Auto-generated transcript. Speaker names, spelling, and punctuation may be slightly off.

Mark Evans: It's Mark Evans, and you're listening to Marketing Spark. I've worked with b to b SaaS companies for more than a decade. There's a huge amount of time, energy, and money focused on product development, sales, and marketing. But pricing almost seems like an afterthought. There's so much focus on attracting customers to validate the product's viability. In some respects, it's like making sure your hair is just right for a big date, but you go out wearing a t shirt and jeans. Now it goes without saying that pricing is important, so it needs just as much TLC as other parts of the business. Let's take a deep dive into pricing. And to help me do that is Dan Belkowski, the founder of Product Tranquility, a consulting firm based in Austin, Texas. Dan is an expert in helping b to b SaaS CEOs define pricing and packaging for new products. Welcome to Marketing Spark, Dan.

Guest: Thank you for having me, Mark. I appreciate the intro and looking forward to our conversation.

Mark Evans: As I mentioned off the top when we were talking, I get a lot of requests from podcast agencies to have guests on my podcast. I reject about 95% of them easily. Most of them get deleted automatically. But when I got the pitch from your agency, the it resonated immediately because pricing is something that is obviously very, very important but never gets talked about. First question, do you think I'm being overly dramatic about b two b SaaS companies and pricing, or does it reflect what's really going on out there?

Guest: Yeah. I don't think enough companies pay attention to pricing. I was recently working with a SaaS CEO on pricing. As we're going through the proposal process, in the middle of that, they had a three day executive strategy off-site. Monday morning, I have a follow-up meeting with the CEO, and I go, okay. Hey. I know we're talking about this pricing project. What's changed in regards to this project based upon what you guys discussed in the meeting? And he said, we didn't discuss pricing. Can you imagine that? Three full days with your entire executive team. This is a very successful Silicon Valley company and series b company. Incredible amounts of momentum and intelligence. It's not for lack of skill, but just was not paying any attention to that lever, I guess. And given the impact that I know pricing can have, I guarantee in that three days, there were less important items that were discussed or spent time on while you had the entire attention of the executive team. And I don't think it really gets enough attention at any stage. You know, I don't wanna pick on early stage companies. I was recently at the Professional Pricing Society Conference, actually, just last week, and that was one of the topics we were discussing. Even among, you know, the largest of companies, you know, we've made progress over the last decade in terms of even the largest companies have, you know, dedicated, you know, pricing teams and professionals. But I think there's still work to go in convincing the rest of the world that pricing is actually a thing and deserves more attention.

Mark Evans: There's so many places we can go from here. It is interesting to me because I spend a lot of time working with b to b SaaS companies on positioning and website copy and messaging. About pages, for example, are almost in a sense the equivalent of pricing because a company will do all this great marketing and their about pages and afterthought. You go there and it's like, this is so confusing. It doesn't even reflect the brand stature and the people and the excitement about the company. And then you go onto the pricing page, and it's the same kind of thing. It's like, that's it? They really didn't think it through that well. And I guess the obvious quest why is pricing almost like that child that's gets shoved into the corner? Like, it doesn't get a lot of attention when other parts of the business are obsessed over. Is it just something they don't think about? Is they just are they so focused on getting the product to sales, period? Explain that to me because it's a it's a mystery.

Guest: Yeah. It's a great question, and I wonder about this a lot myself. So I could give you my theories, but, you know, I think every each individual company will have its own reasons. I think there's really three ways to grow, especially a SaaS business. Customer acquisition, monetization, and retention. So acquire more customers, you know, keep those customers around, continue to pay you and sell them more, or change how you're monetizing. And I think that acquisition sucks up all the oxygen in the room. And it's really not until folks hit some structural break where maybe they have, you know, a brand new product or they're going after a new market segment or something else breaks in their you know, they have a new competitor that shows up that's like, oh, we actually need to focus on this other monetization lever. I think it's just all about acquisition. I think part of that as well is there's not really pricing has this black box voodoo aura to it, I guess you would say, where, you know, people are if you're a manager and you're asked to control your costs, well, I can go count my costs. I can ask the finance team, give me all the costs for my AWS infrastructure, how much are we paying the engineers, and let's make all that more efficient. We're talking about pricing. It's very there's not really good academic boot camps. You know, we have I guess, you know, we've made progress in the world of product management over the last, I would say, twenty years. Like, there wasn't much training in the world of product management. It's sort of a go do it yourself. The worlds of data science and even programming have now shifted all these boot camps. But I think pricing still doesn't have that that background. And so when you know, if you're a marketer, you're like, okay. I know how to go use HubSpot. I know my demand gen engine tools. I that's very concrete to me. This other thing, I'm not so sure about. It's scary. So let's not let's put it in the corner and not talk about it.

