Unlocking Value: Effective Pricing Governance and Models for SaaS and MSPs with Dan Balcauski

[00:00:01] Let's dive into one of the most mission-critical levers for MSPs, SaaS providers and tech companies, pricing. And to guide us through it, I'm joined by Dan Balcauski, Founder and Chief Pricing Officer at Product Tranquility. We'll unpack why most companies confuse price metrics with pricing models, how to build pricing governance into your organization, and why usage-based pricing may not be the magic bullet everyone thinks about.

[00:00:27] You may be building pricing for the first time or fixing a structure that no longer fits and Dan's going to challenge the way you think about monetization and give your frameworks to do something about it on this bonus episode of the Business of Tech. Well, Dan, welcome to the show. Good to be here, Dave. Excited for our conversation today. I love talking about pricing because you've got a really interesting way of approaching pricing that I had not heard before. You refer to it as a living system.

[00:00:57] So give me a little bit of a thought of like, how do you shift from the thinking of this sort of one-off pricing fixes to this idea of managing an ongoing system that theoretically would have some governance around it too? How do you think about pricing as a system? Yeah, well, you know, I think you hit on a key point, which is I think people feel like pricing is a one-time event rather than an ongoing iterative process.

[00:01:23] And so, you know, we may or may not get into this, but, you know, pricing has a fundamental relationship to your value, especially your differentiated value in your marketplace. And I don't know many companies that are like, all right, we're done offering value or improving the value we add to customers. I know your competitors aren't having that conversation. They're constantly making changes.

[00:01:45] Also, we're dealing with macroeconomic effects, you know, 50-year high inflation or, you know, unexpected trade war, whatever it might be, where then we have to be able to pivot, reassess. Are we still matched to our value and the value our competitors offer? And so, therefore, to me, I think it's just a fundamental misunderstanding when folks think about it as, oh, yeah, we did pricing five years ago. We're done with that.

[00:02:15] Which leads out to the other thing that I thought you said that was really interesting. So I buy into it. Like pricing is a thing that you're going to continually be adjusting and tweaking and iterating on. You also separate out the idea of price metrics from pricing models. And I thought that was really fascinating. Tell me a little bit about, you know, what people normally misunderstand here and how correcting it makes things better. Yeah.

[00:02:39] So I think, you know, there's a couple of different components of what you're hinting at there. So I see the first is, you know, I spent all my time in B2B SaaS pricing. And when I say pricing, I always mean pricing and packaging. Why is that? Because when it comes to SaaS pricing, most executives think that what you charge determines your success. In fact, who and how you charge determines your success. And so what you're just pointing out there is really the how you charge.

[00:03:05] Because price is not just, oh, should our price at end in fives or nines? You know, should it be $19 a user or $99 a user? Those are interesting conversations. Love those conversations. But they happen at the very, very end of what is a intense process to really understand how it is that our product creates value for our customers.

[00:03:30] And then how can we figure out ways that our product, not all our customers are the same. And so then we have to figure out how we can differentiate between those customers. So you mentioned this concept of a price metric. So I always, when I'm talking about pricing and packaging, I'm always talking about both together. Because when people hear price, they just think of that number. But packaging is probably where I spend the majority of my time when I'm engaged with clients and the marketplace in general.

[00:03:58] And this packaging, I think it's broken down into a couple of different components. Price metric, price model. So you're offered bundles or configurations as well as your price fences. And so you mentioned this price metric and price model. So let me just kind of zoom in on those very quickly. So let's use everyone's favorite fast food restaurant, McDonald's, as an example. Because this idea of a price metric can get confusing. But we've all been sitting there in the drive-thru and we get that McDonald's hamburger.

[00:04:27] We buy one hamburger, whatever, let's say it's $3.50. If I buy two hamburgers, it's three times $3.50. If I buy 10 hamburgers, it's 10 times $3.50, right? And so what is, in that case, my McDonald's hamburger, the price metric is per hamburger. They could charge me per pickle they put on there, per sliver of onion. But that probably wouldn't make any sense to you when you're sitting at the drive-thru. And so they don't do that.

[00:04:53] And so we have a very similar situation for whatever software we're building. Should we charge per device or endpoint monitor? Number of sites, number of end customers, number of geographic regions, whatever. It could be any number of things. But we want to think about how does our price scale with the value that that end customer is receiving?

[00:05:19] How does that price scale with the costs that we're incurring? And then what is operationally viable? Like what are elements that both sides can feel they could exert some sort of operational control over, right? Because I wouldn't want to charge you by the number of CPU cycles my backend software is running because you don't have any control of that. You don't have any control of the architecture. And also, you don't even want to have to think about that. That's not your problem as the end customer.

