Tiered Pricing in the AI Era: What Actually Works (with Dan Balcauski)

Welcome to Building Better Developers, the Develop-Nor Podcast, where we work on getting better step by step, professionally and personally. Let's get started. Well, hello and welcome back. We are here continuing our season of Building Better Foundations. We are Building Better Developers, the Develop-Nor Podcast. I happen to be Rob Brodhead, a founder of Building Better Developers, also the founder of RB Consulting, where we help you assess your technology and build a roadmap to success. Good things and bad things. I have been good things. I have been talking about technology and cool tools and stuff like that recently and have found that there are, like I said, there's just a lot of neat things I've been able to do that allow me to really embrace digital nomad and all of those kinds of things, having a virtual office, being able to have conversations with people, being able to keep in touch. It's really been awesome. This is a really good thing. I really enjoy it. So this is in the plus column. The negative column is doing so now I have more of a feel like I'm in a studio when I do these things. I have like bright lights on me and things like that that drive me a little bit nuts or maybe nuts-er, a little bit more beyond where I normally, my sanity level normally lies much like my co-host who drives me crazy on a regular basis for a wide range of reasons. But go ahead and introduce yourself. Hey everyone. My name is Michael Milash. I'm one of the co-founders of Develop-Nor, Building Better Developers. I'm also the founder of Envision QA, where we build and test custom software that helps businesses run smoother and grow faster. Good thing, bad thing. A good thing, said technology. I like playing with gadgets and that. I love playing with those little studio things and video equipment. Bad thing is the audio editing tools are a pain in the butt. It's like one tool works great for one thing, another tool works great for another. But unless you pay a lot of money, you can't really do it all in one. So sometimes these edits get a little complicated. I will say that of the tools that we've played around with over the years, although I did it manually for a long time, Adobe's tools are top-notch. Although my son who does a lot of this would actually argue some of those, there are some better tools out there now. I found actually Descript is a really good tool to take a look at and it does do, it has progressed very well and very quickly. This is an area where there's a lot of change because of AI and stuff like that. So I would say check your new tools on a regular basis because there are cool stuff out there and maybe a better price point. All of that being said, let us now return to our conversation with Dan Bokowski and we're going to talk more about pricing. Then yeah, we're going to range far and wide, but pencils up because I think you're going to want to take notes. There's some really good areas, even areas that we don't dig into necessarily to go too deep, but we will have links and show notes and all that kind of good stuff for you to check in with Dan at another time and see if maybe you can have a conversation with him to go deeper in those areas. Here we go, back where we left off in our conversation with Dan. I love that. So I have one more question and I'll pass it back to Rob. So where do you see in this modern age of AI, SaaS pricing going over the next few years? Oh, big question. There's so many different areas to touch on here. So I'll try to boil it down to a couple. I think one thing that we're seeing right now is an incredible amount of dynamism in the software pricing space that maybe we've not seen for a very long time. I think probably the last thing was comparable to was the transition from perpetual to SaaS model maybe about 15 years ago at this point. So one of the things that's happening is that you've seen competitive dynamics unlike anything you're ever seeing at the sort of foundational model layer. And I think there's multiple battle fronts here, which is one of the reasons why it's so complicated. But if we just focus, for example, on say the foundational AI model companies, you see every week they're one upping each other with a, you know, Anthropic just did this, you know, a week or two ago when they launched Opus four or five. It's now the best model and they drop the price. Right. So just by that alone, you can see sort of the dynamics that are happening. And so we're seeing constant iteration and update as folks try to figure that part out. I would say the other side where we might talk about AI enabled software platforms. So every board of directors has asked their CEO since the launch of chat GBT in late 2022. What are we doing with about AI? And we've seen a lot of interesting experiments. I don't know that anything is fully been a home run yet. But so everyone is baking AI enabled capabilities into their products. And so what we're seeing there is a very real tension between how do we monetize this thing? Is it ready to monetize? And how do we manage margin? Because software has got to exist in a very privileged position of world industries where, you know, if I sell you hammers, I have to care how much it costs me to land that hammer manufactured to put it into Home Depot. Like, I can't just be like, I'll charge you $1.50 per hammer and I'll figure it out in the back end. No, you're not going to be in business very long. But software companies forever have been able to do that. There's been some exception. But the marginal cost to serve because network storage compute has been almost infinitesimally small per incremental user basis that they've been able to ignore such things. And so now there's a real