Minimal Viable Pricing: How to Stop Guessing and Start Learning (with Dan Balcauski)

Welcome to Building Better Developers, the Developer Noir podcast, where we work on getting better step by step professionally and personally. Let's get started. Hello and welcome back. We are continuing our season of Building Better Foundations and we are Building Better Developers, the Developer Noir podcast. I am Rob Brodhead, one of the founders of Developer Noir, also the founder of RB Consulting, where we help you assess your technology and build a roadmap for success. Good things, bad things. Good thing is technology. We've talked about this. The New Year's was great. We did some specials around that. I like the ability to be a digital nomad and to be able to just pick my stuff up and go wherever I want and be able to have something that feels like studio quality, especially now with all the AI video and audio tools and things like that that can really clean stuff up. The downside is that I have a technical advisor that goes with me everywhere and sometimes drives me nuts making sure that I look better. And let's face it, there's a lot of improvement that can be made here and there's just only so much that technology, lighting and filters can do. That being said, the better side of it can go introduce himself. Michael, how's it going with you? Hey everyone, my name is Michael Melasci. I'm one of the co-founders of Develop a Nerve, 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. Good thing is I was able to meet up with you. For those of you that watch the New Year's specials, we finally have been talking for a while, getting together. We finally did. Finally, we were able to meet up in person and had a great time. That thing is the drive home yesterday, normally is a two hour drive, took four and a half hours. So, yeah, holiday traffic is crazy, especially when they decide to do construction and you have overturned semis. Yes, accidents do happen and they cause problems. No accident though is we have an interview guest today. And Dan, I'm going to go ahead and let you introduce yourself because you, I am sure, do it best. Yeah, well, I appreciate the intro. Thank you, Rob and Michael. Well, I'm Dan Balkowski, founder and chief pricing officer at Product Tranquility, a consulting firm based down in Austin, Texas. I've spent a couple of decades now in software, starting as an engineer myself and then moving into engineering management and then product. Early on, I noticed that most tech companies obsess over acquiring customers but neglect how they capture the value that they create. So this insight crystallized for me during my MBA internship at a successful Silicon Valley startup where I led a freemium pricing project. A decision on the CEO's desk among many that summer was should they go freemium with their product offering. And so among a couple of things I worked on for them was that. And through my research, uncovered that this popular pricing model only works under very specific and surprisingly rare circumstances. Today I help B2B SaaS CEOs transform their pricing from confusing liability into a strategic advantage, whether that's helping them uncover millions in revenue through revenue leakage analysis or helping them establish a pricing process to become their standard approach for all future SaaS products. That opens up like a whole season of questions practically. I think I want to dive into because this is a world that I've been in. My background goes back to freeware, shareware, stuff of that, crippled approaches to software, freemiums of varying sorts. And especially I want to, what are your thoughts and maybe some of the things you said are like you said it only works in some cases. The freemium types of apps or offerings that are out there in particular when you think of like there's a lot of I've seen a rise, especially in the last couple of years of essentially they're top of the funnel sales funnel kinds of tools, assessments and things like that. My favorite one that like example of it that you see all the time that businesses starting to use are the like what peanuts character are you or what you know what what house would you end up in in Harry Potter. But then it's really I think the places that I've seen it really well done are with like Enneagram and Myers Briggs and things like that where they are personality assessments of some sort and they suck you in with the top of the funnel. And then it's like, hey, we're going to give you a full report for money and stuff like that. I see very much as a freemium type of approach. So what is sort of like to hear like expound a little bit more on how you see those and where where the where would somebody use that properly a freemium approach on the Harry Potter house. Dumbledore. I'm not sure. I'm not a huge Harry Potter fan, but you may have stepped into a bear trap on this one. I'll try not to spend the rest of our time giving my rant on freemium. I want to make a couple of distinctions right off the bat. So I think there is a distinction between freemium and free trial. I'm very much a fan of a free trial. The idea of a free trial software folks like to think we invented everything. We did not invent everything. You walk through the grocery store on a Saturday afternoon and they give you somebody to hand you a sausage on a toothpick. All right. That's sampling. That's been the case in consumer goods forever. Free trial is the exact same thing. You had no idea the sausage was so tasty and now you have an idea of that so tasty. And why does that work? Because you actually eating that food has a much more impactful experience on your understanding of the value of