Featured Links: Follow Dan on LinkedIn | Product Tranquility | ‘How To Price Your Product: A Guide To The Van Westendorp Pricing Model’ feature at Forbes | ‘Identifying and multiplying your best customers’ – Tamara Grominsky on The Product Experience | Buy ‘What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services’ book by Anthony Ulwick
Episode transcript
Randy Silver :
Hey Lily, welcome back. I can’t tell you how happy I am that you’re back for this week’s episode. I bet everyone listening is happy too. Ah.
Lily Smith :
Thank you so much. I missed you and all of our listeners and I haven’t had a chance yet to congratulate you on getting this Speaking slot of the year at MTP Conference in London. That is awesome. I’m definitely gonna be right at the front so I can heckle you properly.
Randy Silver :
I would expect nothing less, and thank you very much for that. I’ve spent the last couple weeks completely freaking out and Really getting started on the talk. It’s gonna be a good one, but it’s a. It’s a bit freaky, but what have you been up to?
Lily Smith :
Well, I went on a free diving course, which was awesome, but actually I wasn’t feeling great and it turns out I had COVID, so I’ve just been recovering from that over the last couple of weeks. But, honestly, there’s a lot of fun stuff to learn about Breathing when you’re doing a free diving course, and it was great to step out of my comfort zone in a new way, and you just can’t put a price on an experience like that.
Randy Silver :
Well, that’s interesting. I mean, I wonder what the price for a course in a niche specialist subject should be. Isn’t that? Isn’t that the kind of thing you cover in your day job at BBC Maestro?
Lily Smith :
Yeah, it is exactly, but I’m not sure I’m a pricing expert just yet. So this week we’ve got someone who absolutely is we’re chatting with Dan Belkowski, founder and chief pricing officer at product tranquility and we covered Absolutely loads of stuff and we both got some really good guidance from him during the chat.
Randy Silver :
So let’s not waste any more time, let’s get straight into it. The product experience is brought to you by mind the product. Every week on the podcast we talk to the best product people from around the globe.
Lily Smith :
Visit mine, the product comm, to catch up on past episodes and discover loads of free resources to help you with your product practice. You can also find more information about mine, the products conferences and their great training opportunities happening around the world and online.
Randy Silver :
Create a free account on the website for a fully personalized experience and to get access to the full library of awesome content and the weekly curated newsletter Mine. The product also offers free product tank meetups in more than 200 cities. There’s probably one near you, dan. Thank you so much for joining us on the podcast. How are you doing this week?
Dan Balcauski:
I am doing fantastic. Randy is good to be here. Thank you for having me.
Randy Silver :
It’s a pleasure. So for anyone who doesn’t already know you, can you just give us a quick introduction? What do you do in these days and how did you get into the world of? Well, not product, but but pricing.
Dan Balcauski:
Yeah, well, like I said, it’s great to be here. My name is Dan Balkowski. I run a consulting firm based in beautiful sunny Austin, texas, where I help high volume B2B SAS CEO is define pricing and packaging for new products. I’ve spent my entire 20 year career in software, started more on what you might call the value creation side and the value capture side that I’m on today versus an Engineer and then engineering management. Ultimately I became a lot more fascinated by how products created customer value and turned into dollars and cents for the business. Also, just temperamentally, the code never cared how mad I got at it, it still wouldn’t run. So I realized that maybe the software engineer route wasn’t the long-term best path for me. Ultimately, you know, those interests led me to pursue an MBA. I didn’t realize at the time. I was quite lucky with my just choice of graduate program. It was widely recognized excellence marketing. I didn’t find out till very recently that many business programs have courses in pricing. So I received a lot of my theoretical grounding and pricing there and then during that internship during grad school, worked for a very successful Silicon Valley startup where One of the questions on the CEO’s desk was should they pursue a freemium model and so kind of. Right away I got thrown into the world of pricing TLDR. We may come back to it later, but I do not recommend freemium in the B2B SAS world. So that may be a holy war. I am happy to continue fighting down the line, but we’ll just leave it at that right now. No, after business school, ultimately I took a series of product management, product strategy roles, increasing levels of seniority. Ultimately was had a product Start up and then, about four years ago, decided to go off of my own and Give a hand at consulting. So I’ve been doing that and now all I do is, you know, have the privilege of helping, you know, b2b SAS CEOs and their teams build profitable businesses and fulfill the company’s missions.