trade off that those companies are facing. Okay, we're now seeing the CFOs seeing a giant check every month going out the door to Open AI or Anthropic or to Google. How are we? What are we doing about this? And so we're seeing a lot of companies. What I think fundamentally is changing is that companies are having to look at their pricing a lot sooner in their lifecycle to account for this. There's many other sort of dynamics I could talk about, but I wanted to start there. It layouts a landscape. Well, I think that that sort of leads back to something I want to swing back around to, actually, I guess. We'll start with this one because we started off talking about like freemium and things like that. And how do you want to sort of combine wrap this into two questions. How do you look at tiered pricing, like the famous, like, bronze, silver and gold approach, which to me feels similar because there's always like the free demo and then bronze, silver, gold that tend to be out there. And then how do you see, for example, these like these SAS tools that are out there, how do you see that like adjusting pricing based on the, for example, like now we're going to have AI as part of certain tiers or things like that. And it falls into the same, to me, it falls in the same categories of things like what do you do? You adjust your pricing based on the monetary flow and things like that. If you suddenly have contraction or expansion or things like that in pricing models, because AI is definitely going to be part of that as I think it's lowering the cost of the technical tools in a sense, or at least has the opportunity to do that. So how do you see that impacting pricing or how should that factor into the impact of pricing? Yeah, this is a great question. So a couple of different things. So when you talk about the bronze, silver, gold, sometimes folks refer to that as good, better, best. So that is one of the ways that we're seeing SAS companies monetize today. And I think it makes a lot of sense in certain use cases. So the example would be, so I'll use Intercom because I think they've actually done this really smartly. So Intercom does a lot of things, but one of the things worlds they compete in is the world of customer service agent software. So they compete with like the Zendesk of the world for customer support systems. And so they have a platform that has a good, better, best. And so one of the things is some of their AI capabilities, like summarize the entire transaction history with this account and all their service tickets or the last, imagine a service agent gets bounced midway through a support experience, right? And maybe there's a bunch of different notes, summarize all this. So that capability, maybe that's in the better or best tier to help drive upgrade. And maybe I leave my tier pricing alone at like a price point level, but say, in that case, customer support software, much like CRM, often priced per user because how many customer support agents do you have using the platform? Often translates really nicely to the value you're providing. And that value is, that value driver is enhancing that agent's ability to be effective, be higher performance, answer tickets faster. The other reason I'm using Intercom is because they also did something separate, which is they created what they call their FinAI, which is their automated sort of support deflection agent. And for that, they created a entirely separate pricing model because the value driver there is, hey, you don't need to get any agents involved at all. This thing sits on your website, your customers come and have a, you know, Intercom is always the thing that, you know, they started this thing, you know, they started this bunch of other people copied it, but they're sitting on the bottom right corner of your website, your little chat window pops up. So, hey, if we can answer your customer's support questions before they ever come to your agent, we'll just charge you 99 cents per resolution. And there, you're not enhancing the value of the customer support agent. Instead, you have a different brand new value driver where the user is not even involved. And so they separated that functionality out. I like the way Intercom has done that and that structure as well, because I'll just maybe lay out some bad practices that I've seen folks creep into, which is, hey, we've got this bill for whatever, $20,000 a month we're paying to OpenAI. They're charging us per token. So we're going to add a per token usage through our platform writer to all of our pricing, or we're going to add a per token usage limit to the problem with that is customers have no freaking clue what a token is. They don't want to know what a token is. Your salespeople don't want to know what a token is. They definitely don't want to have to explain it on a sales call because that has nothing to do with your product. It's a business call. Because that has nothing to do with your product. If you're selling a CRM and all of a sudden you're in a world explaining what AI tokens are, you've already lost the battle. Even if you have the best salesperson in the world and they have some amazing pitch, you've still gone off the rails trying to explain to a customer you've moved from talking about their problem, how many salespeople have I got 100? Great. It's 10 bucks a user, a thousand bucks a month. Awesome. Sign me up. All of a sudden now we're talking about infrastructure and your costs and customers don't give a shit about that. It's a really bad idea as sand in the gears of your go-to-market machine. The FinAI example I like is they were able to ... There's permutations. If you really believe it's driving value, maybe you increase the cost of those higher tiers in the Good, Better, Best model that