that product than somebody just saying like, look, check out my sausage. It's amazing. It's all organic, all natural, no pesticides. Whatever you want to say about that sausage tasting it is going to make all the difference. So free trial really helps that because there's nothing like as good as marketing teams are as much effort they put into their website, white papers, video, overviews. Nothing beats seeing your own data in the product. The distinction between a freemium free trial is there's a burning fuse. There's a deadline. I have to make a decision. Where freemium as a model goes off the rails is folks think, well, look, folks will become so enamored with our product over time that they will convert. And this was part of that research that I looked at during that MBA internship. Best in class companies convert 1 to 3% of those free users. So it's a mirage usually. And this causes all sorts of, let's say misaligned behavior inside of an organization because if you're a CMO, you've got a really hard job. You're trying to drive people to the website. You're trying to give them to give your contact information, drive them to a free trial or download or whatever it might be. And so if we have a freemium like, oh, wait, we have all these users. And if we just tried a little bit harder, we put a little bit more spice into it, we made some workflows better. They would all see how valuable it would be to upgrade. The net net of it is, is that you should really think of those free users as an entirely separate customer segment. And really the ability to drive those people to change their behavior, to upgrade is going to be minimal. You'd much rather see a free trial where there's a decision point and then the whole organization knows that's not a lead anymore. We want to move on. We also want to talk about misaligned behaviors. There's often an implicit assumption of, well, we don't give support for our free customers. Well, support is part of the product experience. So what kind of experience do you want your users to have? You know, your support tickets are answered. You get when you're in a sales process, those emails get answered immediately. But if you're a free user and you have to go check out the knowledge base or use our AI chat bot that can't actually answer your question, that's not going to help you in the long term. I will make it distinction going back to your other point. I used to work for a company called SolarWinds, not an energy company. They're in the IT operations management space. They knew this very well. The core products had a free trial experience. This is pre-SAS days, dating myself a little bit. So all the products were on-premise installed software, but the whole idea was a very, we call it a high volume velocity go to market model. Kids today might call it a product-led growth model. And those all had a free trial, but we had separate products, but we didn't call them products. We called them free tools and the free tools were different code base. They look different than the core products. They all look the same to each other. And they were really sort of single function uses or use cases of our broader kind of portfolios. And what that did is it made it such that, okay, we're going to have some engineering resource that's allocated to marketing for building some free tools. Okay, so that's well accounted for the internal cost accounting in the business. And then downloaders of free tools would just go into a marketing drip campaign. They would become part of the email list. They were never considered a hot lead. And so you didn't have very expensive sales or sales engineering time wasted trying to convert someone who just wanted a free tool into a paying customer. And so I think when folks jump to freemium, there's a few rare exceptions, but almost without question, it's a B2C strategy that people try to apply to B2B and almost never works. I'll stop there, unless I take up our whole time together. Well, that's what I think. That's always been like, because we've talked about pricing and software and things like that over the years quite a bit. And I think that actually you sort of stumbled into at the end of that and something that I have found to be very different is B2C strategies and B2B strategies, as I find that those have been, I think there's a lot of times they will work for one and they will not work for another. And I think particularly like the, and this is a struggle I've had is the freemium shareware and even the time trials kind of things, where you've got like seven days or 14 days, seem to be, they're almost more B2C kind of stuff. Because it seems like if you're in a business, and to me, it feels like when you're in a business, you're looking for a product. It's either like the really large sales cycles of like ERP or something like that, where you're just going through a whole lot of stuff and the demos and freeware like doesn't really fit because you're not going to be able to get far enough into it to really figure out what your value is. And I think you touched on it very much with the idea of support because you're going to have, you really almost need to have that free thing be full featured enough and have a full featured support to feel like it being sales, like a true sales cycle is that you're like, you're bringing people in that they're either hot leads or you just need to punt them out. And I think the demo side that I've seen from a B2B works a little better where you just say, you know what, we're going to give you carte blanche. We're going to give you like a demo license for a while so you can take a look at it. We can walk you through it. We can do the trials and