but I like her already. One of the major tools in the private equity playbook is pricing. It’s one of the first things that they do. And why is that? It’s because it’s an untapped lever for growth and everyone’s afraid to touch it. Look, there’s only three ways to grow a SaaS business, acquisition, monetization, retention. And sorry, all the oxygen gets sucked out of the room with acquisition. It’s just like, how can we drive more leads? How can we close more deals? And look, for a certain amount of the company lifecycle, those balances are going to shift, but I see way too much attention spread over too long just on the acquisition bucket. Obviously retention, once you get maturity, if you’re a seed stage company, there’s very few customers to retain, so it’s not going to have that much impact even if you move that percentage wise.

(30:15):

So I think that that’s important. And even with the little bit of your tale of woe, you launched it, it didn’t go well, but the world didn’t end, Maxio didn’t go out of business. And so I think that’s a beautiful story because you got pushed to change it, you changed it, it didn’t work, and then you tried something else. And I think people really have this fear that, oh my God, if we don’t know how to do it perfectly, we’re going to break it. Everything’s going to go to hell, and, I don’t know, I’m going to get put on the front page of the Wall Street Journal as the world’s worst CEO. I don’t know what the story is they tell in their heads, but basically it’s some version of that that says if it ain’t broke, don’t fix it, and therefore we’re not even going to try to learn. And that’s not how you do anything else in business, right? I’m sure as a CEO, the job of being the CEO is you get to do something every day you’re terrible at.

(31:11):

So today I’m terrible, and in a year, if I do it every day, I’m going to be less terrible. That’s the way things go. I’m going to build that skillset over time. But if you just ignore it, right? It’s a dragon that sits in the closet, it’s just going to be something you ignore, ignore, ignore. And the private equity folks realize this, they acquire a company and one of the first things they choose because everyone decides to ignore it. So if there’s one thing for your listeners, I would say. It’s a huge opportunity and the world’s not going to end if you screw it up, you can always roll it back and apologize. There’s better and worse ways to do it. Sometimes there are pricing changes that ended up on the front page of the New York Times, you don’t want to be that person, but those are very rare from what I see.

Randy Wootton (31:46):

Yeah, I think there’s something to that, and this idea of, as much energy and effort you put against product innovation, pricing innovation. So to that point, one of the areas we were going to talk a little bit about was pricing for AI product extension. AI is the buzzword. Everyone’s talking about it. What are you seeing in terms of how are things evolving? What are some of the best practices and what are some of the things to watch out for if you’re thinking about taking AI for your corpus of data and coming out with an AI product either as your core offering or as an extension to what you’re currently offering?

Dan Balcauski (32:19):

Yeah, there’s a whole bunch there. And so let me see if I can just give some highlights or some mile markers so folks don’t get too lost because when we start talking about AI, it can mean a lot of things to a lot of people. There’s sort of generally what we’d call AI as a service, and these would be your foundational model companies, your Google, Meta. Actually, Meta is just open sourcing their LAMA models, but like Anthropic and Open AI, they’re selling sort of foundational access to these what are now large language models where they’re increasingly going multimodal. I think most folks are not in that camp. There’s also another camp when folks talk about AI, and especially in the AI and pricing, there’s been companies for well over a decade now, probably 15, 20 years. Pros, Van Dabo, Price Effects, Zilliant, who’s actually based here in Austin where I’m at, and they’ve been applying artificial intelligence for more B2B industrial type use cases to manage their pricing.

(33:18):

And so that is your traditional machine learning models, they’re doing a bunch of different market modeling exercises to do pricing generation, much like the airlines, the hotel companies do, that type of generation. So I don’t think most folks in your world are thinking about that. What we are seeing is a lot of folks these days who are embedding the technologies coming from Google, from Open AI, from Anthropic into their platforms. And so it’s still early days. I haven’t seen one model that’s absolutely the way to go. I think there’s a couple of things I would keep in mind for folks. One is, don’t make the mistake the Web3 crypto folks made by saying, “Hey, now we got blockchain, so our product is better because it has blockchain,” Because mostly customers didn’t care. The blockchain case made a lot of value worse, but we’ll leave that to another day.