Randy Silver :
Fantastic. So before a? Well, aside from freemium, we’ll get to that later. What else do people get wrong about pricing? You know, this is kind of a mystery and a dark art for lots of us. So what is the most common thing? You see that people get wrong.
Dan Balcauski:
Yeah, it’s a dark art. I think only if you keep thinking of it as a dark art, it’s got more science methodology to it than maybe most people look at. But I think the number one thing I see is, when it comes to a SAS pricing, most executives think that what you charge Determiners of success. In fact, who and how you charge determine your success. So I would spend a lot more of my time on what the price tag goes on and little time on what number Goes on the price tag.
Lily Smith :
Okay, so let’s start with the basics, or from the foundation. Like how do you know that your pricing is right? Like what are the signals that you are getting it right or getting it wrong?
Dan Balcauski:
Well, depending upon you know where the company is in their life cycle, right, they may have there’s going to be different symptoms that we may see, right? So I think one of the questions is how early in your pricing or how early in your product or company journey should you really be absolutely focused on pricing? And what I tend to see is that, look, pricing is one of these things that people always have questions about. It’s always not quite perfect, but early on in a company’s trajectory, say, if you have a startup, right, it’s three founders in a room. They’re probably spending all of four hours on a Saturday kind of coming up with their original pricing and packaging and then maybe never think about it again. And it’s one of these things that, yeah, it might not be ideal, but early days you’ve got so. Many say pre-product market fit, and I generally just like that term for other reasons, but that’s another holy war we may not have time to get into. But in general, right, you’ve got. Like, are we actually solving a problem that does anyone care about? And maybe your pricing and packaging aren’t optimized. By the way, I’ll often, whatever I say pricing, I almost always mean pricing and packaging, but I usually just truncate that to pricing. But the problem is, is that, look, pricing is probably not what’s going to kill you in the early days. It’s because your pricing is absolutely wrong. It’s probably you’ve probably built something that nobody wanted or nobody needed, right? It’s very rarely that I see something that. But what is interesting in the early days is really understanding something like what’s your price positioning, because that’s a strategic decision that we don’t often really think of. But it has less to do with research. And just where do I want to play? If we think about so, is a common company like Southwest Airlines in the US, like they decided that they were going to be compared against. You know, not only the airlines, but bus fare as a competitive alternative. So what is the price point at which you are inviting relative competitive comparisons? Right, and so we can think about the. You know the general auto market in. You know again that we’ve got your sort of, your super low entry level players from. You know, say, your Toyota Corolla, your market entry player, your Toyota Camry, then you get your premium segment. You’ve got your Lexus, your BMW Mercedes, maybe your Tesla Model S. Then you’ve got your luxury segment right. None of that has to do with it. It’s not that the Toyota Corolla product manager sitting there being like hmm, I wonder if we should price test, you know, against Lamborghini and Bugatti. I was like, that’s the wrong like you’re not you’re, you’re that there’s a strategic element there, that you’re making decision. But ultimately, look when, when companies are sort of humming along and they’re getting to a certain level of growth, look, there’s all sorts of different symptoms, of reasons they might come to us. But like, ultimately like, are they meeting their goals? Is pricing getting in the way of those goals? If I think about pricing and packaging, you know, either it can be you’ll go, continue to use the auto industry analogy either it could be a lubricant in your, in your go to market engine, or it could be like pouring sand in your gas tank, because it’s going to affect every part of customer acquisition, costs, deal length, in terms of your, your sales cycles, in terms of your conversion rates, in terms of, obviously, the actual revenue, you know, an expansion of original, new business and expansion. So, like our, you know, looking at those goals, is pricing ultimately getting away Like, have you recently done a change? Like a change or an increase, and has it succeeded? Why are? Why not? You know, why are we losing deals? Like, what role did price play compared to other factors? And I think one thing I didn’t maybe explicitly talk about this early in my in my introduction. But one of the things that I pretty much play exclusively in the B2B space these days, and big difference between B2B and B2C is at B2C prices often the number one decision criteria of of a purchase, but at B2B it’s somewhere in the third to seventh most important characteristic that you imagine. Right, there’s the old adage of no one ever got fired for buying IBM. Well, there’s a reason. It’s like well, I don’t care that IBM costs more. It’s like my job’s on the line and I don’t want to be the guy or gal that recommends something that actually doesn’t work. Or, or, you know, I have social capital at risk, I might lose my job. I don’t like, ultimately, I don’t care that they cost. You know, twice, the next best person, even the other person, says they can do even better things than the others. Right, and so that’s that’s.
