Dan Balcauski is a self-proclaimed pricing nerd.
As the principal consultant of Product Tranquility, Dan helps high-volume software as a service (SaaS) CEOs define pricing and packaging for products.
“I’ve spent my entire 20-year career in software,” Dan says. “And now I have the privilege of helping founders, CEOs, and their teams build sustainable businesses and get their products in as many customers’ hands as possible.”
Dan joined Carl Lewis, host of The Connected Enterprise podcast, to chat about pricing models and why they’re critical for SaaS companies.
The 3 Cs of Pricing
Dan didn’t create the three Cs of pricing, but he’s well-versed in them.
The three Cs stand for cost-based, competition-based, and customer value-based.
“The three Cs of pricing are a ladder,” Dan says. “You can’t jump to customer value-based pricing without taking the other rungs on the way there.”
Cost-based pricing is cut and dried. The data SaaS companies need is easily accessible, and this pricing model establishes a price floor below which pricing is unprofitable.
Finance teams like cost-based pricing because spreadsheets show the cost of goods sold, markups, and other data.
But this pricing model has drawbacks.
“Your customers don’t care about your costs; they only care about their problems,” Dan explains. “With cost-based pricing, there’s no consideration of customers’ willingness to pay, your products’ perceived value, or your competition.”
Regardless, cost-based pricing is a good place to start.
Competition-based pricing is also straightforward. It involves immersion in a market dynamic and an understanding of what’s available to customers as they’re considering a purchase.
Dan says this data isn’t as readily available as in cost-based pricing because not all markets are transparent, but the data can still be mined.
Again, there are drawbacks—including outsourcing the work of your pricing department to your competition.
Dan cautions against solely relying on your competitors because you should never assume they’ve done their homework.
“You don’t know if the new feature they just announced was a bright idea the CEO had on a golf course or in a random chat with a buddy,” Dan notes. “If we just focus on outpricing our competitors, it doesn’t help us much. And like cost-based pricing, competition-based pricing doesn’t consider customers’ willingness to pay.”
But research shows the final type of pricing—customer value-based pricing—is a superior way to price products because it aligns a company’s profitability with the value customers receive from products.
The drawback? It’s not easy.
“Only about 20% of companies do true value-based pricing,” Dan says. “It’s difficult. You need to have a very mature understanding of your market.”
Customer value-based pricing also involves a lot of time-consuming and expensive research and must be supported by an organizational value philosophy—more reasons it’s not widely used.
“You need value-based selling, messaging, and customer success,” Dan says. “Otherwise, it’s going to fall flat.”
Owning the Pricing Process
Dan doesn’t think pricing gets the attention it deserves in most companies. He says 75% of Fortune 500 companies lack a dedicated pricing organization.
He tells a story of giving a SaaS CEO a proposal. In the middle of the process, the SaaS company held a three-day, off-site strategy meeting.
Afterward, Dan asked the CEO, “Based on those three days, what’s changed regarding this pricing project we’re discussing?”
The CEO replied, “We didn’t discuss pricing.”
The lack of a pricing process or governance is problematic for SaaS companies.
“It’s nobody’s problem directly, even though everyone’s affected by it,” Dan concludes. “I absolutely think somebody should own the pricing process.”
Listen to the Podcast
For more insights from Dan Balcauski, including tips for optimizing and raising prices, listen to Vision33’s The Connected Enterprise podcast. In each episode, host Carl Lewis interviews bright minds and industry thought leaders about enterprise technology and what’s coming next.
