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Today's episode is a bit like Part B or a follow-up from our last episode a couple of weeks ago, where we introduced our new project, which we're calling Value Culture.

TIME-STAMPED NOTES:

[00:00] Introduction

[03:05] Why do not all companies have specialised pricing experts or teams?

[4:35] What can Value Culture do?

[10:19] What can clients benefit from Value Culture?

[11:17] The Ultimate Objective And The Essence Of Value Culture

What is Value Culture? Aidan: Hello, and welcome to another edition of Pricing College with your hosts, Aidan Campbell. And

Joanna: Joanna Wells.

Aidan: Today's episode is a bit like Part B or a follow-up from our last episode a couple of weeks ago, where we introduced our new project, which we're calling Value Culture. But I suppose in this episode, I wanted to ask Joanna, really, why is this sort of project happening? What did we see?

Why did we think companies needed this sort of product? Like, what is the need or what is the problem that a lot of businesses, smaller businesses and, you know, medium-sized businesses, are facing?

Joanna: Yeah, that's right. I mean, primarily, what we are doing is creating and implementing an essentially commercial platform called Value Culture, which is really aimed, as you said, at small and medium-sized businesses and enterprise businesses too.

And the reason that we have done this, and we're calling it a platform; it is a tech platform and not traditional consulting, is because we saw the mass need, the scale of the need of smaller, medium-sized businesses. Considering that about 98% of all businesses in Australia are small to medium-sized businesses.

In terms of the problem, we've seen consistently when we're speaking to startups, SMEs, medium-sized businesses, privately owned businesses, and then your ASX listed and Fortune 500s’ very common problems with pricing that we want to solve.

And ultimately, as you know, the problem was quite simple. People feel that price can be something that is added at the end of a list of commercial tasks. For instance, when you're launching a new product, often the assumption is that it's okay. We can just set any price and then adjust that price later without really understanding the data inputs required to set pricing, the different pricing methodologies out there, and the metrics that they need to prepare and track along the way. And as you know, customer price response has a significant impact on your ability to change prices. Essentially, once you have your prices out there in the market, it's very difficult to change prices.

And often when people do that, companies small to large, when they just do that guesswork pricing or cost plus, they regret it because they end up essentially either overcharging their customers or losing revenue and volume.

You know, even selling below cost when they've got such great businesses essentially means they're undervaluing their proposition. Aidan: I suppose, you know, here at Taylor Wells, one of the things I'd be very aware of, you know, on this podcast we've spoken many times about how getting a pricing person in really will give benefits to a company. But I think, you know, we're realists as well, and we're completely aware that if your business is doing a million Australian dollars in revenue, you know, you probably cannot afford, like, let's be honest, to go out and pay someone a hundred grand who's a high performer in pricing.

So I think, you know, there's a real gap in the market there. The vast majority of companies are small. As you said, Joanna, and I agree with that, there's a real gap whereby, in smaller companies, people tend to be doing multiple tasks. People tend to not be specialists, and the people often put their hand up and suffer the most stress and go, “Oh, I need some guidance on pricing. Can somebody help me today?” They fall into a trap, a gap, I guess, whereby they're not big enough revenue-wise to finance. A specialist, and to be honest, they're also, you know, there's not much point in getting consultancy for them either because there's nobody internally who could be dedicated.

Joanna: Oh yeah. Look, that's a great point, and that's a big part of the problem too. Pricing then just becomes this quite onerous task that puts real pressure on people who are really out of their depth and don't know where to start, what to do, or how to move forwards with pricing.

And really, what Value Culture does is give them that start, that ability to forge ahead when things are very unclear, the starting point, and then moving forwards, learning things step by step, getting the simple things mastered first before tackling the bigger, bigger things. And then, step by step, feeding the right information in the right direction, whether that's in terms of getting the right inputs, data inputs, and information inputs together for price analysis and cost analysis or what, or whether it's more, okay, we need to learn different types of pricing methodology to set pricing, whatever the key area of the problem is.

Value Culture can give that first start and then move people along their journey. So all of the pricing plans are customised to a roadmap that makes sense for that business. Those roadmaps are very closely aligned with business strategy. And then, if there are requirements to pressure test business strategy, Value Culture can go back to basics with strategic plans too, just to make sure that they're actually resonating in terms of the market and are indeed right for the business.

And then again, once that's solid and done correctly, we can start the process with pricing, get the roadmaps in order, get the individual team plans, get the individual plans, and then before you know it, it's different people in the business, say if it's a medium-sized business, or knowing how they're feeding into pricing, whether that's a price rise implementation or a new price for a product or even a tenderer, or even if it's thinking about how to simplify a very complex legacy system to make more revenue and to ensure pricing above costs.

Aidan: Just listening to you there, Joanna, it sort of reminds me of the Pareto principle, which I think I'd heard of once, and don't quote me on what that actually means, but I believe it's like the 80/20 rule or the 90/10 rule.

You know what I really do think? There's a real gap in the market whereby people will get a huge amount of benefit; they'll get 80% of the benefit, by doing the simple things first. Like there's a whole echelon of companies out there who are doing no pricing, right? like zero. And I don't think we're proposing that these companies will be jumping on day one to perfect pricing and apple style, you know, maximising profitability.

But I think you will get 80% of the benefits with small amounts of work, but where I really see the value, you know, in the way you're describing it, there is, it's just a format, it's a structure. It's like when people go to the gym and have no idea what they're doing. Oftentimes, they can just waste their time, for years.

If somebody sensible gives you a very simple programme, it's better to take simple steps that are concrete and get you in the right direction, and you're making real progress. And I think, you know, if this project can do that, I think there's a real, you know, benefit.

Joanna: Yeah, I think you're right. I mean, when you were speaking there, it just reminded me of numerous case studies where people go, and what we need, is to fix pricing. Get me that right price.

And they just focus on that because they actually don't want to get into the bigger problem, which could be not enough volume, not enough leads coming through the website, which could be a mess. There aren't the right online quote tools to really inform and educate customers on the pricing. There's no value proposition. It's an ill-conceived value proposition. So rather than think about that, there's no understanding of pricing and its impact on the P&L. Costs could be everywhere. There's no sort of understanding of different cost centres. So often they go, "Okay, but that's too much of a difficult problem to solve." What we need is just the right price. Because if you increase pricing, we'll make a significant profit improvement.

And that would be enough to save this quarter and keep the business afloat. But not necessarily, because you've got to think of the pricing and its impact on the customers. You can't just overcharge customers because you haven't got enough of them to lose the very customers that you've already got.

Does your offer really warrant that price increase? Or are you underpricing? So Aidan, when you say that, yes, you've really got, when you start with pricing, what we find is the big epiphany, um, with both small and medium and large businesses, is that pricing is bigger than the price point that you set, right? You can't just make it up. You've really got to think about your whole business. From costs to marketing online. You've got to think about your positioning and approach. You've got to think about your business strategy. And you've got to get all your ducks in order. You've got to know how many leads you're getting. You've got to know your quote-to-book ratios and things like that. And these are highly valuable inputs to a price model, so it's not wasting time going through each of those things in detail or as much as you can as you get that information through. Because remember, you can't do it all at once.

It is a journey, but each of those steps is valuable, and in the end, you will get a price model that is absolutely customised for your business. And you probably think, wow, at the beginning of this journey, I've had so many people say that at the beginning of this journey, I never thought I'd be covering so much ground.

I just didn't realise it. And look at this. Now we've got a price model that I understand and can clearly articulate to the directors and the board. It's making money for the business. There's ongoing recurring cash flow. I mean, this is a good news story, and it doesn't happen over and over. But each of those individual tasks and successes helps and gets you that one step closer to that peace of mind, feeling less pressure, and feeling good about what you've done and what you've done for the business because you actually generated value for the business and even more so value for your customers.

Aidan: Yeah, look, I think just the way you're describing it, what I'm looking forward to seeing is just keeping it simple. Giving people who are coming in, who are time poor, who are, you know, often, maybe they're owner-managers, maybe they're people who are running their own business, maybe they're feeling the pressure and it's on their to-do list that they got this year.

Take a look at the pricing and take this system. Hopefully, you can help them do that. So yeah, I'm looking forward to that. Do you have anything else to add, Joanna?

Joanna: Yeah. I mean, again, keeping it simple is so important because yeah, people are very busy and especially from a small business and you're tasked with pricing, and you really are out for your debts, but you want to pursue that.

You need to keep it simple. And with Value Culture, this is what we've done. As I mentioned at the beginning, it's an online platform. There's a highly sophisticated project management system that we can use for businesses to make decisions and plan. Simple. So everybody knows what they're doing at what time, and if they don't know what they're doing, there are templates.

There are guidelines and dashboards, and for each different stakeholder, there are dashboards, tracking dashboards and results, price, and performance dashboards. So every step of the journey. Full visibility, absolute simplicity. And then, at the end of the quarter, you can see the results.

Aidan: Super. When is this available? I want it right now. He says...

Joanna: Oh yeah. Look, it's been a process of hard work getting this together, but yes, look, it's available. It's been created, and we're implementing it with our clients. So look, if you want any more information about Value Culture for small and medium-sized businesses or if you're interested at an enterprise level, we can certainly give you a demo, run you through it, and talk about it in more detail. But, yeah, look, we're super excited about Value Culture. We highly believe that's serving a great need in a core market. And we just look forward to sharing that all with you. Thank you for listening.

Aidan: Thank you and have a great weekend. Bye for me.

Joanna: Goodbye.

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Why Pricing Requires CEO and Csuite Backing Aidan: In today’s episode, we want to dig a bit deeper into a topic we’ve covered a couple of times in previous episodes. And that it’s vital, it’s so important that a pricing transformation or a major pricing project has CEO, C-suite backing.

And I suppose today we’re going to dig into that. We’re gonna do a bit of a question-and-answer format. Cause it works quite well. So we’ll be asking our resident pricing expert, Joanna, these questions. I suppose then she’s smiling at that suggestion. So the first one is, I suppose an open-ended question.

Why is it important to have CEO and Csuite backing? Joanna: Well, let’s start with the simple truths and facts about pricing. The importance of CEO and C-Suite backing comes down to the returns that you can get from pricing. They’re more than substantial and very impressive when you compare a change in price to changes in cost volume, a mix for instance.

So you can say if you were going for a 2% increase in prices, versus not increasing prices, can lead to an impressive and direct flow to the bottom line of 20 to 30%. Obviously, here I’m thinking, volume is the same and constant and we’ve got our supply chain and costs in control.

But I think you can hear the message here if you just make very small improvements and changes to pricing. You can get a lot of money for it. So that’s why number one, it’s very important that the the C-suite understand how much monetary leverage they have with pricing.

And equally, if they do pricing incorrectly, how much margin they could potentially lose? Aidan: Okay, so I think we understand, that’s clear that it’s important for the business, but does the CEO have to be involved in this project? Does the Csuite have to be involved? Can they not just delegate it down to a finance manager or someone like that?

Joanna: I like how you mentioned delegating down. It’s always about, I hear this a lot and look, I agree with delegating to the right people, but if that in itself can be a problem. I think initially it’s very important for the executive team. A) to understand the importance of it as I’ve already stressed, and B) to get behind it and to be shown as a consistent voice on the topic of pricing.

Even if their areas of expertise are in supply chain sales, and product pricing. They still need to get behind the pricing project because pricing often touches all of those areas inadvertently. And what we also find, if the executive team, you know, they’re role models for change.

What we commonly see within our clients, if they’re not really behind it, they don’t understand it, they’re not committed, and they’re just more focused on their area, almost this siloed culture. And they’re sort of paying lip service to the role of pricing. Yes, it’s important we get that. But that really isn’t what I call sponsorship, that’s just lip service to sponsorship. You’ve really gotta take an active role because if the executives don’t do that, then it sends a clear message to anyone, that they’re gonna delegate the responsibility of pricing to that. It’s really not that serious, and they can just tack it on at the end of the normal day job and nothing really gets done. Or if it gets done, it gets done poorly.

Aidan: You know, that makes sense to me. I think we’ve covered also some other podcasts, and how pricing often slips between the gaps. Which function does it fit into? Is it finance? Is it marketing? Or is it sales? Or is it the commercial function, which some companies, let’s be honest, don’t really have?

So, I completely understand that it needs to be for a real pricing project to really work, it needs to work across multiple functions. So I completely understand that. The other thing I think is if, just on this point, if people do what they’re incentivised to do, and I think that concept you mentioned of leadership, role modelling. People know what if the higher-ups care about something. I think there’s an old anecdote about it.

Some executive, what do you care about today? I care about what my boss cares about, and that’s how you get promoted. So I think it is really important that it makes a lot of sense to me. Joanna: I think, when you mentioned, Where it should be delegated to, should it be the finance manager? And often if there isn’t an established pricing team, it does go to some kind of finance manager often, or a commercial manager. And I think, when it gets down to it, the real reason why you need executive sponsorship, especially if you’re gonna move to strategic pricing or a value-based pricing system, you really do need sponsorship there because what you’re actually saying is, I’m going to change how we think about our customer.

How we think about how we do business, how we think about making money. We’re no longer going to anchor ourselves to our costs. We are no longer just going to look at maximising margin by putting pressure on our suppliers and thinking smart about procurement. We’re actually gonna believe in ourselves and the value of our products, and we are going to articulate that to the market and we are gonna invest in our sales team’s capability. We are going to install a new pricing manager, and we are no longer just going to delegate pricing, a tactical pricing based on cost plus methodology and tools to a finance manager who just rolls out that same, tried and tested legacy pricing method based on cost plus.

Now, that is the crux of why you need sponsorship. It’s a mindset change, it’s a complete culture shift. And you know what, Aidan, sometimes the CEO needs to be reminded of that because often obviously they’re not, they’re not a value-based pricing expert. They’ve been grounded in that cost-plus modelling and viewpoint of doing business.

Like 99% of businesses have been for the last hundreds of years, but it doesn’t work anymore. So sometimes a good CEO will ask for that additional support and education on why they must go to a new system. Often, they know deep down it’s right, but just like they need to be reminded, their teams need to be reminded because it’s a new habit, it’s a new way of thinking.

And once you’ve got that mindset change in place. You can then build capability and then you can keep reminding of the importance of pricing by getting your executive teams there, sponsoring, educating, nudging the teams, encouraging them, and recognising all the good work they’re doing in new areas rather than reacting and going back to cost plus when things get a bit hairy.

Aidan: I think that makes a lot of sense. Look, I’m assuming we’re not proposing that CEOs go to every meeting and sit in on pricing projects. But, at the same time, clearly, if pricing is successful or if this project, even if it’s a fiasco, the C-suite has to be aware that what’s happening in the business.

They have to be aware of the drivers. What are driving volume change, profitability change, and all that sort of stuff? So, I think the question I’ll ask is, what would you propose would be a sensible level of CEO or C-suite engagement? Would it be a weekly meeting? Is there reporting style that they need to be looking at? Are they in kickoff meetings? Are they just championing stuff? Where would they be?

Joanna: These are good questions. And actually, I have met a number of CEOs that inadvertently have been the pricing manager for their businesses pretty much because they didn’t have the governance, the setup in the business, the right structures, the right approvals process in the business and everything, therefore was escalated to them by the sales manager or the finance manager.

So inadvertently they had to do all the pricing, like all the tender pricing, the negotiations with customers, and they were the most knowledgeable. However, that’s unsustainable. That’s not the role of the CEO. And a CEO would know that. So, what I would suggest. This is a balance between knowing the principles of pricing.

So everybody needs to have an understanding of the basic principles of value-based pricing (for CEO and Csuite backing). And you also need to have your organisation set up appropriately and have the right approvals processes in place. So then, where there are serious matters like market changing matters or serious money at risk from a large customer who is threatening to switch and it’s going to impact the P&L. Those sorts of things would and should be escalated. But with a rationale and evidence for supporting the “Why” behind it. So a CEO could comprehensively read through the detail without having to get right into it. And then in my view here, and what I’ve seen work well is that the CEO is almost like a chairman of a meeting.

It’s not the ultimate decision-maker. It’s the people around him or her that need to make that decision. And that overall with the evidence provided that they together make the right call. Does that sort of answer your question? But you see, before I even get there, we’ve got a road of what level of education does a CEO need to know? I think the basic principles, the fundamentals of economics 101 and the reason for the change. Good case studies, understanding the business model changes and trying to align their pricing according to that.

Now, here I’m hearing as well, we also need to get everybody else on board so they trust their go-to people, their sales executive, their commercial executive. So when they feed the information to them, they go, “Okay, that makes sense. Okay. I think we’ve actually got more of a decision here than we actually thought.” And then together they can make a call. But that does require capability build. And often I think sometimes executive teams shy away from pricing cause they don’t want to invest in themselves and build that capability even in the executive team.

Aidan: You know what? Look, I think any senior leader, whether you’re like a general manager, whether you’re an executive or whether you’re the big dog, realistically you’re short in time.

I think everyone’s short in time. That’s the modern corporate world. You know, meetings, emails, appointments, travel, all this sort of stuff. So, like clearly, any executive’s got a very limited time for a new project, right? So, is there a sort of format or a best practice for dashboard reporting?

Clearly these people, or it’s very unlikely, but clearly they’re not gonna all be on the C-suite. They’re not gonna all be by any means pricing experts or even commercial experts. So clearly there’s gotta be a level of detail that they should have, but that isn’t always granular. I’m assuming there’s some sort of, what would you suggest there? what metrics or what sort of stuff should they be looking at? And does that change? Through the process? Through the project? Clearly, you know what you’re looking at in week one. To manage something, you need to know the detail. What is the detail they need to know?

Joanna: Okay. Right. When I hear about this, I think, that’s why I started with the rationale, with the impact of pricing on the P&L being quite significant.

That if we can all agree at the C-suite that this is worth the effort, is pricing worth it? Yes, it is. But you’ve got to have an agreement on that. But what I often see is that, yes, executives may agree on that, but deep down they’re not prioritising correctly. So they go, “Yes well this is a priority”, but actually it’s put on the back burner. And then it’s, as you say, it’s delegated to a finance manager. And even though there are major in price increases at the moment, strategic pricing isn’t given the attention and investment that it requires, and then therefore people think it doesn’t work.

So, I think one of the problems here is that you have to have clear priorities as an executive team (CEO and Csuite backing). And when you say pricing is a priority, you’ve gotta back it up. I think that clarifies a lot. Now, once you’ve decided that actually pricing is a priority, then you’ve got to put in place those commercial systems that I think you’re alluding to aid and that helps fast track and give executives what they want.

So, they are not crawling through the detail of every price rise, every price tender, every account. They just simply don’t have the time for that. But here, you know, to build that structure is a project. And throughout industries, we’re hearing those. To be referred to as pricing transformations.

Now, to really make sure that you wanna fast track that pricing transformation, just gets the fundamentals right, cause I think you just want an answer here. What I would do if I was the CEO of an executive team, I would make the first call here and say, should decision-making in pricing be centralised?

That will cut out huge amounts of work for you. Huge amounts of work because currently, as we all know, in most businesses, there’s discretionary pricing and hundreds of salespeople, and product managers, all having to change setting pricing price overrides. The whole lot’s happening. So it’s very difficult to escalate any sensible recommendation to the executive based on discussionary pricing.

To cut a long story short, if you want clearer answers and fast, think about centralising your strategic decision-making. But obviously, you are in a complex B2B or B2C business. You want to give your sales teams the flexibility they need to make a sale. So here, think about and consider decentralising execution and putting the two together.

In that instance, you’ll go through a pricing transformation with a much clearer direction, and you’ll be able to be given the information that you require along the way. And over time, things will just get easier, but, I’m not saying this is a journey. It’s not just one or two decisions.

And here you’ve got your silver bullet recommendation. You just have to go through one or two pages and the decision is done. Things that work like that. We are realistic business people here. It doesn’t work in any other area like that. So it doesn’t work in pricing like that. So it’s small steps, but making the right decisions, and being guided by logic, sense and the market.

Aidan: Okay. So I suppose, just maybe a final point, what metrics should they know? And this is, I probably am pushing this point a bit, should they know margins? Should they know the general company’s margins? Should they be aware? I’m assuming they should be aware of the actual pricing strategy that we’re pursuing.

I’m assuming we should. If we’re doing value-based pricing, they should know that. They should know about if we’re bundling, and they should know about what our overarching pricing strategy is. I’m assuming they should know our margins going up or down. I’m assuming they should know, what we’re doing to prevent margin decline. What we’re doing versus this and versus that? Should they know about it? And again, this is a CEO. I’m almost painting in my mind, a perfect CEO. They should know the values of the company, the pluses and weaknesses are, you know, those value drivers. Should that be something they should be discussed at these meetings?

Joanna: I think this is, I mean, if they were discussing these sorts of things at meetings, it would be great. I rarely see it, however, but yes, I do think that would be absolutely a well-informed executive team meeting.

When I’ve gone into businesses, I’ve often found it’s very difficult for executives to make any call because their teams haven’t been able to provide them with even baselines on price metrics, on margin. And often you think, “Gosh, it’s astounding.” But even th[e baseline level, like where we at now with costs? It’s incredibly difficult to get that level of detail, especially as we know there’s been major commodity changes and fluctuations and things like that. But in terms of pricing, yes, getting the baselines, understanding price elasticity, understanding the opportunity in long tail pricing.

I think we were talking about that, which connects with elasticity, understanding which parts of your products are highly sensitive and which you, I suppose make a change to pricing and nothing will happen. Those inelastic products, understanding in specifically the value drivers of your customers, Why they’re buying for you?”, those sorts of things are really interesting to executives and once they get that information, they can start piecing it together.

Then they don’t have to go into the details, the nuts and bolts of price management. Then you can trust your pricing team to do their job.

Bottomline: CEO and Csuite Backing Aidan: Okay, look, I think we’ll leave it there today. I think all this is suggesting to me that wouldn’t it be wonderful if there was some format or system that would make this easy for CEOs to do, wouldn’t that be a valuable product or service?

Joanna: I suppose it would. And, we’ve been working with executives and CEOs in the past few years now on building commercial systems that provide these sorts of answers to and support systems to executives and their teams as they go through a pricing project. And overall what we have found accelerates the pricing transformation by three times shorter than just organically finding things out yourself and putting a hodgepodge of tools together, hoping that, that will fix the problem.

It never does. So yes, there are things out there fortunately for executives. And it’s great to see that these new tools and systems are there. Aidan: Well, that sounds really interesting, and I think that’s something that I would like to dig into in a future episode. So maybe that’s something we’ll discuss next week. Okay. I think we’ll leave it there today. Everyone has a great weekend.

Joanna: Yeah, thanks a lot.

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In today’s episode, we want to explore the world of startups and I supposed at Taylor Wells we got asked or approach by quite a few startup businesses and the early stages of development with questions about pricing advice and pricing strategy and how start-ups should price. And I suppose we just really want to explore some of those ideas today and maybe just discuss some ideas.

TIME-STAMPED NOTES:

[00:00] Introduction

[03:00] What’s our advice on issues regarding pricing for start-ups?

[12:19] How can we advice start-ups in discovering value in pricing?

[16:57] Would you advice implementing various pricing strategies for start-ups?

[22:01] Pricing Advice For Start-ups: Don’t lose data. Keep learning, testing, and trialling.

Pricing Advice for Start-ups to Kick-start Their Growth Especially quite recently. We’ve had a number of questions and inquiries from startups. And we’re talking about startups, people that are literally coming up with new business ideas. And often, it’s the first time that they’ve done that and they’re trying to launch either a new product.

Now, this could be ranging from, you know, an FMCG good product or you know even a Saas type product and you know, they come with legitimate concerns often they’ve heard the podcast and there’s thought, you know what, I never really considered any other approach to pricing, other than thinking about costs and putting a markup on the cost to give me that margin that I need to cover my costs and get revenue in through the door.

And I never really thought about value-based pricing but it really did change my viewpoint, not just on the price point, but also it gave me a new perspective on what I’m trying to do in the market, my business model, how I’m going to generate revenue, what the sources of value are that are going to help me do that and cover my cost, how I’m going to work with suppliers who my target customers are.

All these new and very important ideas came almost flooding in people’s heads after thinking about value-based pricing and, you know, we just going to explore today, you know, a little bit more about pricing for startups and a few techniques just to help people make those first few steps because it doesn’t have to be a difficult journey or long drawn-out journey, you can start pricing immediately, even though sometimes you think “God I’ve got so much else to do. I’m just going to get money through the door”, type of approach.

It’s clearly, you know, we’re not gonna go into cost-plus pricing on this podcast, but clearly for a start-up, it’s even more exacerbated. You know, if you make one item, you know they’re your cost base is going to be higher than if you make a thousand. So, you know, as you grow in scale, do you intend to reduce prices? So, that makes no sense.

But clearly a start-up even number of issues that will make pricing more difficult: A) there is no right price for your product. At the beginning, you don’t know what a value provides to your customers you might have an idea, you might have you know obviously you’ve got your pitch deck and you’ve got your ballpark figure and your idea, your elevator pitch let’s say, you know and you thought about why you’re getting into the business and where you fit in the niche. But realistically what’s that old saying?

Everyone’s got a plan until they’re partially on the nose. I think Mike Tyson said and you know until you go out there and made customers and really get into the market you don’t really know, you look at statistics, how many companies, how many start-ups pivot?

How many really hit a niche and really make money it’s limited obviously we don’t want to put people off from starting up but you know those things have to be borne in mind and when you’re looking at pricing, that is the issue. They are, you don’t have enough information at the beginning, there’s no saying that trying to get some customers, trying to get out there with some customers. Realistically, I don’t think the price of the beginning, we’ll get into this a bit later, but just winning customers is very important. Because then, you can explore value, it’s a value discovery process.

Almost look at it as a subsidized value discovery process where a customer is almost paying you, it may be too much, or it maybe too little, but hopefully they’re paying you and then you can explore and learn about your own business. So that’s the first thing I’d say, clearly, It’s very important to get customers on board. The second thing I say, unless you have funding and we’ll talk about, you know, series A or a large amount of funding, it is highly unlikely to have a pricing manager.

Let’s be honest. Most startups at the beginning have very limited revenue, and a good pricing manager’s salary probably will be quite expensive. So, you’re going to be doing an ad hoc, you’ll be doing it in-house. Probably the startup. The founder would be doing the pricing and so, you know how much attention you can really give the pricing at the beginning is limited.

I totally disagree with the point that, you know, people often come into the business with a really good plan. In my experience even consulting with major corporates, medium-sized businesses, even you know, blue chip companies, often the surprising point is they don’t even have a plan when it comes to pricing or even their business strategy.

What they’ve actually got is a very flimsy outline of what they kind of want to do. Often the key question of, Why are we selling this product? How do our customers value this product? How do they perceive and value us? What are important in the eyes of our customers? How good are we at delivering what customers value? Are things that are hot, not addressed in, I would say, 98% of business strategies, even though that’s the most important questions you should be asking.

So, I would say, most startups don’t have a plan either to be fair. And really, there’s a little bit of hope and a prayer that this product, this new business is going to solve a gap in the market without actually, as Aidan said, approaching customers and seeing, you know, giving it that, you know, testing our assumptions.

Pricing Advice For Start-ups: Testing out, let’s call it a hypothesis about what we think we’ve got and how valuable that is, in the eyes of our customers. Because essentially, if you’re going to get investment from private equity, seed investors, they’ll be asking that. I mean, because it’s the central aspect of a business, a new business model and operation system or it should be.

And if you haven’t got clear answers on that, you’re not going to get the funding and that brings me back to what I was saying before. You know, a lot of startups have come to us and even with you talking about value-based pricing, it made us think about value.

And it made us think that there was that major Gap in our business thinking, and our strategy, which has, in turn, delayed other things, not just pricing, but even you know, how we go and approach, our customers, our pitch, what do we say to them? You know, what is that compelling message?

All of these things, you know, were sort of underbaked and then have been preventing people from launching. So like Aidan was saying, let’s go back to basics.

Let’s ask and turn these questions into hypotheses and start going back and thinking about who our target market is. Can we think about the personas of these customers, that would want to buy the products we’re trying to sell? How are we going to communicate that offer to them? How are we going to make it easy for them to buy from us? Now, these are the questions, like you’re not going to have the answers and don’t fear not having all of the answers.

When you approach your customers, the key here is to have some hypotheses in mind about what you’re doing, and what the value of the offer is, right? When you go in to speak with a customer. But then ask the questions and then listen. Listen, very very carefully to what they’re saying to you. What you will find, is that some customers that you’re talking to are really not your target market.

Even though you thought they were whereas other people really are potentially changing your viewpoint on your initial business model and plan and then iterating from there. This is the fundamental aspect of value-based pricing and as Aidan mentioned we call it a value discovery process, but really it’s essential. It’s an activity that leads to profitable revenue growth and it’s one that’s often ignored and skipped but it’s the central aspect of any pricing model and of any business strategy.

Pricing Advice For Start-ups: Let’s be honest at the beginning. For anyone who’s ever started a business, every single interaction with a customer, feels like life and death. You know, you stressed about them.

You dig into too much, you know, all those are those interactions statistically valid, you know, is it over time when you scale up your business, you know, will that apply across a larger number of customers? Those questions have to be decided. I suppose at the beginning you have to have a ballpark figure.

As to what value you’re providing, you know, are you aiming to be the cheapest in the market and undercut traditional operators because of your cost of operation, you know, is that your model? If that is the case, likely, then you probably will be cheaper if you’re cutting costs; if you’re value-added or you’re cutting costs? If you’re value-added that you’re offering, we’re more features and benefits, you know, then you probably can be charged more than other people. Big questions.

Should you be going into the SAAS situation? So many startups, Online businesses try to get onto a subscription. There’s a huge movement towards recurring revenue, showing recurring revenue. You have to really think. Does that suit your business? Is that really the type of business that you want to be operating? It gives investors confidence but you know, is it actually plausible into what you’re doing?

So that also has to be considered. I suppose you’re fundamentally, you have to really dig into what your business do. And what is the best way to charge for it? Just pick the best that you can think of at the beginning. Over time of course you can optimise, you can go into it once you get more professionalised, once one customer becomes ten, becomes one hundred and hopefully becomes thousands.

Then over time, you can start to optimise potentially bringing pricing expertise and pricing analyst over time and optimise that stuff. But you know you really got to think about what you know, I suppose companies will go through different strategies at different periods of their life cycle and development, you know, at the beginning.

Are you trying to grow your market share? Are you trying to get some sort of like give us good network effects? I’m assuming that you’ll be wanting to try and grow the business and potentially to try and grow. You might be offering freemiums, or you might be offering lower quality, you know, tester versions of that. So again, all have to be considered, but you have to be, I suppose you put on the old saying a cart before the horse.

You know, what are you actually trying to sell? That’s the fundamental thing, pricing is not, it doesn’t separate, it is your commercial strategy. And the point I’m trying to make is, what is your business trying to do?

In an ideal world, let’s say, obviously you’re not going to do everything perfectly but is trying to do something and then once it’s doing that and a customer is, you know, bought into that and want that service or product or whatever it is, you know, how are you, what’s the best way to charge that customer for that while some shaving, your objectives of growing, you know, over kidding solvent until your next funding round? You know, that is the question.

I mean, you make a good point that you know, is a value discovery for one or two customers statistically valid? Obviously not, it wouldn’t be, but it gives you a starting point. And I think it’s an important point to note here, that value discovery is ongoing, it never stops. You’ve constantly got to do it.

Pricing Advice For Start-ups: So it’s important that you don’t lose track of the data and the insights that you learn from different customers, as you approach them, in terms of understanding value. So actually, in a way, it’s a very scientific approach to understanding value and has to be set up as such for it to be meaningful in a statistical way.

And to give you insights that inform your strategy over time in regards to, when I was listening to Aidan there, you know, I agree, though there is certainly an evolution of pricing methodology that Startups and even big businesses, go through, starting with the rudimentary cost plus, knowing your cost and adding a simplistic markup going through that competitive benchmarking scenario.

When you line up all your competitors’ prices and then you go, “I think I’m going to be somewhere around here”, so you go, you pick lowest-highest and you go, “All right, I’m going to be here in this bit in this price bandwidth”. That’s what they call it. I’m not going to evaluate these methodologies will do that later on. And if you listen to other podcasts, you probably have heard us evaluate them.

I just talked about evolution and then I think Aidan was going on about SAAS businesses, using subscription models, now that’s a revenue model.

But the pricing methodology that tends to be adopted within that revenue model is called attribute-based pricing where they do look at the features and benefits of the product or plan and then they set their different price tiers. You know, good-better-best essentially or decoy pricing based on those features and benefits, you know, evolution from there, you know, obviously got Dynamic pricing looking at, you know, inventory and capacity utilisation and demand and forecasting, and things like that.

And then in terms of evolutions of the subscription model, they go into like consumption-based pricing, where basically, you charge customers for how much they use different plans, that’s becoming particularly popular at the moment, and then from there, you know, a more sophisticated one is based on outcome-based pricing, but basically what a customer gets from using your service, your plan, your product.

Now, that’s a newer one. And all of these as Aidan says, it’s not like “Oh, that sounds good. I think we’ll just use that .”, even though 90% of SAAS businesses do that, they just go with trends.

Pricing Advice For Start-ups: You have to be very careful which one you choose because each have their limitations and it takes a hell of a lot of time and effort to integrate them successfully within the business model. And if they’re out of sync with the market and the business model, they’re not going to generate profitable revenue growth, then, in turn, you’re actually going to lose probably more money than you make and overtime. So you’ve got to be right.

And this is why Aidan was talking about pricing expertise. It’s quite important to get that pricing expertise on board, but obviously, as a startup, you’ve got to be aware of the strengths and weaknesses of these different pricing methodologies. And what we’re trying to say is, the best way of doing that is, understanding your business model, thinking very closely and how it connects with the market.

And then thinking about, how you’re going to capitalise on the value that you’re offering based on the perceptions of the market, your customers and how they perceive and use that value. What do they get from working with you, in a very simplistic way.

From buying your product and working with you, how did they perceive value? And what value do they actually generate in terms of, you know, do you help them lower cost, do you help them generate more revenue, I’m using your plan, your products, whatever. Are you helping mitigate some risk in a way for them? And those sorts of questions really give you a head start, when it comes to evaluating the best pricing model for your business.

I think everyone when you’re starting a business clearly you have to be a jack of all trades. You want to know a little bit about everything. But the thing about pricing is, I suppose people come and they go “Oh tell me, a pricing strategy” and we hear that a lot. The reality of it is, there’s no right or wrong pricing strategy.

There are many potential strategies you could implement. Some may be better than others clearly, obviously, how you implement them. There’s some science behind that, there are approaches, but you could have meant for many businesses.

Pricing Advice For Start-ups: You can Implement various strategies particularly when they were a very early stage. When they haven’t proven anything you could tweak certain things in the trajectory that business will go in that are very different. So you could pick different ones at the beginning. Clearly, because they’re not tested by the market, they haven’t got many users and you haven’t got feedback. Clearly, some are more likely to be successful than others. And you have to visit.

There’s an art to picking that one. You know, the actual pricing strategy that commercial strategy used. Clearly, a lot depends on so many moving parts, you know your funding, you know, do your funding, or do you have to actually make profits from day one and grow boost route. You know, you look at MailChimp.

I think they never took on funding and grew pretty much organically by being profitable and then adding additional features over time, but not, you know, jumping massively, just growing gradually, Canva, probably the most famous Australian unicorn, fundamentally they grew at the beginning, by giving free service to huge numbers of people.

I don’t know what percentage of people who use that platform actually pay for it, I read, I think it’s in the papers this week, that it seems implausible, but apparently is true. Every month over 1% of the world’s adult population uses canvas which does seem unbelievable. But apparently, those are statistics. So clearly they’re not all paying for this service but a significant proportion are.

So you know you’re thinking clearly they had funding and a lot of these startups are clearly lost making for many years. You’re thinking, Amazon, you’re thinking Uber, they’re clearly lost making for a very long period of time.

Pricing Advice For Start-ups: Until you know, the investors are confident that market share, skill, efficiencies, economies of scale all that stuff will factor in later, you know. So those questions have to be asked and if your business needs skill to operate, to be profitable in three years time, then clearly you need to grow that scale and potentially, it could be, you know, using pricing strategies such as you know, skimming or like being even a loss leader or, you know, going in cheap and then over time adding additional services.

And you know upselling, so really look, the answer is,it really depends, but it all stems back to the beginning to having a clear view as to what your business does, having a rough idea is to what potential value it has and the longer term business model, focus on the business model.

And once you have that and confidence and backing in your team behind that business model, then you start charging forward and working out, putting in place, a model that can: a) keep your business solvent long enough until that’s achieved and, b) making as much profit as possible along the way. I think those are my comments today.

Bottomline: Pricing Advice For Start-ups I like that. Don’t be afraid to try new pricing methodologies and revenue models. You’ve started your business now with a great proposition, you went with it, you’re already going in with an experimental sort of mindset, and you’re keen to learn. So just do the same thing with your pricing. I actually say, even in big businesses, it’s much better to learn quickly and fail quickly.

It’s okay if you make mistakes, as long as you learn from them, same applies, with startups, just learn and do exactly what you do when you’re passionate with your own product when it’s very the same mindset apply, so keep doing that and I hope along the way, we’ve given you some overview of all the different types of approaches that you can take.

That value-based approach mixed in with more of the technical sort of methodology that potentially is out there for you to utilise as you experiment and learn. Key to all of this is if you’ve got a number of different products and plans often, that means there would be different types of pricing approaches and models.

You don’t always use the same type of approach for everything, that’s sort of like when markets are more stable. So, having that creativity and thinking, a very granular level, when you have time about different products because every product has a different type of price sensitivity, and different value profile.

Pricing Advice For Start-ups: So you’ll find over time that different plans will require a different approach, but you’ll learn this. If you just keep on learning and testing and trialling but do so, you don’t lose that data. You don’t lose all that learning. You apply it, feed it back and you continually update and learn and test and tweak, that really is pricing like it is with product development. It’s the same type of thing and same approach. I think overall I’ll leave it there. But feel free to ask any more questions about some great feedback from you guys recently. So keen to hear more, well thank you for listening.

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[00:00:00] Aidan: Hello and welcome to another edition of Pricing College with your host Aidan Campbell

[00:00:06] Joanna: and Joanna Wells

[00:00:07] Aidan: Often at Pricing College, we find new ways to show that we live in the past. And so today we are going to talk about cinemas, cinema pricing, and I predict somebody will say movies are not as good as they were in the old days.

[00:00:21] So I'll let Joanna kick-off .

[00:00:24] Joanna: I think we we're talking about cinema pricing, partly as response to that Bruce Springsteen, dynamic pricing scenario that occurred a few weeks ago. I'm sure we discussed it in a podcast few weeks ago, but it's been throughout the press and, you know, it reminded us of, you know, back a few years ago, when cinemas were sort of, I mean, struggling with their business model, less people going, demand for cinema and movies going down, rising of Netflix, all that sort of stuff. But, so they were thinking about, you know, how can we make more money and more margin as a cinema? What new pricing methods could we use?

[00:01:03] And they're really toying with the idea of dynamic pricing. So yeah, when I look at that now, that strategy and you think, Oh, well, it seems to be working in the ticket industry for other entertainments. Why is networking so well for cinemas? Well, partly, I mean, through the pandemic, you know, it's been very difficult for, you know, cinema to even test new pricing methods like dynamic pricing, because simply people weren't going out or allowed to go to the cinema for a long time.

[00:01:37] And still, you know, there's that, that knock on effect, on demand levels, you can see they're dropping. Very few people still going. Before we go onto that, let's think about how cinemas really do make money? How are cinemas still open today, considering very few people go?

[00:01:52] Well, the sales model really is based around the distributors really funding a lot of cinemas. Cinemas pretty much give way about 20. Well, let's say 80% of ticket sales in the first two weeks to distributors for movies. And after that point, they pretty much keep all their sales. So for them movies like Avatar are great because what they can do, they can bring out the old avatar movie, the first one.

[00:02:22] Because they sort of own the rights to that one. Now they don't have to pay the distributors anymore. Well, they don't own the rights of it as well. They've got, they can keep all of the sales revenue from that in preparation and then move on to, you know, forward forecasting for Avatar two.

[00:02:41] And that's a great way for the cinemas to make money, at which point they could potentially use dynamic pricing, you know, as they build demand for that movie, however, the customer experience and demand levels have to be optimised to be able to do that, and I really don't [00:03:00] think at this point cinemas will be able to test dynamic pricing. Hence, it's not really been tested.

[00:03:08] Aidan: Yeah, like I find there's a lot of interesting pricing things we can look at with cinemas. You know, I think there's been an arms race, at least in Australia with the quality of the cinemas themselves, like the actual rooms, the buildings, not so much the locations because they've probably moved away from of market, red carpet style, CBD areas to, you know, malls on the edge in suburban malls.

[00:03:31] But one thing that, you know, we've seen in this Australia Gold class, I don't think there might even be a platinum class, almost like very leather beds. Fully flat seats. It's almost like the peripheral has really invested in that. And usually that's something we really push with or we promote here in Pricing College, talking about the value adds that they offer.

[00:03:51] You know, you're gonna have drinks brought to your seat. Some cinemas will have buttons you can press and a waiter will come up and bring you stuff, which all sounds very luxurious. But, you know, [00:04:00] I think almost can we argue that, And I think I'll be the first one to say that, you know, maybe the core of what they're offering has decreased, you know, the quality of movies, I think a lot of people admit that it isn't as good as it used to be.

[00:04:11] I think the only movies that are selling out now, there seem to be disney style movies or the never ending stream of Marvel, and DC comic sort of action hero movies. But I think cinema in general, you know, the normal cinema goers, I think that market has decreased.

[00:04:26] And to some extent you have to argue that the core value of the cinema, which is the actual movies, you know, there is a real risk there, a real issue there with what's being produced. Obviously the cinema owners don't have an influence on that. So that's the first thing I'll add. Second thing, I just think, we often talk on this podcast about, you know, revenue management and capacity constrained, like, and to a large extent, cinemas are capacity constrained also, there are number of seats watching a screen, but like, I cannot remember ever being in a cinema in the last 5, 6, 7 years and seeing a cinema full or even having difficulty in buying a ticket. So there's [00:05:00] clearly that revenue management aspect isn't been optimised. You know, and we're not arguing that you should be selling those tickets at 1 cent or two 10 cents, but, you know, maybe that is a question people should be asking.

[00:05:11] What is the revenue management model behind these screens? Look, I was at a movie maybe two weeks ago, midweek Thursday night, which used to be regarded as, you know, midweek shopping night. And I think we were the only people in the cinema, and it was potentially a 500 seat cinema.

[00:05:25] So you're really questioning the model there. Another thing I will add is, I think we'll get into a later on this podcast, but some things I'd like to look at are loyalty programs that they have that they try to get you into, you know, the rationale behind that. I'd also like to look at the geographic variation in pricing, where they charge you different to go to different locations.

[00:05:46] And I personally experienced that, which I find a little bit strange. You know, the actual differentiator is huge. And then the third one I think is, sometimes they try to sell you a subscription model whereby you can go infinite times for a flat fee, [00:06:00] which traditionally was in with students and maybe even later school students.

[00:06:04] So those are models that I think are interesting that maybe have they been fully developed and of course the classic of do movies, just, it's more of a conspiracy theory that I personally like the popcorn. Do cinemas favor bad movies in the teenagers because they eat more popcorn than old people. It's an interesting one.

[00:06:21] Joanna: Well, if they look at their sales model, yeah, they really do. That's where they make their profit is. It's on the concessions on the food. It's literally pure profit for them. And I think a while ago there was some price tests being done on dynamic revenue management, on the concessions as opposed to the tickets.

[00:06:38] People didn't like the dynamic pricing on the tickets so much, but they optimised by a few cents on the food, which is already profitable for them. Now I can see, you know, potentially their backtracked cinemas are backtracked from that and they're now utilising more, like bundles using tiered pricing to upsell to, [00:07:00] you know, the large popcorn, based on price, because there's very limited price difference.

[00:07:04] So why not get the larger version and the theater makes more money? That's one that we all know. In terms of that, I just wanted to circle back to the customer experience that we were touching on before. I'm sure, consultants have come into major cinema businesses and said like, really the number one thing to think about before you look at optimising price or testing different pricing methodology is to really work on your customer experience.

[00:07:31] Because that in term will enable you to utilise and test these different pricing models like subscription pricing. The problem is you're not driving enough traffic to the theater and that's feedback from the market has said because we don't enjoy the experience and Aidan touched a point a lot of the theaters got.

[00:07:52] Quite run down and there wasn't enough money being invested into the cinema, the room itself. Some [00:08:00] cinemas got these nice, lovely leather seats recliners, reducing the number of seats in the cinema, thus reducing potential for that capacity constraint idea through dynamic pricing.

[00:08:12] Other cinemas then thought, Well, let's not improve the cinema. Let's look at how we can implement dynamic pricing by potentially looking at when people buy their cinema tickets, if they buy it closer to the cinema. The movie date or time, then we'll charge more. People didn't like that.

[00:08:31] And then really all of those things, if they didn't really help boost the experience, it took it away from the experience. So thinking about customer experience, often cinemas. That do well. And I'm thinking very much like the petrol stations, gas stations, they do well not just cause of, you know, the product or what they're selling in the store. It's actually the site where they are, where they're situated. Are there restaurants nearby? Are there like entertainment late at [00:09:00] night? Aidan made the point of most of the cinemas that are doing well at the moment, it's because they're showing, movies for kids, but potentially if they built a customer experience for adults. And by thinking about, you know, what's around that cinema? Would that actually bring more adults into the cinema because you think, Oh, you know, I'm not just gonna get, you know, I'm not, it's not just a, you know, gonna watch a film cause I can just watch a film at home. I'm gonna, you know, have something to eat.