Randy Silver :
those are different things that we want to keep in mind, dan you said earlier on that you truncate pricing and packaging to just pricing. And you said a lot of stuff in that answer that probably conflated the two things, pricing and packaging. Can we just be really clear before we keep going what is packaging? What do you mean by?
Dan Balcauski:
that. Yeah, no, it’s a great question and I think it’s something that you know when I really got deep into the weeds and pricing, it’s something I don’t think is relatively crisply defined, and so when you start trying to learn about the space, it’s another area that can be ultimately very confusing, because it’s not, I think, the the pricing industry has a lot of work to do still to sort of standardize these terms. But I’ll use you the. I’ll give you the examples of the terms that I use. So this goes back to what I said before of. You know, it’s not what you charge. A term is just as it’s who and how you charge. So the what you charge refer to as your price level. That’s usually what people refer to think of as pricing, and then what we’re talking about packaging. It’s this element of how we charge, and I really think of it in four different elements, and so I use the analogy of McDonald’s. So, say, I go to McDonald’s and I go to buy a Big Mac. Okay, so now I buy the Big Mac. The Big Mac is my price metric. I pay per Big Mac, right, we have this in the B2B SaaS world, where I pay maybe per user or per API transaction or per amount of data stored, but that’d be my price metric. It’s a perpetual transaction. I pay you, I pay McDonald’s cashier a set amount of money, they give me a hamburger. There’s no implication of future payments being exchanged right Within that transaction. That transaction is complete. That’s what we’d call a perpetual model. This is our pricing model. But you might think in the subscription world we’ve got subscription pricing. We have this pay-as-you-go or utility-based model, like you might have for your electricity company or other utilities. It’s been very popular. You might have auction-based pricing models, like you have for Facebook and Google. They’re at inventory, so those would be price models. That’d be the second one. So we have price metric price model. Then, if I think about my decision to upgrade this, I’m going to get a Coke with my McDonald’s meal. If I’m going to get the small, the medium or the large, I’m going to pay a different price for each of those. But if you think about my price per ounce, that changes right, and so the price per ounce of the large drink is actually much less than what I pay if I get the small drink. And we think that’s an example of a price fence. So price fences will come in terms of either volume, identity or time. We see this all the time with other price fences. For example, if I take the bus, I may pay one price, but a student or a senior citizen, because they’re different by their identity, they’re a different person. We’ll show some identification and pay a different price. So this price fence. And then we have this idea of if I’m at the McDonald’s drive-through again and I decide to get a value meal or a happy meal, this would be an example of an offer configuration or a bundle. So how are multiple disparate features or sets of components put together in a way that makes it easy for our buyers to buy a consolidated group of things, right? So that speaks to a specific use case, right. And so there’s a whole art and science that goes into properly creating those offer configurations or bundles. You might think like oh, it makes a lot of sense if I have my burger, my french fries and my Coke together. But if I take out the Coke and put in a coffee, I might actually drop the willingness to pay of that overall bundle, because coffee with my burger kind of actually sounds disgusting and I’m a big coffee drinker. So there is an art and a science to how we actually construct those as well. Right, and we think about all those elements together. We haven’t even talked about price level, but those other elements tend to be much more important and much more difficult to change. But it can also help us reinforce our overall value story that we’re trying to tell.
Lily Smith :
And Dan, when you talked about all of the different options there and how you can create like various different or you have these various different variables to create like multiple different options to try with your customers I think particularly referring to like B2B SaaS businesses how do you effectively do pricing research in order to understand what these variables for your business could be Like, where people are going to find added value and what they’d be willing to pay for that and Dan’s? Can you or should you be asking?