[00:05:49] And so we put a lot of thought into what is that appropriate price metric. And then the price model that you mentioned, let's go back to the McDonald's drive-thru. I buy that hamburger. I have the full rights to do whatever with that hamburger I want. I pay McDonald's, the cashier, the money. I take my hamburger and transaction is done. And we think of that as a perpetual pricing model, perpetual transaction. You know, those of us who've been in software world long enough, all used to be perpetual.

[00:06:18] But then, you know, Mark Benioff and Salesforce came out, no software. And of course, a little bit of a marketing bait and switch because of course, it's, there's still software under the hood. What it really meant is, hey, we're going to, you're going to pay a subscription for this right to use the software as long as you're paying us versus this thing that you take and install, right? And so this, another pricing model. And these days we're seeing a lot more as well in terms of like hybrid or pay as you go type models or utility billing models. So I, you pay for what you use.

[00:06:47] So it's called utility billing model because I love everything in technology. We always take credit for inventing something. Oh my God, like snowflake. They're so innovative. They've created a new pricing model. It's like, well, I don't know my water and electricity company would be building me in a utility based model for a hundred years. But you know, everything old is new again. And so we want to think about how these elements interact because there may be different trade-offs that are appropriate for our particular product and our customer base that make one model suitable than another. I don't know any fast food restaurants.

[00:07:15] I think I read at one point Taco Bell was flirting with a subscription. We could debate whether or not that's healthy for you, but that's, you know, in general, we're paying mostly in our real life for perpetual transactions. You know, unless you're looking at something like a car, right? Cars have had leases, right? Very similar, right? You can almost think of those as a subscription. They have a little bit more complexity, but we want to think of those elements separately and then make very explicit decisions about them independently because each of them can have their own sets of trade-offs.

[00:07:42] Well, and arguably not fast food, but Panera offers a subscription for their coffee. So there's ways like there are models in that. And it's interesting that you bring that up because that actually leads me to the next set of questions that I wanted to ask about. And you're talking SaaS subscriptions and that's where your expertise is. But that translates incredibly well to managed services and service delivery because it's just another variety and flavor of that. And one of the things that we've been having lots of conversations about that seems to be

[00:08:10] like a hot trend to discuss is the idea of either usage-based pricing for this or ultimately outcome-based pricing. Now, what I want to get your sense is, is this hype that's distracting or is this the actual direction that things are moving? Well, you mentioned the term usage-based pricing and it's a term that is unfortunately widely

[00:08:35] used, but I really dislike it in a lot of ways because whenever someone is talking about usage-based pricing, you never know if they're talking about any pricing system that is just not your standard subscription seat-based pricing, or if it includes other type of consumption-based pricing metrics, or if it's subscription or pay-as-you-go or some hybrid version.

[00:09:04] So this is why I like to split out those concepts of a price metric versus price model. And I think we are seeing some transition generally in this space. We go back decades when we were selling perpetual software. I mean, a lot of people used to price their B2B software on the number of server cores used to use. And when we went to subscription, seat-based subscriptions tend to be the rule of the land. But even then, I mean, back at...

[00:09:34] I used to spend a lot of time in the IT operations management space, and we had pricing models based upon the number of servers or network devices, or I was responsible for a storage management product, the amount of gigabytes of data storage you were managing. And so those were all perpetual licenses, but how much you paid was sized by those particular price metrics. And so to me, I see it as an evolution. And I see just... Unfortunately, I feel bad for a lot of folks who are pricing experts because you'll hear

[00:10:03] a lot of folks talk about usage-based pricing, and I think it just adds to some of this confusion. So I try to at least be consistent the way I talk about it. We'll be right back after this message. Are you ready to get your brand in front of the tech leaders shaping the future of managed services? Here at The Business of Tech, we offer flexible sponsorship opportunities to meet your needs, whether it's live show sponsorship, podcast advertising, event promotion, or custom webinars.

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[00:10:59] Visit mspradio.com slash engage today to explore all the ways we can help you grow. And we're back. What about the early conversations about outcome-based pricing? Because the idea here being, of course, that we can make promise to a customer that a change will happen. Some outcome will be resulted and we'll only get paid on based on that. What's your take on this conversation?

[00:11:27] Outcome-based pricing is incredibly difficult to pull off in practice. A lot of people will say that outcome-based pricing is the future. My retort is it is the future and it always will be because it is very difficult to establish attribution with your customers. So we think about what outcome would mean in the mind of a buyer.

[00:11:52] It usually refers to some broad-based business KPI that we're helping them improve. We help them save a bunch of money. We help them increase their revenue. Those are usually the two big metrics people would try to attach outcome to. And so we can look at something like Stripe. I think Stripe is in a rare position where they're in the payments layer. They're able to charge a percentage of the transaction that goes through.

