Episode 78 Jun 21, 2023

Subscription Pricing Models on the Rise in B2B

In the subscription economy, a company’s product takes a backseat to its subscriber. What does this mean for a company’s go-to-market strategy? For starters, value-added services and customer support become paramount.

In your everyday life, you most likely subscribe to various streaming services or office software tools. But subscription and usage-based models are expanding far beyond the consumer realm, becoming more and more popular in traditional B2B spaces.

Dan Balcauski, founder and chief pricing officer of Product Tranquility, joins the show to explain why this shift is happening, the ramifications for the B2B world, benefits versus risks, best practices, and much more.


Read: How to Power Intelligent Subscription Pricing

Dan Balcauski

Dan Balcauski

It's in the name, right? We talk about software-as-a-service, infrastructure-as-a-service, everything-as-a-service. It's really a focus and a shift from a product-centric world to a service-oriented world, which means your products are no longer the main focus of your company, your subscribers are the focus.
- Dan Balcauski

Episode Transcript

Dan Balcauski: You really need to get out of this mindset of we sell and then we sort of walk away, right? Instead it turns into much more of a mindset of make, sell, own, operate. You know, it's in the name, right? We talk about software as a service, infrastructure as a service now, everything as a service. It's really a focus and a shift from a product-centric world to a service-oriented world, which means your products are no longer the main focus of your company, your subscribers are the focus.

Barrett Thompson: Hello everyone. My name is Barrett Thompson. I'm the general manager of Commercial Excellence at Zilliant, and I'll be your host for our podcast. I'm joined today by Dan Balcauski, founder and chief pricing officer of Product Tranquility.

Dan, welcome to B2B Reimagined.

Dan Balcauski: Excited to be here, Barrett. Thank you for having me.

Barrett Thompson: Yeah, it's good to have you on the show. Before we get into our topic today, Dan, would you tell us something interesting about yourself?

Dan Balcauski: In pre-Covid times, I did a solo round the world backpacking expedition for a year and a half.

Barrett Thompson: Oh my gosh. How many countries did you visit on that trek?

Dan Balcauski: I think there was about 23 on that particular venture.

Barrett Thompson: Pretty amazing. I guess you have some calluses on your feet and stories to tell. I'd like to hear about that at some point. Sounds interesting. Dan, what about your professional background?

Help us understand what you do at [00:02:00] Product Tranquility.

Dan Balcauski: So Product Tranquility is a consultancy that I run here based in Austin, Texas, and we help high volume B2B SaaS CEOs define pricing and packaging for new and existing products. I've spent my entire 20-year career in software. I started more on the value creation side, then the value capture side first as an engineer, and then into engineering management.

Ultimately, I became fascinated by how our products created customer value and turned that into dollars and cents for the business. And this interest led me to pursue my MBA. I didn't realize it then. I was quite lucky with my MBA. The program I went to was widely recognized for excellence in marketing, but I didn't find out until very recently, very few MBA programs had courses in pricing.

So I received my theoretical grounding in pricing there, and got thrown into the mix directly with a project that I worked on. My internship on the pricing side. And after Kellogg spent much more of my time getting deep on the value creation side and product management, product strategy roles, you know, at those companies.

We acquired a lot of other companies and rolled them into our product portfolio. I gained tremendous experience seeing all the mistakes those acquired companies made in their pricing and product strategies. [00:03:00] And now I have the privilege of helping founder CEOs and their team build sustainable businesses, helping 'em get their products into as many customer's hands as possible.

Barrett Thompson: It's highly relevant for our audience. Dan, I appreciate the specific expertise you bring to help companies think about their subscription or usage based offerings because this is a topic we hear often coupled with other larger digital strategies. Looking to get to the next level as a business or break out of some of the traditional manufacturing and distribution go-to-market models that have been around for a hundred years.