actually maybe incorporate some of your processes, your data, your business, which of course is very sticky because once you're starting to give us some of your stuff, you're going to feel like, okay, I don't want to switch to something else. I guess I see that a little bit more in that world versus consumers are when you get to the B2C side, I guess people are a little bit more like, maybe I'll do it. Maybe I won't. You got to hit them at the right time and things like that. Where maybe it's nice to have that in the back of their mind where they're like, oh, I can't afford this cool tool and this cool widget for my videos right now. But maybe at the end of the year I get a bonus and I'm like, oh, this is sort of cool. So you hit them then with that light little drip campaign or something that says, hey, it's 10% off if you do it this week or something like that. And so I guess I'm going to shift that into off of a soapbox and into more of like a question is how does that fit your soapbox? How does that fit in with time trials? And particularly, do you see a difference in what the type of target market, whether they're B2B, B2C, or maybe even if it's B2B or even C is the types of tools, the industry or tools that they are? Yeah. Let me touch on each of those. So the time being and then the different types of tools. So just to be clear, I spend all my time these days and have for most of my career on the B2B side. I have opinions on the B2C side, but most of my lived wisdom is from the B2B side. There's a general practice in B2B on shrinking the number of days in a time trial. At some point, the default was 30 and then the default was 14. Now it seems like the default is seven. I don't think that that's necessarily good for anybody. Generally, what I've seen is that there's some belief that, oh, we'll get people to make decisions faster. But as you might imagine with even relatively simple B2B, I don't know if you've ever gone and evaluated a free trial, but you're like, oh man, I'm going to try out this tool. You get five minutes after sign up into using it, you get some urgent Slack message, then you get 10 other urgent Slack message. All of a sudden, it's a week later. You're like, you haven't gone back to play with that tool and your trial's expired. So I think that's just the reality. Most B2B folks who are evaluating software are in and that's just nothing but frustration. I've also run into issues with a seven day trial where, hey, I ran into an issue trying to figure out how to use the thing. So I file a support request. It takes them one or two business days to respond. I run into another issue, one or two business days. You do that two or three times, all of a sudden you're at the end of seven days. So you've got to make sure that your customers or your prospects can actually see, get that aha moment, see the value in the time period that you're allotting them. And generally, there's been no data that I've seen that's been convincing that 14 versus 30 day trial converts better. They're about the same. So shrinking it below that seems, maybe for a workout app or a fitness app or something like that, it would make sense for two to seven days. But for most B2B, it doesn't. Then I think on the B2B side, there's parts I agree with and parts I don't. I think there's different ways to maybe slice the B2B market. So in general, you might think of, there's not a huge bright line, but just to make it for folks, say below a 25K ACV, folks might think of as a product led motion and then above 25K, more of a sales led motion. And so definitely free trial type experiences work very well in that lower one, less so in the larger one, because usually you have multiple, all of a sudden you're dealing with buying committees, not just a single buyer or champion. Because usually, if it requires integrations to a bunch of, we've got to pull in all of the data from other systems, being able to do that in a time trial experiences can be difficult. But I will also say that we had a very successful motion like that at SolarWinds. And I think one thing that surprised me when I was in product there was how much of my roadmap was focused on that easy to set up piece. Because the entire business was aligned to, that was the go to market motion. And so while other, we used to have a love hate relationship with some of the analyst firms because other, the BMCs of the world or IBMs or whatever would have these beautiful like features, dashboards, et cetera. But yeah, it requires nine to 12 months of professional services and multimillion dollar fees. And we might not have those features, but what we did have is, hey, you don't need a professional services. You could set this up yourself. Your IT guy can install it in an afternoon. They could see all their entire network or all their servers and you're off and running. And so we put an incredible amount of our engineering bandwidth on that experience and making sure those products, even though they were highly technical for any IT person, not just the best of breed person who could maybe do it, configure anything to be able to set that up on their own. I will push back slightly because you did mention something like an ERP, which may not necessarily feel like it could be a fit, but I would push back slightly in that if we think about a portfolio, if I'm Oracle or SAP, I may have multiple add-on modules or other products within a suite that I have existing customers that I can turn trial experiences for those existing customers on because perhaps now they have those data integrations. And so, hey, if you turn on our new AI planning module, we already have the data. You could just play around with it