[00:09:30] I might, you know, have a nice like drink before I go in and not the drink in the cinema. Do you know the gold class membership in the cinema? Rarely see anybody really in there, you know, taking in a nice drink before they go in. People prefer to have a drink with the dinner outside, then come in.

[00:09:48] So maybe I'm thinking here and boosting, you know. The customer experience by thinking a little bit outside of the walls of the cinema. And you know, partnering with [00:10:00] entertainment businesses, you know, partnerships, loyalty cards that look at how connecting, building a community outside of it, you know, that sort of stuff.

[00:10:09] It just requires a bit more creative thinking. And then once that's done, once you're bringing the people that you want to attract into your cinema, then you can start testing pricing models.

[00:10:21] Aidan: I think that's a great point. I'm thinking some of the local cinemas, you know, in my area, and to be honest, they're deserts in the evening time. It's like you'd have to get in a car and drive at least 10 minutes to have a restaurant or somewhere. So the idea of having an evening out. It takes that away. It strips that away and when I think of the more successful ones I know of there's restaurants and some of the more recently renovated Westfield big shopping centers, they do have restaurant options, bar options near the cinema and reducing to be more of a buzz and it can create a date night atmosphere or stuff where people would go for an evening without having to plan a second location. So, you know, that is a big thing. Like the other thing I'd say is [00:11:00] cinemas, they've almost dumbed down.

[00:11:02] Like obviously people's society is dumbed down hugely, but I think with cinema and entertainment, and it is a bit like music. If you all go to the middle and we covered a bit of this in Bruce Springsteen where if you want people to pay top dollar and really be a addicted to watching bands.

[00:11:17] It's because it's not one size fits all. Some people love Bruce Springsteen. Some people love dance music. Some people love whatever rap music, et cetera. It's the same cinema. But in the mainstream cinemas, it's gone towards the popcorn selling, you know, rubbish in the middle spectrum.

[00:11:34] And the more art house or that sort of aspect, there doesn't seem to be appetite forward, or is it just that it's not provided? So potentially that is decreasing the attendance as well. When you minimise the offer. You know, again, in the pricing stuff we talkabout you optimise the tail. I don't see the tale of what's been provided being optimised really.

[00:11:54] And even the peripheral, not just you know, there's a cruise ship element to the cinema of course, too, whereby they've got you [00:12:00] captured once you come in the door, you know you're not supposed to bring in external food, et cetera. There's an opportunity to upsell you clearly. And I don't think the rate that really is developed much in the last, you know, 10, 15, 20 years, and to some extent it's even become more middle of the road.

[00:12:15] It fundamentally is in the main cinemas, it's popcorn, it's a Diet Coke or a Coca-Cola and a large bucket style container, you know, an a limited selection of lollies or sweets. I think even the pick and mix, which kids used to love hasn't really seemed to come back post covid.

[00:12:31] I haven't seen that really. And again, kids used to love that. And that was an element of stuff, but I just feel it's almost like in a shut or a slowdown of the cinema industry, you know, I think there's clearly opportunity for upselling on, you know, more, you've got them captured. So more ancillary services. Clearly you can be provided and creating more of an atmosphere. Building more of a community. Clearly it's like, cinema at least it used to be fans, it used to be, you know, people would [00:13:00] diehard of certain genres, they would go to the cinema on a regular, weekly basis.

[00:13:04] You know, you'd have season tickets, you'd have reduction. I just don't really see that happening. I know Hoyts, one of the cinemas where I'd be most used to going to. They have a loyalty program like that, to be honest, doesn't make a huge amount of sense to me. It almost like, you know, they're giving you a lot of value back immediately just from signing a former pay. I think it's $15 you pay annually and then you see, you know, x percent of every ticket sale. But it doesn't really seem to make a lot of sense to me. It seems to be almost. You know, they just want that 15 bucks up front, and then they're giving you back the 15 bucks immediately. So it's a strange one. And again, I'd be open to people telling me that there is method behind this, but to me it doesn't often stack up.

[00:13:43] Joanna: I sometimes think, people go, Oh, you know, this generation's different. All they wanna do is stay home, watch the screens, and watch Netflix. They don't really wanna go out. It's a bit about the defeat attitude. Like, I'm thinking about this one restaurant. I know it's in the middle of nowhere. It's next to a [00:14:00] lovely beach, but it literallyhas nothing else around it, but they've made this restaurant a destination point in itself. And then after that, people can go to the beach, and it's a new business, right? But prior to them taking over the business, it wasn't at a destination. There was tons of different types of restaurants going in that really hadn't focused on how they could create this wonderful customer experience. So really what they did instead is like, it was an awful experience. People just went and they didn't even go to the beach, even though it's a gorgeous beach.

[00:14:31] They just were like, I just wanna leave. But they did it. And people go and even, you know, millennials and the whole lot of young people, they get out of their bedrooms. They go to this place because it's giving them something in return, right. Cinemas can do the same thing.

[00:14:49] And I do think it's a cop out for business to going, Oh, you know, things are changing. We can't keep up. Yes you can. You just got to think carefully and strategically about [00:15:00] what your customers want, how you can connect and partner with different businesses to correct, create an experience that is worth staying around for.

[00:15:09] You don't just go to the cinema to sit in a lonely, dark, dusty, old room to watch a poor film. And that's where we've got cinemas and distributors in the whole industry have to think differently. Now, thinking about that on the other side, What's happened to cinemas, they've been captured within the Westfield Mall type experience, which, as Aidan was saying, shuts down, especially in Australia at like six o'clock.

[00:15:38] It's a dead zone, partly because Westfield rent is ridiculously high and they can't attract niche and creative businesses in there for a long term before they shut down. So there's something with the whole ecosystem, with, you know, having cinemas in malls and reliant upon landlords who [00:16:00] charge too much, in which in turn negate the experience that bring customers in, because the rent's too high.

[00:16:07] But then they argue, well we need the rent to maintain such a big complex, Well, maybe this is the end of the mall and we know that this is happening in America. . However, what's happening in America isn't great either because that's just breaking down community at the same time. So like, are we going back to the old school way of, you know, high streets, independent businesses just clustered around actual areas that people congregate, they congregate around beaches , in metro city, you know, where there's life, people go, So rather than think we all go where there's life. Let's get into the creative zone and create life and bring traffic to you, rather than the passive reactive. Oh, I'll only go when I know there's a business case to set up a business, and everyone goes to malls. They don't go to malls anymore. It's a dying [00:17:00] business model. I think that's, I don't wanna rent anymore, but I think you get my gist here.

[00:17:05] I think we just gotta think completely different. Get our creative hats on, start to reach out and connect with businesses, not these major malls. That's not the answer anymore. It's the niche players, it's the startups and its partnerships. And from there you can build loyalty plans and pricing plans that are absolutely spot on.

[00:17:28] Aidan: Look, I think we're talking about a creative industry In a previous one. We, we covered that. Like, I think Hollywood often goes through these cycles of, you know, the big corporates, and then you have, you know, the new wave, the French movies where you have even in the seventies where it was like the alternative movies came through.

[00:17:43] And then you had in the nineties where you had like the Quentin Tarantinos and this new wave of directors. Like, I think that's Hollywood's crying out for at the minute. Like, clearly everything seems to be produced by committee and by what do you call it, focus groups, you know, whereby, so you, you get movies that are [00:18:00] basically cookie cutter and that appeals to the middle section.

[00:18:02] But when you appeal to the middle section, you don't get high emotions or you don't get, you know, people going to watch the movie twice or unmissable. There aren't really movies that you cannot miss anymore. There aren't movies that people talk about much, and I suppose it all spreads down from there. You know, at the end of the day, if people aren't overly fostering going to the movie, you know, the paraphernalia around it and all that, it then is a habit that if people are out of that habit, you know, maybe they won't get back into it. So, like, I would argue, you know, there's fundamentally, and you need better movies to be watching is the first thing.

[00:18:34] And secondly, there's clearly a pricing element about the peripheral around that, creating an evening out, creating an experience for people. And then it's trying to somehow charge them by optimising the pricing, which to me, you know, doesn't seem to really be happening. It just, you know, is it like, at the end of the day, if people don't want to see the movie, they're not going to pay less or more depending on the day. So fundamentally, you need the movie first, but then there's gotta be an optimisation process, that[00:19:00] is the ticket too high? Are people not going cause it's too expensive? Or, but at the end of the day, should a cinema be sitting empty, you know, during a peak time?

[00:19:07] And if that's the case, there's a severe issue. And are we facing a blockbuster video scenario where no pricing change? When no pricing strategy change will rescue what is, you know, a defunct business model. I'm not saying that, but you know, I think there should certainly be warning signals that people should be looking at this immediately and asking is the existing model, like, does it work or not?

[00:19:29] Joanna: Yeah, agreed. And I don't think it's a defunct model. I just think they need to do a complete mindset change. There's no point doing tactical price changes, and implementing new methodology. If you just don't have enough traffic to optimise a revenue based on demand, there is no demand. That's because as we were discussing, The whole proximity location is often wrong. There's no experience. There's no connection with other businesses. The movie itself is middle of the road and not drawing in enough traffic in and of [00:20:00] itself, and the experience around the cinema is dull. It's lifeless. The cinema itself is tatty tired. Leather seats will not compensate for that.

[00:20:09] However, the model in itself, the whole industry could be better. We know there have been great movies before which have driven in traffic. We know that when you put a cinema near a great restaurant, people go, Oh, the restaurant's great. Let's catch a movie after that too. It works. It's not rocket science, but you've got to start thinking differently and maybe breaking outside of the Westfield Mall premise, because I think that's capping revenue potential. And people are simply just not going to those sort of things anymore. So yeah, look, fear, like repeating ourselves, I think that's kind of what, what I've gotta say on that. And yeah, really keen to hear what you guys, are thinking about this particular topic. Well, thank you very much for listen.

[00:20:55] Aidan: Yeah, just as a last point, like I wonder is there the opportunity for small, [00:21:00] regional, local, you know, niche cinemas, you know, to restart , it used to be that every major town had 10 or 15 cinemas showing with one screen, showing one movie or one genre, you know, is there room for that again, could you open a cinema in Sydney or Melbourne showing just horror movies, are showing just the latest, you know, international movies or French movies or Italian movies, is there an appetite for that? Would that model work? At the minute it's dominated by the big players, the Hoyts, the events, the major corporations, the Warner Villages. The small operators have left the market. Is there room for, you know, we've seen popup bars reappear to create life again in CBDs. Is there a popup cinema? And I'm not referring to council run open air cinemas showing 1980s movies, see if middle the ground for families. I'm not talking about slightly more challenging, slightly more things that people might, you know, make people think. Is there room for that? But obviously that's entrepreneurial. It takes risk building, it takes love of cinema and I don't know if love of cinema is there at the moment. So that's it for me [00:22:00] today. Have a great weekend.

[00:22:01] Joanna: Thank you. Bye.

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In today’s episode, we are going to cover something that’s very close to our heart. If you just listen to our podcasts, you may think we are just pricing gurus, but we are also incredibly ripped.

And so we’re going to cover, gym memberships and gym pricing. A subject that I think a lot of people, both consumers and businesses can learn from. So I think we’ll let Joanna kick-off. 

Yeah. But firstly, starting with that, Aidan apparently goes to the gym five times a week. Not so sure. Maybe. Uh, anyway, aside from that gym pricing, gym pricing, now we wanted to speak about that yet.

Look, we do go to the gym, but I’ve actually worked with like a couple of gym companies with pricing. But I don’t really see improvement overall in the industry. Like really, Can anyone really think of a gym that has one clear price point for different plans? It seems as if, yeah, they’ve got millions of different price points.

To me it’s pricing, chaos and indicative of discretionary pricing led to predominantly by the franchisees, the owners, but more particularly by the individual sales people that are driving that sales. You know, they’re sort of dressed up as, you know, personal trainers. They wear the shorts, but really they really go for the hard sell.

And like from my experience, going to a gym and working for gyms for pricing. It seems like the maturity of pricing is still dominated by that person who wants a sale for their commission. There’s very little price transparency and to my thinking like. Is it fair? Is it very, It’s very promotional driven.

It’s always targeted on, you know, time based, promotions, getting people in , driving traffic to meet a sales quota. I’m thinking very much, it’s very similar to like the recruitment model . As a result of doing this over many years, it has led to a lack of trust in gym pricing, a lack of transparency, and you never really know what you’re gonna get.

And sometimes the plans can even change as well. So you’re thinking what’s the value of this particular plan? In my opinion, I really don’t think I’ved looked at customer segmentation at all well, they’re really just driving traffic to get sales through the door for cash flow purposes, and I think it’s no wonder that gym profitability is declining as a result.

Like to some extent I think , I’m gonna disagree with this. I think, I actually think we can learn a lot from gyms. There’s a lot of interesting stuff happening in the way they do stuff. You know, it’s a subscription model. Before most things were like, I think it’s probably almost impossible to go in and pay just for a workout, in a gym.

You know, they’ll have an onboarding system and all this sort of stuff, which to be honest, is probably some health and safety aspect to that, but I’m sure it’s also just a barrier to actually letting you just, you know, work out once, et cetera. Say if you’re, you know, do wanna work out this week and then next week, so they get you on a subscription model, which is almost way before the, the whole SaaS revolution.

So where it’s a service. They also have a weird, they make it almost impossible, as Joanna mentioned, to compare pricing, virtually no gym will have a, a price on the internet. You have to go in, meet someone, chat to someone, you know, invest time and effort, shoe leather cost before you even get a price.

And so your willingness to shop around would be very low, clearly. You probably just go to the first one you get. You get to, you’ll decide based on, I don’t know what criteria, you know, we’ll get into the value drivers, but I think your ability to shop around is low. Unless they really try to rip you off or charge way above market rate.

But that aspect, your lack of ability to shop a around or compare is interesting. Also, the promos they offer tend to always be focused on like a fake joining fee. You know, joining fee wave for this week or joining fee 50% for this week. And in reality, joining fee for a gym is clearly preposterous.

The joining fee often is so low, it’s like maybe $15. It’s really just. I think it really is just used as a method to let them advertise something because they don’t wanna reduce their subscription fees. The other thing before I pass back to Joanna that I think is very interesting about gyms is they try to price at a level whereby, I think some of the stats we’ve read, the majority of people don’t visit the gym every month.

They take out memberships maybe in January or dry July or whatever, whatever the month is where you’re on a new health kick and people have all these great aspirations. We’re gonna work out every week, you know, and it sounds great value. And then they, of course, human nature. They stop and they don’t go back.

But then you’ve gotta think if you know, there’s a psychological aspect too. You wanna stop your gym membership cuz in theory that is quitting and giving up. Or do you just wanna keep that aspirational, Oh, I’ll start again next week. And so basically they have that subscription model set at a level whereby really , it’s almost designed just to be under the radar, not to cost too much pressure on people so that the letter keep ticking along.

I don’t know what the actual occupancy rate of a gym is based on their, you know, how many the sell, but clearly it’s a bit like an airline. Clearly they’re selling more tickets than there are seats on the plane. Clearly not everybody can do the, you know, the bench press, et cetera, at the same time. So it’s an interesting approach. 

I think that may be applicable for gyms that don’t have many, like gyms within the firm, like they don’t have like a large transactional. Sort of capability they may have, you know, a couple of gyms dotted around. Then they’re more likely to understand what their price bandwidth is and to get that more optimal price bandwidth that you were talking about, and then promote within that range.

However, with gyms with a number of different gyms and franchises within. Or geographically dispersed throughout the country, that may be more tricky, in terms of finding that optimal price bandwidth. And that’s what we’ve learned from research and to the point where, you know, it’s very difficult to price shop because there’s a lack of transparency. Is that a good thing? I mean, you just have to go on social media and see the reams and reams of complaints about that very topic. And looking at the data, what does that indicate? Yes, they probably attract customers using price point, which is, you know, one could argue with a great thing at the beginning, but then they lose profitability because the customer churn rate is actually quite significant. And although the customer doesn’t price shop at the beginning of the journey, because yes, there’s pretty much hard sold to the offer. Told to sit down like an naughty boy and girl and fill in their paperwork and pay an additional , membership fee on top.

They do so. But then aftera while you know, they do start to shop around because the value of that gym is not appealing anymore. Or the fact that they didn’t like the pressure, the price point, and the whole shady aspect of the model. And you can see that in social media and in data the churn rate is huge.

And for those type of businesses where they’re sort of selling premium type of services, but actually delivering the value in a very shady manner. There’s some discrepancy in misalignment, and customers are onto it. On the point of subscription models, I think they’re actually quite interesting from a psychological perspective in that for gyms in particular, The fact that it comes out of customer’s bank accounts every month could, and research shows could be considered a good thing because it reminds people why they’re going to the gym.

And in fact, contrary to what you, you, you think even though it’s a lower amount of money coming out of the gym, people actually do notice it. And especially in times of inflation where. The first things to go are things like gym memberships because people are under pressure that they’re spending less and they’re thinking and evaluating consciously, what they’re going to spend.

So things like newspapers, things like gym memberships, things like software as a service models. They’re really gonna be hit. Streaming services, video streaming, music. That’s the sort of thing, expenditure that people start to evaluate. And so then when they see it, So the pro of this, the psychological pro is if you actually are committed to your fitness and you see that going out your bank account, you go, yeah, you’re reminded to go.

However, if you’re sort of lack a day or so about your fitness and you see it going out of your bank account, you probably think, Do you know what? I probably will give it a miss. And that’s also reflected by the churn rate. Most people fit into that latter segment. The non-committed to gyms except Aidan of course, is highly committed.

Which makes you think, Okay, are we charging enough for the, the value that we offer to the more premium segment, the people that do actually value the gym, people that do utilise the gym and get the money’s worth. And are we undercharging the other segment. So what I think needs to be , that price value, profit equation still needs to be ironed out, especially for the bigger gym networks.

On that point, like I think there is probably more willingness to pay, you know that value discovery. What do people really value in a gym, that aspect? I don’t think, you know, I think I’ve, a couple comments made before I forget them. The first one. I I actually, the payment, they nearly always take a direct debit is something I wanted to add.

It’s a very, it’s almost impossible or not available to pay on invoice in a gym. There’s almost an, an entire industry of payment facilitators who basically focus on gyms because a lot of gyms fall below, at least in Australia, fall below the level of where the big banks, the big four banks would allow direct debit facilities.

So there’s a whole echelon of companies who are in that space just cater for the gym industry. So it’s quite interesting that, you know, they’re smaller businesses sometimes, you know, mom and pop style and they are direct debiting. So that is interesting. I also believe the fear of direct debit obviously seems a lot in bad collection and It that aspect and improves their cash flow.

But I also think if an invoice was arriving every month, people would be much more aware of what they’re paying when it goes direct debit, it sometimes goes onto the radar. The thing about value discovery, what do people really value in a gym? Clearly, you know, the tangibles, the number of machines, you know, the weights.

Does the gym smell? You know, simple stuff. Is it clean? Is it hygienic? Is it nice? Then there’s other stuff. Is it aspirational? You know, is it in a good location? Is it open? What hours of the day? Is it open? Is it 24/7? Can you go in public holidays? Does it open early in the morning?

And then other stuff like the real, the value add capability that gyms have, you know, those sort additional, the luxury aspects of like swimming pools and, you know, is it more of a health club. Can you have play racketball like in a movie set in New York, like Wall Street, you know, where Gordon Geco goes to play racketball?

I think even the first time I became aware of gyms was, I suppose when we were a kid and you’d see Princess Diana in Britain and she’d be going to this fancy health clubs in Chelsea or wherever it was, or Kensington. And you know, and I’m assuming those gyms are charging top notch, you know, very high prices.

I’m assuming they’re capturing the value they offer, but are they, are the regular gyms really even digging into that value discovery? You’d have to argue not, but again, because of the lack of clarity on gym pricing, it’s hard to know, but what really drives people to, and these things, the drivers probably change.

You know, with working from home, there used to be big chains that would, you know, publicised. You can work out in our gym at your, in your suburb. Then you can work out in the gym at lunchtime in the cbd, you know, when you’re at home on holidays, you know, if go up to Queensland for sunshine, and winter, you can work out at our gyms there too. Like those drivers have probably decreased with working from home, I assume. And I wonder how that’s played around into the different value driver. One aspect I really like about gyms is, you know, we talk about ecosystems and building ecosystems and buyers to entry and ability to upsell.

Like in a gym, it’s almost like a perfect little enclosed, air conditioned hopefully air conditioned world. And they’re always trying to upsell you with personal training, with extra classes, you know, all different things added on, like from massage machines. To body dexa scans and everything else.

So it’s almost once they’ll capture you, they are trying to move you along that sales funnel into the next thing, which is a great opportunity for these businesses. It’s almost like being on a cruise ship to some extent. They have you where they want you to some extent, and they can, you know, they can sell you additional stuff.

I was just thinking about there, there’s actually a proliferation of new types of very niche gyms. Ones like, for instance, I’ve seen, like for those who really like pump to really into weight lifting, they’re appealing to a very target market. Everyone goes there or like into the same thing.

They lift way above the average weights, dead lifting and all that sort of stuff. And they choose those gyms very consciously. According to a lot of research out there, even though smaller niche players are using price and promotion, to drive traffic into their gyms because obviously they’re reacting to the pressure of, you know, having to pay the bills, mass inflation, churn, because it still happens in those gyms too.

So even though they understand the value, sometimes I feel that they’re not confident in the value that they offer and often resort to price. And like I say this, like it’s a surprise. We see this in every business from B2B to B2C, even when there’s a clear and delineated value proposition and people are willing to pay and people do go, there’s still that propensity to backtrack and default to price and promotion as a way to drive cash flow ’cause cash flow to smaller businesses, smaller gyms with a niche audience means a lot. And it also means a lot to those sort of big low budget, let’s call it sort of maybe more members that go to them, but low budget gyms who maybe we completely ignore.

Even looking at value drivers, it seems because they’re using price and promotion to drive traffic, they’ve understood their churn rate to some degree and know that the replacement of that customer is cheap. If they, if they drive more promotions. However, is it really cheap? Could they be nurturing customer lifetime value, their customer base. That would be more profitable, especially at a time like this, I  would argue it would. And also, you know, you would give them much better reviews and credibility online and a more sustainable business model. So are they looking for sustainability? Are they looking for, you know, cash, quick cash now and sell on the business? So I feel it’s probably the latter for a lot of the budget gyms, they’re here today, gone tomorrow, sort of thing and then customers have to find another alternative because they’re not truly committed to the gym memberships. And those that are, go to the, the more specialised premium gyms, niche gyms, and unfortunately, they are the people that we should really be thinking about because they’re committed. They’ve been going for a number of years and maybe business owners in that position. Should be really reaticulating reminding their customers, not just through price, but through their marketing and the people that sell their, their plans and offers, through their sales, their marketing, their operations, renewing the gyms and all that sort of thing. The value in use and the value at risk concept. So, I suspect that even with the lady Diana gym, they probably could be charging a lot, but they probably are not charging the full amount optimal price point or exploring that. But I’m hedging my bets there to think that based on what I’ve seen in gym pricing.

Cause I imagine Princess Diana really shopped around for pricing and she really went, she probably did invest quite a few, you know, days in just checking out pricing and could you see if a few pounds here and there? One thing I say about gyms, the ability to charge an upsell, Like there is a large amount there.

I know we should talk about the price, consciousness of people, you know, but clearly people care a lot about their fitness. Health is wealth is an old saying and clearly people will pay big money and you can just see that by, you know, these gym, you know, one on one coaching and you’ll see people paying, I dunno what it is, I think it’s like 60, $70 plus an hour in Sydney to get someone to tell you to do your press-ups.

You know, And obviously I’m underplaying what they’re really doing there. There’s obviously some really good ones and some probably not as great, but if it works, you know, people are willing to spend big money. The other, there’s been innovation in the sector in the last couple of years, which is probably.

Trying to address some of the, you know, the boredom, the monotony, that aspect that gyms have been criticised. , you know, and we’ve seen, is it CrossFit, which has been a, a big phenomenon. And then , this other one, um, is the name has just slipped my mind. It’s the one promoted by Marky Mark, Mark Wallberg.

And it’s huge. It’s more like individual classes they run. The name just slipped my mind, but you know, the one I’m talking about, it just being on the stock market. The share price has fallen recently, but those have been innovations that are sort of catered more to, I suppose, making it more competitive thing, making it more, you know, bit more camaraderie potentially in the gym to drive people on, you know, to counteract some of those criticisms people have had.

But look, it is, gyms are not going go away. You know, I think one of the, even during the Covid restrictions, which we’re all trying to forget, one of the things that people really looked forward to when they ended was for a certain percentage of people it was getting back to the gym. Some people wanted to go out for dinner, some people wanted the movies, and a lot of people just wanted to pump some iron.

And so that is, gyms will never go away. Clearly there’s, it’s like a spectrum. , clearly there’s a huge opportunity for optimising pricing by tailoring things and all that stuff, but I think it is a sector that we can learn a lot from. And, you know, even small businesses, et cetera, If you’re running a business, you know, one gym like that is by definition to small business.

But in reality, you’re facing a lot of the challenges that a big business has. Also, you know, hundreds, potentially thousands of customers collecting debts from them, offering, tailoring your service to them, competing with other gyms in the local neighborhood. So yeah, it’s a microcosm of, I suppose, pricing challenges that even, you know, mega corporations.

I suppose just a quick one. I, I was just thinking there that even between the plans that they offer, I find that the price, the pricing is, and the relativity between those, like the difference in pricing between the plans, good-better-best is often very like narrow. Also indicating that really they’re thinking about the features and benefits of their plans as opposed to really the full value of, each plan. So that’s something that I potentially would address, as a quick and very important fix because when you see that, really, what does that show? It shows a lack of understanding of the basic price and fundamental price model and structure and promotional structure, discount structures are just not there. It’s just ad hoc. That’s what that indicates. So, you know, that’s something potentially to fix. I suppose the last thing that I probably would want to mention here is that there is a clear difference between people that are committed to going to the gym and people that see fitness as part of improving their life, their health, and it’s like their medication, that they’re committed to a healthier life. Now, I’m not saying here that we overcharge the ones that are committed, but there is a point here of, you know, why, of the people that are not committed here. And what I’m thinking is you can make that market more profitable. Aidan mentioned right at the beginning of this podcast that they have removed sort of that ad hoc usage of gyms.

Why is it a highly profitable market if people want to go once or twice? Charge them for it, they’re probably willing to pay. And in that way, , they’re actually making money from a highly price sensitive and non-committal audience because they want to pay at that point. So what I can see, there’s really some really good pricing, quick wins, as well as long term wins that they’ll get from building a sustainable value base in customer focus pricing architecture, but a slight changes to the model that won’t, disrupt the flow of business and they can make money at the same time.

Almost like feel like here we’ve, even in a tough time, we’re still making money and it’s profitable. Okay, well I think that’s what I’m gonna, what I’ve got to say on that in the moment. 

Okay, Thanks. Have a great weekend everyone. Bye.

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PricingPodcast #PricingCollege #ChiefRevenueOfficer

In today's episode, we want to talk about probably a new addition to the C suite, which is called CRO which stands for Chief Revenue Officer. And this is probably a role that we're seeing more in SaaS companies, software as a service, more startups, more tech, probably more in America, I suppose. And it's someone whose focus is on all the revenue in the business, customers, profitability, revenue, selling, marketing, sales. It's a real catch all term. And I suppose we want to discuss today, is it really just a rebranding of an old fashioned pricing strategy director?

Yeah, well, I suppose you could argue it is, but then you'd have to say that the pricing manager role is set up properly. And often the problem with the pricing manager role and executive role is that it isn't set up correctly. And often it just looks at one or two tasks like price setting or price administration or pricing systems in a business. It doesn't look at pricing holistically. And to many degrees, I think this new Chief Revenue Officer role can learn a lot from the mistakes of the evolving pricing function and ensure that it doesn't fall into the same traps, because I do foresee that happening. But looking at the role in itself, it is a huge role. It looks after sales, which is a specialisation in itself. It looks after marketing. And if it is an SaaS business, there's huge amounts of work to do in marketing. You've got the website build, you've got the technical side of it, you've got the content creation, you've got the alignment with marketing to product. And also they oversee products, they oversee product innovation. They have to match product to market. They have to understand their customers.

They've got to utilise huge amounts of data to price, to develop products to market correctly. And these are just some of the aspects of revenue generation, as you can see. As I explain it, it's a huge remit. And yet I know in prior podcasts that we often argue that pricing has to consider all of these things to be able to price. However, there are some drawbacks. You've got such a huge remit if you can really oversee all of that. Are you doing it properly? And I think from what I've seen, based on a lot of the SaaS pricing, I think it exposes the business to risk principally because it spreads itself too thin. And I think a lot more, I think effort and resources have to be put into pricing. When you've got such a big remit, can you possibly do that all yourself? So I believe maybe that the remit is okay if it oversees big teams and specialist talent to do specific areas of the job well. However, I still think that the role is way too big and often doesn't change because often people in those sort of businesses startups still have that start up mentality and as they grow, don't change and morph the role. So I think there's some organisational design issues at the heart of this that need to be addressed now to make this role even better.

I'm actually surprised by Joanna's view there, being honest. I think it's a great thing. I think it's what we've been arguing for in this podcast since day one. Often when we look at companies and we look at people trying to recruit a pricing manager or a pricing analyst or implement a pricing function, and then you go, who will this person report to? And it gets lost and falls between the cracks and it becomes reporting to sales, reporting to marketing. Fundamentally, I think this is great because it basically means you're bringing commerciality,it chief commercial officer is another way you could describe it. And you're bringing them up to the top table where they get to say we often complain that businesses are run by finance, they're run by operations or marketing, and sales don't work together. And that often happens because there isn't a head honcho to push them together. That's why I think this is a really good step. Clearly, I depends on the size of the company. Even a small company, one person can't do all this, but with the team, they need to be flowing in the same direction and there needs to be someone at the top.

So I think it's a good thing overly backed up by the right teams and the right expertise. Clearly once a company gets a bit bigger, once it gets multiple revenue streams, once it becomes you're operating in different markets, clearly this becomes harder. But again I think that makes it even more reason to have this senior leader, whatever you want to call him, a CRO, chief commercial officer, pricing director, strategy director, blue-sky thinker whatever it is, I think it's a great thing. I think as long as they're being backed up by the expertise, obviously under those categories, clearly if this person is running sales, marketing, value pricing, clearly they want experts in all those areas under them. Imagine this is a company big enough to afford these roles. So this is the upper, the C suite and then you'll have to probably directors beneath. Clearly those are a lot of salaries but obviously marketing and sales are different functions, pricing is a different function and as long as they're backed up by those people but they're all flowing in the same direction, they're reporting to the same person on the board, I think it's a really good thing and I see a lot of potential for it.

I'm going to argue a lot of companies aren't going to implement this purely because they don't think in this way. And again it's no surprise that it's coming from Silicon Valley, it's coming from those sort of startups where they're focused on revenue and venture capital funding backing them. So I'd love to see more of it, I'd love to see it heading into B2B industries and yeah, I think it's great.

Well I think you've misunderstood me though. I see it as a great opportunity and for all of those reasons, as I said, I think principally there could be issues with the role, if the organisational design and the role structure isn't aligned to a very quick and evolving business model and a changing market, you simply just can't have one person doing all of that work. It's an oversight, you should have one person overseeing it, hence it's an executive level recruit here. Obviously they're overseeing it. So the manpower, the choice of team mix and skills is vital to ensure that you're overseeing all that revenue safely. My point was that often things like organisational design, team structure, role design have not been considered well in pricing functions and I fear that could happen in SaaS businesses as well. And the reason I think that is a possibility is I think with the nature of the business, I think the startup mentality stays with a lot of sets businesses and the emphasis is always on customer acquisition, finding those new customers, finding that revenue, and often through that pure focus on just getting more customers, you forget what the real value of the business is.

It's almost a reactive type of mindset and then you don't put those strategic things in place and over time you start to expect one person to oversee and do all of those different things from marketing, sales, product, and not give them the recognition for it, and then end up blaming them when things go wrong. And really it's been set up incorrectly. I say this from experience. I see it happening. I see it happening everywhere in pricing. It happens all over the place. And I have so many pricing managers and executives saying, I want this to change its business model issue. They're not understanding the role of pricing and the business. So here I just want to say, if you're in a SaaS business, don't fall into the same traps. One of those things, if you think, how will I know if I'm in that sort of lap trap? Well, if you're thinking about that customer acquisition and you're not really thinking, and you've acquired lots of customers, and you're not thinking about customer lifetime value, that's an indication potentially that you're setting your revenue officer up for failure. Because really, it's not just about making money in the instance now, right now, what do you do when you've got all these customers that love what you're doing but potentially don't love the pricing or don't like the product anymore? How are you going to pivot and how you're going to respond to that? Because you want to lose all those customers. You spent a long time generating all the marketing, setting up your business, et cetera, et cetera, and then just lose them by not pricing correctly, by not marketing correctly, but not treating them correctly. So what I'm doing is, don't spread yourself too thin as my point here, and make sure you don't overlook things like planning, organisational design, thinking about your new value metrics and pricing metrics carefully, and potentially really thinking about how you're going to change your pricing and revenue model or potentially have you even thought that you may need to do it? Is a adhoc price rise strategy really enough to generate profitability? Maybe it is now but it may just churn through a whole lot of customers tomorrow. And these are the sort of strategic things I would like a Chief Revenue Officer to consider as they're starting a new job in a SaaS company because those things will come around and bite you if they're not addressed. And if you see in the business and culture that there's a lack of recognition and awareness of the customer, of the product market, fit and all of that sort of stuff, customer lifetime value is just a buzzword and not really part of the pricing culture, then you probably got to be aware that this role may not be set up correctly.

I think it's a good thing. I clearly think it's a very tough job in some way. You're actually cannibalising other people's jobs. Like if the Chief Revenue Officer is doing all this, what's the CEO doing is the CEO just speaking to investors, what are they really doing? Because in theory if we're looking at there's so much of that remit in the business, what the business does, it's pretty much the entire commercial focus. So I completely recognise it's a very tough job. Nobody can be hands on and know every detail. Like very few people are marketing experts, sales experts, pricing experts, customer onboarding experts, customer experience experts, especially when the company gets even small sized it'd be very difficult. But I still think it's a great step. I think it will help people align things going the right direction I would say. I think it is the right step. I think it's going to still know it will never get over. The other issues with, are we sort of saying that then finance and all other aspects are not working in the same sheet or are we just making one big silo and then the other silos are separate.

So our operations and finance sort of separate to this and we'll even become more siloed if we do that. Clearly for the business to really work well, everything needs to be working together. I assume that the CEO needs to be driving everything. At the end of the day, the CEO needs to be the person who you know and again when you get into a very big company it becomes very difficult. But at least they have to have a real understanding in at least broad terms on every area of the business and they need to prioritise and they need to make sure that the entire business is operating with a commercial focus, with a business with a value focus. And realistically, the CEO should be the chief revenue officer or at least have that, wear that hat at least most of the time as well. But I think it's getting one step closer. It's ensuring that someone who has pricing knowledge is at least getting a say on the top table. And I think that's one of the biggest problems that we often see when you see a pricing team set up to feel it's one reporting into this department or into finance or into something else.

It's when marketing and sales are running off doing their own thing without discussing stuff together. And it's when no one really seems to know what the company is actually doing. So I personally think it's a good thing. I would love to see more of it. Obviously it's going to be interesting. Clearly whoever takes these sort of jobs is signing up for an awful lot of work. So we wish them well. But yeah, I think pricing is certainly a string to their bow that they should have. And we'd love to have more discussions about this in the future. I'm sure we'll cover this in future podcasts.

I think it would be a great role, but it has to be set up properly. And you mention the point about the CEO. Is it sort of taking on the CEO kind of the same thing? I don't think so. I think it's an oversight role. It works like pricing across multiple functions. I suppose the chief revenue officer actually recognises that in a sense the pricing manager role still is going no, pricing people are just responsible for pricing and thereby siloing pricing people to just that when really surprised properly. You need to think about sales, marketing, products, customer service, the whole lot. But really revenue officer role doesn't take on anyone else's job and really it's an oversight role. It's actually not responsible for revenue generation. And this is why I feel it's another reason why it's set up incorrectly. There needs to be almost like this centralised mini structure of all people coming together. You've got your marketing director, you've got your sales director, you've got your CEO who oversees all of that, and you've got your revenue officer very much like the pricing officer sitting into the pricing committee. Just because the pricing manager and the revenue officer may be managed and have the expertise in pricing doesn't mean they own it.

This is very much a multidisciplinary decision. Making a pricing decision isn't just for the revenue officer. And sometimes when you haven't set up the role well, people assume that's what it is. And it's not like that. This is mine, this is your remit. It's very much a collaborative effort. But because of that, this is why organisational design and structure of the teams and how different teams work with each other are very important to actually generating profitable and sustainable revenue growth in a business. And that's the point I'm getting at here. So make sure you spend a lot of time thinking about the role in context to your offers, your plans, your business model, where you want to take your business strategy, your team structure. Now, the evolution of that team structure, your customer base, your segmentation, your price structure, your architecture, your marketing plan, how it feeds into that pricing strategy. These are key considerations into how you're going to set up and design a role and how you're going to set up a great role for success. Yeah, so I suppose that's my final thoughts on that.

Yeah, my final thoughts is really when I first heard about startups in Silicon Valley, the only job I wanted was one where you get to wear casual clothes, play a fuzz ball all day and get catered food. And this rule does not sound like that, so it's not for me. OK, we'll leave it there today. Have a great weekend. Bye.

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In today's episode, we want to ask a question about some of the creative industries and the best way to charge for graphic design creativity, like designing logos. This is a question that somebody asked us recently, so we want to explore it today.

We asked this question essentially, a question that a lot of people ask us how do we charge for a particular service or our products? Often the debate goes “ Oh, should we use a cost plus, especially for all time and materials billings, especially for professional services?" for things like design, logos, websites, all that stuff. Or should we make the bold move and try and charge based on value-based principles? And often, we, being from a value-based pricing firm, would strongly advocate choosing that particular method or methodology. But listening to the feedback from designers and practitioners, we'd like to explore how sometimes value-based pricing may not be feasible, and how sometimes cost-plus pricing, if cut and sliced differently, can deliver profitability.

Do you think you want a new logo for your website? I think there are a few concepts and issues we need to discuss here. So say you want a new logo for your website and someone decides how are they going to charge you. Are they going to charge you based on time and effort? Or is it based on the value this logo will provide? It's very difficult to work out what value a logo would provide in advance, certainly, especially if you're a graphic designer, you probably don't know anything about the company you're dealing with. You don't know how big it is if it's a startup, so there's a real issue. And also, as a graphic designer, are you dealing directly with the person or are you going through a website? So if people have all the materials and that's how they bill it, you've got real issues there. Because in the new Internet era, you're competing against people. If you're based in a high-cost environment, like Manhattan or Central London etc. People in cheaper areas would have a much lower sale price potentially than you would. So are you dragging yourself down to that level? The other thing, of course, you're saying is, if you get quicker like how do you price the fact that you're getting better at your artwork you're getting more experience, your quality is for increasing. Even if you could do the artwork quicker, does that mean that you charge less for it? It really, logically doesn't make an awful lot of sense. The only way I think that would work is if you're using a fake method. So to some extent, you're just you're doing a fake medical notice, five hours on average, just as a justification methodology, but the reality of it is the person who's buying it from you. It's not like you're a lawyer in a big firm who can talk about their hours and how many hours they're working like the person buying the product has no concept or idea or realistically doesn't care how much time you spend spent on this or not.

It's funny, you should say that because even lawyers use time materials as the basis for their price calculations with customers and customers don't care. There is a little bit of scepticism about how time is calculated in that regard, hasn't been overinflated because both sides of the equation don't think that the price is justified. Maybe on one side, the lawyers are thinking we should have gotten a higher price for this. The problem is more complex than we scoped out, etc. And the customers refuse to sort of listen to that, and they just want the outcome. Regardless, the same things happen in design. And when I think about it and the feedback from designers, a lot of them, especially the new designers, are saying, "Ah, cost plus might be better for us because we are not really that familiar and comfortable." sort of justifying the value of our offer to customers. Maybe selling is not their skill set. They haven't thought about the value that they provide. And some even argue that we don't have a huge portfolio. We haven't got that track record to be able to showcase to our customers. Here we can see that there's sort of a lack of confidence in their ability. Potentially not in the skill set, but potentially in the business acumen. And also, there's a lack of confidence that may or may not be true being communicated to the customers. Again, since you are new, you may not be good at this. So why would I give you the money for that? But again, this is business. A little bit of like resilience training, you have to take that with a pinch of salt, because like really, what is the value of a logo? Well, if it's a good logo, you'll instantly know it's a good logo. It meets expectations that capture the essence of your business and your brand and that feeling that it is all in one visual glance and it attracts people that you want to be drawn to your business. So it has that segmented type of appeal to it. A designer can't show this before the actual engagement but during the sales process. I'm thinking of 99 designs here a customer can go, look, this is what we're thinking to designers and then they deliver the sort of an idea or a sketch just to outline how they think and capture what you've just communicated to them. And from that, you get a good strong sense. Whether they are seasoned professionals, designers or newbies, whether they can do what you want and a customer can get surprised and delighted and overwhelmed by other people's ideas. It supersedes their imagination, and that's what you're paying for. That's the real value of the transaction. And sometimes, if you limit that transaction to time and materials, you just end up commoditising the value that you offer pretty much because you're not confident in your ability or your business skills.

I think back to when I was one of our previous existences. I was an accountant and I worked at Deloitte and Touche. I got to what revenue would be globally, but it must be in the billions. Then they went through this process of rebranding and came up with a wonderful idea for Deloitte Green Dot. Deloitte full stop or a period of wherever you want to call it. Has a company brought in any extra revenue due to that new logo? I don't know, maybe they have, but it seems far-fetched. But I remember the time I think the story was that they'd spent over a million dollars or a million pounds sterling on that rebrand, clearly an attainment material basis. What are the required materials? Is it the research? Is it the analysis? Is it the learning? You're getting into the old story with Nikola Tesla and Henry Ford, where there was a rattling in the wall and Henry Ford brought Tesla in to try to fix it. And he walked down the lot of the wall, spent two minutes finding a hole in the wall and giving it a tarp, and the problem was solved. And then he charged $10,000 to Henry Ford. And Henry Ford says it only took you two minutes and he goes, "Yes, but it's the expertise, the knowledge, that's where the cost goes." I think, again, I gotta get into the idea of, like, also, if you think about the concept of another creative industry, which is architecture, People like Norman Foster, who is probably the most famous architect in the world, I assume, is one of them. Calatrava will be another one to win a lot of major prestige projects. They get paid more than other designers. Keeping in mind that they probably don't do any work on these projects at all. No, they probably have teams of young architects working on them. But clearly, they're winning these things based not always on design but often based on celebrity status and the value that we peripherally value, such as prestige status, confidence aside, that the company is moving in the right direction. Realistically, if you're a McDonald's or a major corporation who's looking at a rebrand or a new logo, they're not going to give it to someone just based on being cheap. I don't think cheapness is even going to come into it. You're looking at the segmentation of your market who you're catering to, you know, and if you're going on time, that cheapness, maybe that's the right approach mark to market at the lower end of the market. But if you're hoping to rebrand Qantas or British Airways or do the logo for something else, then you need to give the people confidence that it's the best in the world. That you're prestigious, that people will know where it's come from and have confidence in that and buy into the project. So it's almost like high quality or luxury product. There is a luxury product aspect to it. My view would be that if you want to have a sustainable career in this business, you have to build your career. It’s the thing you have to build your prestige, build your market knowledge, or boost your reviews on your website. So people come to you and they are coming to you for a reason. Not just because you're cheaper or you can do the job, but they're coming to you because they believe in interest in the product you're making.

I think it's a mistake to think that you need the experience to gain confidence to get more customers. I often think that experience in itself, like it's an indicator of potentially that you're able to potentially generate value for clients, but it's based on past precedent. Customers that look at CVS are looking at them to gain a little bit of confidence in you, but the confidence will happen when they see your ideas or SEE YOU THINKING and working through problems with them, and they'll see where you're going with it. I think there's confidence in your ability to be able to discuss that type of problem with your customers rather than thinking others are better than you. Are you the cheapest in the market? It is very commoditised. You're wasting your time with that type of thinking. You have to be focused on the customer's needs. And you'd have to be honest with yourself sometimes. Am I able to serve that customer because you may not have a clue about what they're getting? If you're just playing along with that, then you're wasting everybody's time. So yeah, there's an element of honesty and confidence in your ability to read the situation and know your target market. If you don't feel that you've got the skills to do it. Then you've got to think about where you can be best served and build up that competence and resume if that's where you want to go. If you're going to use cost-plus just be very, very careful. It's going to commoditise your offer and it's going to decide that the relationship with your customer is very transactional. What is value-based pricing? It's a conversation based on value. What value can you generate for your customer? Through your design, through your logos, and if you know that you can generate a lot of value, then charge that premium for it. If the customer is still not sure and or you're not sure that you can do the job. Maybe the scope or the brief is still quite confusing, then potentially think about a new revenue model as a way of charging. Not that you can charge using value-based pricing, but think about maybe a retainer model or a different type of subscription model just to lower the risk from both ends. That potentially would help, and then they could see you in action and you're contracted for some money. That way, you both gain experience with each other. You lower the risk and you can show what you can do for them. And then you can It's sort of motransparent, you can build a relationship and trust in the end product.