And in fact, if we could begin there, I think some of our listeners in those more traditional B2B spaces, haven't really considered whether or how subscription or usage-based pricing might fit in their business, but I have seen it's emerging even in these old school industries. And I wonder, what is your take on the growth of the subscription pricing model?

Why is it coming and where do you see it going and the next couple of years?

Dan Balcauski: Well, it's hard to say something new here that hasn't been said before. I mean, subscription has really [00:04:00] just dominated every market. Not only software, but you know, consumer. You've got every single subscription box of the month club you could imagine usually showing up my girlfriend's name on it.

I might add. It’s become all over the place. We see the subscription model, and I don't really see it slowing down. You know, there are some rumors of quote unquote subscription fatigue. Mainly we hear those coming from some of the B2C markets, like how many, you know, streaming entertainment service subscriptions do you need between Netflix and Hulu and Disney Plus?

Whatever HBO wants to call themselves these days. In B2B I am starting to see more what I'd call hybrid models. So these would be not only subscription, but a combination of some amount of subscription as well as pay as you go model, and that's becoming much more commonplace. And so seeing that evolution happen, you know, at least in my space.

Barrett Thompson: Are there some businesses that you think would be a good candidate for subscription pricing?

When you think about the traditional manufacturer and distribution verticals, have you seen some that might lend themselves more easily toward and naturally [00:05:00] toward a subscription pricing model?

Dan Balcauski: Yeah. I think the simple test is any business that believes they can deliver a stream of value over time is a candidate for subscriptions.

There's been a couple classic examples in the pricing world. Rolls-Royce famously for their jet engines started charging power by the hour for the amount of time the jet engines are being used in flight was how they were charging their customers. Michelin had rolled out a, instead of paying per tire on a commercial truck tire business, a pay per mile point of view, right?

So jet engines and commercial truck tires can do it. I think it pretty much opens it up for pretty much anyone. There was a really good example at Professional Pricing Society Conference last year where I was actually talking to some folks over at Zilliant and one of the really good keynotes there was by Dr. Jerry Smith, who's got a great book called Getting Price Right. Highly recommend it. Any pricers who are on your call listening to us will, I think enjoy it. But he gave an example of a company called SKF and they do bearings for the railroad [00:06:00] industry. And they sell by both the bearing and the solution.

So I think, you know, one of the topics we might get into later is, you know, is there a need to sort of ditch one and just go whole hog into the other? I think it's smart on their behalf because it really allows segmentation of customers based upon how the customers wanna buy. And I think one of the nice things as we think about the move to subscription is it really frames, you know, changes what the customer gets or what they're paying for what they get, right?

So instead of just buying bearings and seals, now they get condition monitoring. Now they get a certain amount of uptime dictated by certain customer KPI, and then they pay a monthly fee for that, you know, that extra value. So I really think it's kind of wide open to anyone who wants to take the plunge, who can see that continuous stream of value being delivered to their customers.

Barrett Thompson: Yeah. And you know, I wanna pull on that thread a little bit more. You've started to speak to, I think, why would companies want to bring in a subscription offering? I mean, what's the benefit to them? What's the benefit to their customer versus the traditional way of sell at once? [00:07:00] Invoice at once?

Dan Balcauski: Yeah, it's a great question, and I think the number one reason we see a lot of CEOs pushing there is the higher valuations that you get from investors is quite nice.

Companies have realized, you know, and investors have realized that if you can really get a subscription or flywheel going, can start to have the characteristics of an annuity where you know it starts to produce revenue kind of on its own. Without this need to continually push it, right? I hear from sales leaders who are making the transition from a perpetual, you know, one-time transaction or subscription model of you just, you know, if they're a CRO, right?

CRO has been a big change of title, right? Because now it's not only the initial sale, but making sure that customers renew and expand and upsell, et cetera. So the standard distinction between sort of sales and, you know, after sales money is blurring quite a bit in these models. But you know, the revenue leaders, you know, it's like man, having to start every quarter, every year from [00:08:00] zero, knowing there's no revenue coming in the door kind of automatically, right?