have the AI plans to help cover that. Either way, you've left it as per user price on those plans and a, hey, 99 cents per resolution. We're not talking about how hard our AI has got to work or we're using open AI under the hood and we've got to pay them a bunch of money so we're going to charge you some proximate cause. Companies should have learned this because they had to go through the same thing back in the days of the Twilio with per SMS. If you ever look at telecom pricing, it's like every geography to geography is like this giant matrix. So companies have had to deal with even worse before, but net-net is if you're going to try to cap some sort of usage metric, make it something that your customers are already tracking at best or at least is related to what they're going to be doing with your product in a way that's not tokens. Do you find ... Every time we have a ... Every question we could expand it to like six others. Sorry. But that's the thing is pricing can be very complicated. There are a lot of factors. It's amazing how often we'll have somebody that's a consultant type and they'll say, well, the answer will be, well, that depends. And pricing, it feels like is even more so. There's just so many nuances and details that you can use and dials and such to hit. But I want to swing back to something that I guess is getting back from the idea of a startup or product or something like that. I want to ... The idea of we talked about trials and trial periods in seven and 14 and 30 days and stuff like that. One of the things I see a lot, and now I'm seeing even ... I always saw it in B2B more and now I'm seeing it in B2C and actually push it for the businesses that I talk about is to take advantage of these, is the idea of demos where instead of a free trial, as you really sit down, as a company, you have some resources dedicated to, look, we're going to walk you through this product. Particularly, I think when you get into business products, even CRMs and things like that, it's like, hey, this gets past the support and some of those kinds. Let us show you how this can work for you. And I want to know how much of that you have factored in with some of the pricing that you've ... Discussions you have. Is that something that actually ... Question I have is, could that possibly allow you to ask for a higher pricing? Does it maybe convert better or allow you to have a little more of a feel of this is the Porsche version versus the Kia version of this product? Yeah. Well, I mean, I'm not 100% sure I'm tracking your question, but I think for any talk about monetization, you always need to think about creating value, communicating value, and capturing value. So if you think about your demo, is the demo actually effectively communicating value? Because if we can't communicate it, then only a consumer's perceived value of the product matters to their willingness to pay. So you may be able to write out a beautiful Excel model that shows how we create millions of dollars of RLI for you and your company. And if customer doesn't believe it, prospect doesn't believe it, that's done no work for you. Maybe it's real. Maybe you're like, hey, this is the data. We have thousands of customers, but they don't believe it. If their perception doesn't change, then you haven't influenced the final number, which is their willingness to pay. So the question then is just, have you architected a demo effectively? Or is there an ability to do a free trial? I will say 99.9% of the time, a free trial where I can actually put my data in and play around with it myself is going to increase my perceived value more so than a salesperson sitting on a call with me running me through a demo. Because we all know how we are, right? Most of us can't even watch a full Netflix without checking our phones, let alone some demo of some business software or minds in 20 different places versus, oh, I'm hands-on. I'm interactive with this thing. So then the question is, I want to tie this back though to the idea of these offer configurations or good, better, best structure. If we've done our jobs well, we should be able to say gold, silver, bronze, for each of those, who is this for? We have designed those tiers with a particular customer segment in mind. If we start with that end in mind, it makes this process you're talking about all the more effective. Why? Because we say, look, the customers in our minds, it's a hypothesis, and we'll tweak and tune as we go along. We believe this kind of customer has this type of context. You usually could encapsulate that in maybe three to five kind of discovery questions. Those are the discovery questions we now enable our sales folks with. Based upon their answers, we now have, cool, my demo script is aligned to showing them this, and at the end, I have a tier that's perfectly meant for you with a price point. So have we thought about that entire flow of the salesperson sitting on a call saying, okay, Mr. Customer, nice to meet you. Tell me a little bit about your business. What about this? Do you guys ever struggle with that? Oh, that's interesting. You ever struggle with this? Cool. Boom, boom, boom, boom, boom. Let me show you how our product solves all those problems through a demo that aligns to the features that are in the tier that you believe that they're suited to sell, and we make that more effective. So I just put that all under, are we communicating value effectively? Oh, that goes back to the comment you made earlier about the, because it really is, it's like some CEOs will be like, well, you're leaving money on the table, just like anything else, because you're saying no to, as soon as you segment anybody, you're now saying no to everybody outside of that segment. And now the interesting question there