Mark Evans: If you're a b to b SaaS entrepreneur or CEO, you obsess over KPIs like cost of acquisition, lifetime value. Those those matter to you. You look at those numbers all the time if you're trying to scale your company, and those are all predicated by revenue, which is obviously driven by pricing. So there seems to be a disconnect because key metrics are front and center, but the fundamental, the underlying pillars of the business are ignored. And that again, I'm I'm just curious about why you think that happens. They don't even think about it. It's it's almost like it's something that they sort of make up on the fly.

Guest: Yeah. So there's there's a couple of different things. I've I mean, I've talked to executives who are just scared of touching pricing. It's like we have the thing. It's working. I don't wanna touch it. They feel much more comfortable touching you know, breaking something else. I think there's also, what I found is some amount of skepticism that you can do actual research and provide a structured approach around pricing. It's funny because I've talked to many folks in, like, the user experience research world about pricing research, specifically looking for help for folks to come on and do some you know, help me with some of the pricing projects I I work on. And interviewing some of these folks, it's interesting the responses I get where they have this mindset where, hey. We can't ask people about price because we're we're only gonna get a biased response. And I get that at one level in that, okay. Yeah. That's a that's a fair objection. But, you know, that wasn't the first time that anyone's ever thought of that. There have been academic researchers for you know, fifty years who have realized that, okay. There's bias and what are the different ways we could ask these questions, etcetera. And it is mind blowing because I, you I spent a long time in the product management product strategy world. And that's I went to these UX research experts and said, well, you can't get good feedback from a mock up because that's not the real product. And so you're gonna get biased input. It's like, okay. Yes. You are. But you're gonna get enough input to move the ball forward. You're gonna resolve a lot of uncertainty that you have today. So I think it's it's a combination of those factors of we don't wanna break what's working and maybe some skepticism that, you know, there's there's actually some science, some structured way to unravel this black magic voodoo that, you know, if you don't if you haven't looked at it closely enough, you just maybe assume that there's nothing to be done there or, you know, it's just all just guesswork anyway, so I might as well shoot from the hip.

Mark Evans: If we operate under the assumption that pricing doesn't get enough attention and it should, the obvious question is how should companies approach pricing? Both early stage where they're trying to find product market fit. They're trying to attract customers. And then latter stage where the business is rolling, you've been operating with a pricing model for a number of years, but you're not sure whether it's actually optimized or not. Is there a common approach that different types of companies should take to pricing?