So it produces a lot of stability for those suppliers. Some more predictability for customers. And ultimately I really like the subscription model because it fundamentally helps us align ourselves with our customers. It reinforces the customer relationship over time. It really forces the company to focus on customer lifetime value, not only sort of in the monetization that the company is getting, but the value that customer is getting over time.

You know, from things I was mentioning before, like you know, this continued focus on making sure they renew, how do they expand, how do we upsell them into additional monetization opportunities over time?

Barrett Thompson: Dan, is there an implied shift in who is responsible for what in the buyer seller relationship? When you have something like power by the hour, for instance, does that imply that Rolls-Royce has an ongoing responsibility to, I don't know, inspect that engine, maintain that engine, do something differently than what they did in the old model when they just dropped off the engine at the jet [00:09:00] manufacturer's plant and walked away?

Dan Balcauski: Yeah, well, you really need to get out of this mindset of, you know, we sell and then we sort of walk away, right? Instead it turns into much more of a mindset of make, sell, own, operate. Remember, really does put a requirement on the business to shift in the name, right? We talk about software as a service, infrastructure as a service now, everything as a service, right?

You know, it's really a focus and a shift from a product centric world to a service oriented world, which means your products are no longer the main focus of your company, your subscribers are the focus again, which reinforces the benefit I mentioned before, which is I really do think it aligns the vendors and the buyers very nicely because you are committed to your customer success.

In the old software days, we're selling perpetual licenses. You might get 90% of that customer lifetime value on that initial sale. So if you were a more callous salesperson, [00:10:00] you may not care if they ever installed that software, if they ever got it deployed, cuz whatever the bills paid. But now we've seen the rise of things like customer success in the software world because we have, and really intentional onboarding practices.

That is the handoff from the account executive who closes the business. To make sure those customers are actually able to get the product implemented, get it deployed, get everyone trained, because renewal's gonna come up in a B2B context, usually in annual process. So it could be multi-year, very rarely do I see more month to month in consumer.

But nonetheless, that renewal term's gonna come up in a year. And I don't want the poor customer success rep who's like, “Hey, your renewal's coming up.” And they're like, “Who are you? What are you talking about?” That's not a good conversation.

Barrett Thompson: What are you doing for us again?

Dan Balcauski: Exactly. So there is a whole, you know, machinery that's evolved.

We see this tremendously over the last decade in software as a service. Like customer success as a function really didn't exist before this, right? So we start to see these type of roles evolve and shift. [00:11:00]

Barrett Thompson: As a business begins to make that journey or they embark on their subscription offering, what are the first steps that you might recommend to them in bridging the gap from their existing go-to-market model to expanding into the subscription model?

Dan Balcauski: I think the number one thing that people have to keep in mind, the key is a top executive mandate. Otherwise nothing will happen. I've gotten this question before. I think we were talking a little bit before the call where I teach product strategy for Kellogg, and I've had questions from students where they're like, Hey, I'm a, you know, individual contributor product manager, and I wanna try to switch our pricing model or business model.

I've not really seen that been successful from that grassroots level because there's just so much of a transformation that you really have to understand. A change in your pricing model is a business model change and there are far reaching implications. It needs to be crystal clear between the board, the CEO, the CFO, what the numbers will look like.

You could spend a lot of time wandering in the cash flow desert. We don't have [00:12:00] visuals unfortunately, but there's this idea of swallowing the fish or the fishtail that comes up when you are launching a subscription product or subscription service. Your cashflow can go negative for a period of years and more successful you are, the more negative it gets, which is counterintuitive.

But you know, the CEO, the CFO and the board have to be very clear that's what's going to happen because you might not get through the end of the desert if you don't realize that upfront. So I'd say that’s kind of number one. And I would say the other thing is focus on where you have the most significant opportunities.