You have to consider again, in value-based pricing, what are you delivering? Sometimes people don't just want a logo. Maybe they want the marketing team who are working on this project that they want to feel special. I remember another time I was working at a company, a waste company, and they were developing a new website. And they had a whole team of creatives come in to talk about the colour scheme and all this stuff. I remember one guy was wearing a beret, and it was just preposterous that they were throwing people at something that one person could do. You have to fit the criteria that the people want, that they're looking to buy. Big companies potentially if there are a lot of people working on it. Think about this, if you're a big company and you have a big rebrand, if it goes wrong and then the chief executive finds out that the logo only cost 500 bucks. You can be pretty sure that the market executive is going to be in a lot of trouble with that or the branding person. So there'll be a high price hike, which will give some assurance also, those peripheral values. Given that, you think about what people want. They want the product and the logo. But the chance that the perfect logo will come up on the first go is very low. People may hit the first logo, they may want to slightly change it. So there'd be so many things like infinite reruns, turnarounds overnight, throwing them in different shades, being available at all times. Making sure that it's done in the way they wanted. Good people can be very demanding. And if that's demanding, are you able to provide that? If you can provide that, there's a higher price tag and ticket with that. I think that the ins and outs of the basics of actually doing the logo, and we're using the term "logo," but this can be used in different contexts, also in the fashion industry. Theoretically, you could buy an item from Chanel that might cost 100 or 1000 times the price of something cheaper and sharper like H & M or somewhere like that to the educated eye, and might even be identical, but it's those small nuances that provide infinite differences and the infinite different ability to sell. Admittedly, someone or Coco Chanel, they don't come along every day and that expertise that's what makes people real business leaders and successes. And just because you're the best local designer certainly does not indicate that you will be a great business and you need that marketing skill. You need that selling ability and you need everything

I suppose this is the difference between just designing the logo and creating a business. It's a different skill set. Often people start businesses without really identifying their core market and understanding sources of value in the market. They have no clear value proposition and then they build a business. Literally through panic and fear. Just go I'm going to sell anything to anybody at any price. Just because I sort of need the money and that is not a sustainable sort of way to run a business and customers don't like that. Using pricing methodology as a way to or if you're going to use cost-plus, by adding on hours to the overall project, just to get charged customers more, it's just not a great way of doing business because you side tracking away from the true value of your offer. And that's because you've brushed past your value proposition and you just shooting anything, you just want any work Business is tough, that's why confidence and hard work and learning business skills will come in handy just to de-risk the whole model and might give you confidence that you need to take to get better at that because have confidence in your delivery skills. You're a designer, you thought you could do it when you started when we started the business so just remind yourself of that and think carefully of what your core area and niches are and where you want to go with that. Often in design, It's where your passion lies. So think about that. What excites you about that? Why are you doing what you're doing? And that will help you and then you can see and then that sort of helps you in a way that segments the market because other people will be attracted to that attracted by that particular skill as well. And then over time you're going to niche and be known for that particular thing.

I would also think stuff like payment terms you could offer. You don't stop until the customer is completely happy with the project. Those things are de-risking for the buyer like a lot of people buying a logo or brand name but they're coming to you because they're not creatives they want them to blow them away. You have to maybe guarantee to get from there in that sort of thing you want to you probably want to be working exclusively with people do you want to be putting in a huge amount of effort and not getting the sale. That's something you want to consider also, but I would suggest you find some method of de-risking it for the buyer. Once you build your portfolio at the beginning, you have to have a portfolio, you probably don't have cheaper you're probably broke for lower quality customers. And then you're moving up into the big leagues. If you're successful, bigger companies and hopefully at the end of the day, you're doing AmEx and you're doing United Airlines and all this sort of stuff. So, but you got to start somewhere and you can't know value. The peripheral value is built up over years. But you got to start somewhere. unclearly building a portfolio having logos and brands out there. That's very important, but it's step by step.

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In today's episode, we want to look at a news article that appeared today, 8 September 2022. I think it almost suggests that more people should listen to price in college because I suppose fundamentally it looks at some of the most very basic pricing thoughts or strategies that I think that anyone in business or even the media should know. So, I think I'll just give a brief intro to it. On a radio station, 2GB in Sydney, the presenter Jim Wilson grilled the pub entrepreneur Justin Haimes on the new Allianz stadiums beer prices and said that they're too expensive because they were more expensive than in the largest bar and discount off license store or bottleshop as they call them in Australia. So I think we just want to look at that and discuss what we can draw from it.

It was an interesting one because I suppose the radio host, Jim Wilson was trying to act as the voice of the customer. In some way was trying to sort of accuse Justin Haimes sort of, like, overpricing the beer at the stadium. In a way overcharging because he knew we had a captive audience that couldn't go anywhere else. And often, in pricing, you hear that sort of that fear, that sort of allegation being cast upon the pricing manager and also the reason for discounting. Oh, we think we're overcharging our customers and therefore, its price overrides in the system and discounts occur and go down, more and more until one asked, “ what is the right price as we undersell offers?” So interesting in that way. They thought it was representing the voice of the customer giving examples that the customers thought the beer and the hot dog were way too expensive. Why was it $9 I think the base price of $9.50 and he was charging $10.20? And how extortionate that was for his beer. In Australia is supposed to be in every man's type of beer. It's the standard drink and he was weighing that is way too much for that the average punter to pay. Especially I suppose in a way that they're paying for the football prices that what they're going to see it's not a cheap night. You can hear the justifications and they're fair. I suppose in response Justin Haimes was like saying “well, the cost of operations for my business to be able to supply the stadium, the production, the staff involved, is not similar to that of Dan Murphy”. It's a different business model. Dan Murphy's is the like a supermarket for sort of fairly standard drinks, very different business model. But what I thought was interesting is that they both resorted to justifying the prices by looking at the cost. Justin Haimes was like applauded for his response there, but I thought it was quite limited. Who cares what his cost of operations is? Should customer care? Surely he should have been justifying the higher prices by the value it brings to the customer, and neither of them went there. I think though, that Jim Wilson, the radio presenter was trying to get, that you shouldn't charge based on willingness to pay. But I don't think he had a thorough understanding of the principles of pricing to be able to say that quite clearly to Justin Haimes. But I just thought it was really interesting how they just both devolved into the age-old oak cost, or different business models a bit limited. So I didn't think it was a great response.

I suppose it highlights a lot of the very low-grade journalism that I suppose Australia has and, and other countries. I think if people are asking dumb questions, you're gonna get dumb answers. I think we've seen that certainly through COVID and over the last number of years. I think society is yeah, it's almost like people are just scoring points with ridiculous questions and you won't get a good answer. There's certainly not going to be any intellectual rigour with these debates. Look, I think clearly, anybody in the right mindset will understand that if you go to a fancy restaurant, if you go to the Ritz Hotel or the fancy hotels like Carlton or fancy hotel names, clearly you're gonna pay more for a drink, a gin and tonic etc than you would in a dive bar. There's cater to different establishments. There's a different value being provided. This new football stadium is being built. I think it's the one in Moorpark that replaced the old city football stadium. And I think clearly like a billion dollars or more spent on this facility. It's to be the best and the brightest and to attract international acts, and international sporting events. To create an atmosphere of the real off-market, a real great night out international standard. I don't know if I agree with the bulldozing of a perfectly fine stadium and rebuilding another one on the same site. But I think they're competing. They're not just competing now with Satan in Sydney or Australia. They're competing with facilities in North America. People to talk about some of these big American football stadiums or the Tottenham Hotspur Stadium in London, where they're trying to attract international events, international concerts. Justin Haimes doesn't run dive bars. He runs the Maryville Chain and they own those upmarket and fancy establishments in Sydney. They're not selling fancy drinks. Is it drinks they're selling or is it an experience? Is it exclusivity? What is the value they're selling? And those are the questions that I suppose you want to look at. The question I suppose you could ask is, Is that the right person to be? Is that the right style and value to be selling drinks? What is a football stadium in theory, whereby traditionally at least football, different versions of football were the everyman sport? That everyone could go bring their kids and have a beer whatever it was a social sizzle you noticed cheap and accessible. Is there an incongruence there that Copiah valid point, but like at the end of the day, once you bring in a fancy of market business, such as that don't expect to get Hungry Jacks or it's not just selling a hotdog at the back of a truck. So, what is the value we're selling? What is the value people are buying? There's a whole number of questions that aren't even being acknowledged that they exist, let alone discussed.

So the stadium itself could have more of a premium pricing strategy. Life in Sydney is good, it's sort of trying to increase it's in a nice area of town. It's very exclusive and they're just trying to align with the city and where it's going in the future. Then you've got the customer, the fans who maybe travel quite a few miles out from suburbs into the city. May have a completely different lifestyle. Don't have that type of spend, but they frequently go to like football, and they're surprised. So there's a dissonance there between his business strategy, their market, and the customer. Have they looked into that segmentation? Or, are they just trying to hope and migrate people into that sort of more premium pricing strategy by just dazzling them with a great shiny new stadium or a large ray of drinks and food that potentially they don't want? They just want the standard. They don't care as much maybe for the more premium lagers and ales. You're right, it could be the choice of vendors, and the business strategy potentially is misaligned with the market. The people that are going are average families. They're thinking it's hard enough to pay for the tickets because those ticket prices are going up, as we've discussed before as well up and down using dynamic pricing. And now on top of this, we've been given this premium pricing strategy for an offer that we don't want. Now, this could be all signs that trying to educate the customer about this new business strategy, or it could be dragging them into it. It's kind of a difficult one to discuss now. Because families are under huge amounts of pressure with interest rates, increasing inflation, food prices increasing and now even leisure prices or just doing something, with your family, everything's just going up. So it might be the wrong timing. But in terms of this particular article, I would have liked to hear the justification for a higher price point is about the value it delivers to customers. The convenience of having a nice beer at the stadium has the option to have a beer and a lovely burger as you sit to see your favourite team play. I mean, for some people, they're willing to pay for it, for others they're not. They'll just bring their flask bottle of water and the sandwiches, I suppose. I mean, that's a segmentation of sorts, but a total disregard for if, let's say, Jim Wilson was speaking on behalf of the customer. Whether it aligned with your business strategy or not or whether you agree with it as a business leader, it doesn't matter. There's an element of truth and untruth in everything that we hear. And it should be recognised that potentially, willingness to pay isn't as high as they thought. So what are they going to do to change that? That'd be an interesting transition plan. Maybe change their assortment, change their range, maybe change the menu, who knows? But hopefully, a radio presenter will ask better questions and maybe speak on behalf of the customer in a more educated fashion.

I'm going to disagree on this I think he answered it in the best way for him. The 2GB is not a shock jock station but as a talkback tends to be a little bit right-wing, tends to be popular, and tends to know at all journalists want to who have a certain core audience who likes to complain about the world. Again, that's a little bit that's just my personal views. There's some good stuff on it too, from time to time. But realistically, if you're trying to hold yourself up, Jim Wilson, as the populace, the everyman that champions of the people, like I don't know if Haimes coming on and talking about the value. The listeners on that show probably aren't his audience. They're probably not the people who will be buying drinks on Saturday night at the nightclub or one of these other bars. And so I suppose it's a political protect yourself. Maybe writers to defend themselves. He's not there to educate because clearly, that's not something he can do. He clearly understands value, he is doing very well and understands the value of hospitality. You know, is that the argument of the discussion that this show wants to have? I think you're probably better off arguing along these lines. You're not going to sell any more products, so I think it's better to get out of that ambush by playing the game that they want you to play. Fair enough he is completely legitimate costs would be infinitely different. They're not even chalk and cheese. It's just a completely different life form from running quite a bit of supermarket for alcohol versus a fancy place that sells drinks for football games and concerts. So his point is completely valid. I think he clearly understands the value of stuff. I think he clearly understands segmenting his market. I think those are sort of my views on it. I don't think just sort of highlights a little bit of like some of the common in some certainly in businesses that people think everyone thinks they have a pricing view, and this is what happens, people think they know everything about pricing, when in some ways that don't even know the first thing. You have to get that lightbulb moment where you can move this person from. They want is very uneducated communication to something that's starting to move them along the line to be educated on the topic that is an expert environment. But again, I say who's running the multimillion-dollar business as Jim Wilson or is it Justin hammers?

I suppose it can be a bit typical sort of response that we hear in boardrooms all the time. Like, if you're going to talk to customers, you're going to appeal to them and make them think differently, especially if you've got a different business strategy than using the old my cost structure versus your cost structure leads to that. I'm just thinking about procurement here. It's like, “oh we think your prices are too high or show me your costs”. Okay, my business model is completely different. So I've got a different cost structure so I will show you. Even that was the devolution of the conversation. He was going to show the radio presenter what it was like to run a business in a stadium. I mean, there's like opened up costings. Again, it's a bit tedious. I mean, I actually would like to change the conversation, and break it up a bit. Tell us what is the value here. What are the benefits we're gonna get? Re-educate me on something positive, like, yeah, I want to know why. It's great to go out and have that extra good experience. You tell me you're gonna give me an even better experience. Well, great justify that but that's not only justification is a good marketing opportunity. It just removes the stale sort of conversation around costs. And going back to that it just makes the experience the same old. So actually, we're talking about experience in the stadium. It's all so the price is based on your experience as a business owner, implementing and delivering this service to me I don't care I want this to be about me. I'm willing to pay a higher price if you're telling me that it's going to be exceptional. Is it exceptional? So I think I disagree with you on this one. I think any opportunity is a great opportunity to market and especially based on value because it's always positive. If it's not positive, then you've got something to worry about. And if you're not going to talk about it, the fans will find out and the customers will find out soon enough.

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In today's episode, we want to cover I suppose it's a concept, but it's also a new story that we saw recently this week, whereby Disney plus up-and-coming young whippersnapper on the streaming market that's eating Netflix's. I suppose they haven't announced it, but they're suggesting that they will introduce two-tiered pricing whereby you pay less, maybe about $8 US a month, but you might have to watch advertisements, or you can pay more and avoid advertisements. And I suppose this is a little bit like I think it's called "Red" on YouTube, where you can subscribe, you pay a fee per month, and you get to avoid those annoying ads that pop up during your videos. So yeah, what do we think of this?

We thought it was an unusual article for a news story. Firstly, it just seems kind of a confusing sort of pricing strategy. Is it a pricing strategy to introduce new price tiers based on things that customers don't like? So you increase the price to avoid something you don't want to see like ads. So obviously they've done their research. I just think it's kind of on customers and found out that they don't like seeing ads. They must not like seeing ads, but it seems counterintuitive in a way to price based on that. It sort of sidesteps the value of the Disney plus proposition. I mean, are they suggesting through that that there is very limited value in their offer compared to Netflix and are resorting to going to paying for not seeing the ads? This seems strange because there's value in that Disney plus the selection of movies. Are they suggesting that that is not enough to maintain customers? But if you backtrack a little bit on that, well, it must have been enough because that's what drove customers to the platform. And that's what customers thought, “ oh Disney plus movies are worth migrating from something like Netflix or a Stan or one of those platforms”. So I just think it's kind of an odd price structure to create and really what I'm thinking is, Is it a price strategy? Or, are they thinking about it, Is it more like a covert price increase price rise strategy? And if you're going to do that's more of a tactical sort of pricing move. And it's something that you really shouldn't integrate into your fundamental price architecture, which is that price structure. So to me, those are my thoughts what do you think?

I suppose I have a couple of thoughts. Generally when we're talking about value-based pricing and charging for value, usually we're discussing giving additional value, and charging for that additional value we're giving. It's more of a carat than a stick this more seems to be a stick. This almost seems to be pay or we will self-sabotage what we're giving you. Pay or we will make this product we're providing to you worse, which seems a bit odd to me. Admittedly, they haven't said they're going to do this yet but I've seen and imagined it in a couple of different places. What would that do? Would it drag these services back down to being television? Not very different to actual regular TV, which I suppose was what drove people to stream in the first place. Theoretically, what difference does it make if you're showing adverts on whether it's a streaming service versus whether it's a pair TV system? So I think that was a bit confusing, and I'm not sure that I can see it clearly on YouTube. I would watch a fair amount of YouTube but I can see that the adverts are annoying. The people who tend to advertise on YouTube also tend to be larger corporates; banks, and building societies. These are even term issues anymore. Insurance companies stuff like that big supermarket chains. The adverts tend to be mind-numbing and they're a little bit too long. I think even television adverts some people used to enjoy them, some of them used to be entertaining. There'll be comical aspects to them. I think maybe that's decreased in recent times, potentially with the costs of TV advertising increasing. But I would argue that YouTube ads are more boring unless you also have the ability to counsel them or go straight to the video after a couple of seconds, which is a bit old. It's an old system. It's an interactive system that goes against what TV is. So I don't know if it's well thought through. I don't know if it's a good idea. The other thought about it was it sort of insinuated cost plus mechanism in Disney or whoever will implement this. Are we saying we want to make this much profit from this show over an hour's viewing per person, and we'll either get that money from the paying public or the advertisers? It may be that may not be what they're doing but it sort of suggest that and it also remains with the old saying that, “ if you're not paying for something theoretically you are the product”. If you're not paying theoretically, Disney or whoever it is will be just showing advertisements to you and the paying advertisers will see you as the product and that's how it works. So it's a weird one on it, it leads to something on the one platform, if it stays neat, it would lead to a mixed message I would say from a premium movie enjoyable system to do that. What are the questions I would ask is it clear how the implementation of adverts will make a big difference? Is it going to be adverts during the movie, which will be exceedingly annoying? Or is it going to be an advert before you watch a movie, that is less annoying?

The adverts gonna be customised. So having it customised to what you like as a viewer, are they on to that? Yeah, I mean, Are they using data to customise their ads and all that sort of thing? But I do agree with you. I don't think the pricing strategy is particularly value-based. I don't know it just smacks of a very reactive price increase price hike strategy. And somebody just thought okay, if we introduced this new price to migrate customers, existing customers over to this ad-supported version, even though they were on a no ad version, then essentially get a price increase and increase our profitability there quickly. But my thought here, well.. Is that very customer focus? How do customers feel about that? Well, it'd be highly annoying if you've signed up for something with no ads and it was a good service and you're quite enjoying it to then having an inferior service. So I don't think just easily migrating on on on a spreadsheet. It looks kind of attractive, but in real life, I am assuming there's going to be some kind of churn from that kind of dissatisfaction from customers. Not necessarily to Netflix, but maybe somewhere else or who knows. But I also think, here that, as I was saying it's a reactive strategy, looking at the economics of platform-based businesses where it was very egalitarian in their pricing, meaning it was artificially low price, to begin with. And there was always that mission statement around bringing entertainment to the masses. All that broken model such high costs cinemas, and all that sort of thing, bringing the entertainment to your home, having the access to huge amounts of movies and entertainment law at a low, low cost. Now, as we see, Netflix has been challenged by new entrants to the market. This egalitarian pricing model is also being challenged and different platform businesses are competing, we're now seeing price wars, and it's unsustainable. But now we're hearing like, every other business is those slow, dumb, moving, slow-moving corporations that we often talk about that are in that commoditisation, price war trap, the same things now happening with the smart agile entrepreneurial platform businesses. So is this the end of the sort of platform revolution? And is this the beginning of massive increases in price and mass entertainment through platforms? Maybe it's the rise and fall, a very quick rise and fall of Disney plus that that we're seeing in Netflix and I suppose an indication to customers that we're not going to get those nice low prices anymore. Things are going to go up considerably. Looking at the Disney plus price increase in this particular instance, prices for no ads have gone up 37% if they're going to take this new model and new price structure into the market. So that's a quite considerable price hike for something you don't want to see. So let's see how that pans out for Disney plus.

I suppose a lot of this comes down to these platforms, I’m calling them platforms not sure that the right term is streaming services, they try to segment their market. I think they've been quite a purge segmentation up to now. I think the only real segmentation that I noticed is how many users can be watching the show at one time, which to me is a bit strange. Like is this saying that four people watching Netflix on the same thing in the same house at one point in time is a bit odd as a big house or maybe people should watch movies together more? It almost suggests isolation is a good thing for these people whose company's market share and share price. So that's odd. I suppose they haven't been very good at segmentation. You know, even if you look back at the old Foxtel, Sky Television, HBO, the sort of companies satellite TV, cable TV, they were quite good at segmentation. You could select the package you wanted, sports, all that sort of stuff. I think with these platforms, to some extent, they haven't moved to that yet. Look even at Disney there are cartoons there are movies, and there are TV shows. How many people watch even a small percentage of them? So I'd argue there's room for segmentation a bit more in that category. Disney's catalogue is so big that they control production a lot better than Netflix does, which is generally redistributed for the vast majority of their product, whether it's the content. So I would argue that segmentation certainly will be increasing because these companies don't want to lose people at the lower end of the pay of eight or nine bucks. They want to keep them but push up their profitability on the higher end. I would forecast that go somewhere in the line. I say Google Play, I used to rent quite a few movies. If there was a movie I wanted to watch, and I only watched one or two a month but I pay $5, $6, or $7 to watch that movie on Google Play. And maybe our forecast that that that would be something that will come back a bit more that we'll move away from the view everything at a certain fixed price to more of you view fewer stuff and you pay a bit more per movie. But potentially it ends up with the same money in the pocket of Disney and whoever else. So I think my forecasts are more segmentation will happen. There's going to be more churned. I can't see Netflix surviving in its current form for more than a couple of years. I think the distributor and the actual production house are Paramount, Disney etc whoever the other ones are, I don't know if MGM is still a big one or not, but they will be producing more they will be growing and it'll be more direct to the viewers with segmentation taking away certain aspects that don't require potentially more pay per view movies. I guess that's my forecast.

Sounds like sky and Foxtel to me. So it seems like they're going down the business Yeah, back to the future that's right Foxtel and Sky. I've been through the rocky road and I've recovered through segmentation. But it's funny like with someone like Disney plus there's an element of segmentation in Disney plus in terms of product segmentation because it's all their movies. So as Aodhan was saying Netflix is a distributor of many different types of movies and producers and directors and all of that, but Disney has only got their movies. So there's a bit of segmentation. How niche can they go with their product segmentation? So really what I think they need to work on is customer segmentation. Looking at their pricing model, this new pricing model, they haven't done it except for ads. I like ads. I don't like ads. It is a bit simplistic and dangerous for customer segmentation to go out down because it's highly emotive. It's destroying the very experience they're supposed to be producing well. What does that do that ruins the reputation? So yeah, I'd be interested to see how that goes. And the irony is quite clear. Again, another instance of the egalitarian pricing models through platforms and online comes to piece under pressure when there are more entrants and more competition. So yeah, interesting. We’ll be tracking that one.

Just my final point is that there could be an element of bait and switch to this old, these disruptors came in, you had a Foxtel and speaking in Australia here, you had a Foxtel subscription. Maybe in the US, it's showtime or HBO and Sky TV in Britain. You have that subscription. Some people were paying 100 bucks a month. And then you had Netflix come in and promised the world 15 bucks a month. But now those prices are ramping up. People now find themselves having four or five six subscriptions plus sports subscriptions. In Australia, you've got several Foxtel subscriptions, and cable subscriptions so many that it's almost hard to keep track of them. So in some regard, we're back at the start. We're back where we began. And is it a part of the delivery system and more of a watch on demand? Is it that different to the old-fashioned Sky TV or Foxtel subscription it is a bit back to the future? And maybe this system needs a disruption. Who knows? Maybe we should just go back to the cinema again once or twice a week. Okay, I think that's it for me today. I'm not sure if Joanna has some more.

I'm just thinking, where's the value in all of this and what I'm seeing through this is faster destruction of value than I've seen in the traditional brick-and-mortar entertainment model business models. So yeah, I suppose that's my last thing so I appreciate you listening.

I also don't know if Disney's catalogue was very valuable. Clearly, those movies are shown on videos and in cinemas. Reruns clearly they will show the video shops, Blockbuster Video, etc. I wonder are they making more money now? Is this improving their perception of their brand? Who knows? But I guess it’s enough for the day. So yeah, have a great weekend.

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In today's episode, we want to talk about the pricing story that has made the news I guess, the mainstream news media, which is not that common in the world of pricing, and that is related to dynamic pricing for concert tickets. More specifically Bruce Springsteen tickets on a US national tour and the concept that pricing for those tickets has a dynamic element.

Dynamic pricing has some controversy around it because people don't like that there is a range of prices and they don't like that the price is not fixed. People feel a lack of transparency when there's more than one price and more than one price in one segment and more than one price for one product. So we thought this particular story is quite interesting not only because of the controversy around dynamic pricing as a methodology in pricing but also that how it's being introduced formally within the music industry. When there's a lot of people out there that that go, they're thinking of the music, the art form, they think about their favourite artists and they think that there's gonna be some kind of transparency reflected in the price point because they go in there for the love of the music, and now they're finding the artist has very little say around it. It's very commercialised. It's a business enterprise. There's no sort of you don't get rewarded for being a fan. Now you're getting penalised by paying higher prices for being a fan.

I think music and certainly pop stars and rock stars and the staff like that there is a fan surely the fan element that's how they get to where they are. Bruce Springsteen in the beginning started probably touring small halls. I'm again assuming this, he built up a fan base and those are loyal followers, etc. Admittedly they probably got in there and bought their tickets early, I'm guessing. But some of the points we'd like to make on this dynamic pricing, it's not as if dynamic pricing has not always applied to tickets. The second-hand market, ticket tote, and scalpers fundamentally have operated the infinite, ultimate dynamic pricing model with a standard try that concert hall and try to shift tickets, leftover tickets, or to anybody willing to pay and they will fundamentally charge that price. So that has probably what Ticketmaster here is doing, who is the agency selling the tickets? He's internalising that and giving them to use that willingness to pay. I suppose the old flat pricing model left all that extra profit on the table, the coracoid, the artist and the promoters who are putting cash behind the enterprise, and it was going to ticket tote basically who were who are filling that gap. There are people the day before or the week before who will pay significantly more for these tickets. Whether rich people, whether their superfans, whether even the sort of people in casinos when Elvis used to play in Vegas and you'd have high rollers would get free tickets to those big events and big sports games, etc. So it's nothing new under the sun. Probably to some extent, it's a smart move. I think you're internalising it, as long as you're segmenting it, it's not all tickets. And I think some of the stats we saw or at least because Ticketmaster was forced into defending themselves to some extent. And some of the stats that they did give were that 88% of tickets were sold at set prices below $400 before taxes and fees. So let's be honest, like that still is a hell of a lot of money. 400 American dollars, with the average price paid for the tickets of $200. So that left roughly 12% of tickets the in the market for dynamic pricing.

I think the controversy is more around how there are almost holding seats and tickets for profitability simply for profit. It's not just a little bit of profit quite a huge amount. If you go from a fixed price of say $200 per ticket to something like $5000 that's that's a huge leap in the price relativity price point. So that's number one and that's all being pocketed through the ticket agencies and the artists. I think fans have a right to ask, where is that money going? Is that fair? I think this interests me because generally dynamic pricing is explained by businesses as something to utilise and balance, supply and stock. But here we can see quite simply that stock and the seats are being kept back to push huge amounts of profits for the artists and the industry. So I find that that's an interesting point. Generally speaking, businesses don't really discuss willingness to pay again. And another interesting point that's been introduced with the concept of dynamic pricing, as I said before, you generally it's capacity utilisation that's pushed, not willing to pay. So here we're seeing how you're putting two concepts, pricing concepts together, dynamic pricing and willingness to pay now you can't get confused. They are very different concepts. And you got to be careful how you use them. Because if you start putting them together, you start thinking “okay, dynamic pricing is going to exploit our willingness to pay”. And, why are we willing to pay for our tickets? Because we highly value the artists, we risk, fear of not seeing them if we can't get to see them. So we're being exploited here and to some degree through loss aversion theory, and that's pushing up the ticket prices and our willingness to pay. Then on top of that, we're hearing that the businesses are making huge amounts of profit consciously doing so. So this is why it is in the media, and it really should be explained because if you see a price point of $200, and then $5,000, you kind of know want to know where your money's going.

I think the music industry is the demographic certainly the United States and most of the world are changing. When a lot of these acts started, it was a concert where kids would go to concerts. Fundamentally, it was teenagers or young adults will go to concerts, and then they use that to buy records and the records were where the money came from. Obviously, with the complete change in the industry. It's almost like music has given us a premium through Spotify or streaming or whatever it is, and very few people buy records. And then the real money comes from the concert. And to a large extent, these acts that we're talking about are to some extent the baby boom act to have very wealthy older people following them. I don't know, again, this could be just pre-judging or whatever, but I assume a large amount of the population going to Bruce Springsteen will be older. I think Joanna touched on the concept of gouging, is this gouging? It's a grey area. Some of the articles we read suggested that Springsteen's getting old, and the band The E Street band or getting old. And so some people think this could be the last hurrah. This could be the last opportunity to see this band. Maybe some people have it on their bucket list or a dream to see Bruce Springsteen. The last two, three years have been very, you know, people feel also they've been excluded or kept away from entertainment and stuff like that. So there's probably pent-up demand also for people. So it can't be gouging because nobody needs to see a concert. Let's be honest about this. It's not like selling, a bottle of water or something to someone in a famine or food to somebody on a farm and it's not to that extent. But it is a grey area whereby to some extent is pushing into the area of, will people have a bad taste in their mouths? At the end of this, they look back and go Why would your view on that? And realistically, the view will not be on Ticketmaster the view will be on Bruce Springsteen. I would argue and maybe a concert even in general, there could be a negative, which I always think the definition of gouging is when after the experience you're committed never to deal with that seller ever again. And I would argue in pop music and rock music where there is you need affinity you need loyalty you need. It's not something in some cases, it is love, but you need a real affinity towards the act. It's not just about the music, it's about the lifestyle, the culture, the movement, and almost what it represents to you. If you're an artist and you're selling, you need to make sure you're segmenting that market because if you burn your base, if you burn your core, you know, your career is not gonna last too long.

I think another interesting point here is how pricing is being used to influence and direct behaviours here you've got quite a clear price cycle. They've kept the tickets low at the beginning of this price cycle to entice people to go to the concert to drive traffic to the concert. Fairly, you know, as I said, it's not a low price point. It's still $400 but it's a manageable price point. So that supposes the fans can go. So [A] you learn all right at the beginning of the price cycle for ticket pricing, get your tickets early, because you really will be paying so much more towards the end, maybe two weeks after the first launch of the first price tickets. And then obviously, they're sort of they're almost training people to do that like by quickly and also they're training people to accept extremely high prices for being late in the cycle. So you didn't get your tickets early. So it's your accountability for that. So, therefore, you have to pay more, and not just two times more, three, four or five times more for the price and I'm we can change that and you can't ask questions is kind of the conversation that's going on here. So the onus is completely on us. And what is interesting is how a price point can influence huge amounts of people all at once to do so just one or two things, and how the industry in itself can change by a price point. The music industry is changing pretty much because Spotify has changed the dynamics of that industry. But now it's all going Yeah, through two gigs, live music, but it's that price point that is changing how people buy which I find interesting and ticket tech is experimenting has been like for quite a few years now. Some interesting approaches, and now I do see them bringing that dynamic pricing and willingness to pay to the forefront before it was behind the scenes and now they're trying to push that one.

I suppose the final point I'll make on this, I could be completely wrong, but I think some of it reflects on changes in this society. I think entertainment a lot of things used to be much more egalitarian. Certainly, after World War Two, the whole world was to work towards at least the Western world went to much more of an egalitarian system welfare state. Football was the everyman sport. Pop concerts were affordable, and affordable luxuries were certainly affordable for kids and that sort of thing. They didn't break the bank sort of things. I think we're going back to more of a golden age almost, within the Siak less sort of concept where they're super rich are it's fine, no to discriminate. It's fine. This is for the rich, I'm not making a value judgment I'm just pointing out what I see. And I'm seeing this happening more and more whereby price has been used as a method to discriminate against and exclude people from you can't afford it. When the luxuries are there for the rich, and I think you'll see it and I think conspicuous wealth has been pushed probably more now than then. Certainly, maybe the 80s is famous for conspicuous wealth and you know, the yuppies and the Reagan Thatcher years of course. But I think if you go back to the youth movements, the 60s, the 70s. Like I tell you, if you try to put on a dynamic pricing model at Woodstock, I'm not sure what would happen. So I think a lot of it is the market and the time and the age that we're in accounts for a lot of things. It's not a one-way movement. It goes both ways. And I just think this is we are known this is a discriminatory basis, and it's discrimination on money and wealth and, you know, sophistication or whatever else you want to talk about, but this is I would argue this as a sign of it.

It's an interesting point in itself. I mean, you can see that from the channels to market you've got TikTok, you've got Netflix, YouTube, and Spotify, which are all for the masses. It's cheap, it's accessible. Yeah, you got all the options that you want. However, it's not real life. And really, that's where the low price point is. You're not joining real life, you're watching it vicariously through a screen and all that sort of stuff. However, if you want to experience the real thing, the real deal, then you're in that very small segment now and you have to pay and it's not just it's maybe 800 times the normal exit the price more just to be a part of the real world now. So this is quite a virtual reality versus real-world scenario and the price points that reflect that is a really interesting and mind-bending thought, and it fills you sort of with a mixture of feelings. And I suppose there's quite a lot to up to unpack in and of itself, but I think this particular article, it's brought about new price leadership in a way. It's psychological pricing, and it's the division between business and customers but almost through an alignment of value drivers. Yes as an understanding of value drivers but also how you use that information when you set prices, how you use different channels and how you price those channels. Because if you hit see hear clearly if you see music as through Spotify, and in real life in an arena, then you can see the price point is hugely different. Now, in any other business, if it's done in retail, you'd say is that fair? But hear clearly people are saying it's completely fair. How come it's not fair in other industries?

My final point on this one, I think it is fair. It's just you have to be aware of when you're selling, what it says and what it creates and the atmosphere in the mix. I give the example of Wimbledon, the tennis contest. And look it's probably one of the most segmented markets I'd assume. You've got the royal family you've got the Tom Cruises of his world, etc. in the Royal box. But then you also have the I think it's a queueing system. They operate every day where people queue up and buy tickets because clearly when you could access demand for a product, you either discriminate based on price or you use the Soviet queueing system. But this queueing system gives people the impression that everyone can afford it. That everyone can be part of it that it's not completely outside your realm of you getting it and so you have to consider not just the money but what it means to your base and the longer-term impacts of stuff. But I think that's more psychological and for the later podcast, so I'll leave it there today.

I think my last point on this is that ticket Tech has done this over several years. It's not something we're just bringing upon their customer base there. As I say they're training their customers and I think if you're listening to this podcast from different industries, think about that, how you can understand what your customers value? And then think about your brisk business strategy and see how you can align it because that alignment doesn't occur overnight and even today, we've got 90% return ticket tech, in this instance, 90% of the tickets were at a fixed price and they've only introduced about you know, 9% are being dynamic pricing. So I wouldn't say it's 100% Holy accepted even within the music industry, but let's have a look, is that percentage going to grow in terms of dynamic prices versus fixed pricing in the music industry? I would say it probably is but there'll be a balance. And what we can say is ticket tech is trying to find that balance.

Like I try to keep the spirit of the 60s alive. So I'm just gonna jump dance. I'm not paying anything. Okay, we'll leave it there today.

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In today’s episode, we want to talk about brands. Are brands still as important in 2022 as they were maybe back in the 20th century?

Notes on the time-stamped show:

[00:00] Introduction

[02:05] Building a brand is associated with your value management system, and it is a continuous process.

[04:28] How is your brand connected to your pricing, value management system, and customers?

[08:34] Market preferences change. And you must be willing to adapt and make your brand always relevant. How?

[15:13] Your brand should always be aligned with your customers if you want to remain attractive. To accomplish this, avoid having arrogant beliefs about oneself and be open to feedback.

_____________________________

How Can You Increase the Value of Your Brands in an Evolving Market? I think there’s not a clear-cut answer about it. A lot of these brands used to have a lot of loyalty. People will just buy brands, snacks and beverages. People would buy without question. But over the years, could be due to changing consumer preferences, people buying from different channels, stores vs. online. These brands are less powerful in a way. But what’s happening in retail, I’m sort of seeing the reverse. Like big sports brands moving away from distributor type stores, just expanding their brands. Focusing on themselves, rather than putting themselves in contact with other brands. “We’re strong enough on our own to have our own store. We’re confident enough that people would come.” Maybe that is due to provenance heritage. They’ve got a reputation for being the best. Which may be the retail don’t.

I think maybe a brand is, it is your value management. It takes a lifetime to build a brand, they say, and you can destroy it in an afternoon. I think you’re building your value management system. What is the company that you’re doing? What do you sell? And as we’ve said many times in this podcast, that’s a work in progress. It’s never set and forgotten. You never reach value-based pricing. It’s always a constant journey. It’s the same thing with a brand. Clearly, you build a brand this year. Ten years later, the wind may be changing. You look at the oil. You need to reinvest and posh into electric cars. It’s a constant evolution.

The minute you feel that customer value changes, the minute you do your value exploration. You find what your customers value this year, next year, the world has changed. What’s happened in the last six months? Inflation’s bad. There’s a war. We’ve got Covid residing. We’ve got many things happening that people wouldn’t have forecasted. Things change and move.

You see, in a short period of time, a new entrance becomes an old hut. What seems fresh and new, maybe it’s not gonna last the test of time. You look at Netflix… I even saw in the papers this week, Underarmour. You know, a clothing brand that was usurping Reebok and Nike. They’re probably getting profit downgrades this year when they’re losing popularity. It’s a constant evolution. Will brands last forever? I think the answer there in nearly all cases is no.

I think the interesting point of saying, you know, you’ve got a brand. What is a brand? What is a value management system if it’s not attached to customers? An understanding of the value chain? I don’t think you can think of a value management system in any other regard because that would become as abstract as a brand, if not associated with the person that’s buying.

I think this is where a lot of companies have gone astray with branding. And a brand is associated with pricing and pricing power through branding. They’ve forgotten the source, the reference point which is the customer. Often what the customer values are very different from what the company values, or thinks what’s the most valuable about the business. Aidan, you mentioned oil there.

For many years, the value management in oils and fuels was based on their supply chain. How smart the supply chain, the engineering, and the procurement was? Not necessarily about why people bought the fuel in the first place. This goes right from the B2B to the B2C perspective. It was always based on the fuel company’s perspective of value. And how really clever they were in engineering the oil. But over the years, you see these massive changes in how people buy and what they value.

Fossil fuels, they don’t want anymore. It’s considered unsustainable, for humanity, for the earth. Now they’re moving to electric cars. And we see petrol brands trying to associate their brand with more electric cars, and cleaner energy over time. I’ve read that they’re putting battery recharging in every petrol station. So, some connotations with a brand, and some are trying to make their brand more sustainable.

But I think, that’s my point on the value management system. It’s very important to connect it and the brands with customers. And the customer changes, how they buy. We can see from the new generation, that they’re very addicted to TikTok. They go through brands by the day, depending on what the influencer says is a powerful brand. A brand emerges, becomes very successful, and is gone overnight. So maybe there are different, you have to think about brands, depending on different ages, groups, as well as value drivers, and behaviours. Segmentation, my point here, is very key with a brand.

You know, I think brands, what people associate it with. It comes with values. Oftentimes, the people that run the company might want it to be something different than what customers see and what they do value. You look at McDonald’s, probably the most famous brand in the world. What does that brand really mean? Means you know what you’re gonna get. You know it’s gonna be fast. You know they have a clean toilet. Is that what the company wants to promote?

I think we’re all aware now, of what they’re saying, “Go woke,” or “Get woke or broke.” Where these major brands, Gillette’s an example, have gone for, almost chasing the new, even though they’ve been around for a hundred years or more. They’re known globally. But they go chasing these new hip and fresh. And some people rebel against that and push back.

There is the old concept of, when you build this brand and cater to a certain audience, that audience may not seem to be the vanguard but to be a vanguard, you have to be smaller. Maybe you’re gonna burn your existing customer base. And if you’ve got something in a life cycle, it’s tricky. But people try to be something to everyone. I don’t know if that’s always possible without sub-brands and different stuff. You get into very complex areas.

Just another point I’ll make, you could build the best business in the world and with just a period of a couple of years, the market could change. The example, I’d give is cosmetics and those sorts of personal products. I’d argue, that 50 or 60 years ago, most people use soap and water. And maybe perfume of you have more wealth. Then it moved into the post-war era, the wonders of chemistry, the better living through science… people started using mass-produced products. All these sorts of stuff. And now what we’ve seen is the best thing in the world. The whole trend is moving in the opposite direction. Back to freshness, cleanliness, simplicity.

Lack of chemical compounds, you’re almost back with soap and water. And that’s what we’ve seen as the most progressive and advanced things. You know, you build a brand, and you think of all these Palmolive, these sort of companies whose brands and portfolios were worth billions. But now, are they worth billions? Will they be worth billions ten years down the line? It’s debatable.

I’ve seen some big companies who almost create more brands because they know that the younger generations love brands. So even in B2B, they think, “Okay, my answer to decreasing sales is to create more brands because we will attract more people.” But having brands and them being good brands, and very different people, they want the product to perform. As we go, we’ve said before that based on the value management system, which has to be in itself, in some way, associated with a performance history, reliability, all that sorts of risks, in a way proven to actually solve customer’s problems. And it can do it well.

That is the heritage. The problems behind the brands. I’ve also seen the opposite happen where you have companies that don’t want to create any new brands that could really drive the market and appeal to changing consumer taste and stay with the traditional brand because simply that was a cash cow. They thought, “You know what, this sugary drink, is the best thing and we didn’t really have to move quickly with the market. As a consequence, they lost huge amounts of market share to up and coming entrance that are into more healthy beverages. Simply because of the thought that the brand was strong enough on its own and they didn’t need to move.

But those powerhouse brands are also suffering at the moment. So either end of that spectrum, you really can’t just rest or take an easy option here. You can’t just create brands because you know, we’re a brand-driven world now. Create brands that are real, based on values, and service history. You can’t have an arrogant opinion about who you are. You can’t just leave brands. You’ve got to actually know when to kill them off quickly and when to change. Sometimes just because you want to lead the market with a traditional or a new brand, doesn’t mean it’s going to happen. You’ve got to almost take the feedback response and do something with it.

You can’t just set and forget if the market doesn’t respond how you wanted them to, what do you do with them? You don’t always necessarily kill it off but you have to make a decision. You’ve got to start tracking and monitoring your brands, just as close as you would do with your sales or your prices.

You know, Joanna mentioned soft drinks there. One thing I think is interesting is Coca-Cola and also Pepsi. They’ve invented new products, you know, Coke Zero, which I think is branded as Coke without sugar. Slightly different colouring, but it’s still called Coke. I think it’s smart because it’s transitioning to a new sector. Just one thing I’d also add, Dr Marten’s boots have been basically, the exact the same product, I don’t know how long, but it seems 50 or 60 years… those black boots with a yellow sort of trim on the edge.

But they’re seen as edgy, counterculture, up and coming, and youthful. They seem to have that aspect as if they’re permanently growing on the outside. It is really unbelievable for a company to be doing that when you consider that our parents wore, our grandparents probably wore them also. I think when the kids are wearing them, they’re probably feeling the same way that people did 30 years ago, which is very impressive branding. Never really going fully mainstream but always been slightly on the way out. On the outside looking in. I suppose what a lot of brands want to accomplish while still being profitable. I don’t know if it had so much to do with what we’re discussing but I find it interesting.

Yeah, I think it does. It’s brand alignment. Alignment to your customers, knowing the context. Not just putting a brand out there and just either innocently or arrogantly assuming, it’s going to be a winner. Sometimes it’s not always a winner. Sometimes you’ve got to objectively observe your brands and the market just to see if you’ve got that alignment. Those that do it authentically, not afraid to take the negative feedback from the market, are going to be the winners. You just have to adapt quickly and then over time, you’ll get there. You’ve also had to have a performance history.

And Dr Martens, they haven’t let generations down. People felt cool and parents probably handed on Dr Martens which seems to last forever. They’ve got reliability there as well. But beyond the actual product itself, it’s got that counterculture feel and it does it very well. Anyway, thanks for listening. I hope you enjoyed that podcast and feel free to get in touch with us with any questions you have. Thank you.

Thanks. Have a great weekend. Bye.

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So in today's episode, we want to talk about, the concept of building an ecosystem, thinking about how it can benefit your business, and if you can sell it that way. Notes on the time-stamped show:

[00:00] Introduction

[01:24] How pricing can be utilised to build new and stickier business models that customers find difficult to leave.

[04:53] Business models, such as espresso and Apple, emphasising how they created an ecosystem wherein everything the customers need is offered, boosting profitability.

[08:18] How different it is to build ecosystems in B2B settings, and how can they do it.

[12:20] How to build an ecosystem and create barriers against competitors without your customers realising it.

[15:44] Joanna highlights the need of striking a balance between customer value, manufacturing, and product innovation, for a successful business transformation.

Hello and welcome to another edition of Pricing College, with your hosts, Aodhan Campbell and Joanna Wells

Someone told me last week that I'm known as the cool teacher of Pricing College, so thank you very much for that. I actually made that up. So in today's episode, we want to talk about, the concept of building an ecosystem, thinking about how it can benefit your business, and if you can sell it that way. So what is an ecosystem? In theory, it's building a system that basically increases the chances that you will sell things to people. Whether that is the classic selling of a printing machine, and then printing, you know cartridges or an espresso machine. Then locking in, that you have to sell them on espresso pods. So that's a concept that we will discuss today.