Guest: Yeah. So let me just touch there's a couple of different sub questions in there. Let me just touch on first back going on life cycle or company stage. I think it's important when you're very early to charge something. Don't just give your product away for free, but charge something. And and the reason why that's important is because if you just give your product away, you're actually not getting validated market feedback. We might touch on this later. I'm not a big fan of freemium. But one of the problems in a freemium, as well as just giving your product away is you tend to attract a bunch of users who will never become customers, and those folks may have different needs and steer you in the wrong direction with their feedback. Also, you're not forcing people to actually make a trade off. So what you're talking about, you know, I'll give you this product that's pure value. When I ask you for a price, that's pain. They've done neurological studies. The price actually activates the pain centers in our brain, and so it really forces our brains to think about a decision differently. And so you're not really getting validated market feedback if you're not charging anything. So charge something. Going back to your, I think, broader question, you know, pricing is a process. Like, anything you do in your business could be thought of as a process, has inputs, there's outputs. Aligning on the expected outputs and what goals you wanna get out of that is critical. So understanding, you know, from the beginning, how important the relative priority of this project related to everything else that we have could possibly do, the discovery internally related to what is the work we've we've done, aligning the team on what is the goals that we're trying to accomplish, executing some amount of research, whether that's with internal data or external market data, testing and iteration, eventually decision and implementation. I have a a a four part model that, you know, we could apply sort of that basic sort of process to uses the well, it's the acronym SVCS, so services. It was a happy coincidence. I didn't plan this, but it works for SaaS pricing specifically. So starting with your customer segments, then the value create, your competition, and strategy. So the at the SVCS. How does that how does that work? So understanding your customer segments first is incredibly important. Why? Because your market is not homogenous. Your customers will have different value drivers, and they'll rank those different value drivers differently, which will cause them to value your product differently, as well as they have potentially different competitive alternatives that they may have available to them. Value and competition are incredibly important. Obviously, like, you can only charge, you know, a price in line with the value you create. But in a market economy, specifically, the differentiated value that we create for customers is where our pricing power comes into play. Filtering, if we think about those those first three components I talked about, your customer segments, understanding the value you create for those segments, the competitive alternatives you're up against, that we filter those as sort of the research inputs into your overall strategy. This is where you come to make the decisions around the things like you mentioned. Given the segments exist in our market, who are we best suited to serve, play, and win? So who are we going to target? How are we gonna position ourselves in the minds of those customers so they understand our our unique differentiated value? How do we create the packaging such that we align to the value drivers that that those segments understand and and that we have offerings potentially for different subsegments of those customers? So really bringing that together and to understand, you know, pricing is not just a a single dollar value. It's a set of interrelated decisions that all have input from those different components I just mentioned.

Mark Evans: If we agree that pricing should involve a structured process, research, competitive analysis, and the fundamentals of of making the right decision using the right inputs. Then, ultimately, who should be responsible for pricing? Is it the CEO, the head of sales, marketing, customer success, or is it a group decision where everybody within the company, they do for positioning and messaging, needs to be aligned so that you can move forward in in rocks in lockstep?

Guest: Yeah. It's a great question and one that comes up often because, you know, we could have the best research in the world and that runs into an exec team that is not aligned, and no one has decision making authority, and the best research in the world is not going to, move that group to a a decision that will get implemented, and it will just get lost. In the beginning, founders own pricing because there's no one else to do it. Right? But as we discussed, many companies and many founders aren't spending a whole lot of time on that process. In larger established companies, I would make the argument that product marketing should own it. I would say product marketing or product management. The problem with product management is usually the chief product officer or VP of product has so many other priorities on their plate that they are unable to give pricing the attention it deserves. I think both of those positions are closest to the customer in terms of deep customer insights, but they also have a strategic position inside the company. They understand the company goals at a deep level. They understand the value that they're creating through the product. Obviously, PMM has a a a very strong role in in owning the positioning, which I think positioning your pricing is a function of your positioning. And so having that shared ownership is is is quite valuable. You know, they they understand these ideas we talked about before of segmentation, targeting, and positioning altogether, which is is core to the pricing process. Now you asked, is it a group decision? I believe that you should have a pricing committee or a pricing council because everybody at the executive table is a stakeholder in that decision. Sales, finance, customer success, product management, they all have a incredible amount riding on the outcome of that decision. And so I don't think that it works to have one function, I guess, minus the CEO. But the CEO usually doesn't have enough time to do the research either. So, you know, minus the c, CEO to come in and and dictate to the or to the organization. But I do think, you know, that product marketing person should have decision authority, but be leading and and incorporating the feedback from the rest of the pricing council. And that makes sure that all those stakeholders' views are represented. We do this with if you think about product management, this is the whole role of product management. You have engineering team who, you know, is saying, alright. What do we go build? And a lot of different opinions in the building, including those of customers outside the building. And the role of the product manager is to be that walking persona of the product, listening to all the opinions, balancing all the trade offs that need to be made in order to achieve the objectives the business has outlined, and move forward because otherwise decisions will be made. You got a bunch of engineers sitting there burning time, not building the things they should be building. And it just sort of boggles my mind we don't treat pricing the same way. It's because it has, you know, a incredible impact on, you know, moving the business forward.