Like what value creation opportunities are there for your customers. I always bring pricing conversations back to value. You know, don't get caught up in this as a technology or as a marketing exercise. You know, focus on the customers and their problems. And ultimately, you know, I have a whole model I use for SaaS pricing, but you know, the first part of that is focusing on your customer segments.

Which customer segments have the biggest need, would benefit the most, and going through segmentation exercise where you can really prioritize, right? Solving real problems. And then look, prioritize and ship. You're gonna learn a lot by iteration. You [00:13:00] know, there's a lot more I could go on there, but I'll stop.

See where you wanna take it.

Barrett Thompson: No, this makes sense. First, I hear you say be intentional, right? Because there are going to be some direct consequences at the p and l level and other levels, so it can't be a whim. It can't be driven bottoms up as effectively as top-down. I also hear you saying there with the segmentation idea that it's not an all or nothing, you might be able to identify some area to start first in the business, right?

Go get your experience, go get your sea legs around you. You mentioned maybe customers or segments where that makes sense in the market. Is there, if you pivot that, are there certain products where it might make sense or do you see someone coming in and saying, well, I have my widgets that I'm selling, but I also have some service offerings today that are on top of that.

Maybe I want to really think about making that service offering the first thing that I try to create a recurring subscription revenue stream on it. Maybe not so much the widget itself. Are there any ideas like that? Yes. How you break up the offering.

Dan Balcauski: Again, I would [00:14:00] slightly tweak the direction of your question because, the whole point of this model is to get more and more intimate with the customer, their operations, understanding the problems that they have.

So I don't forget what products you're selling today. Forget what solutions the sales you have today, professional services you offer. Really start mapping out for the customers you have today, what does their life look like? What is their customer journey? What are the jobs that they have to get done?

I'm a big fan of the Jobs Be Done Theory. I didn't create it. You know, many fathers, Clayton Christensen, probably most famously above them, Tony Wick Bob Mesta, and others. Really understanding, okay, a customer is trying to achieve some objectives. There's, you know, different stages along that journey and different ways that they will judge success.

And really focusing on that as a first element, right? And be like, look, we'll become clear when you do this exercise. Is that you'll realize that your product is a small aspect of your customer's job, right? And there is plenty of opportunity as soon as you have that, as your landscape of [00:15:00] all the different places that you could add value and help them get that job better, that extend.

You don't have to completely abandon your industry, right? This is not a, oh, well, I wanna go help them with their home life. Now. It's like, no, we can focus on the job they're trying to get done at work. Your machine, your widget, has a certain purpose that it's being used for. But look, there's going to be set up, tear down tasks on either side of that, right?

That you're probably not addressing today that I'm sure you could help with, right? There's unplanned reducing planned or unplanned downtime ideas of helping lower time or cost of maintenance, or repair all these elements. You know, you could start to think of, okay, there's a customer job trying to get done.

What exists today? How can we extend what we offer to help customers make progress in their lives?

Barrett Thompson: That's a really great lens, right? Thinking about them not so narcissistically about ourselves, right. As the seller. I love that. Dan, when I think about the customer base at Zilliant, we have many distributors who have a very replenishment oriented model where every week or every month they're selling and delivering product [00:16:00] again to existing customers.

Example is food service distribution, and the truck might stop twice a week, dropping off fresh vegetables and meats and other kinds of things, or medical consumables nitrile gloves, and other kinds of things that are going through that doctor's office. Is that the same or different than a subscription and usage based offering when I'm doing these repeated sales and they're kind of on autopilot?

What's your thought?

Dan Balcauski: Yeah, it's really interesting. This is a fun, philosophical conversation. I love this. Let's just say every Sunday I go to the same pizza joint with my family, right? So I'm a regular there on a weekly basis, right? Waitress doesn't even have to take our order. She knows we're gonna get the large sausage, mushroom and green pepper because of course you would.