(34:16):

Telling people you have AI, I think a lot of people are getting swept up in the craze of like, “I need to tell my board, I need to tell my investors that I have AI because they’re asking me.” But a lot of the customers have no idea what to do with this. I’m very sort of leading edge and I’m using AI tools all day, but I’m also a weird pricing guy who’s been in software for 20 years and used to be an engineer. I’m not your standard customer. So most folks, at the end of the day, we really need to care about what is the use cases? What is the value that we’re unlocking for folks? And get the focus on that. And so what does this mean? I think one interesting example that we’re seeing is Intercom. So Intercom, they’re the little icon that pops up in the corner of every website, says, “Hey, how are you doing? Can you answer any questions?” So sometimes sales, sometimes customer support, they have different use cases.

(35:06):

On their customer support, they have released several different AI capabilities. And what’s interesting about that is they’ve actually split it into two different domains. In the customer support domain, they’ve got AI capabilities like, “Hey, summarize all the account history for this client.” “Suggest a message I should send to them.” So it’s capabilities that enable and enhance the capabilities of existing customer support agents on the front line. That’s different than what they’ve created from their autonomous agent, which they call Fin AI. Fin AI is, hey, the customer comes to your website, starts asking questions, and the Fin AI agent, if it can actually go through the entire support process and resolve that customer’s case without ever involving a human. They have two separate pricing models. So the first one that I was referring to where it’s enabling, making your existing agents better, faster, more effective, there it’s just an ingredient in the product. They’re talking about things like everyone else is talking about, “Hey, it was summarization or help you compose emails faster,” But it’s just included with your user license at the different sort of good, better, best tiers.

(36:28):

Versus the Finn AI capability, they’re actually doing outcome-based pricing and they’re charging like 99 cents per successfully resolved case. So I think what’s interesting about that is that it’s made a very clear distinction between, is this just an ingredient to enhance existing value drivers or are we creating entirely net new capabilities like this agentic robot that will act on your behalf to replace a human? Because why is that relevant? For the Intercom base pricing, they price per user. Obviously they don’t need a user if the AI is doing everything for you. And so they’re able to effectively sort of play both sides of this. I would also note, a couple of things I’ve seen folks do that I really do not like and would caution against is there’s two major things happening with this shift to AI. There’s really a lot of ambiguity on two sides of the equation that are intricately related to pricing. What is on the value side? What is this thing? How are we going to use it? What is the actual incremental benefit we’re going to get out of it? So all those questions on the value side are existing.

(37:41):

And there’s a lot of new questions on the cost side, which B2B SaaS companies haven’t really had to deal with for a while. If you look at a P&L, the marginal cost of an additional customer has been relatively small. You’ve got some compute, you’ve got some network, you’ve got some storage, you’ve got very marginal costs there, but if you’re paying for one of these AI as a service companies, that cost equation is going up. And so the thing I’m seeing companies do is, we really don’t understand value, but we really understand our costs, and so what we’re going to do is we’re going to say, “Hey, it’s $25 per user per month, and each of those users gets 2,500 credits or tokens.” And now what you’ve done is you’ve taken your cost model and forced your customer to understand it.

(38:30):

I’ve talked to a couple of startups that have gone down this road and they’re just like, yeah, now every time my sales guy’s on the phone, he’s got to explain what a credit or a token is, and your customer doesn’t care about it and your salespeople shouldn’t have to care about it because at the end of the day, you’re just helping the customer get their job done, and now you’re forcing them… Especially when the value side is so uncertain because you don’t know how you’re going to use it or if it’s going to deliver the value, and now you’re making people like, “Whoa, what is a token? How many am I going to need?” And all of a sudden it’s just going to gum up the works in your buying cycle. I think following the model like Intercom, it really is something that nicely addresses that friction that I’m seeing some folks fall into.