When I think about this concept, I describe it as a sale system, something we can sell more of to customers. But actually, beneath that, an ecosystem is a whole business model change. But before we get on to that, what I'm particularly interested in was how pricing can be used to make a new business model and sales model stickier, not more difficult for customers to get out of but also more valuable to customers so they wouldn't want to get out of this new system that you've built. And thinking about that, you've mentioned espresso... these people love espresso. It's a great business model and it's a new one. When you think about where espresso came from, so Nescafe and all that was built on the dry roasted coffee empire. But obviously, the business model was declining for years. People wanted fresher coffee, but they also wanted the convenience of that coffee at home but they didn't want to compromise on taste. So, espresso was launched. It really did disrupt the market in a good way and gave customers what they wanted. The key about the pricing: the actual machine itself was priced considerably below the alternative. Now the alternative was those, remember all those fancy, we have to grind down coffee beans, etcetera.

Now, they were priced considerably higher on a per unit basis compared to the espresso. But the thing that really locked customers into espresso wasn't the machine. This was the genius behind the idea of the time. It was the pods that at a unit level were priced comparatively high. So as a customer, "Wow what a great business model. It's new, it's great. Attractive pods, interesting. Actually, the machine is pretty cheap. Yeah, get that." Not really thinking of the total cost of getting that machine when you think of all those pods that you use over a year. Some people in Australia drink two or three mega coffees, double or triple espressos a day. And you know, that's a highly profitable part of the business. So, the less profitable part of the business was the machine. They disrupted that market. They thought that compromised on profit on that. Because people will buy more of the pod. And obviously, they have to provide the value with the taste. Anyway, that's a concept where you can reinforce a new business model change with pricing, and use pricing as a way to make that business model sticky so customers will find it difficult to leave.

What I really like about it, you’ll also see it another example, which is Apple. In espresso, it doesn't integrate with other pods or other systems. In reality, it's quite limited which can be seen as a problem. In reality, that problem is the real design genius whereby, in your kitchen, you got one system, you're probably unlikely to change, and you're probably unlike to invest in a second system. It's some sort of aspect whereby you're designing it, you're thinking about the long-term.

The only thing I like about the ecosystem of espresso, and this could be applied to all the businesses, Apple's another example is that it really tries to build this higher value community, versus other coffees. They have this sort of image of George Clooney, the actor, this glamorous individual that promotes espresso and gives it an aspirational aspect. You have them in espresso stores, and shopping centres, whereby you can only buy this one brand, which is very unusual when you think about it. We're used to supermarkets where you can buy everything. So it's an unusual approach but it builds the atmosphere.

The other example I'll give is Apple, whereby they almost built a system that prevents other things from getting into it; whereby even the plugs are different, their operating systems are different. It builds a real community feeling. It builds a really close system that massively boosted the profits over time because they sell everything to you. Once you get on the door, once you got your MacBook, iMac or whatever you call it, they own you. And even small things, when they share a text message with an apple phone, it comes in a different way, and you can see when it's read, and stuff like that. And the people who have Apple phones didn't like receiving texts from Samsung or Android users. So it's almost strange peripheral things that reinforced that ecosystem.

I just want to go back to that point you made. It's really a good point about this particular model. The union of systems seems like an instant hit. But obviously, you're taking smaller chunks or you have to transform your business model to become that new model. Because espresso... you know why they had to use a brand to sort of make some noise in a busy market, and it worked well for them... but I'm thinking for B2B, it quite a difficult play. It doesn't happen overnight. I think a lot of B2B businesses are making the sale now to hit the target because there are so many margin pressures at the moment, especially with inflation, and supply issues.

This sort of conversation is nice to have. "Do we have time to change our business?" But that's short-time thinking. Too many CEOs have thought that in the past leading to the problems that we have now. I think mining, manufacturing, and a lot of industrial companies have a lot of untapped profit potential and aftermarket and afterparts servicing that they didn't explore. Because it didn't look, it didn't have the most revenue. It wasn't analysed in terms of growth rate, so it didn't seem the most profitable. But it's always been there as something that should have been nurtured over time. Some companies have grasped that and invested in it to make the wholesale business model transformation to this type of market.

Even in B2B, I'm thinking of Kaeser who does like air compressor engines. They were, "We can sell engines because that's what our customers are used to or we can try to sell them in an ecosystem, the after-service parts, the ongoing services, the machine learning and data so we can optimise the machine." It worked very well for them. But it didn't happen overnight because obviously customers were used to buying the whole engine themselves. They had to disrupt the buying process as well and that took time, took marketing effort, new pricing model. In terms of pricing, they had to show their customers what the total cost of buying that engine was, not just the unit cost which was very expensive. But over time, if they buy the whole engine, they'd have to service it themselves, the maintenance, the downtime, etcetera. The biggest cost is energy to the customer. 300-400% more expensive than the maintenance cost, 5-10 years after the purchase, that's the average a compressor engine lasted. Here we've got two difficult challenges.

How do you change your business model? And how do you change your market, your customer's perception about your products and make them buy differently, so it becomes more profitable? It requires investment and people to think strategically. People consider this the long play. Often it's the thing that's gonna save your business now. Thinking about profitable opportunities and how you can balance them with your BAU processes, which could be on the decline.

I think there's probably a bigger topic that we'll come back to and dig into more specific examples. But I suppose in any business, the first thing to think is, "What are you really selling? What is the best way of charging for it? Are you selling the printer or are you selling the cartridges?" It's that sort of mentality. And then you start looking at potential buyers from the competition and trying to increase those really—trying to make sure that those barriers are as high as possible potentially without the customer knowing. That could be getting something into their hand, getting a capital asset bot. It could be a cost leader, it could be selling below cost, or it could be providing a capital asset to them. Once you have one, you get it there. It could be providing an app to them, an example is Uber. Once get that app, get used to using it, and you're probably gonna stay on that app. You're probably not going to go back to booking a taxi. I think it's really trying to work out how you can increase those barriers to a third party, to someone shopping and using other stuff without them being aware. I think warranties and guarantees are very useful.

The classic car manufacturing is, you get the car, it's got warranty, as long as it uses official Toyota, or whoever it is, parts. Which really locks you into that ecosystem. It locks you to go back to the dealership. Once you're back, you're more likely to buy a car, I assume when you've seen new models. If you can get your hands on those barriers without them [customers] being aware of it... this could be as simple as free delivery. No set-up costs, no onboarding costs. Make those aspects as easy as possible. Get your foot on the door and potentially, it's hard to get you out of the door. I think this topic is very large. We can dig into it business by business in the future if people are interested.

I know our clients are talking more about this, we need to cash flows now in light of the considerable margin pressures, and inflation that we're facing but at the same time we know we need to be different. But how? What are the steps to take in terms of business strategy? How do I think differently about customers? Cause remember, a lot of B2B, and naturally, operations on manufacturing focused, it's very hard to get out of that mindset if your whole legacy has been built around day to day operations making a product. As opposed to generating value for your customers, it's a very different mindset. And often the very people that are in those positions are struggling. The good ones recognise that and want to change. But that's not disregarding the manufacturing, absolutely not. But there's a balance between customer value, manufacturing, and product innovation. They should always be that competing force. From there, that's how you gradually transform your business—weighing up those three competing pressures in line with your business. As Aodhan said, it's a huge topic, something a lot of our clients are talking about. It's on their mind but making money is also on their mind. To cover the bills, to keep going. So feel free to get in touch with us if any of these has struck a chord, very happy to speak with you more about it. Thanks for listening.

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In today’s episode, we discussed what are the pitfalls of seeking a pricing tool to run B2B pricing.

Notes on the time-stamped show:

[00:00] Introduction

[01:06] Joanna argues that without a great pricing framework and architecture, businesses cannot expect optimal outcomes from automation.

[03:31] The field of pricing have two approaches to technology. The first is revenue management systems, and the second is optimisation systems.

[07:13] What processes do you need to set up in order to make the most out of these tools?

[12:03] Aodhan talks about how important building a good value management system is before businesses can employ the appropriate computer systems.

[13:58] Category management and pricing teams should work together to properly quantify value.

At Taylor Wells, one question we get asked quite frequently, I suppose because we focus on the B2B and the B2C sectors, is what computer system, which IT system, which new fangled new technological approach will do the job for us, will really encapsulate our pricing strategy, and what should we implement. To some extent, the answer is not often what people want to hear. People, I think noticed in 2022, believe that machines can and should do most things for us, we're used to typing and google and then coming up with the answer. But, I think, when it comes to B2B, B2C pricing, tools have a real role but they will not replace the human touch.

Yeah. To put it simply, I think a lot of pricing systems they're great, if you got a great framework and architecture in place already, then you can automate that. But often, what they do is automate what you've got so if you look at it in the negative, you've got broken poor systems, you've got no price structure, you're discount levels are incorrect or you don't have any, you've got discretionary pricing, there are no price controls. Then really what's the point of getting a high powered pricing system to automate that, what you're just going to get is raw automated junk in the machine calculating incorrect and often cost-plus pricing very quickly. So, in a way, what happens next, what people do often is well they stood by that there is a system, a silver bullet to correct what is fundamentally a broken architecture. And often if you got a broken architecture, it's misaligned with a business module and operations. This and in a way indicates that there are some business strategy changes and operational changes that need to occur as well. But regardless, what happens is that maybe a senior executive, the CEO buys this new pricing system hoping that it is the silver bullet to correct everything, may misunderstand the initial sales pitch from the vendor of that machine. What happens then is the vendor comes in, plugs it together, they call it integration with your other systems, like your ERP. And they find that, yes, lo and behold the pricing architecture is broken too. So they work with the business strategy trying to correct that. But often, that leads to a very long drawn up process and very costly process for the business as these vendors are very expensive and end up staying there for many years and not really fixing the actual problem, and just automating it, fundamentally. Aodhan, what do you think?

I love the trends. I read an article once that humanity has not really moved on since the 1950s, nearly all the technologies that we have were existing in some format at that point. You know, jet airlines, motor cars, all that sort of stuff, antibiotics to a large extent. And all we've had really is computers and electronics in the last 20/30 years which have grown infinitely more powerful than they were even in the mid-80s. But the negative of this is that we've become so focused on big data, data analytics, statistical analysis, and the big data that the internet has given rise to. So if we look at the pricing world, we have two real approaches to technology in that aspect--in computer programs, we have really the revenue managements systems which are implemented in airlines and capacity-constrained businesses, such as hotels, tourism, cars. We've seen them try to be implemented in tool hiring less successfully. And then on the other end, you have what I would regard as growth from A/B testing, almost like a website optimisation system based on pricing such as Price Intelligently. There are two things both of these have in common. They have the ability to measure people coming to something and then the historical results of what happens. So you can show them a different pricing presentation, everything else is equal. Statistically then, you can draw conclusions as to prices that will optimise sales, decrease sales, etcetera. That's in the Price Intelligently on that aspect and then on the revenue management side, you know you're selling x number of seats, historically know on a Monday, x number of people, statistically will look at this category and then you can optimise the sales with statistical variants with the risk weighting, etcetera. You can be quite confident in that. What I would say, is that some big numbers when you have statistically valid samples. But when you're in a B2B environment, you're quoting, you're doing rendering, you're probably aren't into statistically valid numbers of things. The example I'd give is, you look at an auction business, you know you're selling a painting but you're not using a revenue management system to sell it and the reason is there are no statistically valid numbers behind that. And so in B2B and B2C pricing, when there's not so long line, it becomes more difficult. You will probably see it in a civil market where there's large footfall, where people are using cards, etcetera to come into the shop. You know what they're buying, you could measure aspects in that regard. There's that grey area where there is room for these optimisation techniques certainly. But when we're looking at more, for traditional B2B, you might be only working with 5 or 6 customers, you don't really know how many people are looking at you, you're not capturing the data as to how many people have asked about your pricing. In that instance, it's extremely difficult and you just aren't capturing the information to feed it into a system to be able to really use those for there to be authorisation approach or the revenue management optimisation either.

That's true and that's what I was referring to in terms of often that's a broken pricing architecture just because it doesn't happen in B2B very often doesn't mean it shouldn't happen. I agree with you in a sense, to make the most out of these tools, you have to set up these processes, measurements, and tracking prior to buying the actual to all make it worthwhile. But often, that particular piece of work is left because businesses in B2B believe that if they just buy the system then that will correct everything else. But it doesn't. So again, I agree with you in the sense that, the pricing system is very effective at doing good pricing analysis. It calculates accurately. However, what it doesn't do and what you need to do before buying this system is set up the business rules and parameters, the conditions and the scenarios that you want to test. And then use those analytics, so set up the ratios, the measurements, the tracking tools. This is all, I call a price architecture. And this really does take two years to do. Get that piece of work done before you buy the system. And if there's one thing that you should take away from this, is that don't go to the system first because it doesn't build your architecture. It doesn't give you the learning that you think it will right away. What they will say is, you need that all set up in the first place, you need the tracking tools, you need your ratios, you need your quote to book, how much of your revenue is contracted versus uncontracted, how many of your products are specific to customers--there's one to one pricing, how much of your revenue is uncontracted, so you have many price points in customers. Because then you'll have different ratios, and different trackings, so you'll know how to optimise different types of revenue groups. If you've got those answers and those things set up, yes automate but don't do it before because you really won't get the answers, just gobbled nonsense.

"If you can't measure you can't approve it." It's a famous mantra from some management gurus. But what I'd say is the closer your business is to commoditisation, the more likely you can capture statistically valid information, measurements, quotes to book, all those metrics that we discussed. You know when you're setting large numbers of products, this is just my viewpoint but when you get into more bespoke stuff, when you're probably dealing with fewer customers, potentially you have fewer competitors in the market, you're value adds or maybe less more to your business, whatever they could be. I personally think that the opportunity for the value of a good sales team in that instance, a good marketing team, a good pricing team, and the human element is more important. Even if you capture all that information, you go through that process, the information you capture in the past, if you're business is constantly evolving, constantly delivering new stuff, the product you give this year different to what you give last year. If the market has changed, and your product has improved, is the information from last year statistically valid? If we're talking about revenue management and the airline, you know flight into Chicago, from New York, for 9 o'clock on a Monday, excluding Covid of course, clearly, there are historical precedences that make sense. But if your product is different, if it has really changed, if it's new, in those instances, the statistical aspects offered decrease. I think a lot of it will come down to your valued management system, how you articulate that to your customers, and your ability to build a sort of network of facts. You'll get it into real complexity, and the more complex things get, it's much harder to put them into a cookie-cutter style system. So you need to be careful. What I would almost say, if you're focusing on being very driven by a system, you should build your value management to suit the system, rather than, which is what Joanna talked about, building your computer system to suit your value management system and strategy. Because the more complex and better your value management strategy is, potentially, the less likely an all-consuming computer system will suit you. Tools are really useful in small aspects from mechanising and automating stuff that humans are probably not best suited to do, to boring, monotonous work that could be done quickly. You know quoting, emailing, CRM systems. But sometimes we can lose track of what really important here.

Yeah, it reminds me of the client I'm working on at the moment. I'm working very closely with the category team to understand at the skew level the value of their product failure, and that really for the pricing people, they are looking pretty much at the attributes of the product. That's the first step, the second step looking at the value of those attributes in the eyes of the customers. That's a different type of cognition that a computer can never really capture and when you look at pricing systems, they just stop at that statistical analysis. They don't go into this cognition that I'm talking about. That real value-based perception and willingness to pay because it just simply can't. AI learns but it doesn't learn like and I have not to date seen a system that thinks in that way. So this is the value of having a great category management team working alongside pricing cause only together can you really unlock and quantify what value is. First, you've got to define it and then the pricing manager works then quantify that. And quantifying is a testing process. You start with your hypothesis, once you've unlocked the value and you've laid it out. But then you've gotta test it in a market and you have to look at price response and actual feedback from the customer. Again, different types of feedback, not just price response sensitivity, and elasticities, we're looking at the why as well as the what. So this is why a lot of AI just, can't do that sort of stuff for B2B businesses. But there are parts of B2B businesses, you know in terms of automating quoting tools but again, a quoting tool for B2B needs to be thought through first by people to make sure that it fits in with the business strategy. Okay, I think that's all I have to say but if you have any questions for either of us please feel free to reach out. I'm more happy to talk to you about that.

Yeah, listening to this podcast today, makes me feel like a lot from the industrial revolution so this weekend I'll be heading out with a baseball bat to smash up computers and machines. Join me if you feel free. Have a great weekend.

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In today's episode, we want to do, I suppose a little bit of value discovery, which is a topic we discuss when we get into value-based pricing and what you can charge more for. What is the value-added to your business? Often you hear we are Australian owned, we are Australian based Australian owned and managed. And the question is, is being Australian owned, is being an Australian company of value. And of course, this can be different for whichever country you're listening to. What is being a domestic manufacturer or company is seen as a plus by your customers? Why would a potentially be seen as such? And how can you maximize the value you get from that?

TIME-STAMPED SHOW NOTES:

[00:00] Introduction

[01:10]Customer psychological impact on buying local products

[03:27] Global Supply Chain

[06:13] Customer patriotism

[09:17] D globalization era

I think over the years we've heard a lot more about Australian owned, Australian made and you can even see in clothes labels when we all know quite rightly that a lot of things are now produced offshore like in China. But now people are saying you know even designed in Australia, designed in the US because there is still some kind of pull in the customers' mind. There's some psychological impact of going buying from your own country. Now, there's one reason there, some emotional attachment makes sense. But in terms of more modern-day recent changes economically predominantly pushed by COVID. We've seen you know that Australian-made becoming more predominant as a result of supply chain shortages. So for instance, in b2b manufacturing, customers have been more willing to pay for locally produced products based on the supply chain because they could get what they needed quicker. Not having to wait. That was at the beginning of COVID. But as COVID went on, you know two years later, what we've seen now is there's been a dramatic shortage in supplies. So even though things are made locally, if you can't get the raw ingredients to make things so there's been and also labour shortages. So even though you are or have an Australian made base, manufacturing base, so you've got things set up here. Things can't be produced. So now people thinking actually do you know what? Maybe the Australian made isn't good the local isn't a good factor. We're not getting what we need right now. So probably more willing to pay for overseas goods because they're coming quicker to us. So I think you know, there are trends and flows with Australia made there's an emotional connection which I mentioned before, and then there's that more technical supply chain need, you know, there's a risk. I need that stuff now. And I'm willing to pay for it, but it's just not there.

I suppose on that point. It is a global supply chain. Now, I guess and we've really seen the pros of that in recent years with prices dropping, and China coming on stream as a major manufacturing powerhouse, really, in the last 30 years. Obviously then with COVID With all these different things we've seen, you know, the shortcomings of that as well. Are we ever going to be able to unwind that and purely domestic focus manufacturing without importation? I don't think so. I think we can always be pretty sure that there will be these issues, you know, in my mind it comes down. I suppose this conversation is a little bit focused on manufacturing. You know, obviously, services are slightly different but in manufacturing my view is there are two questions. Do you think there's a patriotism aspect, you know, do you value buying it from that country because there are ancillary benefits such as employment such as, you know, helping your own country develop your own city, seeing people employed seeing the spillover effects, such as you know, in Australia, we saw when the car companies shut down, Toyota, Ford and Holden, when they left even in recent years, it wasn't just the manufacturing jobs were to spill over into parts into you know, all that stuff. That also went so there's this huge ancillary benefits of negatives that have to be considered. So I suppose that's question one is, is patriotism, really a value? But I also think the second thing certainly in manufacturing is the country that's making it is that seen as a plus? You know, if you look at chocolates, often you'll see chocolates, advertises, Belgian chocolates are Swiss chocolates. If you go into any shop to buy electric appliances, and we covered this in a recent podcast, electrical appliances, you know, Japanese stuff or German manufacturing is really sold as a plus. German manufactured is seen as high tech reliable, all this stuff. You buy a car, certainly, Japanese cars are seen traditionally as being very reliable, and a real plus. You know, I asked the question are all countries have seen in the same way and what the United States manufacture car to be seen in the same way and we've driven us made cars in the past, to be honest, some of them were not the most reliable. There's also an argument that the British car industry failed significantly in the 70s due to unreliability to the point where paying for a foreign car was seen as more reliable. So it's, you know, as far as the equation is it actually a plus and does your country is your Do you excel in that area? Or do you need to do a bit more advertising and push it? And if you're just relying on patriotism, you might be in for a bit of trouble?

On the point of patriotism, I was actually reading some research on that and according to a leading consultancy group, there was quite overwhelming evidence that younger generations are much more we are willing to pay more for goods based on patriotism and the predominant driver there was you know, bringing prosperity and jobs back to the local community. So that seemed to hold true in certain segments of generation age-based, not for the older generations, but more for the younger. What so on the second point, I suppose it's kind of a depressing point. When when you think about the great manufacturing, based that, you know, you mentioned, the UK, it once had the industrial revolutions and then over the centuries, we've seen just a massive decline in production they literally don't produce very much anymore turned into a services-led business. Apparently, a research-led country is equally thinking about Australia. The manufacturing here is very minimal indeed. So does it have a reputation globally for being the best at manufacturing? Anything? No. But what we hear is it's got a reputation for research. Again, look, I suppose if we think about it in that way. It's almost like the elephant in the room. We all know that a lot of art. We've outsourced a lot of manufacturing overseas. And, you know, now we're paying the price and politically we're seeing Scott Morrison trying to reinvest in manufacturing. Infrastructure and industry in Australia, but to a certain degree, it takes a lot of investment and a lot of time to build that infrastructure and get the labour and the assets set up. The business model is set up with new ways of buying new consumer preferences, things are changing. And hopefully, it's not going to be too little too late. But yeah, look, it's ultimately it's a simple question. Are people willing to pay for it? But as you can see underneath, there's quite a few serious, you know, economic, political, and business model challenges that you've got to think through. When you're determining what people are willing to pay for that, you know, Australia made us made. It's not easy.

Yeah, look, I suppose from Ireland, and when we are kids, guaranteed Irish was a brand that was a logo that was put on very large, a huge number of manufactured products, certainly in the 1880s when the Irish economy was in the doldrums, and that was, did people prefer buying Irish items? I think they probably did prefer them. I think they probably did. The more is that as appropriate in somewhere like Australia today? Will people actually pay more? I don't know if they'll pay more, to be honest. I'm not sure if they would. But it's again, it just depends on the customer but depends on the business you have. But I think it's really worth exploring. And certainly, I think at the beginning of the conversation Joanna mentioned, designed in Australia, to me I see that as a classically that's a negative. It sort of annoys me you know, because you're almost just announcing that you're outsourcing to a cheaper manufacturer and outsourcing the jobs to some extent I don't think that's really positive in my mind. Yeah, that's personal for me, and you know, that just annoys me. But I think, I think as time goes on, I think are we going into an era of D globalization are moving away from globalization. People are saying and the press potentially we are potentially people are more focused on jobs on the domestic manufacturing base, probably also in countries like China, and Australia that had a booming economy for a very long time. I think people have forgotten about the importance of domestic stuff. I think they've lost sight of it. I think that we thought that we were always in this upward tide, that would never stop and we just get wealthier and wealthier. And you know what, maybe with the whole, you know, Ukraine war and COVID and all these things. Maybe that's not the case. Also, obviously, you know, domestic manufacturing is better for the environment, which is debatable, obviously, because, you know, you have to factor in carbon emissions and transport and stuff like that. But oftentimes, there are pros and cons and I think we maybe need to go back and re-examine some of these and some of the value drivers that five years ago may have changed. Yeah, I

was thinking the same. I was thinking, you know, maybe globalization and globalized supply chain were based on the premise of harmony where, you know, countries were all harmonious and all agreed on and then alignment together. But then, what really challenged that, you know, the underlying assumption of harmony, I suppose, was that was COVID. Firstly, and then, you know, it just showed put a massive spotlight on how chaotic the supply chain actually is. What we thought was all systematic and aligned a global supply chain optimized with absolutely just quite a shambles, just ad hoc systems undocumented processes. It was literally held together by a few good people just pulling stuff together outside their roles in businesses like from the warehouse, floor distribution warehouses right through to head office, and that's just on a business level. But this was happening globally. So it really just showed that you know, the gaps in this idea of globalized and optimized supply chain and then and then obviously, with the wall, you know, that we actually can't all live in harmony. Even though we want to, maybe other countries have had a different idea, and I have a different vision for what the world may look like, and I think that's really brought to the home and potentially in a good way through this risk of you know, war and chaotic supply and demand. That actually we've got to think we've got to be independent to some degree and we've got to balance our supply locally and internationally to ensure you know, the safety and the well being of the people that are living in those countries. That doesn't say that you don't trade with other countries. Absolutely not. But there has to be more balance. There has to be a balanced I think we went pushed it a little bit too far on the global side. And now and now we're rethinking things in a realistic way. I just as I said before, I just hope it's not too little too late.

Yeah, I think that's, that's it for me. Really, I've not much more to add to it. So yeah, have a great weekend.

Thanks a lot. Bye.

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This is the last episode before the Easter school holidays in Australia. So, pricing college is not out for the summer. It's not out. We continue with our podcasts as we know how vitally important it is for you to get your pricing info. In today's episode, we want to cover the press recently, and anybody involved in B2B and B2C will be looking at surcharges, fuel surcharges, and different surcharges. Basically, covering and trying to protect people from the rampant inflation that we're seeing. Particularly petrol, fuel, electricity, all these aspects, with inflation hitting probably 7% to 10% in different countries. But I think in today's episode we want to discuss why it's not always a win-win with the surcharges. It's not always a one-way street. There are certain things you need to be aware of.

I've been saying this in terms of what Aidan was talking about. In terms of fuel, fuel fluctuates and businesses have to accommodate a lot of those costs now. To a large extent, for many years, they've just let them absorb those costs. But now it's become untenable with inflation to do that. So what's happening now is that businesses are pushing those costs down the value chain. Whether it's with B2B customers, or if it's B2C customers. In terms of fuel costs, that's quite significant for both. I suppose both of those sectors are But essentially, it's looking at an itemising price. So you've got a unit price, keeping that fairly steady. But then they add a surcharge on top of that price to accommodate that fluctuating cost, whether it's in fuel. Now, I think the bit about surcharging and pricing like that is that it really is an open book, sort of cost. You're really explaining to your customers and itemising your costs at a line item. You think you're sort of being smart by not really moving the price, unit price. But really, what you're doing is exposing yourself and really showing what margin you can make. Potentially, this could lead to a sort of more cherry-picking line item discussion or base back costs. And for me, it's a dangerous road to go down. Because then what you're discussing is your costs as opposed to the value you generate for your customers.

I think we completely understand why companies are adding surcharges. Why are they increasing prices? The first time I think I remember seeing this was on airline tickets a number of years ago, with the fuel charges, etc. But I think the point we want to hammer home is that it almost sounds like an easy way to push through price increases. We realise that you have to do it. But it's not really value-based pricing; you're distilling it down to cost-plus pricing. And with that, you're almost exaggerating the negative impacts. The example I'll give with this is when you focus on a cost and your portion of a bucket, and that bucket is one of the temporary fuel costs higher prices. There were a lot of issues, so the examples I’ll give now are in Australia. I think the Ukrainian war kicked off in late February. Oil prices went through the roof. They've almost doubled in a month and a half or whatever it is. And then we got a lot of letters, or you heard about a lot of letters people were receiving saying fuel charges would be implemented. I think some of these letters are placed on Mondays. Then, on Wednesday night, the Prime Minister appeared on TV, saying we're going to cut fuel tax by 20 cents. And already you're seeing petrol prices drop. I think they're down now in Sydney from $2.20 to $1.75. I saw yesterday that it was like 0.40 or 0.50 cents, a very significant decrease. If you're invoicing customers on a monthly basis in arrears, for example, which many B2B businesses do, How can you then justify that fuel surcharge? Are you going to implement it only for the first two weeks of the year or for the month first, and then for the second two months or two weeks, reduce it? And what happens if, fingers crossed, this terrible war in Ukraine gets wrapped up quickly and ends with peace again? What happens with prices dropping significantly in the drop below where oil prices were previously? Are you going to go there and actually lower your prices to customers? Because that's a very logical request from a customer. I know many businesses that received these letters, as soon as they saw the prime minister on TV, were like Well, hey, you know what, let's re-discuss this because it clearly makes no sense anymore. Another example I'll give is when you're trying these things to government policy. What you need to be aware of is that government policy can change. What is in them today, and what might be politically good news next week? We're coming up to a federal election in Australia. There could be a change of government. And one example I'll give is the carbon tax that came in. There was a carbon tax on many different aspects, but I can't even remember how long ago that was, 5, 6, or 7 years ago. But then a lot of companies pushed through price increases that included this surcharge based on the carbon tax. Then, of course, law and behold, the government reduced or removed the carbon tax, even retrospectively. So it did not even apply for the period it was supposed to. And what did that do? That created, as I know of one example, in the waste industry, a terrible accounting issue. Where companies were demanding, customers were demanding literal cashback. Some of the companies did not have that cash to pay. So when you really start charging, we are apportioning money against stuff that is becoming an accounting issue. And if that's what you're doing, you might even need to consider keeping money in escrow.

We're seeing that a lot with clients who have these sorts of rising and falling causes within their commercial terms and contracts. Because of their retrospective view of costs, and this is not just in regards to fuel or everything really. There are inadequate counting systems, IT platforms, and systems. They're actually a quarter, potentially more behind the curve, and implementing these rise and fall causes that are really irrelevant by the next quarter anyway. Then customers are just going, "Well, you're way too overpriced," or some customers are laughing and saying, "Look, we're getting this for nothing." And ultimately, what that means is that the business is significantly losing margin daily. Purely because they're focusing on these sorts of accountancy lead pricing mechanisms. And I suppose ultimately, there has to be a change, and we speak about this a lot on the program. You've got to make a significant change in how you view and measure value in terms of business dollar value and profit value. And your new commercial strategy to get out of this accounting lead, which is very operational in lead pricing and business model. Because they're both intertwined. Because your customers will certainly tell you that your pricing method isn't good enough for them. And they're now moving across to other suppliers who have more transparent pricing. I choose not to work with businesses like that because it's very difficult to do business with them and even at an invoicing level, everything is much more cumbersome and slow. When you're looking at your costs retrospectively, how do you invoice, especially when your customers are complaining? Then it becomes like an invoice by invoice change as your customers complain. It's untenable. So yeah, there are big changes happening in B2B. And unfortunately, that's driven by panic and global changes. Inflation and other negative changes are forcing people to think differently about how they price. But the upshot is that it's leading to opportunity, new ways of thinking. And we're seeing in Australia that people are progressively moving more to a value-based system. Unfortunately, what they've done is limited and is actually now hurting them in terms of margin exposure. But there are plenty of opportunities if you just reframe it and reset your commercial strategy to value.

What I would say is, on this podcast, if you're a regular listener, you're more than aware that cost-plus pricing might have some flaws. Fundamentally, surcharging is enhanced cost-plus pricing. So it basically has the same flaws that we've mentioned for normal cost-plus pricing. Perhaps even more distilled, perhaps even more exaggerated and focused. Because basically, you're shouting at somebody. Look at this cost. You're literally saying, "Look at this cost on the invoice." So realistically, what you're doing is exaggerating, enhancing the negative impact of cost-plus pricing. Obviously, it can be very useful if you need to increase pricing because it's a bit like the old one, which gives you a reasonable excuse. It gives you a justifiable, sensible, plausible reason to increase prices. It's a bit like the "I didn't do my homework because the dog ate my homework" sort of routine. It's providing a reason. Fundamentally, those reasons are not as good as actual value-based or more developed pricing approaches. So yeah, it's probably short-termism. Let's call it "short-termism." Obviously, it's better to have a tremendous surcharge than to go broke. We completely understand that. But just to point out, there are negatives, longer-term repercussions. And here's what I was saying: every cloud has a silver lining. Whatever the opposite of that is, every silver lining cloud has grown. Do you know what I mean? Okay, I'm going to leave it there.

I think we've covered a fair bit there. If you have anything that you'd like us to pick up on that topic, Feel free to reach out to us and we can delve deeper into it. And yeah, we look undefined to getting some more feedback from our listeners. So in the meantime, have a great week and we'll speak again next week. Thanks a lot for listening.

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In today's episode, we are going to discuss the importance of value-based pricing during inflation.

In today's episode, we are, I suppose, going to address the big elephant in the room, which is massive cost increases and massive inflation. On a scale, I think people thought we would never see it again. I read this morning that inflation is at a 30 year high. In some countries, it is somewhere between 6% and 12%. That was even before this entire Ukrainian War and petrol prices, fuel prices, and all that sort of stuff. So it is a massive cost increase. In today's episode, we want to say with cost increases why to a large extent, value-based pricing is more important than ever. If you are a cost-plus business, it may seem sensible at this point in time. But really, you are going to face even more problems than usual.

I think that's sort of right. I mean, in times of inflation, you need to understand the value of your product portfolio and the value of your business. How do customers perceive that value? How interested are they? Do they understand the value that they're offering? What's the level of education that's required to understand that value? Essentially, yes, value-based pricing is important. But what most companies do when there's mass inflation is gravitate to cost. Because they see commodity prices increasing, and they are naturally drawn to that. Because they believe if they capture accurately their cost situation, they'll be able to save margin erosion. But unfortunately, tracking costs isn't the solution. And again, you've got to do the hard work there in understanding value and going through that journey. It's a journey, and it's not going to be a quick fix. I think in a way, the problem is that when companies are leaking margin quite significantly during times of inflation, It's almost easier to do what they know. Capture costs rather than go through that journey to understand the value. But often, I think the problem is that once they start to understand or go down that path of understanding their value, They realise that due to the fixed focus on costs, cost-plus pricing and operational efficiency, the value that they offer has diminished over time. It can be quite intimidating for businesses to realise that, recently, all their investment has gone in the wrong areas. Product innovation is very limited product innovation. They've stagnated the value and innovation in the market. What does that mean in terms of their pricing power? Well, it limits their pricing power.

I think sometimes people look for-we've heard this term so many times-"a silver bullet". People are looking in life and in business, an easy solution to everything. Sometimes value-based pricing is sold as a silver bullet. I'll be honest. I think so many businesses, certainly B2B, but also B2C, are going to face tough price increase discussions with customers. Whether or not this week or next week, but certainly in the next couple of months. Because fundamentally, you can't absorb the cost increases we're seeing and keep costs flat. These conversations are going to be super tough no matter what pricing methodology you use. Because, like, fundamentally, certainly, if you're a cost-plus business and you focus on low cost and you have an articulated value to your customer base, they see you as low cost, and they see you as a commodity supplier, as well as cookie-cutter and all those sorts of things. In theory, when you come to them with a letter saying that from July 1st the price will increase by 15%, or whatever it is, that's a completely plausible number. At the end of the day, a very large number of these customers will go out and look at alternative suppliers. You will lose some revenue. You will lose some customers because we all know how things work. You’ll go out, you’ll shop around. You could potentially get a lower quote from somebody else. If they don't really value or understand the differences and think you're commoditised, they will get a lower quote. Whether that quote is realistic or sustainable, it doesn't really matter. A certain percentage of customers will go to this. And so the guy would say, in this environment of high inflation, we're going to see higher churn on a customer basis. We're going to see more customers shopping around. It tempts people to use the old bait and switch. A lot of competitors will offer you a low rate and then increase your prices later on. Because fundamentally, it's better to have you in the door than not to a large extent. But I think if you focus on value-based pricing over time, or at least move towards that, understanding or having a concept of your customer's real value drivers, you can discuss this with him, and work with them on that basis. Whether it's through key account management or whatever it is, I think you'll have a better chance of keeping customers. You have a better chance of minimising that churn. At least try to keep the conversation. What's the old saying? I think it's the CIA hostage negotiator thing. When the hostage-taker asks for something, it's always, "How can I do that?" How will I do that for you? It's that sort of conversation. It's like, of course, we all want prices to stay rock bottom. Everybody wants the price to stay flat. But if you can get to the next step, how will I do that for you? How would I minimise the cost? How will I increase your value? Getting that conversation started, I think, is a real step. If you're purely a commoditised player, purely cost-plus, you probably won't even get to the first part of that conversation.

I think another drawback of cost-plus during times of inflation is that you really see how both customers and organisation businesses basically don't segment their customer base. They treat all customers the same. We find this is certainly the case when companies utilise a cost-plus system. They think well that that's enough, we'll get enough margin doing that. They don't think about the differences between customers. And, they don't think about, how customers buy? Why do they buy from them? So in terms of inflation, what happens when you don't have customer segmentation? Well again, it’s knee jerk reaction. You think "Okay, I'm going to take as much business as possible. I'm not going to discriminate, we need more volume, we need more business in." But not necessarily thinking the supply. Do we have the raw materials to supply these customers? Are these customers ordering enough from us to warrant the margin? Is this business covering our costs? Often you'll find that the answer is no. Companies are accepting all types of business. Small accounts and the machinery the uptime and the setup costs are quite significant. Then they end up literally selling below cost. Not only would they do that in an environment that isn't experiencing rising costs. Not having the segmentation is critical to businesses but yet it's something that's not really considered.

I think like the old saying self-fulfilling prophecy. People and companies who focus on being the lowest cost, being the cheapest. Being the lowest cost in the market all that sort of stuff you're making a rock freeroll back to some extent. That's all great but then exchange rate movements, so many things are out of your control. So many things, who knows what it could be? It could be a truck breakdown, it could be a road, train system collapsing. Or it can be anything that can really disrupt international trade or access to commodities or whatever it is. That's a cost input to you. When you're selling yourself. When you're presenting yourself. And when you're negotiating purely based on the cost that is what you'll be seen as and that is where the discussion. It'll be harder for you to swap when the wind changes and you want to be discussing value, additional value, reasons why you have to increase prices. It's harder. In the past, if you've started to implement increasing value to customers. Understanding the segmentation as Joanna mentioned those systems. If you're starting to do those, integrate immediate cooperation, upscaling your sales team to do that. Those conversations will be and I'm talking about this is marginal. It's gonna be marginally easier. Hopefully, you will maintain that you will have a lower level of churn come with the price race goes through. You are still gonna have that because I suppose in inflation, people have always talked about how destabilising. This is the wider economy, inflation is destabilising. It undermines societies. A famous example is Germany of World War One, isn't it? Whereby it basically undermine the Weimar Republic or whatever it was called. It undermines people's ability to compare prices, to compare value, to compare offers. When you see that, obviously we're at a much lower level. We're talking 10% versus 1000s of percentage but it still has flow-on effects. It will impact, my predictions for this year it will lead to increased churn. It will lead to tougher and less pleasant discussions with customers. It will lead to potentially lower profitability in many B2B businesses. Because you probably won't be able to push through all the cost raises that you want to and you will be squeezed. There will be a squeeze in the middle. How long did this inflationary period last? Who knows? But I think it's the old saying that Warren Buffett, "when the water goes out, you see who's swimming naked". A lot of companies have been stripping out their sales team, stripping out that marketing, stripping out the expertise. They will be hurt the companies who have been putting more effort into articulating, increasing value, making better products, having better relationships with customers. You'd have to think there are no guarantees, but you'd have to think they would benefit.

Yeah, I think so. Because I think especially in B2B, your customers are experiencing the same type of pain as well. At the end of the day, they do understand the pressures that you're under, however, has to be communicated to them. And often we find that because businesses have stripped out all that sort of the growth functions in their business. Not all of that may potentially be 50% plus. They end up not communicating well with their customers. They don't give customers the communications that they need on price rises. Changes in the business model. Even exciting news about successes. New assets that are going to generate more value for customers. Literally, there's no communication. There's one thing that customers don't like, people don't like when there's a lack of communication. And there's a high need, they need that product. They need you to supply them on time. They need to know whether there are going to be long lead times. Then there's nothing. There's no explanation of why things are going wrong. There's no explanation about anything and then there's whack, there's a price rise. Because in your mind, Yes, you have to give the price rise to cover your costs to manage inflation. And, if only had you communicated that in time to your customers, they would have understood it too. But really all they've heard is a price rise, nothing else. So often you've got to really think about people's talent, pricing strategy, all at the same time. Unfortunately, there are a lot of problems in that it's hard to fix. It's not a quick fix solution. And as Aidan says, if you haven't made the time and investment in really setting up your business and business model properly. Then you're going to be exposed in the sorts of times and it doesn't matter. No matter how hard you try to cover that with cost tracking and new calculations on costs. That's not going to fix the problem. Because you may have covered your actual input prices, commodity prices that might have been covered in the new price increase. But you're still falling short because your go-to-market strategy is misaligned with the market. That could be the biggest margin erosion not rising commodity prices.

I think I leave it probably on a negative note. Nothing like a negative note before the weekend. Maybe it's just the weather in a bad mood. What I say is I think customers understand, everyone knows there is inflation customers understand. But it certainly if you're dealing with procurement and as we know procurement teams are becoming more and more short term they’ll becoming implementation and tactics versus strategy, as opposed to strategy longer-term stuff. And if you haven't built that longer-term value story, they will understand but fundamentally won't care. They will understand but they will take advantage of you and it's appealing to their best interest on their best hearts. I don't think it's really going to cut the mustard. So yeah, I forecast in more churn, it is going to be a bit of business pain. It's going to be tough. I think, yeah, it's going to be certainly tougher for the weaker companies with the weaker pricing strategies. But I suppose on the positive note, on that same fact, the better companies will benefit. As churn increases, they will keep more and probably win more. So you got to look at it in that way too, the swings roundabout.

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In today's episode, we're looking at SAAS pricing and tiered pricing - the good-better-best option.

What is the impact of tiered pricing on market segmentation and consumer behaviour?

In today's episode, we are surfing the web. We are joining the information superhighway. We're looking at, I suppose the very common method that pricing is shown on many software as a service, SaaS style businesses. I think we're all used to seeing them by now. Three options: When some on a month to month you're shown very often a cheap option; Which doesn't have all the bells and whistles. Something like a beginner or an intro or something like that; Then you often have the one in the middle. That very often seems to be highlighted and pointed out. That tends to be most of the benefits kit seems to cater to the vast majority of people. Then you tend to have a third option. A bigger option with even more benefits that maybe doesn't suit everyone and that can be the enterprise value. So I think we'll just talk around this today.

In terms of pricing, you may be aware that this concept is often referred to in terms of the Good-Better-Best Pricing, or Tiered pricing. Can even be explained in technical terms as Differentiated pricing. So you can differentiate pricing based on product attributes, features of the products. Some people look at the features and benefits of the products to differentiate into a good-better-best system. Other companies alternatively look a little bit further and they think, “how do our customers view these products? How do they use these products?”.Looking at an example there would be like a mobile phone company. Looking at good-better-best in terms of data usage. How much data a customer would use? Then would cut off those pricing tiers based on data usage. Obviously, if we look at the evolution of the mobile phones' tiered pricing, we can see now that got a little bit more sophisticated with their tearing. One reason for that was because customers didn't really like the fact that they were tearing the pricing, capping pricing and limiting their data. So what they did actually is increased and made most of their data unlimited. And used other things to other features and benefits to entice customers to buy different phone options. So obviously here now I've even touched upon that word entice. What is tiering all about? Well, underlying all of that is that is a deep-rooted sort of psychological pool using pricing to draw people's attention to different options.

I think there's there are two topics that are Joanna's discussed and I think they're both very relevant. The first one is clearly segmentation. You're not using a sales team. You're not using the customer's service team, maybe making phone calls. But you're selling predominately through a website, online, low human interaction in many instances. So the classic knowing your customer, understanding their value drivers that aspect is harder to do. And so, the segmentation strategy, the tiering is segmenting that market. So that you can charge different amounts for fundamentally the same thing with slight nuances obviously. But you're trying to tier it by stripping away certain aspects to cater to certain customers. Clearly, with that, I think we'll get to this a bit later. That means you really need to know what the value drivers are and that involves understanding why your customers use your product. Understanding who they are. Trying to categorise them in a way that's optimal. Because you can't charge you kind of infinite numbers of variations on this online format. It has to be reasonably simple and I suppose that is the classic three. That's positive, that aspect. The other thing Joanna touch on there, obviously, the other stuff, the psychological aspect of stuff. I think we've covered this in previous episodes stuff like Cialdini I think his name is who did stuff like influence and they're pushing you towards the centre. Something like menu pricing they're often pushing you towards the central one. That potentially could be pushing you to request more services than you may be needed. I think the example Joanna give off of the telephone thing. I think we've read in the past or discussed in the past that people often choose phone plans that give them way more data than they'll ever use and pay more. So there is there's a psychological aspect where sometimes you can be pushed into a category that maybe you don't need. And once you get used to that, you may not downgrade to a lower quality plan. But it's yeah, there's those two aspects. There's the first one which is a rational segmentation strategy and then the second is also psychological. How does the human brain work? And you tend to go for the one in the middle often. You think maybe the lower quality, the cheaper one maybe isn't suitable for you. Do people even buy the higher price one? I don't really know. Or, is it just purely there to make the middle one more enticing? Those are questions also that from a psychological perspective that is interesting.