Dan Balcauski:
Yeah, well, there’s, there’s a lot that goes into answering that question. So what I think makes sense is we’ll kind of zoom out a little bit. Well, I think first thing that I want to dissuade folks from is especially in a B2B context, because a lot of times people are like oh well, you know, obviously, if your audience is a lot of you know, product managers, product leaders AB testing is very popular. I do not believe AB testing in a B2B SaaS scenario is appropriate. We didn’t touch on it. But you know there’s some elements of what defines an effective price and some of those things are that it’s transparent, it’s consistent and fair, and I think AB testing or pricing kind of violates all three of those core tenets of what good pricing is. So then the question is well, what is a, what is a pricing research process? Look like it depends what questions we’re trying to answer, but overall you could think of it in terms of a general three-step process. So first of all, we want to get general alignment of what is the objective that we’re trying to achieve, what is the hypothesis that we think we are trying to get answers to, what are the strawman sort of pricing and packaging options that we think we want to go test. You’d be surprised how many companies haven’t really fundamentally aligned on what they’re trying to achieve. Because we’ll get questions like we want to optimize our pricing and packaging. Well, optimization, according to any domain only has a meaning in terms of some ultimate objective. You can’t just generally optimize. That doesn’t work. If we think just about price level, there’s a different price level that optimizes for revenue versus profit. We may be optimizing for a customer lifetime value. We’re trying to optimize our life or LTB to CAC ratio. There could be a bunch of different things that we could be optimizing for. Getting everyone on the same page for what we’re actually trying to achieve is core, because what I found is that if you don’t have that argument up front, what will happen is on the back end, no matter how good your research is, basically people who are hoping it goes in a different direction will just end up attacking the research, which is not what you want. You want to get everyone aligned in the same direction before you go out and execute Hypothesis goal alignment as step one. Step two actually go conducting research. I can talk at length about how we might actually go. Do that. I can give you some quick, high-level tips. Then three would just be iteration and then a rollout plan. Obviously this is a big. You might be like, oh, we’ll just go ship it. There’s a lot of emotional components, both on the internal side as well as the external customer side. When you’re rolling out this change, especially in a B2B scenario. We got to make sure we have enablement for marketing, for sales, like everyone is ready to justify and speak coherently to it. We may think about doing a segmentation of our rollout plan. We want to. In a B2B scenario we may have 20% of our customer accounts or 80% of our revenue, which maybe you don’t run into. In a B2C scenario Maybe you want to leave those 20% of accounts until the end, once we’ve really streamlined our pitch and understand what the feedback has been from the rest of the market. Maybe we want to make sure that we give those customers ample updates of where we’re headed so that it’s not a big surprise when we finally do announce the change. Get our champions in those accounts to really sort of hey, what are we missing here? But maybe you’re much less worried about the sort of low dollar value accounts. Just the implementation and rollout phase can also be very impactful there. So I’m happy to kind of dive into any one of those areas, whatever would be most interesting for you and your audience. Yeah, I mean there’s so much in that answer and so much to talk about.
Lily Smith :
When it comes to pricing research, I’m curious in thinking about the sort of research that customers or product managers sorry, not customers. What product managers do well, customers do it as well is looking at comparative sort of competitors as well. Again, more specifically, in the B2B SaaS scenario, do you find that some businesses are kind of hamstrung by being competitive and like constraining the way that they’re thinking about their pricing by what their competitors are doing? Because actually, if you do something, if you deviate from what’s the norm in your market, then that’s going to cause you issues as well.
Dan Balcauski:
Yeah, yeah, no, absolutely so. The One of the things that we haven’t touched on yet that I think your question is is pointing at, is what I generally refer to as pricing orientations. Pricing orientations are, I think, very rarely discussed, or At least they’re rarely discussed as a separate thing, because they’re they’re kind of the answer to the question of how is pricing done around here? What are the things that we really take into account? What are the things that we consider when we do pricing? So, in general, there’s three primary pricing orientation types. So there’s cost-based pricing, competition based pricing and customer value based pricing, often referred to as just value based pricing. But if we did that then we wouldn’t have our three C’s and marketers. We love our four P’s and our three C’s and etc. So but so so you ask specifically about competitive analysis or competitive being pinned to whatever competition is doing and and look, I mean these are the way I look at those orientations. Is there a journey? See, each of them on its own doesn’t necessarily give you sort of the full context, but you kind of got to know where you’re at before you can move to the next level. So you know we’re talking at the beginning about look, if you’re really early stage and you don’t really understand. You know, does our product really solve a problem like? Which problems like are we going to be known