Mark Evans: One of the things I wonder about when companies are trying to get a handle on pricing is how they can tell whether it's working or optimized. Obviously, they can look to customer acquisition. If we're getting a healthy number of, of customers, then that's a sign that our pricing is attractive. The other is is is obviously revenue. So if we're getting the revenue we're hitting our revenue goals, then that means our pricing theoretically is working. But if you take a step back and look at it from a higher level perspective, you know, what are some of the things that companies need to think about, a, to make sure it's working, to make sure that it's actually competitive and it's it's attractive, and b, it's optimized. Because companies could sell a product, and they could be 25% below optimized price, but not even know it. So what's your what are your thoughts on those two?

Guest: Yeah. It's a great question. It's a difficult question. I don't think that there's any one perfect answer for, you know, your price point or your packaging. You're always balancing different trade offs and different decisions based upon, you know, your competitive alternatives, sort of the market dynamics, the strategic imperatives of your business, where, you know, where your product is in the life cycle, the type of customers that you have. As you you you talked about, you know, are you hitting your goals? Is pricing getting away at those goals? I think that'd be sort of the first question. Also, are you having sort of regular conversations about pricing? Is it being brought up in your quarterly exec strategy meeting for at least, you know, what are the thirty minute sessions? I think is is worthwhile of having that conversation. Some of the metrics that you might take a look at, things like understanding your discounting percentage can help inform if if your price is is too high or or too low. One thing is I'm of the opinion that if you don't have any prospects complaining about your price, that's a problem. So, you know, you you you normally should somebody's gonna be, you know, relatively unhappy, but, you know, it shouldn't be everyone. But you you know, if you have no one complaining about your price, you're you're you're you're definitely undershooting the market. With discounting, you know, you can look at at those numbers purely, and then you can also look at, like, price band. So identifying customers that are paying significantly more or less than your peer customers of a of a similar size and tenure with the company. You know, wide price bands are often a signal of a significant pricing opportunity. Looking at things like churn and net revenue retention. So are your churn and net revenue retention in line with similar companies? And I've written, a lot about churn. It can get very complicated to compare to the proper, peer groups. So a one size fits all, churn number if I quoted it now, would not fit for, you know, some percent large percentage of the of the audience. But making sure that the feedback you're getting from customers, are you aligned to the value that are you know, perceived value that customers are actually experiencing from your product? And are you seeing a healthy amount of expansion from those existing customers? You know, I'm a big fan of using, you know, win loss data and win loss analysis. You're going out and actually talking to loss prospects to get sort of their perspective. I think, you know, win loss codes are they're a good start, but it's all too easy, especially to b two b context for a prospect to tell your sales team, hey. Price is the issue. When you go out and dig a bit deeper, you usually find the price wasn't the number one issue. So really trying to understand behind the scenes what is the the the real cause of of their of you not winning that particular deal. Because in a b two b context, price ends up usually being somewhere in the third to seventh most important decision in the in the in the buying process. But you don't see that usually when you just look at the win loss codes. It usually is, the number one bucket. But when you go and dig in there, you obviously find a bit of a different story. And then also churn customer interviews, going out and make you know, having those conversations with customers, trying to figure out what are they doing now to solve that problem. You know, maybe it's you're losing some insight on a on a new competitor or you know, we we think about competitors very rigidly. A lot of startups are actually competing with spreadsheets and email. Right? So was your did your did your software not even beat the spreadsheets and email? They just went back to having Joey, the intern, maintain some spreadsheet? Or they did they choose some other way of of doing it? Right? So it can give you a lot of product innovation insight, but then also, you know, understanding where your value is relative to your price.

Mark Evans: In the marketing world, marketers traditionally have relied on the four p's. But in the pricing world, one of the things that you mentioned before this interview was the three c's of pricing. Can you talk about each one?