Randy Wootton (39:08):

Yeah. Clearly the through line through our conversation has been around value and pricing being associated with it, and so then your uber point around the AI product extension is no different. It’s getting clear around the output of the result that you’re driving, and the Intercom one is a great one, so if you can define something like a resolved case, a successful resolve of your case, then you can track. Then to your point around the cost, you as the supplier of that solution need to figure out what your cost structure is behind that in a package or in an offer with a price associated with the value. And then you get out of, to your point, you’re just pushing on costs that you don’t really understand, but as you’re looking at your P&L, you’re freaked because the variable cost is going up and you’re not sure if you’re monetizing it correctly.

(39:58):

So then, going back to your opening comment around your whole background and experiences around trying to find value, deliver value, price value, monetize value, AI is just making it a little bit more complicated because now you’re playing on both sides of the P&L.

Dan Balcauski (40:14):

Well, and I think it’s forcing a more discipline on the pricing side than companies, B2B SaaS companies have had to deal with in a while. So if that is the move to get folks to think more about pricing in their P&L a little bit more rigorously when they’re building features, I’m for it.

Randy Wootton (40:31):

And we like complexity on our side because then you need sophisticated systems to help you do that pricing catalog and then the actual billing and invoicing and monitoring and metering, et cetera. All right, Dan, well, this has been great. We’re almost up against time, but I’d love doing the speed round. So with our speed round, three questions. What’s your favorite metric and why? What’s your favorite book? It doesn’t have to be a business book, it could be any book that you found inspirational recently, and then your favorite influencer. So this is someone who you spend the time reading their emails or listening to their podcasts, you think that they’re actually adding to the conversation versus just in the echo chamber bouncing around ideas you’re hearing everyplace else. So favorite metric and why?

Dan Balcauski (41:13):

Favorite metric and why. I think probably would go with net revenue retention. It’s probably the most important metric for pricing.

Randy Wootton (41:20):

Fair with the caveat of pricing, right? Because where you’re driving the pricing. Okay, got it. Favorite book?

Dan Balcauski (41:26):

Favorite book. I’ll say a series. I’ve got this entire bookshelf behind me and one entire shelf was taken up by the Wheel of Time series.

Randy Wootton (41:35):

Oh. Yep, yep. Have you read all of them? There’s a lot of them.

Dan Balcauski (41:39):

I’ve read all of them several times because I started reading them in eighth grade. And much like the folks with the Song of Ice and Fire, he did not finish in time, so three years between books trying to catch up, so I’d have to reread them in order to understand the newest one that came out.

Randy Wootton (41:57):

Oh, got it. Yeah, I’ve read that. I don’t think I’ve read them all. I’ve read several of them, but they were definitely a great impact on me personally. And then favorite influencers, someone that you’re reading or listening to that you think has interesting ideas that you would recommend for our audience?

Dan Balcauski (42:09):

Well, I would say two in two different domains. I would say just in general, I’m a really big fan of Sam Harris and his Making Sense podcast. I’ve bought Waking Up subscriptions for friends and family. I’m really big into meditation. I think he’s doing a really good job of touching, going in depth on a bunch of topics in our world that other folks are not touching as deeply. So I think that’s really valuable. In terms of just general influencers, I really like this gentleman, Roger R. Martin. He was a dean of the Rotman School up in Canada for a while, and he co-wrote a book with A.G Lafley called Playing to Win, who is the CEO of Procter and Gamble. So if you’re really interested in learning about strategy, Roger’s blog is really good. I think his blog is called Playing to Win, Practitioner’s Insights, something like that. Sorry, Roger. But I highly recommend that if folks are into the strategy world.

Randy Wootton (43:05):

Oh, yeah. Playing to Win is one of my favorite books. I didn’t even think about going to listen to his podcast or read his blog, but absolutely introducing that idea of how do you win strategy. A gentleman, when I was at Salesforce, a guy named Pablo Zamita Ramirez, who was my boss, who had worked on that initial framework, theoretical construct when he was at Monitor, brought it to Salesforce, and we used it as Salesforce, and I’ve used it at three different companies. I find it to be one of the best strategic frameworks, approachable, understandable, but super robust in terms of how do you align along those five different variables of the strategy, so great recommendation. Well, Dan, as always, I’ve enjoyed our conversations. I always learn something, and appreciate you spending some time with us today.

Dan Balcauski (43:47):

I really appreciate the opportunity, Randy. It was a blast.