[00:12:19] And so they have a very nicely aligned model to, hey, you're whatever, either a SaaS company or an e-commerce platform. The more you sell, the better we do as your payments platform. Very nicely aligned. It's rarely the case where you can get that sweet spot of alignment anytime you're not directly in the flow of that outcome. Because what you don't want to end up happening is be on either side of an argument with your

[00:12:44] customer about, well, we're only talking about cost savings in the first year, not ongoing years. Or we're only talking about costs in this business unit, but not that business unit. Or you're not responsible for that because we had these other initiatives that we were doing. What I see actually is I think we may be missing. I've been thinking a lot about this because especially as we may get into it, the world of AI is coming up quite a bit. There's a distinction.

[00:13:12] As we think about pricing metrics, we can go from the world of full inputs on one end of the spectrum. On the opposite of the spectrum, you'd have sort of the business outcome. And then you have a range of different intermediate inputs or what you might term outputs in between. So maybe we need output-based pricing. What would I mean by that? It's like if I have an AI, a lot of people are creating AI customer service agents.

[00:13:40] And so those customer service agents, the promise is that they're going to save you a bunch of costs because you don't have to hire additional customer support people. And maybe you can downsize your customer support organization. But really, the only thing they can measure is the number of customer tickets that they successfully resolve, which is sort of an output, right? But it's not like really an outcome. And so we're seeing a lot of that. So you're really just moving that price metric a little bit farther along the value chain versus getting all the way to pure outcome-based pricing. Gotcha. Okay.

[00:14:10] So that gives me some thinking. And I want to make sure that I make this practical. So I'm going to restrict a little bit, particularly when we're thinking about theories like this. Are there particular frameworks or approaches that you recommend for ensuring pricing gets synchronized with what the business is looking for and the kinds of product and sales rhythms that we're trying to achieve? Are there practical frameworks for thinking about pricing? There's a lot. There's a lot of frameworks.

[00:14:40] So I would say, first of all, this may seem basic to folks, but it's, what are your goals when you're looking at your pricing? I'm surprised how many folks will say, hey, we want to optimize our pricing. And the answer to that is optimize for what? Because we cannot optimize for some nebulous world, right? We have to understand where we're trying to go. And are you trying to ultimately just drive adoption?

[00:15:09] Are you trying to fully monetize? Is it somewhere in between? Are you trying to achieve some ARR growth or some sort of unit metric like customer lifetime value? What is that? And it may be a blend of those things, but having those kind of clearly defined up front. And then I would say that we haven't really kind of talked about this, but the fundamental mistake

[00:15:32] I see a lot of folks make when thinking about pricing is we really want to think about not pricing our product, but we're pricing our customer or pricing our customer segment. So what I said before was price and value was incredibly fundamentally linked. And the concept there is that the value does not exist in the bits. Value like beauty is in the eye of the beholder. It's in the eyes of the customer.

[00:15:58] And so we really want to start with a customer-centric frame or a customer segment frame and work backwards from there because the contexts and situations those customers are in will determine the value that is driven for them, as well as the competitive alternatives that they have available. Those three elements, the value, the customer segment, and the competition, I think of the inputs to the pricing process.

[00:16:23] We want to understand what those elements are because our ability to price is really driven by the differentiated value we provide to a given customer segment above those competitive alternatives that are available to them. And then we have to make the strategic decision, strategy in the Michael Porter sense of the word. We have to determine who are we going after because ultimately when the rubber hits the road on these decisions, we have to decide, for example, around pricing metrics.

[00:16:51] Ultimately, we'll find a certain pricing metrics work really well for this group of customers, but not this one. And we have to be able to make a decision, right? You don't want to be like, oh, well, we'll do a subscription model and a pay-as-you-go model and a perpetual just depending upon what customers want. It's like, yes, you can do that, but that decision will ultimately result in a huge amount of complexity, both in your ability to actually tell a coherent story, your ability to actually service those customers, complexity in your product roadmap and operations.

[00:17:20] And so you're really just kicking the can down the road and probably shooting yourself in the foot. So we really want to think of those elements altogether, the customer segments, the value, the competitive alternatives, and strategy. And that's roughly what I call my services model that stands for the four elements of that framework, SBC and S. Now that feels like you've got an example. Walk me through like kind of an example of the way that might be implemented. Like with, you know, a simple, your drive-through example was a great one. Let's take another one. Like walk me through how this might work. Yeah.

[00:17:47] So one of my favorite examples kind of from a product in go-to-market strategy in general was Elon's whole strategy around Tesla. So if we think about the generations of Tesla vehicles that he created, he started with not the Model S, but the Roadster.

[00:18:14] Most people don't really think about the Roadster because it's a super high-end vehicle, right? It has, it's, it's relative competitive alternatives are your Lamborghini, Ferrari, right? It's a two, $300,000 car. I haven't priced one out recently because I haven't been in that market. But, and so if we think about the relevant customer segment, that's a very niche group of people who are considering a vehicle like that. What do those folks care about?