Guest: Oh, our marketers, we love our our handy acronyms, the the STP, the four c's. We we got we got, you know, Porter's five forces. We love all of our little handy mnemonics. So, yeah, the in the three c's of pricing, real quickly, I'll just I'll I'll I'll talk to them, and then I'll explain them a little bit more. So it's cost based pricing, competition based pricing, customer value based pricing, often referred to as just value based pricing. But if we just said that, it wouldn't be three c's. The way I look at this is it's a progression. It's totally fine if you're starting at cost based pricing. You've got some cost of goods sold. You've gotta keep the lights on. You gotta pay the rent. How much does it cost you, you know, if we're gonna sell this product to maintain, you know, a a profit so we continue to deliver value? Or if you're going out the door in the first blush, absolutely, like, it's totally fine. Not the place you wanna stay long term, but it's a starting point. You know, it's relatively simple, clear cut. You know, data you need is is easy to find within your your company. I will say for each of those, the way I think about this as a as a a progression or a ladder is because you really can't get to, like, value based pricing. You still need to understand your costs even if you get there. So you need to sort of understand all of these things along the way. You don't get to just ignore it. Just be like, oh, I only focus on customer value. Well, maybe customers wanna pay you below what your costs are. You're not gonna be in business very long, so you better have an understanding of your costs. Then you get to competition based pricing, which it's like, okay. Before, if you're considering costs, you know, you just add some some markup to that. Well, you're living now in a very insular reality. You're completely cut off from the reality that your customers are facing because your customers are evaluating other available alternatives in the market and comparing you to them. And so looking outside of your firm at what are the other possible alternatives that customers could use, how are they pricing, and trying to understand, you know, do we believe given our life cycle, our maturity of our product, are we at a premium or a discount to those competitors? So using sort of now those two inputs of cost and competition to help inform your your overall pricing pricing and packaging approach. And then finally, the value based pricing, which I would say is the north star. It's a destination never to be reached, but always to be struck strived for. You know, the value here is, you know, it's customer focus, directly aligning the company's profitability with company's value or the customer's value rather. The idea here is with competition based pricing, you know, much like we were talking about before the focus on, you know, demand generation, you would never give your competition control of your demand generation strategy. So but, you know, when people just stay at competition based pricing, they're basically outsourcing their pricing function to their competitors, which no CEO would ever, you know, consciously do, but effectively, that's what they're doing. You know, I've been on the product management product strategy side, and one thing I learned very early on was to be very cautious when you see competitors releasing a set of new features and being like, oh, this is what the market wants because you're making this underlying assumption that their product managers actually have have a have a process that they've been following. Same if you follow their pricing. It was like, oh, they've actually done their homework in the correct way. So you don't wanna do you don't wanna, you know, stay there because you're you're then, you know, at the mercy of your competition.

Mark Evans: The other question that I wanted to ask you is how companies should approach price changes. I was working with a client recently. I'm working with a client. One of I spent a lot of time looking at the product, the competition, and we got to pricing. Their pricing you know, the sniff test, it seemed wrong. Now in this case, what was happening is they had they had a free product for students. They had a cheap product, and they had an enterprise product. And the gap between the the pricing bands was dramatic. And from a outside in looking perspective, it seemed off. So what we did is we adjusted their price now, albeit and I'll I'll concede this as a maybe it's something we did wrong is we we made an educated guess. We were trying to be agile. We were trying to reposition the company. So we we guessed on pricing. Part of it was that the top tier is enterprise. And like a lot of companies, it's called the call to get the answer. So we're not gonna tell you what your cost until you tell us what you need, and then we'll make it up as we go. That's a long winded question about, you know, how often should companies change their pricing, and how do they determine if they should do it and when's the right time?