The distance between the pricing between those price tiers is called something called price relativity analysis. And it looks at, what the optimal price is at each of those tiers? Moving aside from that though, if you think about price relativity on its own in isolation of how customers buy. Then it doesn't matter how much analytics you do. You'll never really find the optimum price because you've got to see, you've got to base that price on customer usage. It can be now you can look at sales per sales data. How did the customers use that data now we've got much more data disposal than ever before. But it takes some time to come through that you can look at past sales history. What options do they buy more of? But the question is, it does not answer the question of, why did they buy it? So that requires more customer base research, more external research. Then your internal benchmarks of customer usage. So I think often when I see pricing teams that work on tiered pricing. They're overly concerned with the what because it's something that they can control. It's easy, it's data that's at their disposal, they can just go okay, and often they make assumptions based on that. Now that's okay if you do it in a formalised way and you use hypothesis testing to then test those assumptions. But often I would say that those hypotheses aren't followed through and tracked and monitored well. So what the actual is really the business ends up with price points that are sort of out of sync with the market. And often they go back to default cost-plus to get a margin target. Because understanding the nuances and changes in customer preferences can be difficult. If you haven't got your price architecture and customer research set up correctly to inform your price architecture. In terms of the psychological aspects of tiered pricing, they work very well. But it does depend on what I've just said. You've got to have that research, documented and you've got to track because people change, we all change. Now looking at the mobile phone example that was an interesting one. Because they used to actually limit your customer data and put limitations on that to build the price options. And in so doing it created some kind of risk aversion. Because people would run out of data, and people would then sort of fear running out of data and sort of each month “gosh, where am I at with my data?” And there'd be a backlash against that as I've already mentioned. So then as Aidan mention there, what they did just go well, obviously, data usage is something that's of big concern. It's highly valued by our customers, but we're ending up negatively impacting our customers and they're switching because of it. So why don't we just give them an infinite amount of data? Because to a customer, nobody really knows how much a gigabyte really is in terms of real-time usage. So we're sort of as Aiden said, it's nudging us to buy more because of what we experienced before with the phone plan. So that's an ironic sort of use of they're actually benefiting from past failures in their mobile phone plan, usage and tiered pricing strategy. The mobile phone company has learned from it and is now enticing people to get more data that they don't need at probably higher price points. And the customer doesn't mind because they don't really understand the data. The amount of data that they're using, and they just feel oh, well, at least I'm not going to run out which is the biggest risk driver to them. So I suppose an example how of how you can build psychological drivers like risk usage into your tiered pricing to really optimise your revenue.

I saw when we started this conversation, I thought this was a reasonably simple topic, but clearly, there's a huge amount to it. I think, again it's the old classic of strategy versus tactics. Obviously, without an actual pricing strategy, what is your product or service, whether it's online, whether it's SAAS, whether it's a classic traditional business. You need to understand those value drivers and that's your strategy. The tactics clearly, with data, as Joanna mentioned. The huge amount of data it’s sometimes it's the old wood for the trees thing. People can be blinded by the amount of data that there is. But without a strategy, that makes sense, logically that can’t be explained to a human, no aspect of data is really gonna change that. With data, you can run AB tests on these pages, even very simple methods like Google Analytics will help any website do that. There are obviously a lot of companies now in this space, people like price intelligently and a huge number of new entrants are coming in Silicon Valley, focused based on optimising pricing. With websites, you can run A B tests or you can run infinite numbers, given a certain volume of traffic. Semrush will help with that as well other websites. You can optimise colours, click through rates, everything to optimise your pricing. It's a 49.99 and your middle option on a month by month versus 60 bucks, whatever that optimal price ranges. And you can optimise those things around the edges. But I suppose fundamentally you need to set it up in a sensible manner. You need to set that up with an actual proper pricing strategy. I often wonder about the enterprise versions that are on these things that the third option, the highest option. I wonder how many people even choose the enterprise option. If you're IBM or if you're a major corporation, do really just book online? I'd highly doubt it. I imagine you'd be going in and getting specific services and pricing. So I often wonder, even showing that online to some extent, I think it's just a psychological approach to drag you up. The low one in many cases, say this like I even use the example of sem rush. We used that on Taylor Wells for website optimisation. Originally, I think we went with a middle option which was the classic, you're always defaulted into. Later I realised we didn't need that and downgrade it to the cheaper option. So in many cases, there are rules that are there to be broken to some extent. But I think it's the old classic workout, the pricing strategy first and that's your strategy. Then it's down to implementation and tactics. I suppose I would put this SAAS on implementation and on tactics and there's always an overlap between pricing and marketing. And I think definitely when we get into this area of online, showing things you're getting into, certainly, with websites, you're very much into the marketing pricing overlap. And that's when really your pricing departments should be integrated with your marketing team, with your website team and it shouldn't be sitting siloed. Because clearly, in this instance, we know here the colour schemes, the highlighting of words, the word usage, all those things factor into how people convert. It's not just pricing. Pricing is fundamentally the commercial approach of your company. So it's not just the numbers is what I'm trying to say. It's the overall menu really. It’s the overall approach.

Interestingly, for uninformed customers that don't know about the product, use that same sem rush example when you're sort of new to a particular product, especially a technology product. People kind of know that they need it, but they don't know why or how they're going to use it. So what do they do? They go, Well, I know I need it. That's not an option. This one supposedly is good. So how they came about knowing about Sem Rush is an important factor. So that's a marketing poll driver. And then the ultimate decision, it's still ambiguous. So what do people do with it? We've got three options good-better-best. Is the cheapest one gonna be right for me? I hedge my bet so go for the middle. That's why people often go to the middle and then upgrade as they become more informed about the product and about more informed about their needs. Because as a customer, you go actually the middle option for sem rush, it's just not enough. I need to I need more capability. I need to look at more search terms. I need more analytics. I need to know what the competition is I need to know what the saturation is in the market. I need to then decide on what the selection of secondary keywords is. Those are things that you learned over time, but with that learning and using the actual tool, then you're educating yourself. Then the company gets their premiums over time and before you know it then you're using the best version. And then as your business builds, then you go into the enterprise version. Now, this is actually quite interesting about the enterprise version. So they put it as an option on online,good-better-best is the better one. But then they go through often through a very old fashioned fixed pricing negotiation, discussion with clients at the enterprise level. Then we go all the way back to what we've discussed before how they set prices usually cost plus. So on the facade, it's using decoy pricing and tiered pricing. But eventually, the end product is often the same fixed pricing based on cost-plus. So there's still a lot of work for technology companies that are using SAAS and tiered pricing models.

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Today's episode will be probably a little bit different than usual, as we're going to discuss a new project here at Taylor wells, which we are launching. I suppose, to some extent we've already done a soft launch of it with particular customers. That is our project called Value culture. I let Joanna speak in a minute. But I think just a brief intro as to what it is. On our podcast over the last year or two, you probably hear us talking about lots of similar themes. Those themes are pricing settings between different departments. Pricing is a technical skillset, but also a people business. The difficulties in really getting trashed in a corporation. Make sure that our pricing transformation takes hold and runs and isn't just a set and forget but constant iterations and improvements. I suppose we've come to the conclusion that we categorise that as building a value culture in your company. The Value Culture Program through Taylor wells really will address that need.

I mean, as you're all aware, it can be extremely difficult to implement, execute a pricing strategy into the market. And not only that, interpreting that pricing strategy from a higher level, or interpreting higher-level business strategy for pricing. There's always often a disconnect there. We have a business strategy, but sometimes it gets lost in translation when it comes down to pricing, even sales, marketing activities. So, that's just one of the problems we've been seeing in the market. Our customers told us, how can we help with that? Miscommunication, as well as that age-old problem of implementation and executing strategy in the market. As we all know, over 70 to 80% of most transformation and major price change products fail. A lot of people argued that because of the complexity of the strategy itself, or the complexity of execution. We in our work, have seen that often that's not the case at all. It's because there's no system in place to build an embed capability across departments and within teams.

I think anyone who's worked with Taylor Wells will know that we're different to I suppose this podcast is a bit different because we're actually talking about ourselves for once. But usually, we don't do that. But I think it's an opportune time to do so. I think with Taylor Wells, you're always aware that we're helping build capabilities in your business. So that sooner or later you can run it by yourself. It's the old teaching a man to fish routine, isn't it? That's almost a cliche by now. But actually, I think it's the definition of a cliche, isn't it? But I think when you really embed that value culture in your business, it will keep going. You won't need external help at all times. It's something that will grow by itself through iterations as the market changes as you become more mature and your pricing focus as the entire business starts pushing in the same direction. A lot of this stuff is just helping companies get started. Helping people know what they're doing. One thing we're aware of is that you have a pricing department. Everybody in the company has a role to play in achieving commercial results. They don't need to fully understand the entire pricing approach. They don't need to fully understand the pricing technicalities, how things are happening? But they do need to implement and they do need feedback and they do need to feed into this process. I supposed the entire value culture program is making that happen. Building the system, building the structure so that every department whether it's your sales team, whether it's your marketing team, whether it's you know your finance team, your support team, your product development, product research, whatever it is. They’re feeding into and running alongside and going in the same direction as the commercial strategy as the value culture in your business.

That's right. I mean, often the teams don't know how to feed into pricing. A new pricing initiative is announced at quite a high level by key sponsors. Often done quite well as a big bang. People are excited, they're wondering what it is. Then there are sorts of a gap. There's a gap not just in communication. People go “okay, well, we heard that announcement once, what's happening with it now?”. But there's also a gap with “okay, what do we do next?”. Although Aidan mentioned that not everybody needs to know what the overall plan and strategy actually means higher level. I actually think that's very important to engaging teams in the overall process. So even though people need to know exactly what their piece is in the play, they also need to know why they're doing it. That's very key as well. That can be communicated by, not just for executives. It's done through line management. And also done through coaching and enabling and this various different types of coaching and reminding and nudging. Just keeping people in the right direction. Reminding them why they're doing it. Every step of the journey, because people forget. It can be new when there are new concepts. New ways of doing things you need to be reminded to break those older habits often sort of cost-plus. So this value Culture Program does all of that within one system. Utilises obviously project management. Utilises structured change management and people talent management systems, as well as a more technical sort of coaching in pricing and sales. So all within one system and just letting simplifying it down by person. So they know exactly what they need to do to get things done to achieve an overarching business strategy.

I think we're not gonna say too much more about it. We've already done a soft launch with two ASX listed companies. So it's out there. It's happening with companies who I suppose are probably innovative. Also, a word I find hard to say. And yeah, it's happening and it's been very successful. It will be rolled out obviously at different levels for different customer sizes. But I suppose people, anyone any listeners interested, maybe even doing better testing based on this for smaller companies. We'd certainly welcome you to come and chat with us.

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In many of our podcasts, we talk about value-based pricing. How it is the best thing since sliced bread and how everybody should be doing it, or moving towards it.

But in today's podcast, we're going to answer a question we received and that is, can value-based pricing go wrong?

So the simple answer here is yes, it can go wrong. I'll give you some context, some scenarios where I've seen it go very wrong. Often it's done in businesses that are very cost plus. They've got a history of cost-plus. They're quite traditional businesses. They're used to doing everything cost-plus. Then they read about or have been consulted to implement value-based pricing because this will lead to more profitable results, revenue growth. So they get excited by that. Then they start implementing. But fundamentally the culture is an entrenched cost-plus. It's very difficult to crack that just like overnight. You can't because often that comes with a commodity mindset. No matter of spin on value-based it will really penetrate that cost-plus code. Because that's taken a number of years really, in the legacy, the history of the business. That's what people are used to doing. When people are used to something it's very hard to stop those habits even if somebody has told them that they're no longer helpful. Or even impact the bottom line. So I think scenario one would be it can go implementing value-based pricing can go terribly wrong. When you think you can do it overnight. The business is, is very traditional, slow-moving and used to cost-plus pricing.

I think I'd summarise that. I'd say that if something's very difficult to do, and costs and value-based pricing is very difficult. It really is a transformational change. If something is difficult when it is implemented perfectly it looks amazing. But yeah, when some things are that difficult, there's a very high chance that your implementation will be vast. I'd love to be a ballet dancer, the ball show Ballet but let's be honest, I don't think the chances of it occurring are very low. I think you have to look at a real true value-based pricing is chalk and cheese for what most companies do. It is difficult. I think on this podcast, we always say it's a journey. Do you ever get there? We're not trying to hold it out like a never-ending over the rainbow sort of thing. But it is one of those journeys and obviously, every step you take in that direction is a good step. But you have to put steps will have the next you can't jump to the destination. You can't just send out an internal memo and say we are now value-based pricing. We've reached Valhalla and that is it. It's a journey and you have to logically keep stepping along without rushing. Don't throw away the structures that are working for you. That is paying your bills that are delivering revenue. That is keeping your Salesforce in the field. Those sort of things you need to keep them going. Then progressively enhance them and move them towards something. You don't just declare, pull up stamps in a cricketing term and say we are we're now value-based pricing. Because when you do that, the high chances that all the structure systems process that you had in the past. Will they fall apart? Potentially.

Okay, so scenario two, where I've seen value-based pricing go terribly wrong. Okay, so the first scenario there was when a consultant has come in and said this is the best thing since sliced bread. Why don't you implement now in a cost-plus culture? Now, this scenario is when a business similar to the first cost plus used to that sales discretionary pricing all of that stuff happening. But they decide it could be through an executive smart executive in the business or maybe a consultant suggesting it. That they should have a pricing team come into the business and implement value-based pricing. All the while can zoom away with that, implementing this roadmap and not really fixing the fundamental problem here which is the rest of the company building capability across departments. Because as we all know, if we know about pricing now, pricing isn't just something that the pricing team does. It's something that all departments should understand and often are involved in. Like category managers, often are involved in pricing decisions. Sales managers and their teams often talk about value and pricing with customers every day in fact. An executive signing off on strategies for pricing. Even HR incentivise teams to build more profitable revenue growth. Everyone's involved in pricing. So my point here really is you can't really expect a pricing team to do an excellent job with value-based pricing. Fortunately, yes, they can forge a path and show good examples. But they can't really do it for the business. Everybody needs to get involved. Everybody needs to know how they fit into pricing. And if they don't, the poor pricing team turns into an object of ridicule, or even that they're blamed for implementing what is actually best in class. But it all falls apart. Doesn't get the results that were expected. Because nobody else is actually implementing their advice. So that's a fiasco that I see time and time again. I'm really would hope that we can all avoid it. But that's scenario two why value-based pricing can fail.

I think I'll reiterate that one. I'm a big believer that people do what they're incentivised to do. Everyone in any job you've ever had might have your job description. But fundamentally, you really know what you're supposed to do to get paid or to get your bonus. And if you implement any business strategy badly. You'll have people pulling in different directions. You'll have people who are incentivised to protect their silos, to protect their turf. If you try to move to a value-based pricing system without actually realigning goals, incentives packages, what are people looking for? Is it margin? Whatever it is without that aligned you're inevitable as Joanna said, you will have people pulling in different directions. And if that increases, if this implementation is worse than the old system. The old system may have been an imperfect pricing methodology. But at least people might have been pulling in the same direction. In this new one, they're pulling a different direction. So you certainly could go backwards. One final thing when we started this podcast, I thought I was going to talk about how a business had an inferior product. You could do worse through value-based pricing. If your value was actually low, and then I actually thought about that. I don't think that's the case. I would have said that if your company produce a low-quality product moving to value-based pricing. Or you're actually capturing the value of that product. In theory, your prices will be lower or probably lower than the market average. I actually don't think that will be worse than the cost-plus or any other methodology. Because theoretically the market and the customers will know that. If you're trying to charge more than what it's worth, they’ll quite quickly tell you or move to a competitor. So I don't think in that scenario, this methodology pricing would have a worse outcome simply based on quid pro quo. I don't even know what that means, but that's Latin I think. That sort of thing I don't think somebody changing the pricing system would decrease profitability in that scenario. I think generally the market tells companies by pushing them into problems before they really make them jump into the hard work of moving to value. So I think yeah, reiterating, it's a people issue, its dynamics, it's setting up the systems, it’s making sure the team are pulling in the same direction. How is that tug of war team pulling in one direction? Because otherwise, it's not going to move.

I was thinking along the same lines as you. Is it the right method for maybe for commoditised industries where products are very similar? There's a price war blah, blah. But then I was thinking the problem isn't that. It's probably if you implement value-based pricing in those industries, or even I've seen this in startups. You either over overestimate or undersell yourself, either or doesn't matter either scenario. You just leave it and you just leave that assumption there without testing it. And I call that set and forget pricing, which is another disastrous sort of scenario for when value pricing goes wrong in businesses. Because value-based pricing changes. It changes because it's highly connected to the market, to your customers. So we know that the world around us changes. So if you then implement a set and forget price and that could be with cost-plus or even value-based pricing. And you don't double-check and cross-check and validate your assumptions, test and trial, tweak and all of that sort of stuff which is a more scientific approach. That's not value-based pricing but you need that scientific approach to test your assumptions on value. That's when I see another scenario of when value-based pricing can go wrong. When you just think okay, I'm not going to invest in dedicated pricing resources I think my perceived truths about the market are just fine. Because I think the markets like this, therefore it is. Because I know as a leader that this is true about the market, inconsistencies in how my sales go to market with that strategy is their issue, not mine. So those sorts of scenarios, are really bad for any type of pricing, but especially bad for value-based pricing. Because markets change, customer preferences change. So anyway, that's my thought on that.

Just my final words, I think like pricing often, certainly in the cost-plus environment, it can be left to a pricing department to a finance department to a sales department to really implement value-based pricing, a value culture in your organisation. You need leadership from the top level from the C suite. It needs to go through every aspect of the company to make sure people are aligned, to make sure that the company is all moving in that one direction. Let's be honest, that's hard. That is difficult. Do most people have an appetite for it? I also argue that this is one of the reasons why value-based pricing people get into it. Not when they're having great times. They tend to get into it and look into it when they're having problems. Because when everything's going swimmingly, do people really want to push themselves to do a lot more hard work? People tend to like to enjoy the good times and only look at tough and longer-lasting solutions when bad times hit. But smart companies, smart people focus on the long term, even in the good times. So there you get on the podcast, you get a bit of philosophy alongside your pricing. So I'm going to leave it there today. And I'm gonna pass it on Joanna for final words.

Unfortunately, the tenor of executives even the CEO is much shorter than it ever has been. So even if you get a smart executive, they often end up leaving in about 12 to 18 months. So whether they implement a value-based strategy was full-on best intentions and even tried to embed it. Often the person that replaces them can have a completely different view and not be as committed. I suppose in one way you have to remove it. Yes, value-based pricing and any good pricing does require sponsorship from leadership. But really to make it truly last you need to embed that in the culture. You've got to do the hard work to replace those bad habits. Well, not necessarily bad habits all the time, but that cost-plus culture. You've got to replace it over time. Do the hard work in the good times and the bad and that will see you through. So you've got I supposed to simply make new ways a habit for your teams. That can only be done through capability building recognition and rewards through HR. Through incentivising, rewarding people correctly for changing and adapting to new methods and approaches. If people make mistakes, do not use the old blame game. Actually, go okay, what did we learn by that mistake? How can we help fix that mistake? Let's track and monitor and start learning. Again, this is how you know great value-based organisations survive over time. This is why a lot of traditional businesses fail because they don't do that. And often the business and the leader are quite happy with the old way of doing things. It's easier, it's comfortable. They know they're going to move on to another role. But look, I have full optimism that with markets changing now. That we're seeing greater adoption of value-based pricing. But just bear in mind the advice that we've just given here. I think it will serve you well but if you've got any questions let Aidan and I know happy to help.

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If you are an avid listener to our regular appointments or regular podcast you may be wondering where we were over the last month or two. The answer is we were too busy with Taylor Wells to record a podcast. So I don't know how you coped without us and all our grid pricing information. So here we are back today. We are covering the typical question that is in the press relating to white goods. The pricing on white goods such as washing machines, fridges, that sort of thing is increasing apparently for the first time in almost a decade.

Yes, seems like everything's in crisis, prices are increasing at the moment. It's in the press a lot across the board. But we were particularly interested in white goods because as Aidan says they haven’t increased for a number of years now but a decade. So why now? I think just to sort of start off, Why didn't they take the price increase? I think, looking at it in terms of often businesses look at this in terms of their costs. I think it's much easier to reduce costs, through manufacturing. A different type of input cost material cost reductions those sorts of things. Then to increase the retail price to customers. So often that has been the general way of maximising margins. I think, though over the past few months that hasn't been possible with fluctuating input, material costs, effects changes, and also changes in customer preferences. People want different types of fridges and all those white goods they don't want the same old. So that changes the manufacturing process, as well. But starting with that first one, let's just really examine that sort of cost implications. There has been very much a focus on that. And as a response, not really thinking much about the customer and moving with the times.

I think with inflation kicking off something people have forgotten about clearly that explains why these companies are pushing prices up. One of the things though that surprised me when I read these news stories were the prices had not increased in 10 years. I'll be honest, I actually doubt that that's true. Just from visiting Harvey Norman is one of the big retailers here in Australia that sells those sorts of white goods. It's actually very interesting to walk around those areas where you're seeing the washing machines, dishwashers, microwaves, all those sorts of items. And what I will say is the just the quality of these machines has improved. The water efficiency, the electricity efficiency, the features they’re through the roof. So they're infinitely better than what was standard 10 to 15 years ago. To some extent, I was very surprised to hear this. I actually doubt the prices have stayed static. I actually think that significantly increased. Even items such as televisions, which I'm not sure if they fall into the white goods category. But if we stick even to fridges 10 or 15 years ago, a standard fridge it was a white good. It was not very many bells and whistles. Now they have icemakers that are reasonably standard in many, you can chill water dispensers. You have the American style fridge which is still reasonably new in Australia. Where the large, almost designer style fridges. You have ridiculous new aspects such as touchscreens and temperature monitors. Aspects where you can change category compartments from freezer to just chilled. So the actual features and benefits of the product have increased many times over. They're infinitely better than they used to be. I also personally think the prices have gone up significantly also. So I do think I'd like to look a bit more detail into, what that actually means? How they're categorised is pricing static? And, if it actually is accurate?

I think in regards to that, I know you're saying I think that has to do with range. They are changing their product strategy by using a sort of like good, better, best, best plus or most ultra-premium by introducing all the bells and whistles with these almost computerised fridges. Whether or not yes, the prices are much higher than the standard fridge. But I actually speculate, are they high enough for what they actually offer? Or are they putting those premium sorts of fridges out there to test demand? Because I just can't imagine there's a huge demand out there for an 8000 grand fridge. But have as we have seen in other industries at the moment since COVID, there have been bubbles of demand in that middle-class population who want premium goods. So, actually, what we could be seen as a raging strategy. That is keeping up to date with demand for absolute premium and luxury. However, we haven't got any past data on that. So how long would that bubble last? But there aren't huge amounts of premium fridges in the market to know that. I think overall still you've got your standard fridges on the bulk of the market. That is where I think they're keeping their cost and price competitive. And that's where the stability has been with a price. And that's where the major price increase, the controversial price increase is occurring now. So overall, the whole category of fridges is being moved up. And I think that's been dragged up by this ultra-premium range.

You're not going to hear any argument from me on that one. I think that hits it. I think, yeah, you've got your standard fridge that chills food and then you have it's almost a status symbol. And I think maybe COVID is exacerbated the way we live. Again, my views here could be based on watching 1950s and 60s television shows. But I think in which that's where everyone's education comes from. But I think that most people had dinner parties in that era. The guests didn't congregate in the kitchen from what I've watched in those sorts of TV shows. People had their dinner in the dining room and people the hosts will bring the food through. Whereas I think no, and again, this is based on watching TV shows. I think people are entertained more in these luxury kitchens than they have. The kitchen is always a focal point in the house which is a change in living style. You have granite tops. You have an island in the kitchen. You have designer sinks with two sinks, and the ovens and all these sorts of things. It's almost like an entertainment entertaining space. It's almost like a status symbol were to show how much stuff you have. It used to be, here's my car, now it’s looking at my fridge. I think if you have this fancy kitchen, you do need to have a fancy fridge. You want your ice compartments and you want something to show off. So yeah, I think these things used to be, the white goods used to be stapled, they used to be utilities or basics. Now I think as Joanna mentioned I think you have obviously you still have that and that's where cost-plus and inflation is kicking in. But I think you've probably got the Bugatti and the Rolls Royces or fridges now also that those people caught up for. Then you also have some of these, I think they're washing machines somewhere that as German manufactured. Where they're so high tech, they're almost like chocolate cheese.

The interesting thing will be when they find as I was saying before, that there's not a huge demand for that ultra-premium now they're still more demand for the standard offer. So the manufacturing is still done around that. But if that demand does shift, so to operations and all that value manufacturing will have to change. Then it'll become interesting. And then there'll be more price changes with that as well I suppose. But I think it really is a trial. I am quite interested to see how they've calculated prices for the ultra-premium range. Have they just the conventional skimming strategy start high. It's novel, we've got a computer that basically almost speaks to you. We think that as a manufacturer of those ultra-premium goods is going to be novel. People don't really fully understand it. When people don't fully understand it, research shows more likely to spend more money on it. But as the market matures and they understand the offer, then it decreases. I wonder if they're using that as their main guiding principle to pricing or whether they're using more sophisticated value-based approaches and thinking about as Aidan was going on about like those specifications of the product. What does that mean to the customer? Has the market research on customer usage really been explored? And how's that been interpreted into the price calculations? So those sorts of things are intriguing to me as a pricing expert in that space. But at the same time, I think it's pretty much a wait and see. Markets changing hugely now COVID restrictions are lifting people are travelling. Disposable income in household goods probably will decrease, what does that mean? Well for white goods, innovation in that space, slow down and will be ranging change back to normal. I don't think obviously now we've got introductions to new premiums that offer. There's always gonna be people that are going to buy it. But, at what pace is the question?

I just got one more point to make. I think it's related to this idea of the internet of things. And I only became aware of this in relation to white goods when I was browsing as mentioned in the shop. I think some of the fridges now can check what's in the fridge. They're hooked up to the internet and they can suggest recipes or meals that you could make from y those five items in the fridge. They can tell you food is expiring if it's going off if you need to buy more. What almost inevitably will happen there will be tie-ups between the white good companies, between the fridges, between unconstrained fridges here. But it will apply to others also. But you'll have the fridges they'll be linked up to online shopping through the supermarket or through delivery companies, Marley spoon or HelloFresh or one of these sorts of companies. And I think you're only a couple of years away really from an integrated food provision service. Whereby your fridge is more of this network concept where rather than just buying a fridge to store food, you are buying a meal delivery. It's almost like just in time sort of delivery process or logistics almost to get the food straight to your belly, almost. Let's be honest. So, I think that's the way it will go. I think you'll see these companies tie up more and more. There'll be automatic ordering. It'll probably automatically learn, How you ate? What do you like? How do you consume quickly? It'll order stuff in advance for you. It might even give you treats on your birthday by ordering birthday cakes. All that sort of stuff is just around the corner. And yeah, when you get into that the pricing equation changes. I don't think we'll be talking about costs plus.

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In today's episode, we are going to answer a listener's query which was about companies traditional B2B businesses switching from selling components or machinery to more of equipment as a service system whereby equipment machines etc, whatever it is, is provided on a monthly or weekly or whatever basis it is almost like a joined-up solution. Sounds interesting.

It does sound interesting and at the same time, the movement from a pure sort of product to equipment as a service model has been very slow in B2B. In spite of the opportunities that such a model does provide a business. I mean, if you look at it in, in theory, B2B businesses have changeable costs, input prices. Often there are margin constrained industries as highly competitive markets, slim margins. And often when you sell a product, you're selling that product one time and often one time only. Maybe a lot of customers choose not to buy again, reducing the amount of ongoing revenue. Obviously, executives are thinking, how can we increase our margins and ensure recurring cash flows? Well, that service's idea concept comes into play. But the problem really stems in my mind is often customers really still don't understand the value of the offer. Let alone what customers value about the core offer. Which is the fundamental principles of an equipment as a service model. You've got to understand your customers, their needs, their wants. The risk factors they're trying to avoid very, very carefully in order to construct a pricing model. And a service offering that is compelling enough for them to trust you with this shared partnership model. So then often, businesses go into this from a very product-based pricing model to an equipment services model, just hoping for the best. And then it does become just a test of an idea because they really haven't done the hard work in the planning. Understanding identifying the value drivers of their customers.

I'm gonna lighten the mood a bit and I'm going to be a bit more positive about equipment as a service. I suppose some of this has come from the software as a service that sort of trend in recent years in IT. SAAS, I think it's even called. I think there are clear pluses. Companies obviously don't have to buy equipment upfront. They save on the capital expenditure and there are constant improvements in the machinery they're receiving. But the thing I'd also say is, there's a number of pluses from both perspectives. You're getting the problem you want to be solved, whatever that problem is. If that problem is road network maintenance. If their problem is advertising signs at a football game. Whatever that equipment as a service you're getting is. You're ensuring that it's a lot of the work that you would have been doing is outsourced or removed. You're not constantly negotiating over the price for each individual item. You're not constantly in contact to order new things. You're not constantly comparing costs or having that pricing tough bargaining that you're used to. To some extent, you don't have to educate yourself as much about the alternatives that there are right there. As a purchaser, you would still have to be aware of these things but it's the solution that you're buying. You're buying the joined-up stuff arrives on time, stuff is done, stuff has been maintained. Equipment is the highest spec. There will be terms and conditions obviously, to what you signed up to. But that, to me, sounds very positive. From the bank perspective, from a selling perspective, it also sounds very positive. And of course, this isn’t the perfect world as Joanna had mentioned, there are quite a few flaws. But this is the brighter side from a selling perspective. It gives much more sustainable revenue, much more forecast revenue which companies love. It potentially gives you more flattened revenue, month by month, you're not having peaks and troughs. And it reduces the need to constantly be selling pressure to discount reduces that selling on each individual line. Also, reduce the need to articulate what you're selling to really go through those details. And it makes it more of we always say we're delivering a solution but this is getting closer to it.

I don't know, maybe it's because it's the end of the week. I'm sounding a bit pessimistic. But I actually do think it's a great model. I think the caveat is you've got to do a bit of hard work. It's not just purely a model that you just work out there and you go. “oh, from this we're gonna get recurring revenues then we're not”. But it's a shared risk model on both sides. Both from the seller and the buyer. And so you need to know what those risks are and quantify those risks. Because let's look at a case example here with Rolls Royce and the Jet Engine when they change to that model. Actually, they've had that model for quite some time. Whether the customers pay for the amount of time the planes are in the air, then, of course, COVID hits. So, there's been very, very limited planes in the air for the past two years. Which has meant that the risk has all been on Rolls Royce. So, what was a very profitable model turns into quite a risk of bankruptcy for a business. Obviously, they've got scale, they've got credence that they'll be bouncing back with innovation. But you have to take in not just the interaction sometimes between customers. But obviously, that overall economic and societal changes that are occurring right now. As we all know, we're living in unpredictable times. So we got to be very clear, and just safeguard our pricing models with real-life scenarios.

I think what I would say here, we have to be aware of the difficulty in changing the business model. Moving from traditional B2B selling or renting equipment. And then moving to a solution specialist equipment as a service style cell industry. It's a complete transformation of your business model. Most companies find it pretty hard even to operate the existing models they have. Defined pricing systems are hard to implement. Very few companies do it well, nobody does it perfectly. And very few companies do it very well. With the majority somewhere in the most improved next year category in their annual review. So moving to a software or an equipment as a service system, You are moving up to a new level of business approach. You need more skilled people, you need to know the value of what you're selling. Why are you doing it? The additional value you're providing. You need to know your customers. What do they want? I think I said earlier it was one of the positives that decreasing costly sales every day. But it makes the upfront sale probably even harder. And you need to be really able to articulate that upfront sell, the sales and the marketing and all those aspects. You need to transform that in your business to be able to articulate that and get a customer signed up month to month.

I think that's a wise step. I think often though, companies don't understand the offer of the core product range. Just that core range as it was traditional just B2B products pricing. Let alone understanding what equipment as a service business model means and the change in pricing required for that. So in a way yeah, highly recommend what you need to do first go back to first principles. Understand what you've got now. What is the value of your current offer to your customers? And then start evaluating new offers within a new paradigm. Because strangely businesses that have moved to equipment models have actually found that commonly their core offering, their existing offering actually is more profitable. And have more value to their customers than they thought and even more valuable than the new offer. But all the time, but sometimes this can be the case. So really go back and do that planning, do those analytics first. Just to be confident that you're not throwing away value. And that you're going full-heartedly into a business model that potentially isn't as valuable to your customers as you thought. And in the process, you've obviously increased your capital expenditure not decreased it which was obviously your intention. The risk is again more on you and you've got to backpack and pedal like crazy to get back to the starting point. But it can be very confusing if you just do things methodically.

I think understanding your business is vital. Equipment as a service will suit some companies, it won't suit many. And many companies will not be capable currently, obviously companies can improve to look like anybody else. But it's not something you implement willy nilly overnight or rationally without fundamentally digging through that model that you have. It's an interesting one. It's probably easier for a new company to implement, someone who's starting up than an existing company. Obviously changing it is harder than starting afresh. But it's an interesting one. It's one we'll keep you updated on over the next couple of years, I guess, through this podcast and other media. And yeah, it's great to see new business models evolve. We've seen outsourcing, we've seen software as a service, and now we're seeing that implement more as well in traditional B2B. So, hope springs eternal. We'll leave it there today. Have a great day.

Before I just clock off, there is a process that you can follow. It isn't just one go from one model to the other. There is a phased plan and process that can get you there safely. It doesn't have to be one thing or the other. And you can phase each phase in a way that suits your business as you reveal and learn more about your business, your core offer with data and information from your customers. But I think as Aidan quite rightly said, I think it's time to wrap up today. But I think we'll revisit this topic because we've had quite a few questions. It's interesting, it's quite a meaty topic, and we'll come back to a later date. If you have any questions, feel free to email us, give us a call. We're happy to discuss any of the questions or topics that you want to cover. Really appreciate the feedback so far. Thanks a lot.

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In today's episode, we want to cover. I suppose we just passed Black Friday last week and I believe Cyber Monday was Monday. I'm sure of my age but I was never aware of these concepts when I was younger but now in retail and especially online retail, they are extremely prominent. So today we want to look at the pros and cons, the good things and the bad things about adding surcharges and segmenting or compartmentalising the costs in services, so that when you go online to buy a product or service, you see the price and then in the box or in the cart there's a huge number of add ons or takeaways that can alter the price.

We've seen a lot of businesses from B2C and B2B even recently introducing surcharges like for freight on the final invoice and I'm thinking to myself, why is that happening? Is it always a good thing? Yes, we know B2C have been doing this quite for a long time but at the same time, there has been a lot of kickback from consumers about surcharges. But I suppose in terms of like cost, companies think it's almost a good thing because they're separating costs from the pricing and there's a view here that if you keep the price stable or you reduce price and then add a surcharge on top like for freight that is in some way fair and reasonable for consumers and at the same time, they can maintain a sort of a considerable margin but it goes back to this thing again, do companies really know their costs? Are they able to calculate the surcharge correctly? To be able to do this and to ensure that they’re going to get the margin, Do customers want to go through the whole process, especially B2B, a very long sales process to then suddenly be hit with a surcharge on their final invoice price without even a commitment of the B2C sort of next day delivery, B2B still not committing to that often they can't. So, what is that surcharge? Is it actually a value add for the customers? It’s more punitive.

I think probably the experience most people have in this regard is probably from airlines back when we could travel, especially Ryanair and Southwest Airlines in the United States. It was almost like you'd see a very cheap headline price, your seat from A to B cost $10 and then you can add priority boarding, better legroom, you can add better food, you can add more luggage, all this sort of stuff can be added on and I suppose the pro of that from a business perspective is you're giving value to customers for what they're willing to pay for and there's no point in giving people value if they don't value it. I suppose this is what we talk about in a podcast a lot, this is positive. The positives of value-based pricing, you're using that to segment your market, you're providing people with what they value and they're paying you for it so you're able to hyper-segment the market which is very positive. I'd say you also see this in postage where you're checking out on Amazon. I suppose Amazon was famous for one-click shopping, but more and more recently especially in Australia, you will have options about service or delivery days. If you want it on a certain day you pay extra, if you want it on this day you pay extra, that segmentation is good but what I suppose my personal view is, that's positive but this can sometimes make it seem to a customer that they're being taken advantage of that they're being a bit of a bait and switch is going on that they're being presented with a fake artificial low price and then when they actually get the product or service it's much higher. I would put a quick and hard-fast rule here that you shouldn't be charging extra for the product if the base price that you should see should give you the base service so I'm very against charging for it on top if it's not a specific day so the basic freight should be included in the price because, in theory, there's no point in saying a price for a product if that price does not include you getting it or accessing it. In my view, it should be that the price you see should be the base price because anything else could be or possibly could be perceived as bait and switch or misrepresentation.

Yeah, I think I agree with that Aidan, with BAU freight that's just an expectation you shouldn't be charging additional for that. If you understand that a value driver for your customers is convenience and like next day delivery and that requires an additional service on top of the BAU freighting service and shipping service you provide then it makes sense to them pull that out, but then to be quite upfront with customers at the beginning of the sales process that is going to happen because you got to remember in B2B the surcharges are not common. Customers aren't in the habit of seeing surcharges on their invoices for B2B. Yes, more so for postal and even airlines pulling out these additional value ads in their service and pricing but B2B customers are not familiar with that and so as I say it's a very long and complex sales process. You have to go through procurement and the whole bit, talk to many different stakeholders, you get alignment, you get agreement, it can be a tough negotiation along the path and then you hit them with this surprise surcharge. From my experience with clients, it doesn't go down well and not only for those big customers, but I’m also talking about those medium to small customers. You've got to be very upfront and clear about the value that you provide and not charge an additional for BAU freight and things like that in B2B. It doesn't work well and ends up damaging your reputation and brand if done incorrectly.

I think this is probably one of the real cracks of the issue of pricing, when you get into value-based pricing we've talked about in this podcast, segmenting markets, differentiating customer bases, providing added value where people are willing to pay for it. When people can I suppose drink the Kool-Aid on that and view it from a selling perspective, but as we always say in pricing, pricing is a technical aspect but it's also very much human, customer-focused. You have to understand your customer and the last thing you want to do is alienate a customer base by stripping away services that they see as their right or their need to enjoy the product or service. The example I'll give is that you could check in to a five-star hotel and of course, people appreciate that if you want the suite or the presidential suite you pay more than you do for a standard bedroom and that's a sensible accepted differentiation, value, add etc. If you want breakfast you pay more but if you started differentiating every little thing and stopped being helpful if the concierge refused to help people who hadn't paid an extra fee, people would start to get their back up about that and that's an extreme example but there's a human element that people expect certain baseline services to be delivered and then the additional they're happy to pay for that extra but you need to understand the product you're selling who is buying it, the reasons they're purchasing it. I personally think if you're starting to charge extra for something that is in the baseline enjoyment of the product or service that you're selling, that if you're not selling that extra piece, it almost defeats the point. If you're trying to sell a car and taking the wheels off that sort of concept, that sort of strips away and that's the point of trying to make if the if you're trying to charge extra for what people perceive to be necessary and vital part of the enjoyment, then you've gone too far and that's the place where you should step back.

I suppose my view here is you can't use surcharges to cover up poor pricing and poor cost calculations or even a cost-plus culture. I do think that a lot of B2B businesses are introducing surcharges because they haven't done the fundamental work of improving their pricing and understanding their costs and often they don't even have a pricing team in place to look at pricing, let alone calculate surcharges. So a lot of businesses are doing this to cover up what I call pricing and cost chaos and it's not going to help and even in the short term I honestly believe it doesn't cover costs or increase margin even though on paper or in a model it does, it seems so I think you've got to go back, do the hard work, address the problem rather than putting band-aids over a poor pricing capability. Do the hard work, invest in your pricing, get accountants to look closely at costs, get a pricing team to think about pricing and the market and customer value and when that's established and only then when you've understood your pricing, you understand that each of your customer segments and price segments can you think about applying surcharges and legitimate they use value-based principles to start teasing out surcharges based on like freight, additional convenience, etc. because you can't just assume it, you've got to test it, you've got to track it and monitor that before you even introduce those types of surcharges into the market.

I think we'll leave it there today. I think it all stems back to the mantra, Know Your Customer, segment them properly, don't overly segment, never try to exploit customers. If you're ever getting into the realms of bait and switch, exploitation, manipulation, you've gone way too far and customers remember that they don't like it and if you leave a bad taste in somebody’s mouth the chance of them becoming a repeat purchaser is massively decreased. So, if you're confident in the value that you provide, charge a price commensurate with that value, charge it in a fair, understandable and easy method and, fundamentally if customers aren't willing to pay for that value either you haven't communicated the value correctly, or maybe your value is not high enough or maybe that customer is not right for you, trying to slice and dice how you present the pricing maybe once or twice, it will work but over the long term. I think it's a mistake.

I agree. It's a very tactical move and I don't think companies do it intentionally to coerce or manipulate customers to make more profit. I don't think it's often used to cover up a deeper problem that requires hard work to fix which is actually improving pricing and understanding and segmenting based on value, which is the harder piece of work but I think what we're both trying to communicate here is that it's a necessary piece of work. It will provide you with not only long term gains but short term gains so you won't have to do these sorts of tactical and quite reckless moves that are only going to hurt you in the end. So just bear that in mind when you think about surcharges, it may seem good on paper and a model, but realistically, they're out there in the market. It often isn't a good idea if you don't know your pricing. If you haven't looked at your pricing you don't understand your customer base.

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In today's episode, we want to talk about something that is probably more common than we'd like to admit. A scenario where a procurement team says show me your costs, I want to see your cost so we know that you're not charging too much.

So what do you do? Do you show them the costs? or do you in some way fluff around the topic and try and avoid that for a couple of weeks? Maybe get yourselves, people, to meet with them a bit more to discuss the features and benefits of the offer and then pretty much after a few weeks like that, come back to just showing them the costs. Is that right? Is there a better way to do it?

I think let's be honest, upfront showing anybody your costs is a truly terrible idea. We can't overstate how bad an idea it is and why would a procurement team ask you to do that. There is only one reason to drive down your prices, it's a method to hammer you down to get you to accept a lower price. If they're looking at your cost, they're probably already interested in buying your product or service and so you're not going to come out of this in a better position than you go in, but how do you deal with it? I suppose on a podcast we've covered many times how cost-plus pricing, all the negatives I think we're all aware but I think if a customer says show me your costs, what you're doing is you're almost instilling that concept of focus on cost into your business, you're almost rationalising it. It's like talking to a crazy person and you're almost trying to rationalise with a crazy person doing so by default you will be in your business see more focus on costs, you will start to try and rationalise and become a cost-plus business and, in reality, it's everything you don't want to be.

And I think if you're coming from a business and even if your mindset is based on costs and then a customer procurement team comes and talks to you about cost, should you be surprised? should you be taken back when you yourself are doing that and pricing based on that? I mean, it seems illogical to ask that question but strangely, people are often surprised that they are asked this type of cost-based question from procurement when they indeed are giving them cost-plus pricing. It's only natural that they kind of would ask that and sort of irrational to assume that they wouldn't. So what you are actually saying is that you don't trust your own prices, procurement in a way is right to question the calculations upon which you've drawn based your pricing, because there's something deeply flawed with that. In my opinion, when I've looked at a lot of clients' work they are coming from a cost-plus culture and a cost-plus culture, what is that? Deep down if you strip all the fancy accounting away from it, it's a very insular inward-looking approach that just focuses on your own operations. It doesn't take into account, a lot of the moving parts and factors are carried around in life and in business. It doesn't even take into account the fluctuations in commodity costs and pricing, increases in freight, changes in freight operations or even inflation and so what happens is that you get this very broad calculation across your portfolio and one assumes that is going to be a good proxy for cost, but deep down, everybody knows that it isn't. So then the basis upon which you've calculated costs could be problematic and then on top of that, you've slept on a percentage markup, and then all of a sudden you have procurement asking, how much is that markup? I don't want to tell them that because really deep down you're not very sure that your cost position was correct.

I think it'd bring into the light, the insanity of cost-plus pricing because, what margin are you adding? Are you adding 10%? When someone does grill you on why 10%? why not 5%? Why not 7%? Realistically, you don't have a good answer. I've had an experience of doing this, we were an industrial business selling to a major retailer and as in many retail businesses some of them are quite low margins, on a billion dollars, you might only be making 1% to 2% or 3% margin, but that might be a very effective or very efficient margin in a company like that. I remember someone in the operations team in our company saying oh, just explained to them that they will only make a 15% margin, almost expecting that they would be happy and let you do that. Clearly, the argument would be, we're only making 3%, why should you be making 15%? It’s simply a method to push you down. I don't think I've ever heard of an example of where somebody has looked at the costs and come back and said, Oh, here, wait a minute, you're not making enough you should add a bit more margin on top so it's sort of like it's a false question is purely a gambet to push down your costs so that the selling price reduces. Generally, they couldn't care less about your long term sustainability, procurement always claims that but unless they're purchasing the vast majority of your product, if they're less than a certain percentage, it's not going to jeopardise most bigger companies and so they're in the game of pushing you down. I have one more topic to add about this, I’ll pass it to Joanna now but I think if somebody asks you a stupid question, I'm a big believer in giving quite stupid answers.

Yeah, well, I think what you're trying to get at is there's quite a big element of bluffing going on both sides so, what do you do in the short term? This question is a difficult question that is often asked by procurement and yet, right you know your pricing isn't great so, what are you going to do about it? Well, I'm not going to give you an easy answer first, I think you've got to work on your pricing capability, building a better system architecture to give you confidence that you actually do know the right market price and then after that, once you know the market price then you've got to start understanding the value of your products and the economic value that your business provides to your customer. So that's the expert answer. But okay, dealing with the short term tactical answer, what do you do when somebody asks you that? Well, I've seen even the most like pricing experts being given this question and you have to almost reframe, reframing based on what you believe you can deliver but ultimately, what I have seen people do is just build out their costs and literally inflate their costs. What I’m saying is that absolutely is not best practice at all and it's a very reputation-damaging move so I do not advise that businesses do that. I think what you need to do is call procurement on this bluff, get back and have a real conversation, start asking better questions, start thinking about segmentation. Are these the right customers for your business? Then start building sponsorship in your business to build a better pricing capability that safeguards you and the business from this type of risk. Because it isn't just short term risk, as you can see from this very difficult question, it exposes the business, the business model, the pricing capability, the whole lot. So yes, you can bluff around the edges and that's what most people do and then they give a long-winded accounting explanation for all their costs and to justify their prices, but that doesn't in any way have any bearings on the value that they're actually offering their customers and the value that the customers actually want from your business. So I disagree, Aidan I think you even procurement would agree that they're not looking for just cross down price decreases, they're actually looking for value. But they ask the question about costs because they know that their sellers can't give them a clear answer. That's what I actually truly believe in. If they don't believe that, the customer has provided them value, then why are they doing business with them? So it's your job as a seller to actually investigate that answer and then provide a clear short answer to procurement and that will completely eliminate such ludicrous questions like that.