Why would you get anything else? So as we're going there, right, you'd be like, oh, well, is that just recurring revenue? And so we use this idea of recurring revenue. We talk about subscription that way, or pay as you go model. And it's like, well, even in a subscription, usually in B2B, right, there's a annual term.

[00:17:00] The recurrence at the end of that term is not always dictated. I mean, sometimes there might be an auto renew in the contract, but that's not written in absolute stone. Sometimes you have to manually renew. But the idea of recurring is that over the time period of that subscription that year, there is a continuous exchange of value going on.

Right? They've paid for an extended period of time. So in that sense it's recurring. But yeah. Where we get into with the pizza joint, you know, is that recurring? Not so much. Right, because the idea is that, you know, every time I go there, there's a credit card being pulled up, right? Yeah. There's a payment being made.

So it doesn't have the same flow of payments and exchange of value, right? It happens at a single point in time. It's very lumpy, right? Versus this, you know, I have a subscription to Zoom, right? I, it might be one day I have seven meetings. It might be a day. I have no meetings, but Zoom doesn't care. I've paid them for the year to use the platform as much as I need.

Barrett Thompson: You know that point right there, that revenue has been committed. Whether you consume the service or not certainly does [00:18:00] not happen in this replenishment. In replenishment, the buyer doesn't pay unless they place an order in subscription. I'm on the hook to pay whether I use the service or not. So I kind of get your point right.

There's a committed revenue stream that you can count on in the subscription model up until renewal date. There's definitely not one in the replenishment model. Your buyer could stop buying from you any week that they choose, right? Bam. So that's clearly a difference. Often when I'm talking to pricing teams.

Dan, a big thing, and then rightly so important is thinking about pricing metrics, price quality metrics, price performance metrics for the overall program. And I wonder from your perspective, how do the metrics or KPIs differ when we start thinking about subscription pricing as opposed to a traditional go-to-market sell once model?

Dan Balcauski: Yeah, so I think the number one shift, and this will mimic kind of the same philosophy track I laid down earlier, is. Optimizing for customer lifetime value becomes paramount, you know, moving customers into the right offering for where they are [00:19:00] today on the initial sale. Right. I know in a perpetual license world or a perpetual transaction world, you want the person to buy as much as you could sell 'em today.

Well, right. Look, you're making a long-term investment in a relationship now, so we wanna make sure that they're happy with this today. They have what they need to get the job done today. They're successful with that, with the understanding that if we do our good job, And as well, product teams and, you know, monetization teams work together and build paths to naturally help customers expand, upsell, cross-sell as the customer wants to, not as the company wants them to.

I was having a conversation with another gentleman and they were talking about how in the software world we have free trials, and he's noticed how free trials have crept down from 30 days down to 14 days, down to seven days. Pretty soon it'll be 20 minutes. This is the symptom of what we're talking about.

There's a set of revenue leaders who are very out of it, like, no, you must purchase how we dictate. Right? But you know, again, the subscription model is developing this long-term [00:20:00] relationship. So we wanna look at customer lifetime value. Like how do customers expand? If you listen to how CEOs of publicly traded subscription and pay as you go companies.

Talk about their metrics on their earnings call. It's fundamentally different, right? They will talk about a net revenue retention, gross retention, customer lifetime value, customer acquisition costs, right? Average revenue per user. These are fundamentally, you know, different than your standards, perpetual license earnings numbers that you discussed.

Unfortunately, for better or worse, there's not a gap accepted or generally accounting principles accepted ways to report things like gross and net retention. So talk to your local investment banker if you wanna compare companies and their success rates. Yeah. With those metrics.

Barrett Thompson: I hear that even reporting outward, you know, for how others judge you, maybe I'll put that in a different category for just internally.

If I wanted to report to my own internal stakeholders on how well we're performing around the subscription pricing, maybe you could just pick a convention that [00:21:00] works for you and stick with it, right? So you can judge how well you're doing month over month, quarter over quarter. Thinking about that pricing professional who's listening to this podcast today, and they come from a traditional widget business or even a traditional services business, what kind of advice would you give them on how to get trained or enabled or prepared to help their organization make the journey into subscription pricing?

