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Escaping the Freemium Trap // Lessons in Product Management Podcast

By April 12, 2023April 13th, 2023Podcast, Pricing, Product Strategy

I recently had the pleasure of speaking with John Fontenot, a Product Manager at Lendio and the host of the Lessons in Product Management Podcast. We covered a lot of ground in this one, from debunking pricing myths to understanding customer segmentation and exploring the pitfalls of freemium models.

In this podcast episode, you’ll learn:

  • The most prominent myths in SaaS Pricing
  • Why your “real” competition is probably not who you think
  • The perils of mistaking a “Job Story” for a “User Story”
  • If you should try to compete in a “Blue Ocean”
  • Why SaaS companies fail at value-based pricing
  • The hidden dangers of Freemium
  • And much more

Watch the episode below (also available on iTunes and Spotify):

Notable Quotes from the Episode

Many companies come to me focused purely on the price level. For example, whether a product is $20 a seat or $100 a seat, or if they should use charm pricing ending in 95 cents or 99 cents. Those are interesting questions, but you’re starting in the wrong place. We’ll eventually have to answer that question, but it’s the least impactful and the easiest thing to change.

I teach product strategy for Kellogg’s executive education program, and I have to clarify the difference between a job story and a user story. People trained only in Scrum often start with a persona, but personas are not decisive for design; context is. If done correctly, you can generate a persona based on job stories, but starting with “Sally entrepreneur,” “Betty midmarket,” or “Emily enterprise” only fulfills Scrum criteria without truly helping your team make progress in building a better product for the market.

Only perceived value creates the willingness to pay. You might be able to convince a customer that your enterprise CRM system will help them generate an incremental million dollars a year in revenue, but that number only matters as much as it matters to the person you’re talking to. This is where psychology and information come into play, as customers or prospects may be uninformed about relevant alternatives, differentiating benefits, or attributes of your product or others in the space.

One crucial piece of advice for product managers or pricing professionals: “You have to talk to your customers.” Not doing so means you’re not doing your job, like a painter who never picks up a paintbrush. I don’t know what they’re doing with their time, but they’re not a painter.

A common disconnect I encounter around value-based pricing is when companies want to use it but don’t know their cost of goods sold or marginal costs for serving a customer. To execute value-based pricing well, you need to understand your costs and your competition.

It’s not the end of the world to be inspired by your competitor’s pricing, but you need insight to understand if you’re playing in the same ballpark. Using a sports analogy, if your customers are playing baseball and you show up with a hockey stick, they’ll be confused. We must be playing the same game and understand our customers’ reality.

The biggest issue with measuring willingness to pay is that pricing often gets slotted into the go-to-market launch plan checklist of product management. It’s treated as an afterthought, something to be figured out 30 days before launching. However, you don’t have a choice of whether you will have a pricing conversation with your customer; the only decision you get to make is when you will have the conversation.

I do not recommend A/B testing for pricing and packaging changes because it lacks the foundations of good pricing, which are fairness, transparency, and consistency. In B2B, there usually isn’t enough data or visits to your pricing page for statistical significance. A/B testing can also create a lack of trust between prospects and confusion for your sales team.

Anytime someone mentions a freemium model, the better answer is almost always a free trial.

Want more B2B SaaS pricing and packaging insights? Follow Dan on LinkedIn and Twitter.