I take that on board, but I think I'm actually going to disagree on this one. I think, obviously, as Joanna was saying, if you don't invest in value-based pricing, if you don't invest in your corporate value, you inevitably will increase the chance of this preposterous discussion happening. I suppose it's like an army you plan for years in advance and strategise and all these things that in the situation where bad things happen you're prepared. By investing in your value management and your sales team and all that articulation, you prevent this stuff from happening. Like the idea, do you think Apple if someone goes in to buy a telephone from apple or a smartphone that they can come and ask to see the cost base of Apple? It’s preposterous because companies like that understand their value and sell in those bases. But let's look at the scenario whereas in many companies, certainly in B2B, when this question is coming up it's sort of insinuated that they haven't invested in value, they haven't done any of this work, they've done no work at all, and they've just bumbled along and now they're sitting in a position where they want to get a big tender through and they've got a thing on their table saying, we want to see your cost base. Like my view with this is it's preposterous question, accountings are very fluffy area and when they're asking for cost base, generally, they're trying to say give a shorter marginal cost, but the reality of it is just a portion cost to it if you have management time, research and development time. One of the big issues with cost-plus pricing is it's impossible to work out costs, we've discussed this ad nauseum on this podcast. It's if you try to work out costs, costs, move its variable cost, its total costs, its opportunity cost that you could have invested in other things, it's ludicrous it's a fool's errand. And in this scenario, I would just suggest just play the fool's errand and the different way and apportion every single cost you can do, if that's what your corporate decision is if your corporate decision as you want to do business on these terms with a supplier or a customer who doesn't value you or who pretends not to, and involved in these value destructive activities, but you're prepared that's how you want to operate. I think that's how you should do it. I often think of the famous I think was Henry Ford and Tesla is probably not a real story wherein the factory, I had no idea of Henry Ford and Tesla ever met, but there's the famous situation where there was a rattle in the wall and Henry Ford said the Tesla can you find the rattle so Tesla walk down the corridor, worked out tap the wall two or three times and heard where the noise was coming from. He then stuck a nail into the wall and all of the sound disappeared and then Henry Ford asked, how much would that cost? And it goes on $1,000 which was a lot back then, when Henry Ford said, how is it $1,000 it only took you two minutes? I think the famous answer from Tesla was it was $2 for the time and the rest was for the knowledge of where to do it. So that's a cost that's completely legitimate and if you walk yourself into a scenario where you're in a silly situation, as a business, you've caused yourself to a large extent there's no real great escape from it so if you've got to play the game, you have to play by the rules.

I don't think that disagreed with me. It seemed to support exactly what I was saying, I absolutely agree. But there is that distinction between that tactical move which often businesses make by just almost being creative with costings, but I would even say when I see that creativity is lacking, or the more strategic thing is, but actually understanding the value that of your product portfolio but more than that, the economic value that your business provides to each and every customer, at which point, then you can reframe and blow away any ludicrous questions regarding costings with that because now you're actually getting procurement to discuss the real topic at hand, which is the value at risk. Are they willing to risk the value that you can offer them? They know that you can give them and do give them and you know that it is important to them and that you deliver it very well consistently. If you know that, then any sort of silly question like that can almost be laughed off and I think then you can move on and do business.

I think if someone comes and asks, how do I know if customers don't value me? How do I know if I don't have a real value management system? Let's be honest, if someone asks to see your costs they're literally yelling in your face that they don't value or they don't appreciate your value, that's a red light. It should be a warning sign, but if you get to that position, I suppose if you really are a high-value company, it's highly unlikely somebody would ask you that. Secondly, if you really understand your value, you just laugh it off and say no, and probably if someone keeps pushing on it, they're not a customer you want to deal with. You got to play the ball from where it lies. You can't become a high-value company, the great Value Management doesn't happen overnight. It's a long term build but you work hard and then one day you find that customers may not be asking you these questions, or at least you can say no, yeah, that's it for me today.

It's a long term build and I suppose the important part to think about here is, are you willing to invest in that long term strategic capability whereas in the short term being more prepared to deal with those sorts of difficult questions from customers? Because you can do both at the same time, but both require a mindset set to change from within, from the top down lead strategic initiative, but then it needs to be embedded within the teams. You can't expect just consultants to come in and give you the answer, because they'll just give you an answer to one or two questions, which tend to be actually quite tactical. The longer game is ensuring that your teams understand what they're doing is building architecture and it's a sustainable capability that's internalised is driven by your team, not by an external. From there, there'll be that evergreen confidence in that commercial pricing field, and you'll be able to not only understand the value that you offer, but you’ll also be able to get the price that you deserve. You'll stop understanding yourself and you'll be able to deal with quite these difficult procurement teams and conversations. Anyway, feel free to get in touch with me, my team, more than happy to discuss these types of issues. They are quite pressing at this time and we completely understand and can give you a few pointers here and there. So anyway, thanks for listening. Appreciate your time. Okay, bye. Bye.

Just one last one, which is just almost like a vindictive thing. If you were forced to do this sort of stuff you should probably add a different line item of cost, which is the cost of the accountant and the consultants time that it took the weeks it took to work out your cost base for this cost allocation. So you should probably highlight that and just make sure that pushes the price up all right, that's just me. Thanks,

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In today's episode, Joanna and Aidan discuss retail therapy for the upcoming Christmas season and Black Friday.

It’s that time of year where we approach Black Friday, and of course the Christmas shopping season. So in today's podcast, we want to take a bit of retail therapy and ask, Will people in a retail environment be prepared to pay a bit more? Not a huge amount more, but will they pay more for better service and other things?

Well, I’m gonna answer that question right away and I would say that Aidan, I think people are willing to pay more for a better customer experience in retail. But now I'm going to add the usual caveat.

But different people are going to have different propensities to pay different amounts. So it's not a sweeping statement. But overall, I do think that people are. But I also think that people that are feeling, say, emotionally frustrated or they've just had a bad experience in a shop, for instance, are more likely to spend more than those that are just having a regular experience.

Nothing's happened or had any emotional sort of things that make them angry, frustrated, etc. They haven't experienced any pain. I think those types of people probably would pay less than those who are frustrated people so here we go into almost the psychology of pricing in retail.

I always think of I looked at what I’ve done in my shopping, I’m not the worlds biggest shopper, I have to admit. But when I looked at the purchases I made. Items like electronics, laptops, computers.

In Australia, I love to go to Harvey Norman and the reason is not that Harvey Norman is the cheapest. It’s not because it is the widest range their quite good for both those things. But it’s more on ancillary items such as a less stressful shopping experience, then maybe a JB Hi-Fi or another retailer.

There are other things such as you can get better assistance from people who work in the store. Harvey Norman often is a franchise. So, people running or working in the store are often more incentivised, I might be wrong. But I feel they are more incentivised to give good customer service, talk you through the product you're buying.

And then also items Harvey Norman has an insurance replacement scheme for a lot of electronics. And I find that quite useful because anybody who buys quite a bit of computer or electronics knows that within two or three years, the chance of malfunctioning reason would be high. So, I do pay more for that.

I have other examples that are given a few moments covering other shopping experiences. But I do think when I'm gonna buy those items, to me, those are big-ticket items. I think "Do I want the hassle or do I want to be stressed doing this?"

It seems to still come down to this quite general term customer experience. And I think you've done a good job sort of defining what that is. Often, people think when you talk about are people willing to pay more for something. They are thinking about the price. The price of a product is dictating everything, even customer experience.

Basically, what we're saying here is that the price actually may not have as much of an impact as we believe. And customer experience is the big thing that influences people. And underneath that, it’s how they feel about the customer experience that influences people's willingness to pay more in retail.

Thinking about Harvey Norman and JB Hi-Fi in very different styles, I suppose of experience. But strangely like both of them have a lot of sales staff at hand in the stores.

And when you go in there, as a consumer you want to buy something that's novel, expensive, or electronic goods. You want to speak to somebody that you trust and knows what they're talking about in terms of that product because you're going to spend.

It's a higher value item for you as a higher-margin item from them. So, they want their sales staff to be good and you want them to be good. So, you can trust that they're giving you the best advice and in both stores. They do put a lot of investment behind that people.

In JB Hi-Fi, their store, I suppose the aesthetics are not great. There's a lot of blaring, sort of confusing price-led signage everywhere. But again, research has shown that confusing signage is a good thing for purchasing. More confusion in a way can create a faster sell. But then again, you need a good salesperson to make a customer or consumers feel comfortable in the midst of all that confusion. And I think JB Hi-Fi nailed that quite well.

Yeah, I suppose I think I saw once whereby someone described it as almost like an explosion in a marketing department. That causes all the posters and stuff like that in JB Hi-Fi. It's almost like, how many posters can you have up?

A similar business is the chemist warehouse which I quite like. The chemist warehouse, I think they spend huge amounts of money on marketing and brand, position themselves first domain. But with chemist warehouse, it is cheap. It tends to be cheaper than other stores.

But it's also the ease of shopping and it is very good. I like the way it's set up along the shelves. You're pretty confident that you’ll find all the vitamins or materials you're looking for. I think they have a big spread of the different products that a lot of stores don’t have.

But I'll give you another example of when I was younger. I used to work in a shop called Marks and Spencers in Britain. It’s a bit of a mixed retailer, I don't know what it could be in Australia. It's predominately under its own brand but also a mid-market retailer. Sort of upper-middle market retailer selling food and also clothing.

But for many years, they had a "no questions asked" return policy on all clothing. So, if you bought a pair of trousers or shoes or anything like that, you could return it no questions asked and get all your money back.

When I worked there, some people did take advantage of that. People would wear items for like six months and then drop them back in for a full refund. But that confidence that it gives you in buying a product, that you're not going to go through the stress of trying to make an argument and explaining, why you should be refunded.

It gives trust and you feel that you're being. It builds rapport I think between the customer and the retailer, even if the retailer loses out on some of the returns. I think the benefits to them, you can’t buy that brand awareness.

And now, of course, we've been talking about customer shopping experience in-store. But there's a massive change in the market now and more people are shopping online. There are people that prefer in-store and online but there is a massive shift and you can say that's due to COVID. Those sorts of things but it could be also, age-related, and again, going back to experience.

I think people expect the same if not better experience online. They want it all. I think overall, customer shopper expectations from businesses are much higher across the board. And I think businesses in a way are struggling to get that unified only channel experience from in-store to online.

I suppose some businesses almost don't know what to do with their in-store because the online customer experience is moving so quickly. But I think in terms of technology and movement and change, yes, that's all happening very quickly. But we still are people and we still feel the same way and have the same frustrations, regardless of online or in-store.

So, I think from a business perspective, you always have to think back to the customer. What is it that's frustrating the customer about the experience, whether it be online or in-store and try and fix it?

For instance, a lot of studies have shown that the worst thing that's driving people online is because in-store, you go to the store and there isn't the stock and that can be quite frustrating. You've made the effort to get in your car, go to the store, find the car park, and walk around the store. You get in there hoping that you find it. It's not there and it always tends to be the same thing. So, most people are going online for that.

Now, could we improve that? Potentially, is online any better? Often, you have to wait longer if you like a pair of shoes you want to be here. And often, you have to wait for three or four weeks, especially now with like supply chain issues, porting issues, things left in the ports. It's not necessarily a seamless experience and it has its hiccups. So yeah, just bear that in mind too.

I think Joanna touched on the idea of the value drivers of what a customer is going there for.

One thing I'll say about this is supermarkets. As in many countries, you have the more traditional - what you would call a full-service supermarket where even somebody packed your bags for you.

At least in Australia and in comparison, to say the new entrant German discount supermarket, one thing I'd say is one of the big differentiators between Coles and Woolworths and the new entrants were that you could have somebody pack your bag for you. You didn't have to go through the self-checkout. Etc. And that is a big value add, especially for some older people.

To be honest, also, just when you've been having a stressful day shopping, do you really want to wrestle and deal with doing it yourself?

I see there's a real plus but more and more recently, when you go into the supermarket, there are no check-outs available. And you're forced to use self check-out system which, to me, is almost like a supermarket stripping away its actual value add. It’s stripping away what people saw as a plus and driving itself.

Fundamentally, if you want to compete on price, that's what you’ll compete on. But you're probably going to lose those other customers who probably want that additional service that makes life a bit easier, a bit more full-service aspect. I think you'll see this more and more I wonder what people feel about this, the listeners but when you're in a supermarket particularly in late evenings, or maybe at 7 pm very often no checkout is available and you're forced to do a self-checkout system that I can understand completely saves the supermarket money but that’s how feels like, it feels like your savings supermarket money.

Yeah, I think that particular example there's definitely a push in the supermarkets to drive people to either that click and collect or that online delivery service but then it goes back to that point, is that a better service? Does it create it? Does it make our lives as consumers shoppers easier? Or is it just as frustrating and you're saying, we want the old fashioned experience where there's a bit more assistance because potentially what they're offering isn't as convenient as the sales pitch of click and collect? For instance, often you can drive in click and collect after work or, later on, in the evening or the middle of the day there's less staff who did the picking in the shop, and you're just sitting there, waiting in your car, is it going to come? Is it not? Is it going to come? and then wasting maybe 45 minutes until the bags come down for you. Is that convenient? No, it's not. Equally online delivery service they give you a large window of time where they're supposed to come and deliver that shopping Is that convenient for me? Or is it convenient for them? I have to sit around waiting for them and that can be very frustrating, especially if I am time poor and I've got things to do or meetings to have in the day, etc, etc. It's all about convenience and I'm fitting around them rather than fitting around me. So I still think there's that shift to online clicking collect, especially in that retail area. But is it working? No, not necessarily. It is supposed to be in favour of the customer but isn't. So anyway, that's my thoughts on that one.

Yeah, I think I'll finish off with I'm a big believer that everything in life goes in cycles, business goes in cycles, too and I suppose you could argue that the supermarkets were invented like most of these things, probably in America, I assume, or Britain or Western Europe, probably and they're implemented and rolled out from the 50s and 60s onwards, where you're bringing all the screen grocers and fishmongers and butchers all under one roof. To some extent that brought convenience because it was all done at the one time but I think things go in cycles and as you dehumanize the shopping experience, take away those value adds, take away even somebody to help you or give you advice on if you want to buy a cut of meat, people will start going back to the neighbourhood butchers, the neighbourhood grocers I think it's widely accepted that you probably will get better meat from the local butcher store if it's a good butcher store, same a fish same with any of those items. And I think yeah, things will go in cycles, they go to conglomeration, big multinationals and then that creates room for the alternatives as they cut back on those additional services, the advisory, the friendliness, the knowing you the person at the deli counter, you might know that disappeared from the big supermarkets through cost-cutting. At least some people will search for on that spectrum and they'll search for y maybe pack in the place we’ll start back at the butcher shop.

Yeah, I agree. I think there are fads in business and there is a tendency in business to leave the human element out because it's often the more complex emotional irrational side of things, and then lead with something more logical, systematic like IT technology, operational efficiencies, but at the end of the day we still are human. We are the ones that are buying it regardless of the channel and what we're using to buy that particular product and we've got to bear that in mind as we zoom ahead with our technological advancements not saying that you shouldn't because that's it's progress, too. But it's integrating that omnichannel experience by thinking very, very closely about the business model where you want to take the business and at the centre of that business model, the customer and that customer experience unpacking what that means for your particular business and your customer.

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In today’s episode, Joanna and Aidan discuss the return of inflation and how it impacts the price rise strategy in 2021.

Inflation affects businesses and consumer purchasing power

In today's episode, we want to cover something that has been in many news articles in one way or another and that is I suppose the return of inflation which was a monster we associated with maybe times like the 1970s in the 1980s but inflation appears to be back. A lot of the financial press is talking about it and from a pricing perspective it's leading obviously to cost or price increases for nearly all products and in the pricing community, I'm sure some quite tough conversations with customers.

I know from a B2B consulting work, a number of clients are dealing with the impacts of inflation in terms of pricing but you may have even observed this in your day to day life in terms of food price hikes over the last few months. It's not just food, it's clothing, it's B2B, it's everything. It's across the board now and it's quite a significant problem for both businesses and consumers. I suppose to keep it simple, inflation basically means that the price of goods and services is going up and when that happens, there's a tendency that people and businesses lose their purchasing power, which basically means that you're not getting as much for your money. So, in turn, a lot of businesses are in a way panicking with this and finding that they have to implement quick sharp price increases to align with this new inflation but not really knowing if their price increase is correct, or whether they're applying their price increase in the right part of their product portfolio.

I think we've been through a historical period probably from the late 80s to the early 90s, wherein Western countries become used to an inflation rate of a negligible rate of like 1%, 2% that sort of thing. I think a recent study I saw was forecasting maybe next year up to 5% in the US, and the old saying, if the US catches a cold the rest of the world gets the sniffles, which probably isn't appropriate at the age of COVID, etc. But we're not in a position where if you're a B2B business or any business that’s selling to customers but in B2B, it's more appropriate where you have input costs. It could be petrol, it could be timber, it could be sugar cane, it could be anything really. If you’re input costs and then you're selling to a customer, you could be caught in the middle. At the end of the day if your cost basis is rising, at Taylor Wells we often talk about value-based pricing as a way to avoid cost-plus pricing, obviously, but in this scenario, value-based pricing fundamentally you will have to increase your selling prices, as the value of money decreases. As your cost base rises, that rising tide if you don't want to be caught in the middle, if you don't increase your prices to customers you will face declining margins, and obviously, threaten your business continually. The big difficulty is we've been coming through a period where procurements drive down prices, you're signing multi-year contracts, your price rises are capped at a certain level. It's more and more difficult to push through those price raises. To be honest, because of the fact that it hasn't been a big issue over the last 5 to 10 years, people haven't paid that much attention to it. I've seen contracts where your price rises capped at X or capped at 1% per annum but let's be honest if your cost base has gone up by 5% per annum and you can only push up a 1% price rise. You're in some trouble.

I'm seeing just that with clients at the moment, they used to have very robust price variation formulas in place, and they worked quite well in more stable times but then recently, in the last few months, in particular even though they're still good price variation formula they're not having the impact financially that the businesses need and they're losing money, quite significant money, which means it isn't necessarily your price rise formula or price rises that's going to help you here, it’s getting understanding on three very important things. You've got to understand inflation and the banking monetary system and be prepared for those changes. It can be something that hits you between the eyes and is a surprise. You've got to understand and have room to move when there are fluctuating costs because that seems to be with us now especially with all supply shortages, COVID etc. is putting pressure on the supply chain. But the third thing and an important thing that a lot of businesses forget are understanding the value of your product portfolio. Often, businesses try to improve margin through price rise or price adjustment strategies without understanding the value of the product portfolio at an SKU level. Generally speaking product hierarchy, price structures, discount levels are a mess even before inflation hits and when inflation hits and you haven't got all of your price architecture in place that's when you see massive declines. This is at the heart of value-based pricing. It isn't just a nice fluffy concept. It's something that really posts together both your costs, market pricing, customer value and economic trends and does in a scientific and very rigorous manner.

I’d touch on that point that Joanne has mentioned. I think we look back at the last few years before COVIDis the good times when we thought inflation was gone forever, etc. I suppose in those times people took their foot off or their eye of what was important, they stopped thinking about it and there's an entire generation of people who are not used to inflationary pressure. They're not used to what happened in the 80s, the 70s whereby mortgage rates were 20% and this sort of thing, and people became used to stuff and when you become used to things and see that not as a risk you don't look at them but this stuff exacerbates all the problems. If you don't invest in a value-based function if you don't understand the value of the product you sell if you're getting hammered by procurement teams day in and day out, if you're cutting costs, if you're discounting, if you're doing whatever the procurement team, jumping through those hoops that they're set for you. You're probably setting yourself up for even more hardship, now when there's the other side, you're between a rock and a hard place. You've got the procurement team if they're used to winning, they're not going to really stop and if you're used to giving in to that, it's gonna be a very hard turnaround for you. It's very hard for people to change their personalities or change their negotiating style and then you have the tide of the pricing pushing you from the other side. So it's a very tough scenario for sales teams, for pricing teams but I think in the longer term, from an economic perspective, keep in mind that we talk about real pricing and monetary pricing. So in real pricing, the pricing isn't actually increasing, but you need to push through a price rise. If you want a price rise of 2% and inflation is 5%, in real terms, you need to push through a 7% price increase and to do that, I think you really do need some form of value-based pricing, understanding your value, understanding what you offer, your clients value drivers, and it's all the work you should have done in the good times now it’s the time to use it. It's almost like Muhammad Ali stuff, you train hard and the fight becomes easy. Have you done the work? Have you done your value discovery? Have you done the training of your sales teams to know where it will pay off?

I agree with that. I think businesses that haven't got a price architecture that brings in all those different elements will really find and continually find that they'll have to do these ad hoc price rises guesstimates as inflation builds and the margin pressure continues to build, it's just going to be inevitable, which means that's the majority of the businesses. Because there are very few businesses that I still see today with a very good price architecture and I'm still talking about leading businesses because those are the people I'm working with. And I'm often quite surprised to see the lack of alignment in their price architecture. Sometimes it's just literally a bare-bones priceless, that's not the price architecture. But saying that so, what do you do if you don't have that price architecture? Well, you have to have a more considered and planned price rise and not be shy with price rises, because as Aidan says, increases in inflation require a considerable price increase. So what do you do? You have to plan it, you've got to consider what way you're going to focus on your product portfolio. You cannot do blanket price increases across the board that creates much more damage than good. You have to work with sales, ultimately, highly advise hiring a pricing manager if you don't have one to coordinate all these efforts, and to come up with a very robust price variation formula. I do stress that this price rise approach is only a tactical approach. The most strategic thing within that will get you through is building that product price architecture, and ensuring that's in place and then working with sales, the product team, pricing to align everybody to this new way of pricing in a very margin pressured industry and time.

I think one final point I'd make and this is reminiscing back on when I was B2B sales. A lot of contracts would have in there, CPI adjustment once a year cap and CPI etc. CPI is an Australian based inflation measure but it's a basket of goods and anyone who's looked at inflation in the past certain areas are much more subject to inflation than others depending on drivers. Is it imported? Petrol prices could be going through the roof and raw materials may not go through the roof. So, CPI may not be a defense in some way for you and may not be appropriate for your contract. So even just to protect yourself, a final point I'd make is to really understand what you're selling and if CPI is not appropriate to defend yourself from inflation, picking up these things aren't that important when inflation is 1% across the board. But you could have sectors now with inflation of 1%, but other areas could be 10% and if you're a cap of CPI limit at 2, again, you're just in trouble. So this is really understanding of what you're selling? How are you selling? what you're subjected to? What are your risks? your continuity of supply? Those aspects of the insurance concept behind what you're supplying and have complete confidence that you're not committing yourself to a longer-term contract without that protection for you. So that's just what I would end on today.

I think that's a really good point. I think it hits the heart of the problem. People, businesses don't understand what they're selling, they don't understand the value profile of their product portfolio. So then they do this blanket price increase that often tends to be too high or too low creating disruption in the market, and ultimately, doesn't give them the financial impact ongoing that they wanted. I think Aidan summed it up quite nicely before and I note in the newspapers today that Unilever, Dollies, Pepsi is not shy with advertising that they've taken considerable price increases in response to inflation. Albeit I'm not sure how well they've increased in exactly where, but I'm sure they've got dedicated pricing teams in their businesses looking at inflation, looking at price rises very carefully, I'm sure.

One final point I make and I just noticed this on the streets recently. This affects businesses of all types and sizes. I've even seen local restaurants, Thai restaurants, who've had lunch specials probably between 10 and $12 for the last 10 years. I see a lot of them now even have signs in their windows talking about the cost of materials of food and in particular seafood, prawns, etc. and the same prices are rising for this reason. So even from the smallest local neighbourhood businesses seeing these issues, but okay, we will leave it there today.

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In this episode of Pricing College - Joana and Aiden talk about the Mercedes Benz fixed pricing model.

What it is and how they’re going to execute this in the Australian Market?

Hello and welcome to pricing college with your hosts Aidan Campbell and Joanna Wells. You may have noticed that this is our first podcast in quite a while and you might be asking, why? Fundamentally, the reason is that we were too busy, and we were caught up with work at Taylor Wells. And so now we are back on track and we've made a few adjustments basically to speed up the process. You may notice we don't have an intro because some people said they didn't like it and it delayed getting into the good stuff. So I suppose we're stripping away some of the superfluous stuff and hopefully leaving the good stuff.

To get down to it. What's the first topic we're going to speak about today after such a long time of not being on there? We’ve decided to take a topic that we probably all have read a bit about as pricing sales professionals and that would be the Mercedes pricing model change moving to a fixed pricing model and sales model. Before I suppose the recommended retail prices were just that and the franchisees could obviously use that as a benchmark but could negotiate around those prices. Now, since a couple of weeks ago, they have launched a completely new model where the franchisees cannot do that and the salespeople in those franchisees are not happy about it because they've lost I suppose the compensation benefits and all of that negotiation power that they had in one fell swoop.

I think there’s a lot of stuff going through the court at the moment because obviously, the dealerships are very unhappy, dealerships I believe it'll cut their margins that aspect of the actual structure of the pricing we're not too sure about, but the dealerships are very unhappy. They’ve obviously invested in fancy showrooms, etc. and feel they're getting all their hard work has been taken away. But I suppose some of my thoughts on this are from a value perspective, you can look at it in very many different regards. You can make the argument that Mercedes is so confident in their value that they think they don't need salespeople in theory that the product sells itself that the marketing, the advertising, the brand image those things are selling the product and literally the showrooms are distribution centres, it’s a shipping model to get them to the place, that's one aspect. I would say to some extent might undervalue the value provided through the selling experience, the differentiation of answering questions. If you've been to the Audi dealership, and then you pop in to see the Mercedes dealership there's a lot of value that if you'd have questions you'd want to be answered, you might even trust the salesperson, you might know them previously, you might be a repeat buyer and that gives you confidence in them where they're a good dealer, they're not selling lemons as the old saying goes. And also thinking that a car is just a single item is to me it's a bit foolish. There are so many slight differentiation, leather seats, colours, trims. Is it available today? Is it available to drive away? Is it a demonstrator model that's been sitting on the forecourt for a while? Is it something you know, there's a lot of little intangibles, I'm all for canning and cloning and selling through websites, but when you are when you're going into something as tangible as a car, there's a lot of stuff in there.

I agree with that and when I read Mercedes' response to that very point about the value and the different attributes of their cars and range. They came back and said, Well, we considered that within the fixed pricing. However, the sales teams don't agree with that and they argue that the number one value driver for customers is the ability to negotiate and search for high-value cars through different franchisees. So, they're claiming that yes, on a product level, i.e the car, that may be the case or may not, but from a customer perspective that they're missing out on a very important value driver and that is customers want to negotiate the price on the car within a certain range and highly value that. Now look, when you think about that in itself, it's a little bit of a grey area and I could see that, that might trouble head office and Mercedes that having that grey sort of wide price range and ungated value proposition in the hands of sales and franchisees and maybe that was a reason in itself to go to a fixed price model where they could control that. Maybe they were hearing other sorts of market intelligence feedback from their customers that was contrary to the sales team that was actually saying they didn't like the wide price bandwidth for high-value cars and if you're going to pay a lot of money for a car, you want to know what the price of that car actually is.

I can see a lot of the point in protecting margins, protecting the brand image and this sort of stuff, but there's so many on this podcast, we often talk about the tradables, the intangibles, the little things people don't think about. When it comes to cars, there are so many things. There's, you know, if you do a trade in your other vehicle that the dealership will take it away for you and give you a bit of money off. People like the concept of haggling and negotiating and even that they like to feel they're getting a little win here and there. Is the dealership near to your house? Has a dealership invested in a place that's super local that you can go to easily? Even then, the dealership, is there a car that they just want to shift to get off the forecourt they've invested in that stock or do they need to move it? We move into concepts such as clearances, people like the 2022 model versus the 2021 model, all these sorts of things. Can this be run from Germany when we're talking about the Australian market where there are these differences? The Australian market is significantly different to say the European market due to the size, the geography, the temperature, all this sort of stuff. The other thing I'd say is, on the Internet, yes, you can get all the information you want but oftentimes when you go to a dealership you want to know information that the salesperson knows. They know what will get you across the line, fuel consumption, what your value drivers are? being able to tailor the offer to you. Even getting to down to like financing, how many people go in and buy a car in cash? Can you trade and price for the financing aspect? All these sorts of things that I think there are just too many things around it that in theory, you could be stripping away and damaging your sales force. On this podcast, we often talk about centralizing, you know, centralizing the strategy, but then decentralizing the implementation and I think what we're doing here is we're over centralizing, but you're damaging the actual skills salespeople that in any market are vital.

Yeah, I suppose that itself it's a fixed model, not just a fixed pricing model it's a fixed business model and an inflexible by definition being fixed. It's inflexible with execution implementation and getting those regional and local differences. From a stock management perspective, interestingly, with this new model the franchisees no longer own the cars. Sales teams, franchisee owners are saying there's no incentive for them to shift old stock, new stock or any stock saying that they don't own the vehicle which is going to have, which I suppose was the very lever that they were using during sort of the long negotiations to prevent this new pricing model over the last few months. From a pricing perspective, I did notice that prior to the fixed price model changes Mercedes Benz had implemented a number of price increases prior six months before introducing this new fixed model. I imagine that they use those price increases as the usual covering costs in a fluctuating cost environment. But I also imagine they did a little bit of modelling on those attributes but I do believe a lot of those value attributes were based on the product and as Aidan was saying, have missed out on the tradable the other things that people value, not just the price, the product, or even the brand, it's everything else around it, which is the pricing system that architecture piece. So, yeah, in a way, maybe looking beyond that, what could be a broader business strategy implication of this new price model change? It could be that they are thinking of deranging certain cars in Australia, potentially introducing a completely new look and feel and modern Mercedes feel that there's a more aligned to the electronic car, the Tesla type idea phasing out old, bringing in new thinking about demand as well as supply thinking about that in itself. At the moment, there are huge supply issues with cars. Maybe they took that into account when they're doing a prior price increase over the past few months. But demand is high at the moment and supply is short, which means that maybe they've kept their own revenue opportunities right now because there's a huge demand for these cars and just not enough of them. So with a new fixed price model, they've kept the revenue opportunity but in so doing maybe they've got broader business implications for making these decisions, which I'm thinking is probably deranging and thinking about business strategy.

Yeah, I think one of the things we look at here is, on this podcast we often say never piss off your sales team. As a pricing department, one of the worst things you can do is get the back off of people on the sales team who need to implement the strategy. If you get the back off, it will often backfire on you. That's the first thing I will say and the second thing I would say is often we're very against discounting, you find strategies not to discount but often sales If you discount you might get a sale in the door where someone is shopping around the competitor to an Audi or BMW or a Lexus, or whatever it is, and maybe they just want a little bit of knocked off the price to get them across the line to match another price or something like that. So in that instance, I think it could be a foolish thing. The only thing I'd say is, what is the impact this will have on the second-hand market? If you're keeping the inflated price for brand new cars, what happens to a car that was sold two months ago, when someone needs to sell that will there be a significant difference in pricing in those in those different markets? So I think it's a very interesting one, there could be the concept of a change in the model, the Mercedes model completely and some newspapers have reported that potentially they're moving to electric engines and their entire model will change. Who knows? But the alarm bells for me will be annoying a sales team that has built up expertise over time and can you centralize something as passionate about such as a car?

Yeah, I think we're yet to learn the real answers to all of this. I think there's going to be a lot of work done locally to make this work, but which in itself seems hard to imagine because it's a very much centralized German strategy. So how they're going to execute this realistically in the Australian market is yet to be seen that it's probably going to be quite difficult. But an interesting topic, and we'll probably circle back as we learn more and provide you with those insights. But up to this point, I hope you've enjoyed our conversation about Mercedes and feel free to let us know your thoughts about this topic. If you know more, let us know. If you've got any questions, happy to answer them. All right. Well, thank you very much for listening.

Thanks again. Bye

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In this episode of Pricing College - we take a look at the world of cigarettes and ask what the Marlboro man can tell us about marketing now he is basically banned.

We look at the tax collection role cigarette companies now play.

In today's episode, we're going to salute that time-honoured Aussie tradition of having a cigarette break. I think it's called a “Dury” or “Dora”? or maybe I'm exposing myself as not Aussie enough, but you know what we're talking about.

We thought it'd be a good topic to discuss, especially with the fairly recent tax increases on cigarettes. And the subsequent price rises that cigarette companies have been enforcing since 2020. Now, both the tax and the price rises have been pretty substantial. I think over the last eight or so years, the tax increases have been in 12.5% increments over eight years, which is huge. So, for the most part, the cigarettes that people smoke are now heavily taxed at well under 50%. As a consequence, cigarette companies have had to raise prices. So now we see massive price market positioning as well as new tactical plays in the market to encourage new smokers to smoke as older smokers may give up or die.

When you start thinking about the cigarette industry, you realise that it's a pretty unusual and challenging industry in many regards. We're going to completely ignore that in this episode purely for convenience's sake, the moral aspects of it, etc. Some people are obviously very against cigarettes. But we're going to use the example of selling, marketing, the value, etc., of cigarettes if you work in that industry, so she could think about your own industry, whatever it is. When you sell, like cigarettes, obviously, I suppose in the Western world and most developed and developing nations, you build a huge percentage of the population. Smoking was probably, if not over 50%, of the auto-population at some point in the 1950s and 1960s. It has declined since then. But clearly, it's still a large number. But it faces an awful lot of issues. So, in this episode, we'll kick around some ideas about how you market that product. What is the value of it? The malleability of cigarettes what is the current business model for cigarettes now? And is it what we think it is?

So we all think of cigarettes as being a very inelastic product. But since the subsequent price rise, what companies are finding now is that some customer segments are much more elastic and that those segments tend to be the ones that are giving up. The massive tax increase added to cigarettes is simply a great incentive to do so as soon as possible. So it's accelerated, people giving up in those segments. However, what the cigarette industry is also finding is that in certain sub-segments, which happen to be the most socially deprived segments, cigarette consumption is still inelastic. So it doesn't actually matter how much the price goes up when taxes are added. Those segments are still consuming cigarettes.

We could be getting into the classic economic concept here of the Giffen Good, whereby it's reversed taxation almost. Where it may affect lower-income people more than higher-income people, But there is an aspect where people are prepared to buy that product even as the price increases. It could be that it's an affordable luxury even given the pricing where it is now, which I think in Australia is roughly around $40 per 20 cigarette pack. So it is very expensive, especially if you're a 20-a-day smoker or even more. So it really does add up, but maybe it's one of those affordable luxuries that still falls into that category and that people want. So yeah, it is inelastic and that's obviously the reason why people put a huge amount of taxation on it. But I suppose the other thing is inelastic, but not, particularly the products themselves. You can’t swap from one brand of cigarette to another because, in reality, the tax is applied or lifted at the same level. You're not going to shop around for the cheapest one. To a large extent, it's either you make the life-altering decision that really is a medical choice to a large extent by quitting cigarettes,

This is actually a really interesting point, Aidan. Because since the price increased and the taxes were added, cigarette companies are actually finding people to be less brand loyal than they ever have been. So, say, even about 10 years ago, people really wouldn't have considered swapping brands based on price. They'd be quite loyal to the brand. There'd be Marlboro smokers, there'd be Embassy smokers, you name it, they would stick to that brand because they know it. However, since 2020, there's been much more brand swapping. Even changing the type of cigarettes could be vaping now or people will be prepared to switch towards the end of the month when their budget runs out to lose cigarettes. Roll your own tobacco cigarettes, simply to aid the addiction and to keep in line with the budget. They can't afford the brands that they want. So they have to downgrade. What are the cigarette industry and the government's response to this new behaviour? Well, initially a tax was imposed on traditional cigarettes. But now the massive tax has been applied across the board to rolling around tobacco cigarettes because this is where the markets moved. So what cigarette companies are doing now is really thinking about something, almost like choice modelling, across a month to see how customers are consuming different varieties of cigarettes and tobacco to aid their addiction. So, companies are now thinking about how they can accommodate changing preferences across a month too. The interesting thing here is that now more than ever, cigarette companies are tracking consumption. Because before, they could just guarantee that people would smoke a certain brand in a certain way. People's preferences change over time, even across a month when they get their money and when the money runs out towards the end of the month. So this is a really interesting point.

I think we've touched on a couple of topics there. I suppose one marketer would know more about this. Obviously, the value of the brands could potentially be decreasing as marketing and imagery, which used to be so important for cigarettes, have decreased. Items such as the Marlboro Man and, without a doubt, Rathmines.People that he used to advertise at Formula 1 races. It was always very much a visual aspect, and even people old enough to remember cigarette ads on TV. It did sell that lifestyle of being cool and independent, whatever that was, whether it was a cowboy or whatever it was, or motor racing. So that is decreasing. It certainly has decreased over the last X number of years. Potentially, that might be driving or swapping between different brands. One other thing I would say is that due to COVID, certainly in Australia, international travel has massively decreased to almost zero. So duty-free shopping will also hit almost zero. A lot of people would have taken advantage of the duty-free shop in years gone by to get those cartons. The 40 packs or whatever it was that they would have topped them up throughout the year. Also, in duty-free shops, you'll always notice that the visuals behind the marketing and branding are much stronger. You can still see the packaging and nearly all those locations, which is now something of a heritage aspect almost everywhere in Australia. So, those were the only two topics that contributed to that.I suppose the other thing I'd say about cigarettes is that we always talk about them as an addiction. But people have many addictions, whether it's gambling, alcohol, or spending all their money on a sporting team that they love. Some people just enjoy cigarettes, and we can never dismiss that. So they enjoy them. They enjoy their flavour, they enjoy the feeling it gives them. It could even be the attitude that makes them think more at certain times. Those aspects that people value, that's the value driver that people have. One thing I recently discovered while doing some research for this podcast is that you can buy cigarettes online, and when you buy online, you can still see the packaging a little bit more. There is still that exotic aspect to certain brands, like Davidoff and some of the French and international brands. A bit like international beers, where people might be reminded of holidays, when they were younger, or those sorts of aspects. Branding is probably still the flavour. Those things do play on the mind, and that's good for marketers. I remember reading that smell is a big thing to help people remember things. If you smell a certain smell, whether it's cooking or coffee or whatever it is, it can bring you back to a time and a place. Let's be honest, cigarettes certainly smell.

So, in terms of branding, cigarette companies have found that the packet itself, the design, the brand, and the colours used are still the number one driver of purchase. I suppose the number one brand that most people, even today, still recollect or recall when asked is Marlboro. Marlboro is still the number one brand. It has the greatest brand presence of all brands. But the problem, really, even for Philip Morris and those major corporations, is that one of the main channels to market supermarkets is the number one. Supermarkets aren't legally allowed to display cigarette packets. They're locked up in a cupboard where you can't see them. Then when the cashier opens up the cupboard or you do see those horrible images of rotting teeth, or cancers, or other stuff that's really unappealing, there is nothing quite like the brand positioning and brand image that companies actually want to show potential customers. They’re actually there to put new customers off. For our existing customers that are used to smoking, it has been shown not to put customers off showing those diseases and bad teeth. Because they're addicted, that's what they're going to continue to do. Equally, with the price points, it's very difficult to track the changes in prices. Because they're in a cupboard or you can't see the differences. So very often, and legally speaking, different cigarettes can't compete with competitive brands. Often, they end up competing with their own brands if they start making any pricing changes anyway. So week by week, what actually happens are two things. There are new channels to market because existing channels to market can't provide a brand. And the brand is the number one driver of purchases. So, they use online avenues that are highly I suppose it's unregulated compared to more traditional channels of marketing. It's much harder to track changes online than it is in store. As for the next point, unlike any time before, cigarette companies are using both price positioning and tactical discounting on a weekly basis. It's not as fixed as it used to be. Pricing has become much more active. However, the price range within which they're discounting is very, very tight. It's almost between $25 and $27. If you go below and above, this causes a below margin loss, an unnecessary margin loss. And above all, people switch to cheaper brands. The cheapest brand was about $30, and the optimal price point is around $50 for a pack of 25 cigarettes. There are a lot of different revenue plays in the market. But the essential one that's really driving the strategy at the moment is how can multinational cigarette companies acquire new customers? This is where the new businesses What's happening? [A] It's through the Internet, through promotion, subtle promotions through social influences. If you look into it a bit more, you'll see that a lot of social influences actually smoke. Some of these social influencers have, to some degree, some alliances with cigarette companies. Now that is a great way to promote a brand. It looks cool. Consider 1930s cinema and how it glamorises the cigarette. The same things are occurring online, and young people have been exposed to these sorts of images, associating smoking with being cool. [B] The second thing is that they're actually branching out into developing economies like Africa, India, and China, where it's still highly unregulated. It's still possible to show the Marlboro Man looking cool on a billboard. That's all okay. Whole populations are being exposed to those sorts of promotions, as the US, UK, and Australia were many years ago. So the same tactics are being played, just in a different way.

One thing I’ll say I think about cigarettes is that I suppose there's been so much push to stop people from having them. So much drive has been based around that. You can't smoke, and you can't advertise. There have even been situations wherein certain countries have gone back with technology and removed those movie stars and the cigarettes that they used to smoke and made it look as if it was all clean. I will even say, again, in a Hollywood movie nowadays, it will be more socially acceptable to see a scene with someone taking heroin than to have a few Marlboros with a brand visible. So that's by far the way things have changed. And one thing I would say is that with all this pushback, I would say now that a lot of people are sick of this. They're sick of being told what to do, and a certain category of people will always want to rebel against that. So cigarettes are seen, as you know, as a tool of rebellion. The Torch of Liberty was an Edward Bernays advertisement back in the 20s to encourage women to smoke at that point in time. So they've always had that image. I would really think, certainly in 2021, an awful lot of people just want to tell the government and medical people where to go. They feel every aspect of their lives has been ruled, whether they agree or not. There'll be a certain percentage of people just clocked out that just do not care anymore. I think we've talked quite a bit in this podcast. One thing that we wanted to talk a little bit about was: what is the real business model is known to tobacco companies, or cigarette companies, in developed societies or in developed economies where there are significant restrictions on selling tobacco? Recently, I spoke to somebody who works for a major tobacco company. They described their business as fundamentally one of tax collection. A licence for tax collection with the ability to invest those funds in overnight deposits. And the investment that counts has to make returns before they have to pay that tax to the government. So in theory, a $40 packet of cigarettes, let's say $35 of that is government duty or government taxation. They have the licence to collect that money. And they have the ability to collect that money and hold it in their own company accounts for a period of time until they have to make a payment to the government. They employ quite a team of accountants, lawyers, etc., to ensure they maximise the financial return on those assets.

All the while, whilst that's happening, they're using price optimisation to ensure those loyal smokers are going to smoke until they die. They’re going to smoke at price points that are well optimised and that are revenue-generating for businesses. Then there's that new business strategy that I mentioned as well, in developing countries, where they're going to keep pushing those new marketing strategies to acquire new customers. To ensure the longevity of the cigarette industry, because, in essence, that is critical to even the financing model that Aidan mentioned, The cigarette companies still need new customers to keep everything running. The strategy in developing countries is actually very, very important to the cigarette companies globally. There's even talk of the major cigarette companies joining together now. To unite in the face of such a serious business model challenge. Rather than competing with each other now, I don't know if that may or may not ever happen. But there's certainly talk that options are on emotion at the moment to ensure that the cigarette industry remains.

I think the news and 2021 are always confusing to look at. I always think of David Beckham, the famous soccer player who played for the Los Angeles Galaxy soccer team. And that club was sponsored by a marijuana company. They were allowed to have that blazoned on their jersey, whereas putting a Marlboro or something like that on their shirt would have been completely unacceptable. So things change. Trends do change. We hear how much the government cares about our health and well-being to the extent that they can lock us in our own homes. So, we hear that a lot. But it is strange that cigarettes where there is a lot of evidence. There is a huge amount of evidence that they are a factor in causing cancer. But I don't think there's been a single developed country to actually ban the sale of them. So there are a lot of ways people make money from cigarettes. But fundamentally, the people who make the most money are those in government. I believe it was in the Czech Republic that looked at banning cigarettes. Their other economists told them they could not afford that. Because the supposed excess healthcare costs for cancer patients were much smaller than the actual revenue brought in from the tax on the cigarettes themselves, So it's an interesting one, but the business of cigarettes fundamentally involves selling cigarettes with a lot of stuff right in the back of it, such as tax collection and other things.

I believe that, in terms of tax collection, Australia has the highest tax collection on cigarettes. And cigarettes in Australia are the world's most expensive cigarettes. So you can imagine that the revenues coming to both the cigarette industry companies and the government here are quite substantial. Although the tax is purported to be used to stop people from smoking in the segments where it should, it's actually increasing demand. What's actually happening is that the black market for cigarettes is increasing. The hunt for new, young, and more naive smokers is on the increase. Again, is government intervention required here? Or is it actually creating further problems that are more difficult to control?

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In this episode of Pricing College - we discuss the new Aussie Federal Government plan to boost domestic tourism by subsidising flights by 50%.