is when you have those tiers, and you say, which makes perfect sense, is you have now, let's say you have three tiers, so you've got these three layers, you've got three specific types of customers, essentially three avatars that you're serving, each product is perfectly suited to them. So when you talk to a CEO or a company or a founder about that, do you get pushback of the like, okay, we're going after the bronze person, or this is what this looks like? Do you get the pushback of, but wait, we want to be able to upsell them as well, as opposed to, and maybe does that muddy the waters, or is that actually something that you like say, okay, we're going to target the, we'll call them the lower end or the less margin customer, should we talk about upselling and trying to get them into that higher tier level or offering? Yeah. I used to think that way. I've learned the hard way that you don't get out of a pricing exercise without having that conversation, so you have to front load it. So we didn't talk about my core model, but it starts with customer segmentation. That's the first step of a pricing exercise, because if you don't do that, inevitably you're going to be at the executive review of the new pricing, and invariably this question will come up. Well, this is great, but what about ex-customer? This won't work for ex-customer. So I've learned you want to have that conversation at the beginning. Have everyone say, what about ex-customer? What about Y customer? What about JP Morgan? Because blah, blah, blah, blah, blah, blah, right? Get all that, and then help them figure out who are their customer segments and get those defined, and then build the pricing and packaging around that as a foundation. Because if you get to the end and you haven't done that, inevitably it's going to blow up with that line of questioning. That actually is a perfect segue. We're sort of hitting it like this thing could go, like I said, we could do a whole season, I think, just talking about pricing and all these different areas and the different approaches to it and what works and what doesn't. So I think right there, because we haven't even talked too much about your model and your approach, we got way off into other places, which is a perfect setup for people that now hopefully they have got a nice teaser of like, this is somebody that maybe I should talk to. Maybe this Dan guy knows a couple of things and would be worth reaching out to. And in so doing, what is the best way for them to go to hold of you? Yeah, I'm on LinkedIn, Dan Balkowski. So folks can reach out to be there. Just let me know you heard me on the podcast. I could separate it from the rest of the random LinkedIn spam. Or go to my website, producttranquility.com. There's a way to contact me there. I also try to blog about this stuff as often as I can manage, try to demystify this. I've got a lot of scar tissue. So happy to share that love. And I try to do that through my writing. I also have a podcast called SaaS Scaling Secrets myself, where I interview scale at B2B SaaS CEOs about all the ways to scale their company. So folks could find that wherever podcasts are found. Awesome. Because I think we've got more than a few people in the audience that have, that seems to be one of the more popular ways to launch products these days. People look at it realize like, I don't want to, I don't want to do a desktop install or I don't want to do a website necessarily. That's not going to have that, that stickiness that SaaS tends to. So definitely you guys can check that podcast out. There will be links in the show notes for sure, for all of this. And that will wrap this one up. I want to thank you so much, Dan, for hanging out with us and having this conversation and allowing it to go all over the place as conversations sometimes do. But that's sort of the messy part, I think, of pricing and products. And it gets back to like, this goes back to something we talk about so often is the why is it's like, who's your customer? Who are you serving? What is the problem you're solving? And does the solution also actually solve the problem in a way that people are like, yes, take my money. So you always want to find those people that are on the desert and you're selling them a bottle of water, as opposed to the people that have just gotten out of the, you know, just walked off a boat where they about drown. And now you're like, Hey, would you like a little more water on top of that? So thank you so much for your time. I appreciate you hanging out with us, Dan. Thanks for having me. It's fun. All right. And for all the rest of you, check this out in the show notes and the links there for him. And if you leave any comments for us, we will pass those on or reach out to him directly. It'll be that much easier. Go out there and have yourselves a great day, a great week, and we will talk to you next time. This was sponsored by RB Consulting, your partner in building smarter, scalable tech from startups to established teams. RB Consulting helps you turn tech chaos into clarity with proven roadmaps and hands-on expertise. Visit RB-SNS.com to start your next step forward. Also sponsored by Envision QA. They help businesses take control of their software by focusing on what matters most, quality, reliability, and support you can count on. Find out more at EnvisionQA.com. Thanks for tuning in to the Develop the Newer Podcast, where we're all about building better developers and better careers. I'd love to hear your thoughts or feedback. So drop a note to info at DevelopTheNewer.com. Be sure to subscribe on Apple Podcasts, YouTube, or wherever you listen. And remember, a little bit of effort every day adds up to a great success. Keep learning, keep growing, and we'll see you in the next episode.