Guest: There isn't one magic number that specifies how often to revisit pricing. It generally makes sense to revisit at least once a year or whenever a change in the product or the market would necessitate a review. Companies, product managers, engineering design teams are constantly evolving your product. You're constantly changing the value. It makes sense to reevaluate your pricing in line with changes of value, and maybe you're not doing that with you know, if you're shipping in an agile fashion, pushing code multiple times a day to production. I'm not saying changing your pricing every day is a recommended thing, but, you know, you do have step changes over time of we are significantly different product than we were, you know, a year ago. Our competitors have significantly changed, and therefore, you know, it's time for us to to revisit. But, you know, I saw some data. I don't remember where it was, but companies that did more pricing changes. And, I'm not just talking about the number, but this could be creating new add ons, doing pricing localization, making tweaks to the the display of the pricing pages, showed higher growth over time. So there is some correlation. Again, causation correlation, unsure, but companies that are revisiting your pricing more often are showing higher growth over time. You know, if you're talking purely about pricing increases, again, I'd mentioned this before. If you don't have any prospects pushing back on pricing, you know, that could be a signal that it's maybe time to look at it. Customers maybe explicitly you know, if you're a product manager, they might not say this to sales, but if you're a product manager and, you know, customers are telling you how cheap you are, that might be a good signal. You know, if you have a very clear understanding of the, return on investment or ROI that you create for customers and you've validated that with customer data, and you can, you know, bring that to the executive team, that might be a good opportunity. Again, if you haven't touched pricing in years, this is coming back to bite a lot of people because now people are there's some real concern about inflation. And now people are like, oh, no. We haven't touched our pricing for years, and all of our costs just went up because of wages and cost of goods. And so now we need to make another a a much bigger adjustment that we were, you know, even we were planning on on touching it. Now we have to do all this catch up work and, like, then forecasting what's happening in the future. We didn't touch on this before with metrics, but another thing is most companies in the SaaS world have different offer bundles or configurations, which is like a good, better, best. In those situations, you know, you'd like to see a somewhat balanced purchasing across your different offer configurations. So, you know, there's not a hard rule of thumb, but, you know, some people will say, like, 25, fifty, twenty five. You know? So 25% at your at the at the, you know, the least expensive version, 50% in the middle, and 25% at the high. You know, if you start seeing 90% are buying your highest, that could point to, like, okay. Well, actually, you know, our our highest maybe underpriced and, you know, there's or there's not enough value at our at our lowest that we need to to balance those things.

Mark Evans: I wanna ask you about two pricing related sales and marketing approaches that a lot of b to b SaaS companies take. One is free trials. Seven day trial, fourteen day trial, thirty day trial. What are your thoughts on free trials? Because in many cases, what I find is that it's hard for a prospect to determine the value or price of a product because they don't get the full experience. They may get a truncated view with a free trial. So when it comes to making a buying decision, they've got a taste, but not really. So do free trials, do they work? And how what's the relationship between a free trial and pricing?

Guest: Yeah. So so I think of free trial as almost an acquisition strategy, less so a monetization model. I do believe free trials work, and there's good data that shows this. Now the we're gonna nerd out for a second. The idea of a free trial comes from what economists would term as software as an experience good. So an experience good is a type of good that your perception of the value changes as you use it. So if you imagine you go to a restaurant, you might see what's on the menu, but it's not until you you taste that Wolfgang Puck and stop by your dish that you're like, oh my god. Now I see why this, you know, salad was $95. It totally makes sense to me now. You know? And and, you know, we talk a little bit about about tactics, but, you know, I worked for several different companies. I had free trials. And, you know, the the ideal from from, you know, there is, and a lot of other research I've seen, is fourteen to thirty days. And the benefit of a free trial is there's an expiration point. So your go to market motion is very clear where customers see the value or they don't, and then they make a decision. And that decision might be, I need more time, in which case you've got a salesperson who maybe has a a trial extension key that they can hand over or, you know, based upon, you know, how the how the conversation is unfolding. But it creates a decision point at which, you know, it makes sense to either, you know, go with the software or not. Now there's a lot involved in making sure that those free trials are optimal. You know, everything from onboarding flows, you know, customer education. Right? So it's it's at that point, it's not really a pricing decision. It's it's really being sure that the value is very clear and that, you know, the entire, marketing growth product management team is doing everything they can to, support the the value proposition of the product.

Mark Evans: The other lever that a lot of b to b SaaS companies pull is freemium, which you touched about earlier. It strikes me that freemium was a lot sexier and captured a lot more attention a few years ago. Maybe it's because freemium has become old hat. It's just part of the sales and marketing and product landscape. What are your thoughts on freemium? Because in some senses, you're giving away your product for free, trying to win people over by showing them the value, and then hoping that some of those people actually like the product enough so that they'll upgrade, and they'll find the pricing to be acceptable because they've seen the value. Any thoughts? Or I'm sure you have thoughts on freemium. How and when it should be deployed?