We discuss is price the major driver of tourism nowadays in a post Covid world - or is it the rationale expectation that your vacation will be ruined by State Governments locking down cities and closing borders willy nilly.

We're recording this podcast a day after the Australian Federal Government announced a 50% subsidy for holiday flights to certain destinations throughout Australia. From a pricing perspective, we want to look at that and ask, what should you be looking for? And will it actually boost travellers?

I'm also looking at it from their pricing team's perspective. What prices are they going to set for their retail prices? Are they going to go higher than usual? Or are they going to because they know there's going to be a 50% discount, or are they going to keep within range? And, what is their range when they normally do things like dynamic pricing? So there are a lot of questions to be asked.

I'd be honest, that was one of my first thoughts. If you're a pricing person at Qantas, Jetstar, or Virgin, You know that customers have you charge $100 and then customers will get a 50% discount. I don't know exactly how it works, but you will get a 50% discount from the government. Would you be tempted to slightly increase your prices? Move from $100 up to $120. So, that's something we'll see. Yeah, I don't know the answer to that. Maybe they will. Maybe they won't.

I think this all comes back down to price positioning. If you think about how you set prices, just because you can set prices higher. Does that mean you should? How does that affect the brand? How does it affect the reputation of a business? These are all very serious considerations, as is the amount of attention that will be given to the newly released prices by regulators and consumers. Everybody's watching. Everybody is very interested. Obviously, going away now, especially at Easter time, is on people's minds. People are weighing up whether they should or not. In fact, I imagine Qantas and Virgin would be very interested in getting that kind of feedback. What is market feedback intel about what customers are going to do? Are they not just going to be willing to pay more or less? Are they actually willing to go on holiday at all? With the knowledge that borders could close, announcements could be made about COVID. Lockdowns can happen instantly, and people will be stranded. So this is on everybody's mind. Now, how does this affect pricing?

I think, looking back to that first question, how do you even set prices? We've discussed on this show numerous times how the travel industry was probably leading the way with revenue management tools and computer programs. But let's be honest, the history of a year ago isn't really relevant anymore. Has anyone who flew during the Easter holidays in 2019 changed their mind about flying this year? The answer is probably not. So, how would you even start setting prices? Let's be honest, all airlines at the moment have excess capacity. It's not as if there aren't flights available internally if you want to take them. So that's not the problem affecting the airlines. So, how would you set those prices? I’ll be honest, I don't really know. What is the methodology they're using on the airline? It’d be interesting to hear from some of those people. Is it based on historical metrics? Or is it just based on more of a value-based approach based on today?

Well, we are certainly living in unprecedented times. There are no benchmarks. The past data, as Aidan was saying, is not very relevant today. So, what were they doing before? They were using algorithmic pricing to set their prices. They were using advanced AI and pricing software. Are they using that now? Not at all. Looking at a very recent example from United Airlines in America, they actually had to shut down the pricing software. Due to the crisis, the algorithm was massively reducing the rates of the fares to almost rock bottom prices based on market conditions, availability, supply and demand. It just didn't make sense. So what they had to do was to step in very quickly and shut it down. Now, their pricing team is stepping up to the floor and leading the price-setting process yet again. The same is undoubtedly happening all over the world because the pricing algorithms set in the systems just don't make sense for now. Yes, they were logical for a market that was stable and set up for a particular scenario or market conditions. But now things have radically changed, and you can't just tweak the system. It takes a long time to reset the algorithms. So they just shut them down. So even here today, I would imagine the pricing teams of the leading airlines are very, very busy. They're thinking, "Okay, and they're setting new hypotheses about customers." Because customers and their willingness to pay for what they're thinking about travelling for lead this discussion. I imagine the data on this would be anecdotal. It'd be based on a lot of assumptions. So I would say, to a certain degree, their pricing will be the same. But that doesn't mean that it can't be scientific and done scientifically using hypotheses, testing, learning and trials. At the same time, it's very important, as I said, to bear in mind all those other things, like a business strategy. What do you intend to do in 3-6-9 months from now? But also, what does the airline want to be in three to five years from now? Because you've still got to maintain that as your point of reference to understand what you're going to do now. Because you don't want your tactics to drive your strategy because you could ruin your future business strategy.

I think the airlines, talking about the future, obviously, they've got their eyes on the future. But this is seen, I suppose, as being promoted by the government as a way to safeguard those jobs and safeguard those industries so they will have a future. I have serious questions as to whether this is an efficient use of taxpayer money and whether it really will boost people travelling or wanting to travel. I personally think there's a lot of pent-up demand for holidays and travel. I think what's holding people back is not necessarily paying $50 versus $100, or whatever it is. I think the elasticity of demand It's almost, to some extent, a bit inelastic at the moment. You could increase prices and people would still travel. I think what's holding people back is more is not a pricing-related aspect. It's a risk. It's whether you get to Queensland or Perth, wherever it is, whether halfway or 10 minutes before landing, you're told you’ll spend two weeks in a quarantine facility. Let's be honest, that's a bit of a downer on the holiday mood. So I think that's what holds people back. I think there is also a fear that governments will just shut down willy nilly. Personally, at this point, I don't think many Australians are fearful of COVID to that extent. I think they're afraid of wasting their money during their two-week holiday. The horrific implications of being on holiday in a hotel room, not being allowed out into fresh air for two weeks. That puts people off. Whether saving $50 at the fair will compensate for that and make them confident is another question. I suppose just the one thing I'd add to that one is maybe when the government is spending this money. It can be seen as the federal government, to some extent, vouching for or pressurising state governments not to lockdown again. Not to shut down borders. Obviously, if they did, it would just be seen as literally flushing taxpayer money down the toilet. So, I think people may get more confidence that if taxpayer money has been used to finance that stuff, maybe there are some brains behind it.

I recall. I think it was before Christmas. I think the airlines wanted people to get back to using the flights and go on holiday again. There was like a huge, massive sale for interstate border holidays to Queensland, etc., Perth. So many people obviously needed that holiday then, and they went for it, buying those tickets. Then, after that, there was a surge, a massive increase in prices. Because the demand was quite high, I think it exceeded the normal price range at that time. Even accounting for seasonality and it being Christmas time, People were complaining that going to Queensland for a holiday was extortionate. So, after the initial huge sale, there was a massive increase that exceeded the range. So that was interesting. I do wonder, even though that wasn't government-sponsored, whether that trend will happen again. Or what did the airline industry learn from that? As Aidan was saying because they learned that after they did that, there were lockdowns. Especially in Melbourne, people had to drive back in their cars over Christmas and stay on the highway. Some people have to stay out for days to get back in. Will the airlines now provide some risk mitigation here? Will there be extra flights just in case? Will there be some sort of logistics in place for people to get back home? Or will the flight schedule just be the same? Are they going to be running their flights pretty badly because they want to ensure that their costs are down and their running costs are down? Or are they going to be bumping up that supply just to be sure? And if they did that, then that would make any price increase quite justifiable. But it seems like it'd be interesting to know kind of what the plan is.

Personally, my view is over the last 12 months: is there a plan? Probably not. You could even look at a scenario. I don't think anyone would bet that borders will not close at the drop of a hat at any point in the next few weeks. What happens to the airlines if they've collected funds for flights that then have to be cancelled? Will that be covered by insurance? Will these airlines have a monetary refund for these customers? Let's be honest, there's a very high chance of that happening given the slow rollout of vaccines etc. The slowdown in Australia was even predicted. So generally, when people want a holiday, they want a vacation to relax, to unwind, to get away from things. Is that the product or service you will be purchasing when you buy the holiday? When you book that week in Port Douglas or wherever you want to go, I think it's a bit like the one we covered in the cruise ship stuff we covered in the previous episode. With that, we did say that maybe it's a bit of hope over experience. People are purchasing hope. If they're booking a holiday for the future, that gives them hope that this stuff is over. Now there is something to look forward to. So maybe that's part of it. Maybe it's a national positivity week, etc. I think that that gives people a really positive view of the future and something to look forward to, so I hope that's accurate. I know a lot of other people. You have to wear masks, etc. on flights and on airlines. Is that the holiday mood? Is that something people really want to do? To be honest, I would expect that would dampen the spirit also. At the end of the day, when you walk through a shopping centre, people can wear masks in Sydney if they want to. 99% of people choose not to. So clearly, people vote with their faith and people don't want to wear these things. So it's going to be a question, especially in the long flights of the current etc., or Perth. So it's all to be seen.

I suppose what they found in America recently is that the people that were going to go on holiday or use aeroplanes had a very specific reason for doing so, and they were going to fly regardless of the price. So offering discounts or heavy discounts didn't really matter. The rest of the population wasn't going to go anyway because of the COVID restrictions. So maybe that logic still applies now. Using some sort of mass discount subsidisation to drive people to drive demand looks unlikely to work. We're still coming out of a very serious crisis, and a lot of people are still very cautious and have safety and health in mind. But, if you notice, this comes down to segmentation. For whatever reason, there is a segmentation.'s going to be a segment that is going to fly anyway, and they're willing to pay the price to do so. Should they be paying an excessive markup on the traditional flight price for doing so? because that will impact your reputation and business strategy. Many people remember that sort of thing. Yes, they’ll be paid for that right now. But as soon as things get more stable, they'll be looking for alternatives and thinking about businesses that treated them well when things were tough.

I think a lot of people at the moment feel very sorry for the airlines. They feel for the people: the staff, the pilots, the cabin crew, the ground handlers; people feel for them. They feel for the people who hold the resorts and want to support them in this country. There's that attitude. But at the same time, there's still a big lack of trust with the state governments. There's a lack of trust that, you know, the holiday you book will be available. Is it worse not to have booked a holiday or to have a holiday snatched away from you at the last moment? I'm not sure. So it's all to be seen. I personally would love to have a holiday. I think 90% of the world's population could do without a break after what we've been through in the last 12 months. I personally think the demand for interstate travel is certainly interstate. I'm not so sure about international. But interstate, it's probably reasonably priced. I think a certain percentage of people will not travel currently given the fears of COVID. But another percentage of people couldn't care less and just want to get back to the old way. So I don't think dropping the price by 50 or 100 bucks is really going to influence that. But again, I've been wrong in the past. So let's see.

I tend to agree. There are a lot of reasons why it's not a particularly good idea from a pricing strategy perspective. But it seems they're using the age-old economics 101 theory. This is the government's way of driving demand. They're not thinking about pricing as pricing managers do by segmentation and picking value drivers. There is no such thing as a segment of one when considering it holistically. Hopefully, it'll work. Best of luck.

Just one final point. There is also a question of equity. Whereas the people who have lost out most from the COVID lockdown restrictions have been young people. People are probably less secure in employment. They're probably not in a position to really go off and enjoy themselves for a week's holiday somewhere interstate. To some extent, what we're doing is using government taxpayer money to basically subsidise potentially wealthy people who can already afford to book the trip. and would have booked the trip anyway. So like, Is it a bit of a pork-barrel thing to subsidise people who don't need that subsidy? I would argue yes. But I've got my own political views. To some extent, the government nearly always finds new ways to waste money, so I am not really surprised.

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In this episode of Pricing College - we discuss what impact a cashless society will have on pricing.

Will it mean less focus on budgets and costs, will people spend more or less - and what businesses and industries stand to benefit.

In today's episode, we want to discuss the movement to a cashless society. What that will mean for business, for consumers, for value and all things pricing related.

There's definitely a trend for using less cash nowadays. People seem to prefer just paying tapping and going, using their cards, much more than cash. Before people would carry much more cash in their wallets. And I suppose businesses, small businesses, in particular. I'm thinking like cafes would be much more set up for that sort of cash-based sort of society. But things are definitely changing.

I think obviously, using cash was something we're just used to. Workers would get their payment often on a Friday evening. They get the money in cash that goes to the office and pick up their cash. Anybody working in the hospitality trade obviously received their money in a small envelope. Whether their tax was paid or was not was a different question. But I think certainly over recent years and probably accelerated. To some extent by the whole COVID restrictions and fear of touching things. That has done it has increased. What I sometimes think about when I'm using the tap and go. What are the benefits? What are the negatives? What is the value? Clearly, there's a value in not having to go to the bank, to the ATM to pick up cash. So it saves you that time. It saves you that effort. And so, probably that's why people like it.

I think the cashless society is really tapping in on that value driver of convenience. People nowadays love convenience. Everything has to be simple, easy. People assume that paying with a card is easy. It's easy for them. But there's a whole range of financial structures underpinning that transaction, which is rather complex and actually is very difficult to develop. To be able to build that sort of cashless society and also monitor.

One thing, I think, certainly from the customer perspective, do people stop seeing it as money? We've covered this in some of the previous podcasts. I think we covered it on the menu pricing. Where if the menu doesn't have a dollar sign people, people don't really see it as money. I noticed clearly, we always talk about people paying for stuff with credit cards depending on the never. It's almost seen as not real money. When you have real tangible cash in your pocket and we touched on this in a previous episode about the music industry. When you have a tangible thing in your pocket. Maybe you see it as more. Maybe you spend a bit less. Maybe you look after those pennies and dollars. Again, that's just perspective. But yeah, be interested to see what Joanna thinks about that topic.

There's always this sort of psychological implication from using cash and or different types of things to buy whatever you want. I suppose because cash is very tangible. It's in your hand. It's there. You may monitor it more closely. You count up the cents, then dollars and maybe you have more of a budget in mind. When when you're paying with a card. It's just a piece of plastic people do tend to tap and go. We often see people literally not even asking on those terminal payments. People just tap. They don't even look at how much they're tapping on the screen. It literally just tap. Now it's gone to tapping with your watch one of those iPhone watches, scanning with your phone. It's just becoming more like money. It's just becoming more and more impersonal. Businesses like that. They don't want people to think about what they're spending. Because what happens when people think about what they're spending. They become more logical in their mindset. People spend more when they're in that irrational mindset. I think we talked about that with that Daniel Kahneman the irrational buyer. That's exactly when people buy more like impulse buys. Impulse buys tend to be more expensive buys. So if you're spending with that mindset, then you're going to be spending more on higher-margin products.

I've noticed this, I was in a bar recently. When you asked for a beer they don't even tell you the price anymore. It's almost like just to give you the machine you tap it, and people generally don't seem to even ask. So there's a trust aspect there. You must be trusting the place you're in, but it does create issues. The second thing I'd say is probably in older times, last year I mean. People would have had a budget in their minds for that night. They might have gone to the bank, they might have taken out, $100 $200 whatever it was. That was their budget for that evening. You think when you're in an environment whether it's a restaurant, certainly in the evening scenario. You think of the casino, you think of gambling. There are dangerous implications for that. Whereby 10 years ago, when the money wasn't in your pocket, you had to leave and go to a bank, etc. And those natural control on how much you could spend. Now the only control is what your credit card says.

I think there'll be a trend now as more businesses get set up for more of that cashless society. For instance, massive supermarkets at this point in time are testing and trialling that just tap and go payment terminals right at the end. So they initially set up with no tap and go. You could literally just walk out of the store and then people didn't really like that. They wanted something that they could tap and go almost like the tubes. So they felt like people could visibly see them paying. They weren't like stealing anything. So they actually wanted a tap and go poll. But initially, that idea was not to have that at all and supermarket. So that's been tested and tried now. Now, why are they doing that? Well, if you have everything online and it goes straight into business analytics, business intelligence systems. They can basically track your spending, what you buy, purchasing. Also, they'll lead you to more of a sort of subscription type of payment revenue model. Rather than coming in when you want to. They gonna try and like bring in some kind of subscription model to keep you lock you into that. So let's say we keep with this, supermarket theme to a particular supermarket chain. So you always get your groceries at that particular place. And you're sort of locked into that ecosystem. So I think when we move into a more cashless society, we'll also be moving to more of a subscription-based society. A lot of our money, our budgeting will just come out of our account. So I think from a consumer perspective, we've got a really like more on top of budgeting than ever before. But as Aidan was saying, we're probably less inclined to do so. Because it's not tangible to us yet and it's very new.

I think on the topic of supermarkets I read this week. Some of the newer style stores that I think Woolworths and Coles had in the CBD in Sydney were trying to trial a tap and go only no cash had to withdraw completely from that and are now accepting cash again. And the reason was abuse from potential customers. In all societies in all populations, there are early adopters, there is the middle ground and then there are people who don't want that. There's a very large audience of people who want to pay with cash for various reasons. Whether they're not used to tap and go. They're older people. Or they're also privacy-minded. And like anything else, like we see with vaccinations or anything that people feel as being fast-tracked or pushed along on them. There's also a certain percentage of the population who push against that. So I would argue that you're seeing more people wanting to pay in cash, and a certain population holding on to cash. And let's be honest, there are always transactions that people want privacy on what they're doing. They don't want to be tracked, whether it's as simple and innocent as buying somebody a birthday present. Not wanting their husband or wife to see that on the credit card bill. That’s an innocent version of that I can think of. But you look at a huge amount of transactions that happened globally that are in cash. That will want to be the remaining cash. Whether they're legal or illegal, there's an awful lot of activities that people will want not to be tracked and not to appear on their Amex bill at the end of the month.

I think this is a perfect example of segmentation and the interjection of major global trends being that cashless society. There's always going to be as Aidan was saying maybe it's a generational difference. You've got the younger people that do value that convenience. They don't mind the information being used to track them. They think that's a great thing too because that adds convenience. And they also don't mind getting that convenience though I'm not sure if that'd be willing to pay a price premium. But over time with a subscription model, I do predict that prices probably will go up once you're locked into a system. Whether that's if we go back to that supermarket example. Across a basket of goods because I'll have all of that data. Then it's much easier to optimise based on consumption patterns. Because consumption patterns by each individual will be tracked with that sort of subscription cashless society model. But then equally there are people with different value drivers that do respect privacy. Having the freedom of choice in a different way. I think both of those value drivers are equally important. It has to be thought about in business model transformations. Because we're not fully there on one trend, was really at that crux weed, we don't know. So a lot of businesses are still contemplating how they can balance those different needs sets. Even though we're rapidly progressing towards digital and everything's online. There is still a large majority proportion of the world's population, that maybe don't value that as much as Harvard Business Review would like us to believe.

I think the regional practices in every country are very different. Like one thing I'll say, anybody, who's been to the United States for any period of time will know the importance of having small dollar bills and different things like that for it for tipping. We're a culture of tipping is so ingrained. I would think the idea of cash Dango in the United States would be much less than in a maybe a country like well, like Sweden or Denmark. Or one of those nations where there's just not a tipping culture. And there's potentially more of a regulated market with less not illegal activity, but let's call it less regulated activities. I think that also we'd have to look at in previous times, you could often get a discount for paying in cash. And maybe you'd have to pay a slight surcharge for paying with cards, whether debit cards or credit cards. Even in Australia, it's still quite common in many certainly the smaller locations to pay a surcharge of a couple of per cent maybe for using an Amex card or even some of the more obscure ones like diners cards or JCB cards and these sort of things. I could see a day when previously is seen as a privilege or seen as a value add. People might actually pay a small premium of 1% or 2% to use cash. I think that's actually something that potentially could happen.

I suppose that my final point on that would be, it's quite likely if you do move to a cashless society that there will be more surcharges and fees attached. Often hidden to a certain extent like with everything. There'll be a website page direct into another page with all the like terms and conditions of a particular subscription or purchase. And with that will come fees. Research clearly shows that people, businesses do not like hidden fees. I think that probably be tested again and again as we move forward. People who continually try adding those fees. I know banks keep doing it even though the research says the customers don't like it, that is still done. So it's obviously quite profitable to do so even though you might lose customers as a consequence. So obviously, those calculations have already been made and banks still do it. It obviously is very profitable to them. There'll be those sorts of things to consider segmentation business model adaption. I know quite clearly from consulting businesses, cost structures, as well as the revenue and price management systems, aren't really set up for a cashless society. At the same time, we do see business leaders thinking in that way. However, segmentation even in its most traditional form is still very ambiguous in a lot of companies and something that people really don't consider as much as they should. Segmentation and pricing are critical to this cashless society equation. So, I think there's a lot of work, especially in terms of internal capability, systems and strategies that need to be developed to actually operationalise this type of concept.

Surely from an operational perspective, I think it could have implications that people don't really haven't thought about yet. And it could go either way. One example I can think of is the Reject Shop, which is a major chain in Australia of I suppose discounted items, home domestic items. Items such as sweets lollies, home cleaning materials, those sorts of things. My understanding is they were suffering in recent years through competition from less regulated cash accepting businesses. Where potentially there was a bit of suggestion that maybe these companies weren't paying full tax and all that sort of stuff. That's potentially just a defence mechanism. But if you move to a cashless society, not paying tax, not Reg, following through with all the accounting etc. It makes a much more even playing field and decreases that the black market or the less regulated market sector. So potentially it could get a bit more power to the larger corporations to the bigger companies who have better banking systems in place. Have a potentially lower margin to pay to the bank companies. There have more than happy to move towards it because it reduces the costs of handling cash, reduces the likelihood of theft. So, there are actual operating costs that potentially will decrease. For example, remember when I was a teenager, working in a supermarket. One day I was asked to drop cash down to the bank, in actual bags of cash, which with due respect was quite dangerous. But I suppose the days of stealing from supermarkets stealing from shops to stairs, maybe are over in many regards. But there are implications from this cashless society that could change the potential strength of some companies versus others, and we won't really know what those are.

I think there'll be a lot of learning a lot of tests and trials will be required before, during and after all of this sort of change happens. And yeah, look, it'd be exciting to see, how consumption patterns change? How do people come about knowing the different companies? And why do they choose certain companies over others when they make their purchases? But I suppose exciting trends to come but there's a lot of work that needs to be done to ensure that that can be done safely and can be you can fully operationalise that from a cost and demand perspective.

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In this episode of Pricing College - we discuss why so many companies do not practise or invest in value based pricing.

We discuss that value based pricing is difficult but very rewarding - and explain that many companies are not developed enough to truly pursue this systematic approach.

In today's episode, we want to ask the question, why do some businesses push back on value-based pricing? Or why are they not seemingly interested in value-based pricing?

It seems strange that a lot of companies still today don't think or consider using value-based pricing in their business. When I say that it's both B2B and B2C. I think to answer the question, in short, it was really because people don't know-how. Potentially this is because they spent a lot of time doing basic cost-plus pricing that they really forgot. Or they really don't know how to do value-based pricing. But what is value-based pricing? It's really a method of understanding your customers and what they value about your business. And that takes a little bit more time and thought.

I think fundamentally, companies don't do or don't practice value-based pricing for the very simple reason that it is very difficult. To practice real value-based pricing, you really have to be top of your game. And obviously, you can move in steps in that direction. But let's be honest, a lot of companies are not very good at it or anything. A lot of companies focus all their efforts on one area, whether it's operations or delivery, or whatever it is. And very often, I’ll be honest, I've seen very few companies who really focus on customer value or value-based pricing. It's almost it's not saying that, why do companies not do it? It's almost always the question is, can name companies that do it?

Strangely, even if a company says that they're specialists in the supply chain, operational management, production, things like that. That could be in oil and gas distribution. That could be a very traditional B2B sector where pricing and customer is not a priority for them. But that really should be. Because with all of those things, supply chain everything should be positioned and focused on what the customer wants. Because basically, every business that sells to customers is there because of their customers. And if you don't understand what your customers value, then everything else falls apart. Your supply chain or being efficient is not focused on the right things. You're not buying the right things, Are you delivering on time? etc, etc. So even if you think being value-based is simply a pricing thing that you can leave to later on. It's something you should consider and it's something that's embedded in the entire business model.

I think a lot of companies who do value-based pricing in one way or another many of them fall into it. They don't have a structured process, a Value Management System, they don't have that. If you look at a lot of companies who are in the luxury goods market. They are aware that intuitively to some extent that they have to maintain the value of their product or service. But, do they really manage that value? Do they study it? Very often not. The number of companies who really do it is very small. It is due to the difficulty of it. And nearly any company I've ever seen, there's always an important problem that has to be fixed today. There's always firefighting and issue management and trying to rectify today's crisis, let alone billing the future. Even if you look at a Silicon Valley startup, which arose in the media these days. Most of them don't have value-based pricing or value-based methodology. And the reason I would say what I would suggest for that is that they're still trying to actually come up with their business model. They're pivoting, they're trying to work out how they sell to customers. They're trying to actually win customers, before even optimising or truly understanding where they're trying to get to.

I suppose when I've seen businesses attempt value-based pricing, two things happen. They either outsource the value discovery to a market research agency. Who in turn provides very intellectually stimulating observations about, why customers like or dislike the business? And, often break that down into customer satisfaction. However, the problem with that is in terms of pricing. It's very difficult to integrate that tight type of very loose generalised observation into your pricing, especially on a product level. The second thing I see and this is even common in leading FMCG businesses, they say that they're doing value-based pricing. But ultimately, it's still cost plus with a little bit of value, add on at the top of everything else. So if they look at the price ladder, its costs, costs, costs. What are the competitors doing? Another markup and then, how valuable are we? “ oh, we think we're about that or let's add another 10 cents.” That sort of thing. It's not very scientific at all. Fundamentally, it comes down to skills gaps in analytics. There are huge knowledge gaps in value-based pricing. And there's a lack of strategic thinking about how to integrate your pricing to drive a value-based business model.

I think we have to look at there's the journey, there's the destination. A lot of companies have a lot of problems. We always hear in the press and anybody who's worked in a corporate is aware that there are skills gaps. There's corporate culture issues, those sort of things. It's very rare to really work on a championship-winning team. To be part of a great team and system and process, it's really delivering results. Those companies are later few and far between. And even when companies hit them, Are they able to maintain that over a long period of time? It is debatable. But I think the point I would make is just because something is very difficult. It doesn't mean it's not worthwhile doing. You don't have to achieve 100%. But the closer you get to it, the better the business will be. It's like going to the gym in any way, shape or form will benefit your health. You don't have to become obviously Arnold Schwarzenegger. But you have to do some steps and further along that line you get, potentially the better. But we have to be honest, it is tough, it is hard. You do need to work hard. The company needs to put a lot of effort resource focus on value management and really embedded into the company.

Maybe it's not like resistance to change, resistance to something new. It's more resistant to learning. Maybe not challenging thinking assumptions about value. Because often we when we've done workshops on value, for instance. I've been surprised to find how difficult even identifying internal value drivers can be with stakeholders. It's almost as if that's never been thought or a question on their mind. So the articulation of value, even from a hypothetical perspective. It hasn't been tested on the customer. It's literally internal is still very ambiguous. So, what can you do to go from there? You need frameworks. You need proven frameworks to help you think through the problem. These things do exist. There are processes in place. As Aidan said, it really now is time to sort of have that sort of step-change. Think slightly differently and start testing those assumptions.

Of course, different companies have different lifecycle stages. Whether new startups, small businesses and very large corporations. They've got very different needs, very different objectives. The mode of focus and resource putting to this sort of stuff will change hugely across all types of companies. Whether it's a small, one-man-band or whatever like that. They just need to have a few thoughts a week or a month and what they're actually trying to achieve. To the point of where you get to a major corporation where they really have to think about, what their differentiators are? How they're focusing on winning customers? Whether better or worse at certain value categories. So it very much varies along the line. The other thing I think will say is business is tough. Every aspect of the business is tough. We can't dress that off. Obviously, some companies are going to be better than others at doing these sorts of things. Fundamentally real top quality Value Management is what separates the great achievers, the big companies from the lesser lights.

The successful people that I see implementing value-based pricing well inside businesses are those that have almost resisted organisational norms risen above. In spite of everyone telling them not to do value-based pricing. They've done it anyway. And they've really challenged that cost-plus thinking. They've even developed their own sort of models. They're even tried to develop frameworks and things like that in place. So they can pretty much capture more revenue and margin for the business. Over time, because they repeatedly through their methodology, which has value-based gain more traction in the market, more additional margin than anyone else. And everyone's wondering, how can they do it? And no one else can. They get seen by the executives as being high performers. From there they rise through the ranks. Rightly so they're the ones delivering value. But the unfortunate thing in this is that often that there's not that commitment from senior management from the executive team. To give very smart people like that the bandwidth to do the best work they can do. And so often it just becomes ad hoc here and there. It never becomes a rounded complete piece of work. So I think I'm saying here that yes, you can invest in great smart people. But if you don't give them the bandwidth to try and test and learn new methodology, and start embedding value-based pricing in the business. It will only ever be a concept. It won't work out. So the executive team need to give teams that space to learn and trial test. Because with that space, they'll be able to prove to business within three to six months that value-based pricing works and then everybody else gets on board.

I don't think I've much else to add to that. I think with a lot of things, it's just getting started. It's knowing the direction you want to go in. It's putting in place systems or processes and milestones etc that will help you get there. So, yeah, as they're all saying “the first step is the most important on a long journey”. So yeah, that's it for me.

I suppose never feel that you can't ask, we are a good resource. We know people out there that implement these sorts of things. If you need advice on training providers or things like that. Please feel free to ask us any questions we can get you started with all these types of value-based concepts and implementations. So yeah, taylorwells.com.au or feel free to get in touch with me personally.

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In this episode of Pricing College - we look at the recorded music industry and the pricing model.

We discuss Spotify and what a lack of live concerts is doing to revenues in the Covid restrictions era.

What can bands and artists do?

This episode is about recorded music. The business and pricing model in the recorded music industry. Interestingly, we've actually had a lot of problems with our zone this morning. So this is the second tick at this episode. We could do with professional music recorded to help us.

In the music industry, if you compare now to the 1970s, you'll find that sales in music across the board have dropped by almost 50%. The market size is contracting. And we're wondering, can we improve the business model the pricing and revenue model in some way? What seems to be the problem here?

I think the first thing we'll look at now to kick off is, how the technology basically made the music industry? And, how has it been damaged in recent years? Like many industries, we've covered in the past from Blockbuster Video to others and even the Coca Cola model with vending machines. Recorded Music was actually a quite recent invention in the early 1900s, late-1890s. Of course, before that would have been live music, etc. We said the gramophone and recorded music on records. We could actually have recorded artists from the 1920s onwards when we had famous recording artists. It said the talking movies and all that sort of stuff. That probably peaked around the 60s and 70s. Think of the Beatles, The Rolling Stones, Motown and all that, Elvis Presley. Then with the 1980s, we had video pretty much started to kill the radio stars. We had MTV come on we're pop down recorded their videos. And then with digitalisation, the backlogs of all the money in the music industry became worthless or very diminished overnight night. Whereby people could share music for free. You could see the rise of Napster, Pirates Bay and these sorts of things. Then in recent years, we've seen I suppose the demonisation of Spotify. Whereby music can be consumed almost freely and it should be the world in your headphones.

What is the true value of the music recording industry? Let's think about that. Is it in owning the music itself? I think there's a fair bit of value in that. Yes, you can sing a song. But it's the person that sings and owns the song that has written the song that gets the money, the royalties. So royalties is a good revenue stream. Then the second value driver is in the distribution of music. If you own distribution, you own like channels to market, you own supply and you also can meet demand. So there's this huge value in that. That's why record labels own distributed very carefully for a number of years. Why does Spotify want to disrupt that very thing so we could freely distribute music without having to pay a huge markup for it? Yeah, I think you can remember that when people were paying something like $40 for a double CD. Not because it was potentially, depending on how much you wanted to listen to that music worth it. It's just the music industry that big labels really did own all rights. And could markup in distribution costs and production costs. But anyway, that's a whole different area. I suppose Spotify came in and completely disrupted that old model. Some people say it was an outdated outmoded model that was one-sided, I think so to some degree. But, has Spotify really fixed the problem? Yes, it fixed the distribution problem. But why are so many artists now complaining about it?

I think a lot of people look at Spotify and say,” Oh, we're only getting a couple of cents per song.” Or, the vast, the lion's share of the money collected from the subscriptions, etc. The vast majority of that money will go to the top 10 artists. I suppose that's the way any industry always has to be whether it's sports, movies, entertainment. The big stars take the big money. But people compare, they always compare the modern market with Spotify. Whereby they're getting a few cents per listen to the old market back in the 80s. Whereby people were buying the albums in the local record store. I think that's a false comparison. I think the reason is that the 80s is an awfully long time ago. We can't go to Spotify back to the 80s. We can't remove the digital revolution. I think we're either going to go from Spotify to again just a free for all file sharing on illegal downloads. Were in that regard, the music industry gets nothing. So I think the expectation is that we can ever go back to the way it was. That's never going to happen though because just technology has changed. We can not uninvent the digital revolution. So I think the reality of it is in that recorded music sector, this distribution method is what we have at the moment. But I think the question we want to ask is, is it the best distribution method that there is? And, how is the product that music actually sells? How's that significantly changed?

I think Spotify was set up on very idealistic principles that once the music is free distributed, people will listen to more and a greater variety of music through the platform. However, looking at what people actually listened to, that's not the case at all. It's the 80/20 percentage rule. Most people listen to the top 5, top 50 artists and that's it. When you look at the Spotify revenue model, basically all revenue from all artists go into one central part. And a percentage fee is given to the best selling songs. The best selling songs go to that top 5% of artists who we all know, the Taylor Swift of the world. Whereas everybody else gets very little. In fact, they get paid much less than one cent every time their music is streamed. So, in effect, if we know that very few people are listening to most artists and they're only getting paid less than one cent. It would take the 1000s of the streaming listens to get something like $10 to $15. It doesn't make much financial sense for most artists to go through the platform. This is why there's been so much bad press about Spotify as a model in the artists' community and also customers. People that listen to artists think that this is unfair. I don't know. Maybe there's an opportunity to revise the model. Because even when you look at the profitability of Spotify, it's still largely unprofitable. So it's not really working for them either.

I think with recorded music, we have to ask the question, what are people actually buying? In the old days, people would go into a record store that was experienced. They enjoyed the day out, would go with friends. They might get some advice from the person who owned the record store. They browse down the aisle, attracted by the cover art on the record, on the vinyl. You People might even have conspiracy theories about some of the classic records like some of the Beatles albums. Where entire conspiracies grew up around what the symbolism meant on that album cover. Owning the product bringing it home. It was like a piece of art. So you're buying the sounds but you're also buying the paraphernalia that goes with it. The membership of the club, people apparently carried the Beatles record with them when they were first released in the 60s. That really gave that sense of ownership, the solid feeling of the music. That has all been wiped away and really has gone with digitalisation. People would sit down with the vinyl and albums were written to be listened to from start to end like a work of art. Now with Spotify, that's not the system. I would say very few listeners really sit listen through an entire album. They've been on their own and listened to it, in the car or walking. The relationship with the music has very much changed. And, are we buying a product? I don't think we are. We're not buying products anymore. We're not buying something that could go on your album or your shelf and you could show your friends. You’re buying content, you're buying some form of content that could be consumed in a different way.

I suppose in the early 2000s, it was CD sales that peaked. Before that was cassettes, vinyl sales pretty much have stayed constant over time. It just appears now that vinyl sales are peaking, but really in demand, but they're not really it's still a very niche segment. Bought by a few people who still do value music in the way Aidan was describing before, that music is art. And vinyl is more than just music, it's a sort of living memory. They're also a status symbol for musicians who go, “look I have vinyl I'm serious about music”. Now there are only a few people that really are willing to pay the $100 price tag for listening to the music so much. However, it is a very profitable segment and also sales are growing. But, what's the profile of a segment like that? It's probably something like a middle-aged sort of man or woman who likes very niche music. And potentially there's not a mass-market need for that type of vinyl sale anymore. Young people are quite happy and automatically go to Spotify. To get the free dose of music, and they're pretty undiscerning. They'll just listen to the basic 10 songs at the time that they potentially hear off the radio.

I think we can look at a lot the pricing concept. We all talk about pricing that, if something is for free, it will be consumed many times more than if it was charged at one cent. People consume pop music or anything of music through Spotify or YouTube or any other system. And they don't really care about it. It probably decreases the attention of the care because you're not upfront paying. My understanding, still with Spotify for example very few people actually subscribed. Still, the vast majority of people consume the free version with advertisements. So I say that the relationship with the music then perhaps it feeds back on itself. A negative feedback loop whereby the less value that it becomes, the less value people put into it. The other thing I say is until the COVID a situation hit last year. You could almost argue that recorded music was a loss leader in many regards. It was being put out on the market really to advertise the concert experience. The large concert, the tours that were probably bigger than ever for new artists such as Taylor Swift and some of the more established stars. People, like I don't know if calling them historical, will make them happy but people like Madonna, Rolling Stones etc. Whereby they were packing world stadiums, football stadiums worldwide. That was really becoming the financial model behind the industry. Obviously, at the moment, we don't know when that's going to return and I'm quite confident be sooner than later. But with that gone, we're actually left with real revenue raising abilities in the music industry. And then it brings the whole Spotify issue to a crisis. Can we go back to the scenario where it's somewhere the bands, the writers, the music companies can add some additional value to the product that isn't just the same?

I think because of COVID I really started thinking about the impact of COVID on musicians and the industry. I think one of the positive things to come out with COVID for musicians, was that people actually found themselves becoming more willing to pay for the premium version of Spotify than they did even a year before. As Aidan was saying before most people even young people were didn't even think twice about getting a premium paid plan. They'll just go, “yeah, that's fine, I'm quite willing to listen to the ads”. However, when you're stuck in a confined space for weeks on end. What was found was that people would pay for not listening to adverts. So what we see now is an increase in people switching to premium plans since COVID. Because they've come fasciae they want to just listen to music. The types of music they listen to, however, are the same. They just don't want to listen to the ads. I think potentially another area that musicians can think of new artists to get more revenue would be looking at something like YouTube. Because they pay much better rates than Spotify and music platforms. A lot of artists are going there now. I think influencers have really led the way there. How we've seen their success stories, rags to riches of social influencers. Getting rich quickly by showcasing their lives for us on YouTube. I think now musicians will follow suit. Another revenue stream would also be royalties, off-radio. But as a result of COVID, unfortunately, restaurants cafes are closed and people are just not playing the music so royalties have gone down. So now a lot of artists are going to crowdfunding platforms to literally get finance to help with marketing. To help with promotion in general. Some are even going back to the old agency model to get promoted and sponsored for events. I think what's happening quite clearly is that musicians and the music industry are diversifying. The money is now in different areas and you've got to be much quicker and nimble to find it.

I think we could see a lot of overlap between what's happening in the music industry versus the cinema movie industry. Whereby we've seen conglomeration through one portal, where the Spotify and Netflix stuff like that. But I also think and we argued this on our last podcast about movies that studios will go direct. You'll just go directly to their company and they will do it. And I think the music industry is very much like that. You could even go from down to the artist's level. Let's take the example of a Taylor Swift, why would Taylor Swift who's got a dedicated market, all that brand awareness? Why would she not just do it directly to her own portal her own system whereby people subscribe to the music that pays her? She could with that provide additional benefits such as that could be artwork provided. They could send record sleeves to the post if they buy into the website. You could have a subscription model to that music. You could get access to the latest music early. This could be done in any niche audience because obviously with the internet niches can be local but can also be global. We joke about that, the middle-aged guy with a Rolex sweater who's into smooth jazz and sits at home listening to these variables. That may be one in a city but, “the riches in the niches” is a known saying marketing. If you can target that audience and sell products to them, something can be of extreme value to certain people who really value that product. The one who would value live streamings or, question and answer sessions. That's where I think the growth area will become as we move towards more digitalisation. We probably go back to more of the human element, the human contact that I think we're in the initial stages now of digitalisation, which is the mass market. I predict will go more towards a mass market, but niche audience.

I think to some degree, artists and musicians have really thought it's enough just to be an artist and musician to play a good song to sing it really well. A lot of them play covers, very few actually write and produce and perform the songs. But that's where the money is if you think purely in terms of producing content. A lot of artists, however, really failed to say the business aspect side of things. It's the IP moment and the marketing and the distribution that goes hand in hand. To get heard now, you need to have an eye and manage all of those things as an artist. It's not enough just to be a good artist, because now we're surrounded by choice. We're surrounded by platforms, bombarding us with lots of information, different adverts, lots of options, and very little curation. So, what does that mean? Is that we've got to make sure the artists are visible and seen. But they've got to ensure that they know about the business and they do some type of marketing activity to back themselves. So you know, I think only then can we start seeing more selection and a bit more competition in the market.

Obviously, I think this is a tricky one because clearly music in a better form is an art form, this is probably the purest art form. But having said that, obviously a lot of disposable pop music is borderline whether it is art. A lot of it is a plastic pop produced by the committee by picking members of a band to fit demographics, and really have to tick the box to be moneymaking. So, we're discussing the broad stroke. But obviously, there are more artists and then there's less. We're not suggesting that a band should start with a business model or business plan, go through a business model canvas. But I'll be honest, that's probably what people or bands created from TV shows like Power and that's probably where they do start out from, and they hit those demographics. Obviously, if you're in the music industry, for the art aspect, you might want to be listened to by as many people as possible. You might value film, you may value the love of the music more than money. And so in that context, Spotify is probably the best thing for you. But if you're searching for money, I would doubt that ever the best option is to give it away for free. If you're giving everything away for free, why would anybody logically pay more than they have to pay? So if you're in for money, if you are that classic pop and you want more than money, maybe you have to make it harder to access. Take it off these platforms. Don't give access and the free stuff. Stop recording music videos, unless they're on your own personal website. So it's a freemium model. When we talk with freemium models, generally what we want to do is up the price at a certain point in the future when you've got market acceptance. The problem with pop music or any sort of music is it's almost impossible to do that. So you're doing a lifetime freemium that will only lead you to be I think public streams.

If you think of even Taylor Swift she uses or she's advised to use some of her music as a loss leader to gain sponsorship. In Nike for instance to get exposure in films, the movie industry. In everything, there's a value exchange. As an artist, you've got to think very carefully about, what the exchange of value? Who your real customers are? Then work towards that to get money. Because often, the money is not in the end consumer necessarily. It could be in the person who's going to help you distribute it. It could be in the royalties. It could be in if you're looking for funding, the person that's going to give you funding or the crowd or the group that's going to offer that. But you've got to think what's the value exchange because nothing in this world is free. But there's has to be a fair exchange. And to date, because musicians think in that sort of one dimensional way. It's about the content, the art. There hasn't been a fair exchange and a little bit of exploitation. But that doesn't have to always be the way there are other options. And I have seen a fair few artists taking it upon themselves and being more proactive to really own that marketing and channel. A lot of building websites or subscription pages and downloads. They are trying to collect and engage with their audiences. They're trying to partner with other like artists to create even bigger, like audiences to then create a virtual network effect. And all of these things are essential. If you can do it yourself and you can work with others that can do that. You're more likely to get heard by people that can give you extra funding or advice where you need it. Because anybody will jump at the chance of signing somebody up if they know that they're getting a crowd listening to them. That's essential. There are people with money who want to know that their money and their investment is going to be well spent. I suppose, to do that it's easy now with Google Analytics. You can show people numbers, you can show people your audience size. So it's much easier than you actually think.

I think we've covered a lot here but at the end of the day, we weren't really skimmed the surface. Music is a huge industry, it’s a huge art form and let's hope it stays that way. It stays an art form. At the end of the day, we've listened to music from the beginning of time, so hopefully, we always will. We've touched on a lot of subjects. Obviously, there's music from the highest art form to the lowest music in the supermarket aisles. So obviously we can't cover every aspect. But hopefully, we've given you some ideas, some concepts maybe or some methods of thinking whether we're right or wrong.

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In the first episode of 2021 - we discuss cruise ship promotions in early 2021.

Clearly given the continuing restrictions on everyday life in 2021 -whether you will ever sail on that cruise is doubtful - and if you do - will it be the way you remember?

Aidan and Joanna discuss promotions, overbooking, revenue management and if people are just buying a bit of sunshine!

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In this episode of Pricing College we stray into an area we do not look at - asset pricing.

House prices are one thing most people have a view on.

We discuss how changing interest rates - really reflect lifetime cost of ownership and payment terms - and what value based pricing can tell us about it.

If there's one thing people love discussing in this era, it is house prices, houses, more houses your house, my house, how many houses do you have? And housing bubbles, housing inflation housing crashes. We've been through it already, I suppose in the last 10 or 15 years since the GFC, etc. So I suppose at today's podcast, we want to maybe give a separate view. A slightly different pricing view on house prices.

What's been happening with house prices? Well, let's look at this in terms of what the bank's been doing interest rates. The interest rates have just been going reduced further and further down to almost nothing. This means people don't have to spend as much on their mortgages. It's easier to mortgage repayments and potentially, what's happening to the prices from there? Are they going up as much when interest rates or the price of houses going up substantially more than the interest rate or things like literally static? If you see over years, Aidan and I were discussing this earlier. We're saying in a way that the value of houses sort of is almost remaining the same. They're not going up substantially as interest rates fall. And Aidan's, the economist here, probably explained this sort of much better than me. He's not merely just an accountant he is also an economist here. We think it has ramifications on like, how price setting? What are the price calculations for price-setting calculations for houses? It seems very much the predominant driver here is spending on a national level, and even on a suburb by suburb level. Yes, we see competitive pricing, price setting dynamics, but it's more than that. It's banks looking at our ability to spend on houses. Which we are more than happy to as consumers of houses we when we see as an investment.