for solving? Like, why are customers like to guess. But you have a general idea of what your costs are. Like this is we’re usually where customer Company start is because it’s like well, I know, to run my infrastructure every month it cost me this and so I’m gonna 10x that and charge that. And you know, and it feels quantitative because you’ve got, you know, a spreadsheet, numbers and you know I feed the finance. People really love it. But the end of the day, it’s really qualitative because your markup is a decision. There’s not any, you know Finance God that says you deserve at 80% gross margin, sir, like congratulations. But look, ultimately, if we’re trying to not make the mistake of selling $20 bills for $10, like that’s not a good business model. So we want to make sure that, look, we could at least cover our costs, right, but you don’t want to stay there. So what’s the next step? Next step would be something like who you’re pointing to, which is a competition based pricing. Competition based pricing is better, right? It allows us to Also occupy the space that customers are occupying right, because at the end of the day, look, customers, I’ve never bought a piece of software and asked how many engineering hours, how many story points were involved in this, this piece of software. Like that’s never been a consideration. Like, your customers don’t care right, but your customers are comparing you against the competition and so you know that helps right. But ultimately, in your audience of good product managers will probably know this already. I learned this early in my product journey. You want to be very careful as a product manager. When your competition releases a giant new major feature release and announces a bunch of features, you don’t want to be like oh man, we got to go copy all those because you have no idea what those come from. You don’t know if they’re product managers are doing their job. You don’t know if those were all the nightmare Visions of their CEO when he got off the golf course and we’re like oh man. These are all brilliant ideas and we had to build them right or so, or they got one. You know they had to build those ten features because JP Morgan wouldn’t sign the deal at the end of last quarter unless they shipped them, like. You have no idea what happened, right. And so I feel like pricing we end up in the same thing was when we have competition based pricing and we just get fully enamored with it. We just assume that the people on the other side have got past this idea of pricing as a black box magic voodoo and that they’ve done their work and done their science and really understand their customers and that they’re playing the same playbook like. Ultimately, the core of competitive strategy is Not playing the exact playbook as the person you’re next to. That’s like, that’s a that gets you in a commodity market very soon and that’s a bad word in the pricing space. You do not want to be playing going after doing the exact same playbook as your nearest competitor, and so I don’t know any other CEO that would outsource their demand generation strategy, that outsource their product roadmap. Why would you do that to your pricing? It just makes no sense, right. So, but it is. It is better right, gives us a little bit better review. And so ultimately then we graduate to this world of value-based pricing when, you know, we’re really trying to understand at the end of the day, like what is the differentiated value that we create above and beyond our dearest competitive alternatives. That allows us to kind of price, to the value that we’re really creating for customers. But what I’d say kind of just to summarize all that up you don’t get to just skip to value-based pricing, so you have to do the steps in between. And you know, because I’ll have clients who will say that to me of, oh hey, well, we want to do value-based pricing, I’ll be a great, what’s your? You know, break out your cost of goods, you know, for all these kind of features, what drives. They’re like, oh, we don’t know. It’s like, okay, what’s actually? We just start the beginning like it’s glad, great, we have the ambition. But we can’t just jump there off the bat.
Lily Smith :
Randy, what’s the most effective way to learn from the best in the industry? Connect with other pms and sharpen your skills.
Randy Silver :
Why, lily, you must be talking about MTP con London happening this year on the 20th of October.
Lily Smith :
You know it, and this year’s lineup of speakers is shaping up nicely we have Tim Harford, behavioral economist, award-winning financial times columnist, data detective and BBC broadcaster Heat. That’s all of those things. It’s just him, plus the legend that is mark Abraham, product director at back base.
Randy Silver :
There’s also Randy Psydu, who’s the former CPO at reliance health, and Claire Woodcock, who’s the director of product for machine learning at Mozilla, and many more, including a great friend of this podcast.
Lily Smith :
That’s right. And don’t forget Workshop Day on the 19th of October. There are seven full day in-person workshops led by experienced product managers who share their secrets and tips for success.
Randy Silver :
And finally there’s the Leadership Forum, an exclusive event for senior product leaders, with carefully curated speakers, guests and delicious food.
Lily Smith :
So grab your tickets for MTPCon London today at mindtheproductcom forward slash London.
Randy Silver :
So, dan, I’m curious because I’ve been playing around with pricing for the first time in my career on something and I’ve gone through these steps to a degree and I went out and I did some Van Westendorp to try and figure things out and I just got this massive range of things. People just did not know and, to be fair, the competitors and comparators in this space are a huge disparity. So how? Do you go about defining or finding out the value of things or the perceived customer value of things.