What would that look like?

Dan Balcauski: So I think the first is, you know, helping everyone you know, again, from the top leadership down, understand this mindset shift to a service orientation in customer centricity. I think the other thing I would really encourage people to look at just now making the change you. May feel you're late to the game.

However, being late to the game does have some advantages, meaning that there is a lot of work that has been done on the tech stack to actually support this set of revenue operations that having subscription or pays you go model [00:22:00] requires. So a lot of the early adopters, if you go back 10 years or even five years ago, if you wanted to implement, you know, pay as you go models.

I had a conversation, I think it was at PPS last year. Somebody who was talking about, they used to do pricing for the telcos, cell phone plants, and all of that billing software and invoicing software was all custom. Yes. Because there was no off the shelf solutions. So do not get, you know, not invented here syndrome and think you need to go build all these things on your own.

And some of these things become more important as you scale, right? So if you're doing a hundred deals a quarter you could probably make due with some manual entries and somebody in finance could manage an Excel spreadsheet. But as soon as you start doing significant volumes and transactions, you're going to want these revenue operation systems all the way from quote to cash.

Being able to have finance recognize revenue appropriately. There's a whole world of revenue recognition that I think a lot of these companies aren't prepared for. So one of the things is making sure you get your right teams aligned, your support teams. [00:23:00] Customer success support functions. So legal's gonna have to get involved.

Finance is gonna have to understand all of the regulations around, let's called it a SC606. It hurts me that I know what that is. But this is the world we live in. You know, it, you know, work through the tech stack, and then sales, right? Making sure we understand who's going to sell this, how are we gonna go to market?

Do you sell through the channel? Do you have a strategy for your channel? Because there is a very, in a lot of these manufacturing style businesses, you know, the manufacturers perhaps never know the name of the customers that are using their product. In a subscription world that doesn't necessarily fly, right?

We're taking on a little bit more responsibility, like we're going to have to change a bit of that relationship. And there's, you know, a potential that's gonna run yourself into some friction with your distribution and channel partners. And so, you know, one way to approach that is having a very strategic approach to which of the partners are the best fit for you to start with.

And roll it out. Right? Like, Hey, we're not going to upset [00:24:00] everyone, right? Not everyone's gonna be interested in the new way of doing business. Right? And who's. On the leading edge, who's willing to experiment? Who's done this with other partners before? Right. And starting sort of small, right? Similar to how you might do a customer segmentation, a partner distributor segmentation can also be helpful.

Barrett Thompson: That makes great sense. Before we leave today, Dan, is there anything else you'd like our audience to take away from this conversation?

Dan Balcauski: Yeah. I think when it comes to pricing overall, I think most executives think that what you charge will determine success. The number that we put, in fact, I think who and how you charge determine your success.

So I think Steven Forth, who I love the pricing world, he has a great phrase, says he spent most of your time on what the price tag goes on, and little time on what number goes on the price tag.

Barrett Thompson: Appreciate the orientation around that. Keeping the first things first right? Making sure we don't get so caught up in the details that we missed the mission overall of helping our organizations be great and excellent at their pricing.

Dan, thank you for being with us today. It's been a pleasure to have you on the podcast.

Dan Balcauski: Well, I [00:25:00] appreciate the time Barrett, and thank you for having me.

Barrett Thompson: I want to thank each of our podcast listeners for being with us. If you'd like more information on the topic today, check out the show notes which contains links to the Product Tranquility website, as well as additional Zilliant content on subscription pricing.

We're committed to your success, and if you need any assistance, please reach out to us at Zilliant. Would you do me a favor and rate and review the show in your podcast app? This helps us to put out great free content. Until next time, have a great day.

Are you ready to learn how Zilliant can help you overcome your inflation challenges?

Reach out to us today to learn how we can help!