Guest: Yeah. I absolutely hate freemium. So thank you for the question. So my so but this is actually my first foray into the pricing world. So I did my MBA. And during my MBA, I went out to Silicon Valley, worked for a very successful Silicon Valley startup there. They had a problem where they sold apps, like, for your phone, but they went to market through these four large go to market partners. One of the go to market partners was incredibly concerned about being perceived as the low cost player and made all of their app developers have a freemium version of their app. On the table as CEO was a strategic choice that he had to make when I showed up, which was, hey. We have to do this freemium version of our apps for one of our go to market partners. Should we have it for all of them? Dan, go. So I threw me into, you know, research for a good part of that summer among others, several other projects completed for them. Really, it turns out to be generally a terrible idea for a whole host of reasons. Most of the arguments that people make in favor of freemium are better suited with a fourteen to thirty day free trial instead of freemium. It's a very bad idea except in a few rare cases. So the first thing to think about is that it's very challenging to move customers from free. I was talking before about the free trial. At the end of that free trial, there's a decision point. There's no decision point in freemium. It's sort of this lingering continued usage at which you there's a lot of hope involved in the freemium strategy, I would say, of like, oh, eventually these people will become paying customers. This is an illusion. Best in class freemium, you're gonna convert one to 3% of those users into customers, which by definition means you have to have a massive market, like millions of potential customers. So when I talk about, you know, some rare cases, people are like, oh, well, Zoom has free. I'm like, okay. With COVID, every person on the planet was a potential customer of Zoom. So they have a massive market. In their case, it's it's the free works as well as they have embedded, network effects because I invite you to a Zoom call, then you use Zoom. So so there's a couple of these situations where where it does make sense. There's an incredible amount of energy misspent inside of businesses because, again, you look at these 99% of of users who will never become customers. And look. Growth teams are working incredibly hard to acquire new customers. Right? They're going out every day working in SEO, social, paid paid search, etcetera, trying to acquire customers, and you're looking at this giant pool of potential users like, oh, if we just tried a little harder, I'm sure this giant pool of users will convert. And then you spend all of this energy and money trying to move those people who never will actually convert. And so it's a it's a it's a mirage, and I think it's a giant waste of energy. And I think that there's there's some debate going on right now that, well, it improves your customer acquisition costs. I think this is playing games with the income statement. The reason so for those of you who aren't aware of cost of acquiring a customer is your sales and marketing expense divided by the number of customers you've acquired. As soon as you do freemium, it can look like your customer acquisition cost went down, but that's because you took a giant portion of the engineering and product design teams and put them in the marketing and didn't account for that when you did your your CAC calculation. So if you did that, I'm pretty sure actually the numbers wouldn't look as rosy as as they normally do in that situation. Again, you know, there are some rare cases. For the vast majority of arguments, I would say, you know, free trial works. And here, when I'm talking freemium, I wanna be very explicit because some people will be like, oh, well, we we could do an ad supported model. In that case, that's very different. Don't say that that's an ad supported model. Right? Like, I don't call Facebook freemium. It's a it's a two it's a multisided network with an ad supported model. So freemium is purely like, oh, we get no money. You know, there's no revenue from these these free users. But going back to what I was saying before, in terms of some cases where where it can work, you know, I think Zoom where you've got this network effect from a perspective and it's a giant giant addressable market. If there's, like, developer focused products where you have you potentially a a developer needs to use your products in dev and staging for months or maybe a year, before they could move it into production, and you wanna be able to give them that opportunity to do so. It doesn't make sense to keep on renewing free trial keys so that some of those type of products make sense. But if you moved it to production, you know, the the free version wouldn't be enough to actually use it there, or something where it's like a built in community. I think Slack is a good example where, you know, you don't wanna show up to a party and no one's there. The product doesn't isn't useful unless all of your teammates are on at the same time. And so just the, you know, the fact that it has to be social in order for the the product to actually function, makes it so that they they needed to have sort of a freemium a free, version of their product there.

Mark Evans: I guess I could really I could ask you. So how do you really feel about freemium? I'm pretty I'm gonna ask you actually a favor and some some some free consulting advice. I've got a client. What we're trying to do is create a new category. Like a lot of b to b SaaS companies, you know, the the nirvana is you don't compete in an existing category is you actually create your own subcategory or a completely new category. And once you do that, you you sort of put yourself off to the side against all the other traditional competitors that you've battled against. What are your thoughts in terms of pricing when you're making that transition? When you've got this legacy product with legacy pricing, but you're trying to reinvent yourself and in the process, maybe trying to position yourself as a higher value premium product. How do you manage that journey?