[00:18:43] I got the hottest new thing. I can beat all my other billionaire friends off the track at zero to 60 because this, this electric motor has, you know, has the unbeatable torque compared to any combustion engine. What do I not care about? I don't care about a nationwide charging station such that when I'm taking my family on a road trip, I'm not worried that between Austin and El Paso, I'm going to run out of battery charge and everyone's going to be stranded on the side of the road.

[00:19:12] And so it's this idea of, he had a price positioning that defined a relevant customer group that cared about with a set of capabilities that they were able to meet that those folks care about and made explicit decisions like, Hey, they don't care about these other things. Uh, and for that relevant competitive set, it was the better choice, um, where that allowed them, you know, among multiple things to, to build up volume and capability manufacturing,

[00:19:42] et cetera. Right. As he worked down into, uh, other price positions, uh, lower in the marketplace. So I think that's like one of the better sort of well-known examples. I think people can, can relate to that sort of bring those, uh, those components together. Gotcha. That makes perfect sense. So as, as I kind of wrap up our time together here, I want to, the last thing that you advocate for that I think wraps this up really nicely for me was you advocate for the idea of embedding pricing governance across it.

[00:20:09] I thought that was a really interesting approach because in a way, like it would be the final step of all this. I thought through all the pieces, rolled it out. Then I've got a governance approach that helps me make sure it's consistent. Talk to me a little bit about the way you think embedding pricing governance works in an organization. Yeah. So governance is a big word. Whatever I think about governance, I always think about the old, um, uh, what was it with the cartoon, uh, the, the bill sitting on the Congress steps, like how, how a bill, how bill becomes law.

[00:20:38] Uh, yeah. Schoolhouse rock. That's it. So I think about what I think about governance, right. That my, my head always goes back there. Right. And, you know, it's a, it's a fancy term. It just means some, there is a process. Uh, at each stage, there's something that transforms inputs into outputs in that process. Like any process, somebody owns, uh, those steps. Somebody's responsible for the whole thing. And it has some, uh, cadence where, Hey, every, you know, Congress has got to pass a budget

[00:21:08] every year. And there's, you know, we're going, we're living through that, you know, now, uh, where, you know, there's this whole rodeo of between the, between the houses and the president and the, uh, the legislature, et cetera. And anything in your business has this smell. Pricing's weird because again, if it's treated like a one-time event, one of the fundamental disconnects that I often see is that nobody's actually been given explicit ownership of pricing.

[00:21:34] And so I think this is a fundamental thing that's be easy for folks to kind of take away is like, look around your business and who is the person who's got responsibility for the pricing in your organization, because what you don't want to be is the CEO business leader. You got some pricing problem. You go into the Monday exec meeting, you blow up at everyone and all the other senior leaders look around sheepishly and be like, well, I don't, I don't, that's not, that's not mine. And so having that distinct ownership, I think is a key part.

[00:22:04] Then other things I mentioned, right? Like what is the, what is the process? Who gets decision-making authority? Um, whose inputs are just, uh, consulted, uh, versus who has sort of veto or final decision making what's, and also what's the cadence that we go through? Because as I hinted at at the beginning of our conversation, if pricing was just, oh, something

[00:22:30] that you did five years ago, it's probably time to repeat, uh, that process or dust it off. Uh, I would even say, you know, rule of thumb, if you haven't looked or done a serious evaluation of your pricing in the last two years, it's probably time because, you know, a lot changes these days in 24 months, uh, you know, you'd be surprised. Uh, but you know, if you think that, Hey, what was, you know, really, you know, on point two years ago probably needs at least a nudge, right?

[00:22:57] Maybe you're lucky, maybe, maybe it doesn't, but, um, you know, if, and so as you go through that, you're, you're going to improve that just like anything else in your business that you'd go through multiple times. Well, MSPs and IT service providers should in theory be really good at process. Dan Polkowski is the founder and chief pricing officer at product tranquility, bringing over 15 years of experience in managing the full product life cycle from incubation to end of life for both SAS and hardware products, formerly a principal product strategist at SolarWinds

[00:23:26] and head of product at Lawn Starter. Now guide SAS leaders in value-based pricing and packaging. Dan, if people are interested in reaching out and having a conversation and learning more, what's the best way to do so? Yeah. Well, uh, I'm happy to connect with folks on LinkedIn. Just let me know you heard me on the podcast so I could separate it from the rest of the LinkedIn spam. Um, you can also reach out to me at my website, product tranquility.com, but I'm usually on LinkedIn most days. So feel free to reach out to me there. Awesome. Dan, thanks for the conversation. Thank you so much, Dave. It was a pleasure.

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