Dan Balcauski:
So that’s a great question. So ultimately, I think look, we have to realize there’s a longer answer to this I’ll give the shorter answer. Willingness to pay is not a universal constant like Planck’s constant or the speed of light, that we can just go out in the world and measure. Willings to pay is an outcome. So then the question is, what is an outcome of? Like, any pricing exercise is ultimately always a intersection or influence by your costs Customer willing to pay, customer value and competition, and so how? Things like customer value? Well, we could run a survey. That’s one way, and Van Westendorp is perfectly legitimate. Like, any of these methodologies have the drawbacks. But let’s say we run Van Westendorp, let’s just use that as an example, and I could run two surveys and get entirely different answers. Why might that be? Well, one if I don’t understand what kind of respondents I’m looking for. So one of the elements we haven’t talked about it, but one of the core elements I start with is, you know, is my services model for SaaS. Pricing Services stand to be the first S in there stands for understanding your customer segments. There’s no average product for an average person. Similarly, there’s no average price. So if I go out and ask a bunch of random strangers what I’m going to expect to expect to pay, and then I go ask a bunch of another, you know, then maybe I have another random set. Yeah, I may not get the same answers back. Also, if I, if I change the way the product is described, I may get different answers back. Now, look, the world of pricing, research and market research has gone a long way and we’ve there’s answers to all of these sort of sort of baseline objections. But you, you need to kind of understand that, like, ultimately, we’re asking people to make a judgment call. So, for example, here, let’s, let’s, I’ll do it with the two of you. So, lily and Randy, welcome to the prices. Right, what should a beer cost?
Randy Silver :
I mean I’m in London, so it’s going to be twice the price that Lily pays out in.
Lily Smith :
I mean, I know more about cider because I’m from the West Country. But if you ask me about a beer I would say for a pint of beer I should be paying like I would pay maybe four pounds for a premium beer and like two pounds for a cheap one.
Randy Silver :
And I’m exactly right. But here in London it’s going to be closer to six or eight pounds for the beer.
Dan Balcauski:
Okay, that’s not what it should cost.
Randy Silver :
That’s what it does cost, okay, excellent.
Dan Balcauski:
Well, there’s a couple of things, a couple of things I want to point out there. One is you know, you, you made a distinction, lily, on there’s a you know that cheap beer versus premium beer, right. So. So maybe you know your version of premium is different than my version of premium, right? So if I use that word, maybe there’s a different level of interpretation, right? So we got to be careful in our, our research design process that we understand the words that we’re using, right, robust, scalable, right. The marketing world is full of these words that we easy to use, right, and I think that’s what you may think has. Oh, it’s inherently like. Everyone knows what easy to use means. I love Tony O’Lick, one of the creators of jobs to be done. He has a great book I highly recommend to your audience if they haven’t read it. It’s called what Customers Want and he has a case study in there where they were doing a jobs to be done study I think it was for Motorola and they realized that when they broke it down, there were 22 different definitions that customers had in mind when you said something like easy to use for a cell phone, like. So you know you say so. We have to understand what like. Okay, what are we? Are we using price terminology? Does you know? People don’t understand what that is. You guys mentioned a geographical distribution, right, are we able to account for that when we get the results back? Randy, you said something interesting. You said it’d be somewhere between six and eight pounds. You didn’t say a precise number, which is interesting because we should always think about. Well, that’s one of the benefits of the Van Wessendort method, is we always should be thinking about willing to pay as a range, even in our own internal minds. We do this all the time. Be like I don’t know. Like, be like I don’t do. Would you go out to eat? I don’t know? I would go somewhere if it’s kind of in the 20 to 30 buck range, but I don’t know. If we want to go somewhere, fancy Right. But you don’t know, you wouldn’t say, like, I’ll only go out to eat if it’s below 25, 97. Right, like we don’t, we don’t, we don’t think that way, right, and so we need to understand what we do, research that way. The other thing you guys didn’t talk about is, with that price of that beer in London, would it be different if you bought it in a grocery store versus a pub, versus at a concert, or you know. So what is the context that we’re in? Right Cause, ultimately, context is decisive. If, if you’re in the, you know, if I’m trying to sell you a bottle of water and you’re just at a gas station trying to, you know, quench your thirst on a road trip, maybe you have one willing to pay, but if you’ve been wandering in the Sahara for a week, you probably have a very different willing to pay for that water. Right, and so, understanding customers, context and these you know how we describe it what’s the context that they’re in is really, is really important.