and see what it does for you and see how much it make your life easier. And then that's available for the admin to play around with for 14, 30 days. So if we expand that lens from not just the original NetNew logo acquisition, but expanding customer usage, I think we could build in those models at those touch points as well. Very good. So I kind of want to take this a slightly different direction since we've been talking about the free versus trial. I want to start out by asking you, for developers, entrepreneurs, when we're launching a new product, what is the minimal value of viable pricing that developers or your teams or the companies must do before launching the product? Because we could do this free, we could do the freemium. But if we're trying to put value to this, what work must go into defining the value of your software? Very good question. I will say for most, I'll use just early stage companies in general, maybe launching their initial product, maybe they're generally sort of less than five million ARR. Pricing and packaging is probably not what's going to kill you. I used to be head of product at a startup. CEO had a great motto that's stayed with me forever, which is running a startup is like being in a knife fight in a burning building and you also have cancer. All three are going to kill you, but you have to deal with them in that order because you don't get to deal with the cancer until you deal with the knife fight, until you get out of the building. And what I'll say there is that your pricing and packaging is probably rarely going to be the thing that rises to the level of knife fight. What is going to rise to the level of knife fight? Instead, there's going to be things like, does the problem we're solving, do people actually care about solving it? If they do care about solving it, do we actually solve it well for them? And then can we find enough of customers like that in a repeatable, cost-effective way to sustain a business out of it? So those are usually the things that kill you in the early stages. And pricing is going to be a problem. Pricing and value are foundationally linked and maybe we'll talk about that a little bit more. Pricing and value throughout an entire arc of a company's life cycle are always going to be not as good as you would like them. I don't know any product manager or any CEO sitting out there saying, yeah, our product's done. We just have to really fix our support systems and that'll be, you know, everyone's always trying to increase the value and your value and price are always going in lockstep. But a couple of things I'll point out. So what should you be worried about sort of early stage? So I'd say one thing is making a decision around your price positioning. I'll use the example of Southwest Airlines. So Southwest Airlines, the only airline of the last three decades that's actually been profitable when they launched, they launched here in Texas and they made an explicit decision. They were saying, here, we're going to be a local provider in Texas. And there are folks who are doing business trips from Houston to Dallas or Dallas to Lubbock and what do they do it today? They're driving or taking buses. And so we want to be cost competitive with those options. We should be understanding of other airlines, but what is the cost savings of that person spending four or five hours driving their own car or et cetera? And so they made a very explicit decision of we want to position ourselves as an alternative to getting a bus ticket or driving yourself. So I think early stage, something like price positioning is a key strategic decision that you should make. Are we going to be the Timex or the Rolex? Both of them tell the same functional result, same time, but you're probably not in the market for both. So that is a key strategic decision that you should be thinking about early on. And I would say the other thing is, this ties back to our freemium conversation, you want to charge something. Because if we think about the brain, value is the pleasure and price is the pain. If you're just going out there collecting users who aren't paying anything versus customers who are, you're not really getting validated market feedback on one of those key questions I mentioned earlier, which was, do people care enough about this problem? Because you can go and talk to someone and say, hey, we're solving this problem. Is that interesting to you? Oh yeah, it's super interesting to me. Cool. Will you give me a thousand dollars for it? Ha, no way. Right? So you want to be able to get that feedback because if you just get a bunch of people say, oh yeah, I'll sign up for your free app, whatever, and they're not paying anything, there's no buy in from their side. And so you really want to get that validation over time. But keeping it simple, I could go on with other things, but yeah, hopefully that helps. It does. So to follow up with that, so in your experience and over the years with your company, what are some of the biggest mistakes you've seen companies do when choosing their pricing? And how could they have avoided it? What advice would you give to avoid those type of problems? Yeah, so I'd say the biggest maybe misconception is that, especially 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. So what I mean by that is that when we think about the world of price, we always tend to think only about the number. Should our prices end in fives or nines? Our competitor charges $20. Should we also charge $20? Those are interesting conversations. You'd be surprised how little of that work I actually do because it's at the very tail end, and it's usually the easiest thing to change, and it's not the