Guest: There's a lot in that statement. What I wanna do first is call everyone's attention to the idea of how bad idea it is to go try to create your own category. I know it's the market thought of as the marketing panacea, but I do not recommend it. I highly recommend if folks haven't checked her out, April Dunford. She wrote a book called obviously awesome. She is a positioning expert. I absolutely love her stuff. She actually went and was talking on can't remember where it was, but she had actually done some research because she gets this all the time just being a positioning of people and, like, oh, well, like, if we go create our own position, we'll be in a category of our own, and then looked at data of, you know, how many companies sort of when they went IPO had, like, created a market versus not. Right? HubSpot is the one that's always held out of, like they created the whole idea of inbound marketing and became the number one, you know, leader in that space. But then there's also all of the also RANs you never heard of. Right? I mean, think of the creative and Sony m p three players that just got destroyed by the iPod. You know? And the the list goes on where actually, I think it from her, research she did, it was something like 95% of technology companies at IPO were playing in preexisting categories. So very, very small sliver of IPO stage companies had actually gone and created their own categories. So putting that aside, say you go down this road. The I think the other question you sort of asked was, you know, how do you change your your price positioning? I wanna go from the low cost player or maybe the average market player to a, you know, more premium, player. It takes time and it takes investment. Customers' perceptions are sticky. So this is where the real work comes from. It's not that it's impossible, but this is the reason why, for example, Toyota created the Lexus brand when they went upmarket. Because while Toyota might you know, obviously, Toyota and Lexus are the same company, but they realized it was easier for them to compete if they just created an entirely separate brand. There's ways you could do it and you could potentially move there over time. People do transition, but it's it's very difficult if you're Toyota to then go compete with Lamborghini. Like, I don't think you you could even create another brand. You're like, okay. This is still a Toyota. Right? So so there's I think there's even limits there in terms of of of the the levels you can you can compete at.

Mark Evans: One final question in terms of how people can find you. And and as important, what are

Guest: the

Mark Evans: triggers that would cause a b to b SaaS entrepreneur or CEO to wake up one morning and decide, you know, I gotta call Dan because my price something's off with my pricing. Like, what do you what do you find happens the week before or the day before someone reaches out to you and says, I need some help?

Guest: Folks can find me at productstranquility.com. I'm also happy to connect with folks on LinkedIn at Dan Blachowski. Just let me know you heard me on the podcast so I could separate it from the rest of the LinkedIn spam. So, usually, where my clients come to me, there's it's usually some sort of structural shift. What's happened is, I guess, inflation, as I mentioned before, we could think of that as a a pretty big structural shift. It's the highest inflation we've had in in forty years, so it's usually not been a topic that, anyone, has had to think about for a very long time and suddenly becomes top of mind for a lot of executives, especially if you're on the finance side watching your your, gross margins and your wages, increase incredibly and trying to maintain some profitability and and runway for your company. There's often you know, if we're growing to a point where we're now starting to talk to new market segments and the way our pricing and packaging has been structured in the past is not working for that new segment. Potentially, I've either built or acquired another product, and now I'm starting to manage our portfolio of products and now need to rationalize pricing and packaging across those. Perhaps I've even built just a a significant new piece of functionality, and now it's time to start thinking about, okay. Could this be a separately monetizable add on? So those are a couple of the different areas where folks start to, you know, experience a friction and realize, okay. Maybe we need a little bit more rigorous approach as we start to juggle this.

Mark Evans: Well, this has been a fascinating conversation, and it's a conversation that I've wanted to have for a long time. I've talked about LinkedIn. I've talked about different marketing approaches, SEO, and pricing certainly doesn't get the attention it deserves. So I wanna thank you for being on the podcast, and I wanna thank everybody for listening to another episode of Marketing Spark. If you enjoyed the conversation, leave a review, subscribe via Apple Podcasts for your favorite podcast app, and share via social media. To learn more about how I help b to b SaaS companies as a fractional CMO, strategic adviser, and coach, send an email to mark@markevans.ca, or connect with me on LinkedIn. I'll talk to you soon.