Randy Silver :
I’m not going to tell you what it costs at the music festival I went to a few weeks back. That’s a totally separate category.
Lily Smith :
You guys have mentioned the Van Westendorp style of research. It would be great to just explain a little bit more about what that is and how it works.
Dan Balcauski:
Yeah, absolutely so. There’s kind of broadly, when we think about willing to pay, there’s broadly kind of two classes of Question types that we can ask so and those will broadly be direct and indirect Questioning and there’s like simulated environments, right Like so I can go and actually watch people shop right in in a simulated sort of environment, etc. But but in general when we’re doing thinking about like quantitative survey research, so direct would be how much would you pay for this product? Generally this is I mean this goes back 50, 60 years now pricing researchers realize that’s a terrible question. You should never ask somebody just straight out like what would you pay for this? The van Westendorp methodology is it’s named after a Dutch economist who developed the methodology in the 70s and it Presents a slightly better way to ask these questions and what it relies on the idea of a ranged set of questions. So there’s four questions in the survey methodology. You’ll find sometimes if I’m doing a deep, in-depth customer interview I might only use three of them. But generally the questions are at what price Would this product be so cheap that you would doubt its quality? At what price would you this product be considered a bargain? At what price would you Consider this product be getting expensive but would still buy it? And at what price would this product be prohibitively expensive? So why is that beneficial? So one of going back to the point we just talked about of Randy and his range for beer is like what he says, four to or six to eight pounds or, you know, whatever the currency is, I don’t know if he thinks that’s expensive or if he thinks that’s cheap or if he thinks that’s right in the middle. And so that’s one of the benefits I’m trying to understand is is, you know, getting a sense of, you know when is that right and kind of the. The rule of thumb is that Generally, most people will, you know, be happy, they will actually pay the it’s getting expensive price, but there’s, you know, there’s ultimately there. You know there’s problems with the methodology and even those type of direct questioning methods, but they tend to work pretty well and, especially given some of the, the other factors I’ll talk about, or I mean we may not get to in the in the SAS world they tend to be quite, quite effective ways to get you know enough information around willing to pay. The other side is, or the other Categories generally was called indirect questioning methods, and so these type of questioning methods are Either we call a conjoint or discrete choice methods, and so the idea of discrete choice methods is that we’re not asking people Explicitly how much they would pay for something, but you know you may have participated the type of research before where it’s like it shows you. Hey, here’s four different types of televisions, you know. One’s a LG, one’s a Sony, one’s a, you know, whatever you know. One’s a 55 inch or 65 inch, you know 75 inch, yada, yada, yada, right, you can think of all the different specs. One has 3d, this one doesn’t, you know. And here’s a bunch of different prices and asks you to choose which one. Would you choose or choose none, and so, and then you run through a repeated set of those and the idea is that we’re building a robust statistical analytical model in the background that helps correlate what, how you’re trading off choices, right, choices among sets of features, and Price point as one of those, you know, in that in the language it prices just another feature, right, it has negative utility, so it works in the opposite direction. But so those are, and and there’s, you know, a lot of consumer history Research showing that those tend to be pretty robust in terms of their applicability to, you know, empirical findings. Once products are launched, they do have drawbacks, and so they’re not used as much in the B2B space because there’s, you know, drawbacks that are probably for your audience with it. If anyone else is super nerdy about market research like me, feel free to reach out. I’m happy to have a longer conversation about it.
Lily Smith :
Amazing. Thanks for explaining that. This has gone so so fast, and I feel like we’ve barely scratched the surface, but so we might have to invite you back for another part two, or like round two, of pricing, but let’s wrap up on this one. So what metric should we look at to measure our pricing effectiveness and how well it’s performing? Yeah Well.