thing that really has the highest leverage point. So what do I mean by who and how? Who is really talking about, we need to understand our customer segments because each customer is going to be in a different context, and that context is going to set the boundaries of what the problem is, what the barriers to achieving that problem is, and how valuable is the result. Let me give you a simple example using the most commodity product in the world, water. So if you and I are on a road trip and we stop off at a gas station, we're thirsty, I might pay $2, $3 for a bottle of Dasani. If you and I are wandering through the Sahara for a week and we come across a guy trying to sell water, we might be willing to empty our bank accounts for that same bottle of water. So the moral of that story is that the value is not in the atoms or the bits that you're selling. Value like beauty is in the eye of the beholder. So we need to understand the different customer segments because if we just go out there and broadly say, hey, world, what do you think our product is worth? We're going to get a bunch of different answers, and those answers are all going to be informed by the customer's context. And the last thing we want to do is just average those answers because there's no average person out there. So we want to think really clearly about who is it that we're really targeting, which executives are usually pretty uncomfortable with because by definition that requires saying no to a huge group of people. Southwest Airlines, when they say we want to compete with buses and self-driving people driving themselves, self-driving has a different term these days, people driving themselves. They're like, well, hey, business traveler, you want first class experience with, you know, ultra legroom? Sorry. You want built in entertainment behind the headsets? Oh, sorry. Like we don't offer that. We don't offer meal service. You know, everything is a la carte. You don't get to, you know, we don't have boarding groups, so you get to feel special. Sorry. You know, so it means saying no to a whole bunch of customers. Right. But so we want to be very clear about that. And then how you charge is the way I say pricing, we always say pricing and packaging and packaging is all those elements. So price metric, price model, price fences, offer configurations. How are we dividing up our product purchase criteria such that that we are able to properly show the value and the price align at each stage? So let me give you an example. When there's a bunch of examples that come to mind, I think maybe the easy most relatable one is Netflix versus Blockbuster. So Netflix, you remember the days of Blockbuster back in the day, you go in Friday night, rent a movie, all of a sudden the clock is ticking. You had three days to return it. So their metric was per movie, but it was also per day. Netflix said, hey, first of all, you have to come anywhere. We'll mail you DVDs, but you can get three DVDs, keep them as long as you want. When you're ready, return them. We'll send you the next ones in your queue. So they changed how they were pricing in a way that was disruptive to that market. And so we often have that ability to do so in the B2B SaaS world, right? If we're charging per seat, well, is per seat the way that our product scales with value? Like in some scenarios it is. I'm not a believer that user-based pricing is dead across the board. Maybe we could talk about that, but is it per API call or per gigabyte of data transferred or per location or whatever it might be? And there's examples on and on, right? This is how Uber disrupted the taxi industry, right? I'm going to pay for my trip. If you take a wrong turn, if we get stuck in a bunch of red lights, I don't care. I'm paying you for the trip, right? Versus I'm going to pay you versus how much time the meter was running. And that is where we will pause the discussion for now. Dan is coming back with lots of good stuff. I apologize in advance and I guess in a behind because we did go, we've asked a lot of questions and have gone a lot of different directions. This may be a little harder than some to sort of keep track of, but this is sort of the problem. This is a challenge at least I have always found when we talk about pricing, whether it's for myself, for my products, for my services, or when I've talked with other businesses and especially other people in the service industry and the software industry. It's like, what is the value? Figure that out. And there are a lot of factors that go into it. And it's the kind of stuff that I think is very valuable for you to think about if you're trying to price yours is like, how do I do this? How do I attract exactly the market I want? And some of it too comes down to like, you will find sometimes that you will make more that you have a bigger margin than you thought you could because the value is exactly placed with your customer. But we will return with him next episode and we'll continue that. And then we are going to continue into this season. We're getting close though, getting close to wrapping this one up. And I think it looks like we're going to just dive back in. We're just going to continue into interviews in the next season because all of these have been just so much fun and so informative to us. So go out there and have yourself a great day, a great week, and we will talk to you next time. 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 development of our podcast where we're all about building better developers and better careers. I'd love to hear your thoughts, your feedback. So drop a note to info at developineur.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.