Dan Balcauski:
I think the you know you probably want to think through a couple of things at the high level, right, like so we were talking about before, like are you meeting your goals? Is pricing getting away in those goals? Have you successfully tried? Have you recently tried to do a change and it’s it’s be successful or not? You may have more tactical considerations. Are you, do you have too many customers, you know, buying and staying in your entry level plan? Are too few customers upgrading or expanding? Do you have sales selling a bunch of customizations? Right, so those would be things that you might want to be keeping an eye on to kind of keep your hone, your spidey set, your PM spidey sense that something might be going wrong there. But you know, when I think about kind of trying to diagnose where we’re at in a pricing and packaging space, but I want to be looking at things like my competitive win rate. So there’d be like a number of one opportunities over the total, opportunities sliced by competitor. You know any metric is going to have, you know, in this type of category is going to have, you know, some amount of bias. You know ultimately you may have bias from like data hygiene issues where sales reps you know, don’t accurately or consistently tag. You know which competitors they lost to. You know, maybe prospects won’t tell them. You know, very, very often the case they won’t say who else they’re competing against, or maybe that they’re not giving you a full list. Also, it’s like if you only have one option in your who’d, we lose to, but there were five people in the deal you don’t know, ultimately, who the person went with. Right, what does the poor sales rep do in that case? Right, and you? You win 0% of the deals in which you’re not involved. So that also creates a sample. But those are the type of things that you might want to look at. You know percentage of the deals lost to pricing. I’ll say a good rule of thumb is that if you’re priced, you know well losing about a third of your deals based on pricing. Again, this may also have data hygiene issues, you know. So any product manager should should be well aware of that. Right, your price is too high is probably the easiest thing for a prospect who doesn’t want to buy to make the salesperson go away. Like you know, it’s just like I. Hey man, I got to have something to put in my CRM, otherwise my manager will tell me your prices too high because you know they don’t want to be like. Well, actually I didn’t like the way you answered my questions, mr Sales Guy, because all of a sudden I’m in a fight and I didn’t want to be in a fight. I just want to buy a piece of software, all of a sudden, you know. So look for any of these sort of win-loss codes. I would always say it’s a good idea to have them. Be careful, you know, and understanding the trends is important, but having a bit of skepticism that they reflect the absolute reality is maybe healthy, right? Because a lot of times if you go do proper win-loss analysis with either, say, marketing go runs it on behalf of the sales team, right, or you have a third party agency that goes and does it, you can often find a lot of those we lost on price wasn’t actually because you lost on price, but those could be helpful. And then ultimately you know, look, I mean, let’s keep going. I think the last one I mentioned is just things like discounting percentage. If you find that your discounting is sort of all over the map, right, I mean, I think it’s one of these things, especially early stage companies. You know there’s definitely a difference. I didn’t, I didn’t, I used to have this distinction, but I’ve seen enough times now it’s definitely a distinction. There’s a difference between having a discounting policy and enforcing a discounting policy. So you can come in and be like, oh yeah, no, we’re not supposed to discount below, you know, 15%. And you see like, well, that’s not what the data says. It’s like, you know, you got pretty much a Rorschach chart of you know there’s no, you try to draw a regression line through it and, yeah, good luck, there’s no sort of rhyme or reason. But you know, ultimately, you know we could slice that data different ways and can give you a sense of look. Our, our frontline sales folks really feel like they’ve got no other option, right, and so we’re having to really, you know, reset on price. It’s not look the absolute, you know, because ultimately you’re not going to, you’re only going to see discounts go in one direction, right? You’re not going to see customers coming and paying you 120% of the price that they were quoted, unless they were very generous. I haven’t yet to see that, see that happen yet in practice. So so you do want to augment that with research, right? So that’s not the transactional data can be helpful for identifying if there’s a problem, but it doesn’t necessarily tell you what to do.
Lily Smith :
Amazing, Dan. Thank you so much. I definitely feel a round two coming up.
Randy Silver :
I would love that, I’d be happy to, and hopefully in that one you’ll tell us how much to price the podcast at. Yeah maybe not.
Dan Balcauski:
I? You know we can have that discussion. I don’t know if you’ll love my answer.
Randy Silver :
Thanks again, dennis, this was great.
Dan Balcauski:
I really appreciate the time. Thank you for having me.
Lily Smith :
The product experience is the first and the best podcast from mine the product. Our hosts are me, lily Smith and me, Randy Silver. Lu Run Pratt is our producer and Luke Smith is our editor.
Randy Silver :
Our theme music is from Hamburg based band Pow. That’s P a? U. Thanks to Arnie Kittler, who curates both product tank and MTP engage in Hamburg and who also plays bass in the band, for letting us use their music. You can connect with your local product community via product tank regular free meetups in over 200 cities worldwide.
Lily Smith :
If there’s not one near you, maybe you should think about starting one. To find out more, Go to mine the productcom forward slash product tank.
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