I think like let's say, this is probably Sydney but obviously, you know the metrics in your own backyard as well. So, let's say in Sydney in 2020, there's a house or a unit that sells for a million dollars. I'm sure if you pop in to meet your elderly neighbours next door, they'll tell you, they regale you with stories they back in 1984. They bought a very similar property or their property for $20,000 and, what a steal. So you be looking down you go “oh, I wish I was born in a different era and paid 50 times the amount of what they are paying”. But when we look at this from a pricing perspective, I suppose what we're talking about is the elderly neighbours who bought their property for $25,000 and you're kicking yourself that used to spend a million dollars. When you really look at it, is that what you've spent and what they've spent? If you look at your interest rate and your mortgage. Probably 2% to something in Australia below 3% in the UK, it might be one 1% I'm not exactly sure what it'll be in the United States. But when you go back to the mid-80s, interest rates were very commonly above 20%. Inflation was much higher in those years. And so the difference between a 20% inflation rate and a 2% it's so different. People look at the price tag, but in reality, that's not really what you're paying. You're paying that price, you're paying your mortgage interest. The capital and the interest over the period, the lifetime of the loan. Which might be 25 years or 30 years, depending on where you are. So, what you're doing is if you add up the actual lifetime costs of that property. Let's be honest, I haven't got the numbers in front of me but the difference between the $25,000 the elderly neighbours have spent when they factor right over 25 years or 20% mortgage Interest is going to be a lot close to what you're spending than the initial headline price. So when we talk about house prices, we really never talked about this factor. Very very few people will go and buy a property straight off the bat just with a bag of cash. I suppose 80% to 90% of people will have a mortgage of some form or another. And so the headline price is it's probably not the most the best reflection on the actual cost of the property. We often talk about the cost of ownership on this podcast. When we're talking about the cost of finance is so important. So, think about, what the interest rate dropping really does for you, or the industry is increasing? What the price was back in the 80s? So the question is, Are house prices actually in bubbles? Are they actually going up or down? Is that even a relevant concept when we factor in the entire lifetime costs the money that leaves your actual bank account? Is it really that different? And is it really a bubble? When we look at that you're just asking yourself, do house prices just stay static over time? And when they do stay very static, is it just purely a factor, the interest rates are pushing up and down your ability to pay?

I suppose ultimately they can't go up so high that people can't afford them. That would defeat the whole purpose of buying them and then the banks would be in debt. Because people wouldn't be able to buy and people wouldn't be able to pay their mortgages. So they're guiding very closely to the market's ability to spend. Interestingly with the shifts in migration from China to Australia. For instance, where we're seeing an increase from there in an amount that can be spent on a house. People have argued that that isn't one reason one driver for house prices to increase. But the bank's response to that is to lower interest rates. So people here can also afford to buy. The ramification of that though is that people are selling big houses, family homes. Australians are selling them for what they consider to be huge amounts. Downsizing into smaller properties or even renting. So maybe as more Chinese people, with wealthy Chinese people who can pay almost cash upfront for houses. Take on the bigger properties, more land areas in suburban and also city areas. So, what does that going to do to the nature of the whole country? Well, we may see a much higher proportion of Australians renting. That's quite unusual for Australians to traditionally quiet into homeownership. So, we'll see a change there. I think in terms of surprise setting, there's going to be increased competition. It’s gonna be a manual. It’s gonna be optimal pricing on a suburban level as different suburbs get more interest from foreign overseas buyers, etc. There's going to be obviously on Northern Eastern beaches there's going to be more expensive. In lands going is gonna be cheaper. But, who knows? This is speculation. But overall interesting price setting based on consumer spending

and ability to pay.

So I suppose anybody who's more interested in this sort of topic and credit, inflated credit, lead inflation and credit lead in a boom can look into more of the Australian School of Economics, which really focuses on those aspects. Often it's not factored in very much in modern economics. But I’m sure it has a lot of truth in it. I think just ask yourself the question when we talk about pricing, the pricing of houses. If you bought your house today, let's say at a million bucks and interest rates are 2%. Then you try to sell it in 12 months' time, and interest rates are for whatever reason, they're often 19 or 20%. Wish they were back in the 80s. What would actually happen to the price of your house? What would you estimate? Where do you think could market price for that house would be? If you're selling it to a young couple who wants a new home and they're taking out a mortgage. I don't know where the number will be. But I'm very certain that would not be the same price that you paid for it. So yeah, it's just a different alternative viewpoint. That hammers home the idea that pricing is not just the ticket price, it's the payment options. If you're going to buy a car, will they give you credit for that car? Will they do a trade-in? What's the lifetime of the loan? What is the APR? All of these sorts of things are so important in selling any product. Sometimes the offer on price tag can actually hide the reality. It's like a loan shark. It's like, you know, you might get a loan of 100 bucks. If you got it from the bank, you get a 3% or 4%. You get it from a loan shark. You might get a significantly higher interest rate and come up with fewer fingers at the end of the day. So all things are different on the offer on price tag often hides more than it gives.

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In this episode of Pricing College - Aidan and Joanna discuss the common psychological scenario - where the seller says thank you - and sometimes in a B2B environment - the procurement team almost seek to grandstand over the seller. Does the seller view the customer as a boss? Is there a power dynamic at play here? What can we learn from a pricing perspective? TIME-STAMPED SHOW NOTES

[00:00] Introduction

[01:09] Joanna discusses the handover of power between the seller and the buyer when the deal is signed

[03:24] Why shouldn't be beholden to a purchaser? Are they your boss because they are the one who pays?

[05:43] When dealing with a purchaser you have to know your value to avoid the handover of power or to give them an idea of the one who pays are the boss

[07:41] The one who pays is the boss idea is part of human society, It may be related to the capitalism

In today's episode, we want to look into a little bit of human psychology that I think you'll all have experienced. It's when people think they're paying the bill when they're the person purchasing or buying a product or service. They often think that they're the boss. And the old saying I probably, “the customer's always right” has led to this a little bit. To some extent, is the customer always right? But like that's a throwaway statement, fundamentally, they're not. I suppose we want to look into, why people think just because they're paying for something that they are the boss in that relationship?

Well, let's think about this. Okay, so even in terms of professional services, you've got quite a long sort of problem-solving pre-sales process. That could be a bit of negotiation on price establishing problems. It's quite a lengthy process. I think in that sort of process, a lot of emotions builds. A lot of anxiety about the problem not being solved. About timelines, deadlines, things getting done properly or adding to this sort of tension. Then once a deal gets signed, everyone there's a little bit of relief. But then it's back on, “okay, we need things to be done”. But then there's a funny switch in power. That's what we're kind of want to discuss. This happens not even just with professional services, it happens with a sales team selling products to businesses. Everyone's essentially buying something to fix something else a problem of some sort. But when the deal is signed, is there a sort of a handover of power? Even though perhaps the customers come to you for your expertise. Because you've got the products they need to fix a particular problem. In spite of that is there that handover of power, do you lose something as a supplier as a consultant or professional service provider when you sign that deal? Some people say yes. I suppose from a personal perspective, I think not. When somebody comes to you with a problem, essentially you're the one who has the solution to that problem. You can fix that and regardless, you should be paid for what you can do. It's been built up over years. But there is an overwhelming assumption out there. That there is some kind of like debt to pay for, getting the money for working with a client. Is that right? Is that wrong? Have you found that yourself? It'd be interesting to hear from our audience, their view on that. Especially with the rise of procurement. Sort of the difficult pricing discussions suppliers is having with procurement teams. How is that really changing the dimension of the relationship even though they've come to you for help?

I almost think of it as if you're buying and selling a product we also have value-based pricing, you're charging a price that reflects the value that the customer gets. It's an equal relationship. Customers getting something from this product or service is equal to the money they're spending. So in reality, it's a win-win. If you're beholden to the purchaser, it's almost insinuated they're doing you a favour. It almost insinuates that you're overcharging. That the product or service you're providing is not worth the value that they're paying you for it. And that you're the one benefiting, not the purchaser. Which likes, to be honest, shouldn't be the way for anybody to do business. I would see that as a scenario that you're beholden to a purchaser. If there's some level of corruption or bribery going on if you're providing a product or service to someone. And obviously, this has nothing to do with customer service. Because you're selling customer service, solving problems, warranties, guarantees, those sorts of things. And you do everything you can possibly do to rectify problems, etc. But at the same time, you're not doing the customer a favour. It's a professional arrangement where you're providing great value, great service, great quality to them. It's not a favour-based relationship. They're not your boss, they cannot realistically make you jump. The question is not, how high? The question is, is the terms of the agreement that we agreed to jump as part of this arrangement? Fundamentally, what are you selling? What are they buying? And, why would just roll over like a puppy dog just because someone tells you to? They're not your boss. Oftentimes, if you behave in that manner, it just gets worse to just start pushing you around. You'll see this much more in a B2B environment than a B2C. When it's B2B, the person purchasing the procurement officer often has no emotional attachment to the product or service they're buying. Often they're not the end-user of that product or service. So the relationship very much can be about the win. The win in the negotiation, the win in that deal. And in that deal sometimes they can get, let us be honest, they get a kick out of winning big and making you feel bad. Then it can be a power kick for certain people. Not all that common but you know, we've seen it and I'm sure you have.

I think when you said that, the phrase, “they're not your boss”. I think that's key to this. It's sort of when the exchange of money is handed over. Is there sort of a latent psychological shift to feeling like you're an employee? As opposed to the person providing the solution. The solution provider, the expert. That person has changed the shift in power and there's like an employee mindset has taken over. Yeah, I've taken over the supplier taking over the salesperson or whoever's who was leading the solution delivery. Is there some kind of latent? Has the client picked up on that? Alternatively, indeed, is it that you're feeling there's a shift in power but because you're actually working with a client who is fundamentally very hierarchical old fashion. Their culture is all based on a very hierarchical structure. Where there's a leader and there are followers and you have to toe the line to some sort of latent cultural norm. That was didn't know existed in the pre-sales and the sales, the process. Then it's like, “bang!”. It hits you and you get a taste of the client's culture. And that often can be quite a shock. But I think the saving grace with all of this is that you've always got to remember why they came to you in the first place. They came to you for help. You've got the solution that they need to fix it. They may not have the answers to all their problems. If they did, they wouldn't indeed spend the money with you. So it's always reframing, remaining confident in your position and knowing your value. And this is intrinsic to value-based pricing, but also in life. Having those value principles is key to being a successful individual and a happy person.

I think we can give this good messaging I think fundamentally, there is something in granted human society is very deep. If you're going to a restaurant and you pay for the meal. Or, you buy a product, you go to an electronics store and you buy an electronic gadget you pay at the counter. The person who takes the money generally says thank you. The person who takes the product generally doesn't. It's something I think is green, probably from maybe the early days of capitalism or consumer society. Where maybe the highest society would buy products or services and just hand over money. That they learn from an aristocracy and the person, the tradesman selling it was of a lower social class. And perhaps I see that probably is ingrained somewhere inside people. You still see it in Britain, for example, where companies will put a badge on their product or service that the consumer, the Queen or the Duke of Edinburgh somewhere that's bought the product. Almost as if the purchaser is more important than the person manufacturing it. I think that somewhere it gets into society whereby when you're handing over that money and you play the Big Shot, and that is something that sometimes can be beneficial as a customer service person. You want them to feel that way. Because they can take their money elsewhere. Obviously, your business will not exist if you don't have that customer. But at the same time, by no means beholden to that person. And it's of course, your right to refuse service if you want under certain legislation or different areas. But also it's like you're doing it through choice and you're not an indentured servant. So yeah, getting into a bit of politics there in moral philosophy, but that's fine, I suppose.

I think this is all this all happens when you ask people for money and this is why pricing is so important. You need to get the price point right. The conversation is set up well because there's a huge depth. Yeah, tradition, rituals, psychological responses, emotions, as well as financial outcomes and results that occur from literally having that pricing discussion. So this is the depth of pricing. I think it's sort of revealed that and it'd be great to hear anybody's feedback on that in the pricing community elsewhere.

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In this episode of Pricing College we ask has unbundling gone too far.

We discuss the travel and hotel industry - and give the example of Ryanair.

Unbundling can be a great strategy for segmentation - but sometimes we just want the full service!

The more things change the more they stay the same is an old saying. So today we really want to look into it. Whether the recent trends in many areas of business particularly things like hotels, etc. Whereby it used to be all you buy, you pay upfront and you get everything to Bed and Breakfast everything's Included. Same with airlines or travel. Then it moved towards more and more unbundling and deep packaging. And you pass separately for different items and those sort of aspects. So we want to dig into that day today and ask, has that reached the maximum? Is it swinging back the other way?

I mean, we do see a lot of trends for bundling things and then unbundling them. I just wonder if these are trends driven by data. A scientific approach to the market. Whether businesses are in a way either guessing or chance in their own to get and to boost revenue. But I think the problem here is if you don't do unbundling strategically, very much like bundling offers strategically. What will happen is, yes you may boost revenue in the short term. However, over the mid to long term customers get annoyed. They want the full offer. And it starts becoming just a bit of hard work to buy from businesses such as let's think about airlines unbundling even the food that used to be bundled in the offer. Used to know where you're going to sit. And then after a time, now you don't know where you're going to sit on allocated seats. It just becomes an awkward customer experience. It's just a bit annoying, and customers really don't like that. And now this is why there's an emphasis on customer experience. Part because of the unbundling issue that we're speaking about. So yeah, like we've got to think about not just the short term effects. But the longer-term effects of unbundling offers.

So let's first dig into, why companies do unbundle things? In many ways, it's a sensible pricing strategy. It aligns with many things that we've spoken about on this podcast. Whereby you want to segment your market. Rather than you just selling one ticket and everyone paying the same price for the ticket on the boat or the plane, you can choose to differentiate. You can pay for seating extra. You can priority boarding extra. You can do 50 to 100 different types of access, excess baggage. You're going to fit different meals. You'd have different entertainment. So it can be a very different experience for people on that flight. And that makes a lot of sense. It really is what we've spoken about in so many aspects of the show. When you look at it, the companies who have done that, the airlines who have done it are more profitable and are more sustainable. They haven't gone through, how many bought other competitors? Were going to people like Ryanair, Southwest Airlines, etc. Which we're pretty confident will bounce back when COVID decreases or declines. But the thing is, have they pushed it too far to the point where people are just, is there a happy place? Is there a sweet spot that after you go past that it just gets into the area of gouging? There are consistent rumours that Ryanair will even charge you to use the bathroom on flights. And these sorts of things are rumours. But they highlight that people have a breaking point and where that breaking point is who knows.

Yeah, that they are rumours. But I think by unbundling too much Ryanair has set a tone of they're basically saying like, expect anything from us. Because we may charge for separate items. We may charge you for the toilet. They never say we're not going to do it. It's always on the agenda and it's almost for the consumers. It's a risk for them to then even go on the flight because you just know it's just going to be an awful experience. You're not going to enjoy it. It's like grin and bears it. It just goes from A to B but those are the sort of people they're attracting. They've done the research over the years. And they know that the price-sensitive audience for their particular offer airline has been very successful. So in a way you get what you paid for. If you want more you pay more. That's the overarching strategy and messaging from Ryanair. They're like if you want to pay more go somewhere else, but this is what you're going to get from us. But I think over time people even have been surprised by how difficult it is to fly with Ryanair. Just the experience has been quite shockingly bad. So maybe as Aidan said, there is a sweet spot. Maybe they're moving back to offering a bit more value at the ticket price than before. But yet again, it goes back to understanding your market before making any immediate price changes or changes to your offers. Is there something else that we could be doing other than just bundling unbundling offers?

I think we go with the airline industry. The Ryanair example is really an extreme example of it. Partly because of the media coverage but it leads to the customer service aspect of it decreasing. Whereby you get to the position where you don't think you can ask for anything or your any complaint or problem. You're pretty sure it won’t be solved. You're pretty sure that if it's not in the legal terms or conditions, they will not go above and beyond to solve your problem. So realistically the customer service, it's almost like advertising or signalling to you that the customer service is going to be low. If they can wiggle out of providing you with a solution to your problem they will. Whether that is correct or false that's the way many people see it. The other point I'd like to add is, you look at the hotel industry where the classic is breakfast included. If you're looking to book a hotel, you know your breakfast will be there included. I would assume the vast majority of people specifically on holidays. Maybe business travellers are a bit different because you're a bird in the morning with a specific task for the day. But if you're on holiday, with family or a couple of whatever it is. In most cases, you want breakfast in the hotel included because it's convenient. You don't have to stretch you don't have to bring your wallet with you unless you’re tipping. Those sorts of aspects so it's nice and easy. By the hotels charging the breakfast separately. I'd like to look at the numbers from some big hotel chains and see how that does. How does that impact? Does separating the breakfast actually decrease room sales? Should the breakfast almost not be a loss leader in some aspects? That if you might be loss-making on them or even just breakeven. But you're keeping people in the hotel, you're getting booked more rooms, you're making them happier. Fundamentally, do you not want people to be in the hotel whether they booked a tour with you. Or grab a coffee or whatever it is or maybe pay a bit of an extra. I sometimes think by pushing people away with a reasonably high-cost breakfast. You just push them to a cafe around the corner which will probably be half the price. And then for the rest of the day, they're going to do other stuff and then won’t come back and they won't spend in your store. I'd like to know I'm sure that hotels have thought about it. But I would like to know, is there a loss leader aspect to that and what is the thought process?

On that, I've seen the hotel sorts of five-star hotels do exactly the same. Having different price points on the hotel website versus an aggregator site. Like what if and on what if maybe you'll have the same hotel. Showing the unbundled price for breakfast, versus a bundled price for breakfast for the same hotel. But the fixed price of the bundled price is very high. I think it's almost too high cause it's not compelling you to buy that. Like the total bundle versus the unbundled option which is equally as expensive and inconvenient. So overall, I think from what I've seen so far, the channel pricing is an issue. The understanding of why people buy it is still an issue often. Some hotels I think they haven't got the optimal pricing. My suspicion here is that it isn't driving profitable revenue growth. I think it's still might be still more on the testing or guessing phase. I think a bit more work can be done there.

We often talk about strategy versus tactics and these sorts of things. Sometimes I think we can be too focused on the up-close. It's almost the old Shakespeare thing, “you can see the wood for the trees”. And maybe what you're doing is you're getting those extra dollars from that breakfast here and there and you can count and allocated etc. But, are people not going on your flight, your boat, your service because of that? You just have to look at it, people love all-inclusive. They seem to love them. They do consume more certainly for the first few days until they get bored of that consumption. But at the end of the day, people love cruise ships. People love all-inclusive holiday resorts. Because it literally means they can switch their brain off and yeah, they're there. And when you're there and then you don't leave the resort. You buy extras such as the tours, the trips, the massage, it's those sort of things that you did pay extra for. So it's you got to see things in the hole in the entirety of it. Sometimes when you're always looking at the exact detail maybe you miss the big picture.

Yeah, I think that's right. I think if you look at different price options, bundling, unbundling as simply as different options that people can select without thinking about the context. The context in which they buy. How they've come to you? How do they consume? Going on holiday, what is it that they want from this holiday? How will that change their behaviour? How will that change their mindset? And how do they consume products? The perception of price points in different contexts. This is essentially where you start with bundling and unbundling. It's not the other way around. It's not simply just an option in a spreadsheet. And then you tick with the price points, which I still think a lot of even in tourism and airlines, it's still about that. And I think people forget the critical key source of pricing power, which is all about customer usage and consumption patterns.

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In this episode of Pricing College - we discuss how supermarket promotions work - and what suppliers need to know.

Is your brand benefitting or being impacted by a promotion from the supermarket?

How do promotions impact volume and sales and of course profit?

In today's episode, we want to talk about supermarkets. They are probably one of the most powerful actors and agents in the commercial environment. That a lot of companies, a lot of pricers will be dealing with on a regular basis. They are almost the epitome of tough procurement. They are very aggressive in many regards, as regards promotions. Promotions to their customers on the shelves. I suppose today we want to talk about, how these promotions work? What appraiser should know about these? And, if you're working for a company supplying a supermarket, what should you think about these?

Traditionally price promotions, how did it how does it all work? It's actually a little bit more complex than most people think. A lot of people think that it's the supermarket driving promotions. But often it's the supplier that's trying to promote their goods to drive volume. A price point that they make money out, right? Essentially, that's what they're trying to do but they want exposure. So rather than spending on advertising, they spend on promotions. In the theoretical ideal world, they're supposed to work with the supermarket to suggest which category, which products should be best promoted based on data. Or, evidence on consumer preference, demand, drivers and also supply dynamics. Whether it's in stock or not. When it can arrive and which would be the best, a win-win situation ie both the supplier margins and also the supermarket retailer's margins go up. But also that the customer gets what they want, the ideal world. But sometimes things don't work out that way. There's sometimes a little bit of miscommunication. Sometimes not enough data to give either the supplier or the retailer exactly what they want at the right time. Things can get a bit slow in terms of data. Sometimes people can miss out on this value chain what the end consumer actually wants. Another issue would be that the retailer traditionally would also help fund the promotion. It wouldn't be all one way from the supplier they would help promote and fund set it up. But now, over the past few years, big supermarkets know the power in the market. Most of the distribution is through them. They've literally not funded much. They more advise suppliers when they should promote. And the supplier has to fully fund nearly 100% of the promotion through to the trade, trade spends and trade investment. You can imagine if you don't have insights into the market as a supplier. If you haven't got the data all set up, you've got to deal with quite aggressive as procurement savvy retailer who's pretty much telling you to promote 100%. You're probably pretty much going blind. So, it can be a very difficult discussion. A very difficult job for pricing people in promotions and working with retailers at the moment.

I often see and we covered this in a previous episode I think about chocolate. Like, I often see when you go into the supermarket there'll be promotions that often don't make a huge amount of sense. I can't imagine that they benefit the supplier. A classic would be like soft drinks, I was even in the supermarket the other day. They were like a very famous brand of soft drinks, which most people know. It's common. It's been around for a very long point in time and it was half price. I'm thinking to myself, Is someone going to go out? I'll try that soft drink that I've tried 5000 times in the past and might enjoy that at this lower price point. I really don't think so. I really don't think it's going to get a new market or increase sales or benefit the supplier in any way shape or form. I can see how it would benefit the supermarket. But the actual supplier, I don't think for a minute of their choosing that strategy. The other aspect you will see is when as non-perishable goods and you'll see a big discount on them or goods that are longer life aspects. You can put a big discount on those and all it will do is move the spend from over the next six months to move it to today. Let's take a toilet roll. If there is a discount people will go to Costco and buy more of it. All you're doing is making the sale today at a lower price than you are down the line. So, for some of these promotions you're thinking, who did their benefit? Is it cui bono? It’s they were saying who benefits in Latin. In many cases, is it the person producing marketing and selling their product? Or is it the person just retailing it? Like in many regards, supermarkets are retail is dying almost all across the world with deliveries etc. And supermarkets are one of those few sectors left where they have that real market power based on locality. You need that local presence and they're one of the few people who have that. And they have taken procurement and that aspect of their business to the nth degree.

People often think it's the supermarket setting the promotional discounts, but it's not it's the supplier's revenue management pricing team that sets these discount levels. Yes, and they do sometimes seem quite unbelievable. Especially over the last few months, you think, wow, you’ve seen up to maybe 60% to 70% off baseline recommended retail price. And you think, is that advantaging the supplier? Does the customer really go to make them buy more of that product? And, are they promoting the right product? I'd say people are making losing money across the board in this value chain discussion with promotions. It's just not working well. I think there need to be absolutely more data-driven insights on price point optimisation than there is occurring at the moment. Because then when you understand which price point delivers the greatest demand and you know your elasticities. Then you're able to pick the right price point that benefits both you as a supplier and the retailer. And also give people what they want not just promote a brand. Just any brand. It has to be a brand that you want visibility for a reason. You want the consumers to buy, they want to buy it and they're enticed. It's just that final straw they go, “oh and it's a good price”. The good price doesn't have to be you know, 30% or 40% off. You could have got a 12% like the same sort of and this is elasticity modelling. So you need to know, what's elastic inelastic products by SKU level? And also by the pack, the pack price architecture needs to be redesigned. And used a huge amount of data that need to flow through these models at the moment and it needs to be real-time. Because at the moment, it's just not enough. Not enough for everything across the board. As a result, we're seeing quite large promotional levels and differences in promotional levels that are not benefiting anyone. Because essentially, even Coles, Woolies Supermarkets don't want to be stocking stuff that people aren't gonna buy. Even if it's promoted. It makes them look bad, too. They want to give people what they want. There are also ongoing and experiencing some pressure at the moment. Because new entrants online e-commerce people are going directly to find what they want. If it's not in the supermarket, they’ll make this special effort of going online to find it somewhere else. Yes, it might require a bit more time and it would have been easier to buy all the goods in the supermarket. As Aidan says, it's a one-stop-shop. However, if your one-stop-shop doesn't give you what you want, people go elsewhere. It's the natural way of being. There needs to be consistency, there need to be better working relationships between suppliers right through to the value change. So, the category management, financials of the business, financials of customers and consumer preferences are streamlined worked out. And we're providing an agile pricing response and we're providing the people and consumers with what they want, great products. Products they want a price point that they're willing to pay. So yeah, there's a lot of work that needs to be done.

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In this episode of Pricing College we discuss whether it makes sense to centralise pricing functions for large companies.

In recent years - we have seen multinationals seek to centralise pricing in certain cities - i.e. a centre of excellence - and have even see pricing for entire continents being centralised.

This can have pros - and also lots of cons.

In today's episode, we want to talk about probably a trend we've seen in recent months and years where larger corporations multinationals have a trend or intention to centralise their pricing function. And we don't mean centralise it in one territory or say in Australia, centralise it in Sydney or Melbourne or whatever else. We're actually talking about centralising across many countries. We've even seen companies talk about centralising pricing for all of the Asia Pacific region. Which is let's be honest, a huge region. They're picking one centre of excellence, maybe Singapore or Hong Kong, wherever it would be Kuala lumper and centralising it all there. I suppose we want to talk about it, is that a good idea? What are the potential pros and cons?

I think we've seen that trend, as Aidan was saying, with very large companies. I can think of two specifically at the moment that occurs. Rio Tinto has done it, they've centralised all their pricing strategy operations people within Singapore. And also Dell has spent the last couple of years doing that. Gradually migrating people from Australia to Singapore, and building that centralised pricing capability there. Other people are following suit, but they're really looking to see if it's working from these bigger companies. Does it work? Is it really more effective? I think, partly it's been done through maybe a cost management optimisation perspective. Also, as we all know, centralisation and pricing analytics is good. So you get an overview, dashboards on different activities. It's good for one team to oversee all of that, to make decisions quickly. The question is, are those decisions improving as a result? Or, is it better to have a localised presence centralisation within local territories? Is that better still for companies? And you know what, I think still companies don't have an answer to that and they're really just testing and learning and swapping between the two. And there seems to be a correlation between migration to Singapore when the economy dips. So, work does indicate a cost down initiative, more so than because the answer about whether it's effective or not, hasn't really been answered in full. So to draw a conclusion on that, I don't think you can say. I think each has strengths and weaknesses to it, which we'll continue to discuss.

I think it depends on the product or service you're selling. If it's a product, let's just take an example and work through it. Let's take an example of a Rolex watch or any luxury watch or, or any brand where some say, high fashion or hook couture or those sort of things. Whereby it's a uniform product. It's not varied in 99.9% of cases by territory. It's very similar. People can check it on the internet. You can buy it overseas and have it posted to you through Amazon. In those sorts of aspects, to be honest it does make sense to me to centralise pricing, whether it's Switzerland or Singapore or wherever else. In those instances, if a company is building their brand, working on what the company does, getting the brand messaging through marketing those aspects. Yeah, it makes perfect sense to not allow arbitrage between different countries, if the product doesn't rot away like a food product, and if it could be posted. So yeah, you probably would want reasonably uniform pricing across many territories where you can protect it. I would say a watch will be a classic example, a handbag or even a pair of shoes, etc. Obviously, when you're getting to other things such as services that are consumed in a country. That can't be exported, that can't be shipped abroad those aspects. It becomes very different. It's a whole different ballgame. And if you need market intelligence, market knowledge on the ground like let's give example selling bananas. If you're selling bananas, a completely different thing, where you consume that banana is vitally important. Is it fresh in our territory, in that city on that day? What is the price level in that country? Are people willing to pay more for the banana? It's very different depending on the product or service.

I think in terms of that I believe especially in terms of COVID shown markets can change very quickly. People's preferences, how they consume, even luxury goods, groceries is changing. So when you say like, centralise even Rolex watches to Singapore. Does that in some way miss out on the key component of unlocking pricing power and price optimisation? Which is understanding how people consume. People do consume differently even if it's a standard product. Those products are different in different areas, different regions of the world, different countries. So when you centralise to one area of the world, then you miss out on that. And in that sense, you miss out on those, what 20% additional price premiums that you could have got even for luxury goods. So is the secret sauce to pricing is to understand markets and customer preferences. And sometimes you're just ripping that away when you move it to another country. So in some way yes, centralisation is good for control and efficiency. You work within your means in terms of pricing within your bandwidth. Everyone sticks to that, the rules are clear. But then when there are whitespace opportunities or changes in the market. Then you miss out on new revenue opportunities. You become less agile as a result. In that respect, also execution becomes very difficult, it becomes slow and laboured. The communication between teams and regions becomes slow. Everyone just works literally to the same rulebook, playbook and things get lost. This is the essence of great pricing. You've got to be agile, you've got to have an expensive viewpoint and approach to pricing. You've got to be able to test and learn in different segments. When one country becomes one segment. You miss out on that micro-segmentation where you get all of your price premiums.

I think even some of the most commoditised products, and again with all these things, the answer is it depends. It really depends on so many moving parts of the investment. The value of what you're providing, how you're marketing and how you're selling and all that sort of stuff. I'll give an example of McDonald's. They famously were in The Economist magazine. I don't know if it's still at the back, whereby they have the Big Mac Index. It's almost a uniform product sold across many countries, and they would analyse the price premiums in different areas. But the thing to bear in mind even about McDonald's is maybe the product is the same. But the reason why people buy it in different countries is completely different. In the United States, you have an infinite number of competitors in a very similar market, like Denny's and Wendy's and Burger King. I'm not trying to make myself look like the fast-food fan here. You can guess how overweight I am. That's a very different market share than in other countries where like in India. Where it's more of a new entrant and they're having some pricing problems. One of the places I was in previously was in Peru. And in Peru McDonald's was to some extent in some areas it was seen as almost a luxury product. Families would almost save up to go there for the evening. So that aspect, the pricing of how it's done in that country is very different. I also remember locals were given a discount if you could present a national card you were given a lower price and McDonald's than in foreigners or tourists were. So obviously there was localised pricing there as well. I think at the end of the day, you always need local. A big believer in the sales team has the local ability to be flexible. And we've covered this in previous episodes where you need to be flexible to negotiate, to deal, to offer discounts were required. To really implement and work with the customers you have that can never really be centralised. That human aspect can't really be centralised on an offshore side.

McDonald's is a great example. I mean, they're well known for having very much regional-based everything. Pricing, costs, accountants everything's centralised by region, even their strategy is by region. They found in India though they had this big back index and initially they started that even applied that thinking in India and it failed miserably. Having that menu, having that rigid approach in India just failed, it bombed. And for the last 8 to 10 years, they've been really working out. Why does it fail so much? But principally it failed because they didn't realise how strong local preferences, customer preferences were. Religion culture was so significant in India, that they're literally there, McDonald's strategy of the Big Mac leading the way just really didn't work at all. So, what they've done? They've become so localised, they literally are really almost the same offering the same menu as a street vendor. Offering street foods because they found that the street vendor was their main competitor that none of the big, Denny's, or any of that or KFC. It was the street vendor they have to compete against. So they had to radically change their menu, radically change the pricing as you can imagine. Only now are they seeing results of that. But what does that show you? They've shown you that sometimes the regional approach just doesn't work. You have to get local. So I think that's something that pricing functions and multinational organisations can learn from too.

I think we've seen certainly over the last number of years and certainly this year, we've seen the conglomeration of power. We've seen a centralised part of governments taking over to a large extent corporate getting bigger and bigger people are gamers on. And there's a one fit, one cookie-cutter fits thing people will take whether given. But the reality of it is people are different kilometres to kilometres. People from suburb to suburb are different, the drivers that have, their cultural backgrounds, etc. They want different things, they'll pay money for different things and the drivers they have. People often just don't understand what they are. So I think if you also sell the same thing to the same two people across the universe. Yeah, that will suit the business but the people probably will not want to buy it. Even look at luxury cars. Apparently, British people buy luxury cars much more than French people do. French people tend to favour small cars. And that's what their cultural norm is, even though the national wealth, the average GDP of those two countries is very similar. So, if you were a car company in Europe, centralising pricing for a luxury car and Britain versus France, the drivers, there's an overlap there. That's not a pun, but what's driving people to purchase that item in different countries can be so different. That almost makes them a uniform policy obsolete. Yeah, I suppose I moved away from our original concept a little bit talked about around the subject, but that's all I'll say today.

I think overall just to sum up when you move to that sort of regional, global, centralised pricing capability is more of a finance lead decision. Principally from a cost down perspective. Because there are economic pressures. I can get that. But when you think this through the ramifications for pricing is good pricing function, and a centralised capability always looks for new opportunities by micro-segment. Because that's where they get the price premium. It's not making huge cost-cutting or price increases. It is making small incremental changes adjustments to pricing according to market changes, according to customer preference changes, according to competitive dynamics. And that does require more of a localised approach. So yeah, when you're thinking about optimisation and you move things to a global regional capability, then you're going to miss out.

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In this episode of Pricing College - we discuss how much pricing professionals from analysts to pricing directors get paid.

Will it make you jealous, proud or whet your appetite for a promotion?

It's a question that I'm often asked you know, How much should we spend on pricing analysts or a pricing manager? Often clients would consider pricing to be a lower salary than it is. So I often have to have the discussion that to get somebody good you've got to pay the money. Sometimes people are a little bit overwhelmed with that they go, really that much money. Yeah, the returns you get from a pricing analyst a good one or a pricing manager are huge. So you've got to know exactly what the salary bands are.

I think in that instance when someone thinks all pricing they're just plugging numbers into a spreadsheet. I think what you should do is refer them to some of our previous episodes. If you're thinking that a pricing analyst is lower quality. Less skilled person say than a newly qualified Accountant or even an Accounts Assistant, you're probably highlighting issues that will come down the line. If the job is data entry that's not a pricing profession. If you’re looking for business analysts, let's be honest, business analysts and those people are much easier to find than skilled pricing professionals. If we say that in Australia, in Sydney at this point in time, a qualified accountant in a business would have been looking somewhere between $90,000 to $120,000 per annum with the package, etc. A business analyst would probably be somewhere similar maybe $80,000 to that ballpark.

I often think when I hear low salaries, it's immediately alarm bells to okay, the positioning of this role is not right. People don't understand the role of pricing in the business or people trying to like if they do have a pricing team. Maybe the pricing team's been downgraded to some kind of operational like finance-driven admin led pricing team. And for those types of roles yeah, why would you be paying top dollar? Because ultimately literally downgraded everybody to an admin and can only generate so much return from that type of pricing. But like in terms of strategic pricing and people that are good at value-based pricing, latest pricing strategy, analytics, putting it all together plugging your systems. And good architecture, good operations, process improvement, continuous change, innovation, connecting the dots, bringing people together. You're going to be looking for a pricing analyst from 100 to 150 plus, for a pricing manager that can be from 165 to 230. This is like pretty experience but not over seven years of experience. For real strategic experts, leaders, executive executives, like you can be paying well let's say from 230 up to 500 and this is the base salary. This does not include all the thrills incentives or rewards, that's additional. That's another topic in itself. The right reward and bonus structure for pricing people which we'll probably cover in another episode. But that's very important for very good pricing people. Because sometimes if you haven't got the cash to sponsor on like a salary, or maybe you're a smaller business. You need good pricing expertise but you just don't have the money to spend on a higher salary. You should be looking at a good rewards incentive scheme, just to compensate for excellence.

I think Joanna covered there what you said the spectrum I suppose, from low to high and each of those categories. When we say pricing analyst you can have more junior up to a senior pricing analyst. There's a huge difference between the senior pricing manager leadership and somebody else who's, more of a general generic manager. Of course, in companies, there are a lot of people called managers who don't manage very much. The other thing we'll say obviously with it's like a CEO of a business, you can be the CEO of a small company versus the CEO of a multinational. There are hugely different things to compare if we look at the revenue that you're actually managing. Revenue that you're looking at and optimising. It's hugely different from a smaller company to a very large company. Obviously then the higher salaries would generally pertain to people in those major corporations where the cash benefit they can deliver is much larger. One final thing I'll add is, I suppose one final question I'll ask is, are salaries going up and down or up or down at this point in time? I'll ask Joanna what her view on that is. Because I've done some work in marketing in the past, and my personal belief is that marketing salaries are actually dropping. Marketing is a sector that we talk a lot about on these podcasts so what does Joanna think about pricing.

Again it's been a question asked because of COVID and businesses closing down. Is there an excess or pricing talent in the market now? Should we be paying them as much as we did before? Should there be some kind of decrease? Or should we be thinking about decreasing salaries for new starters in pricing? What I have found well, from March to May things just stagnated in terms of salary, nothing went up, nothing went down. In terms of talent flow the good people were maintained, good companies keep talented pricing teams. That's what we found very clearly. The ones that probably were left in the market, either, unfortunately, were restructured out businesses closing down. Or perhaps in terms of capability, not as strong as the people that maintain their jobs. But it was a tough market. In terms of salary, the ramifications of that now, we found that things are getting more buoyant in the market. Companies are more confident and we're seeing definitely an increase in the number of pricing projects being launched in the market, especially from September onwards. And we see that to continue into the new year, especially up until March at least from that there's been an increase in hiring. I think when we've reviewed and analysed the job boards the most people are hiring are for pricing analysts. Maybe lower level so there seems to be a little bit of caution in terms of investing in like pricing managers. However, leading companies are investing in very good senior seasoned and capable pricing leaders at this time to lead transformations. Transformations fundamentally from cost-plus to value-based cultures, big work involved, system upgrade, people Mindset Strategy changes. So for those types of people salary has actually gone up. So, I think it would have gone up about 2% to 5%. We are seeing an increase in rewards and bonus structure as well. And there are very few people in that category that we could trust to do those sorts of jobs. That's why the salaries are going up and companies are willing to pay those salaries. Because they know these are proven professionals that can get the results that they need in a short space of time. Traditionally within a two to three-year roadmap but with expectations to deliver incrementally but maybe in double digits within the first six months. So tougher milestones to achieve and deliverables but these people can do it. So yes, they're getting paid. I hope that's answered the question.

That actually reminds me of when I used to be an accountant in London, and I think it was Michael Page or one of the big accounting recruitment companies used to publish an annual report. To be honest, wasn't very useful but people used to read it. It would either make you jealous give you ambitions or make you lose hope.

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In this Episode of Pricing College - we talk about talking! What should you say and how should you describe pricing when talking to various stakeholders like sales, marketing, finance etc - or even the CEO.

The reality is that not everyone gets pricing the way you do - so you need to have a strategy to gain buy in.

In today’s episode, we want to talk about discussing pricing with various stakeholders. Obviously, we discuss how dealing with stakeholders and bank engagement or getting engagement is so important than any pricing transformation and where you have to convey complex ideas to different people. Stakeholders could be anyone in the business from the CEO to the sales team, to I suppose assistants and admin people. How do you discuss pricing with them? What should you tell them? And what is the approach?

So, the approach depends on who you're talking to, let's take sales teams first. I think sales teams are often excluded from pricing discussions. Pricing discussions are often decided right from the top and then enforced. I say enforced like a top-down, very classical approach pretty much an old fashioned approach. The sales team are sort of the last people to know about it. And there's an expectation that they should embrace it. Often it's the case that they don't know why pricing is changing or being improved. So there are times when pricing projects are rejected, overtly or covertly or there's a culture of compliance rather than commitment. So what do you do to overcome that? Is it really a top-down strategy? To some degree it is. You need decision-makers to drive this, to sponsor. But sponsorship doesn't mean top-down management of this pricing project. I think sales teams, from my experience, consulting with businesses and working with sales teams on pricing projects I think involvement in key aspects of the project are key at certain times. I think that sales teams once they understand the benefit of a pricing project to them. They've more than happy to come on board. If there's any sense that pricing project is going to cause difficulty with their customers. More objections on the price that obviously a sales team won't embrace that kind of pricing project. So it's all how you position the project to the team. And ultimately, why are you trying to change prices is because you want your sales team to sell more profitable price points and they would too if they have the tools. So as part of a pricing project, it's important to reinforce that the sales team are being considered. That they are going to be given the tools and support that they need through the pricing project to get the outcomes. The shared outcomes that everybody wants. Because they want to do well and they want the business to succeed the job depends on it. So there is alignment there is just making sure that you've got your approach and story right. That you actually truly do care and want them to succeed. Rather than isolate them from their projects right at the start.

I think there's always a concept of mirroring or that old concept that you match the way people talk, etc. Let's be honest, there are stereotypes in companies certain departments look for certain things. From my experience that can be beneficial to show that you're on the same page with them. You show that you're not speaking a different language. If it is the sales team you're talking to make sure that they're aware that you're looking after their interest. You're trying to boost, align with the sales interest that may not always be selling volume. But it will be selling profitably is the concept. You have to make sure that you're they're aware. That you're not hiding away or that you're not just a numbers buff and sitting on the computer. That you know what it's like out there and you're helping them working with them. The first thing I suggest is if you're talking to senior executives, personally, my experience is always that they're interested in money. They're interested in results. So the takeaway is the key objectives of what you're hoping to achieve the strategies, those aspects. Not so much the menu detail that you want to go into. But it's the objectives, the longer-term goals. So they can buy to champion it and stand behind you when you're probably having issues with other stakeholders. If it’s the finance department, to a large extent you have to show that you're in charge of the numbers. You know what the numbers are. Then you know why it's happening. You can explain stuff. You can run through profitability, volume all that sort of aspects. That gives the finance department confidence that you're speaking the same language as them. I suppose if you’re looking for extremes often the sales department, the marketing department, and the finance team often speak different languages. Just don't get each other and end up almost not talking is a common aspect. So I think with this when we talk about stakeholders, you're the person in between these three areas. When you're the person in between all three, you have to be talking to all three. You have to have a little bit of all three of those areas. So I suppose it's yeah, it's not giving people what they want but speaking in a language they understand.

Yes, I completely agree. Pricing crosses so many different topics. So many different functions that you really have to know how to approach different people. And what they want to get out of the pricing project and tap into that. To be able to provide to them but also be if it's not possible to explain why or when that can be addressed. Because these sorts of things are the major things that derail or slow down a pricing project. And often consultants will just target the CEO. Because they know if they speak the language of the CEO and just talk money. Then they can sort of get the sale in and often they'll buy the software or that almost Silver Bullet money solution that the CEO wants. But almost don't like tries to take away from the fact that culture and people and alignment issues may get in the way of that sort of that silver bullet solution. So they won't discuss that with the CEO just to get the sale. It's very important when you're thinking about pricing projects to take more than just the consultant's view on there or even your own executive team's view on that. Because they've all got their own agenda in a certain way. So look out externally to different industries, different experts that have done it before, or maybe CEOs and colleagues and what they've done? what they've learned from successes and failures? How they’ve driven that structure change management approach? Because underlying every pricing project is a change management approach. To think of that, as an afterthought will get you in trouble. So make sure that is a priority alongside the money and the EBIT games that you want to secure for the business because the two go hand in hand.

I think that's all we've touched on today. I suppose, get out there have good conversations. Think why is that person talking to you. Think about what department where they're coming from. And, think about what they want to achieve. Fundamentally, you're there to help them. You are there to work with them, help them and have them deliver what they want to do and incentivised to do so. Yes, it's should be a good conversation.

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In this episode of pricing college - we discuss what pricing optimisation is and where to start.

This is different to pricing strategy - and is a more numeric, data driven topic requiring specialist skill sets.

We run through the basics

In today's episode, we want to give a brief introduction to one of the more technical but useful pricing techniques which are pricing optimisation. So Joanna, what is pricing optimisation?

I think in its most simple form price optimisation is a very analytical, scientific price-setting algorithm or process. I hope that that does sound simple and I'm trying to break it down. But I think the outcome is quite clear. Why people use it is to drive almost immediate revenue or margin from that price algorithm. Now an algorithm is almost like a fancy word. Like a formula that somebody’s come up with for pricing to increase or decrease prices in the right way. Either not too high, or not too low across categories and products. This is very significant for all types of businesses. Especially businesses with lots of customers, lots of different customer groups or many products line like thousands and thousands of SKUs. You really need a better way to set and manage pricing. A lot of businesses now are investing in a price algorithm for those difficult price rise times. So they know that they're not just doing a blanket price increase across the board across all of their products. Because it's just easier to do it that way or a business that's looking to improve profitability in a certain timeframe. For both of those conditions, businesses now are using more sophisticated price algorithms. That have either been developed by a pricing team or by a consultancy or by an IT vendor.

I think price optimisation is not something that you do straight off the bat if you're not a skilled or experienced pricer. It's something where there's a lot of technical know-how and ability required. This is often where consultants will come in and help teams with this or upscale in that regard. It's certainly not just a blanket price increase, with price optimisation in many areas, prices could decrease. You'd be looking across the more profitable lines or the more popular lines of your SKUs. It is also often referred to as SKU optimisation also. You have to bear in mind that a lot of companies in different sectors may have thousands of different SKUs. So we're not talking about one or two lines here. In many companies, we could be talking about multiple thousands of lines. And that can lead to obviously a huge amount of data crunching, data analytics and real expertise has the algorithms and the computer number-crunching building that is required.

Now often when you say price optimisation businesses think, does that mean large increases across the board? Will that affect our large customer accounts or which can be and often are quite price-sensitive? What will happen? Will it drive customers away? Will we lose huge amounts of cash flow if we implement this price optimisation process? And the answer is no. Actually, price optimisation doesn't focus on those big accounts or top-selling products. Because those are the sort of you have to protect those. You've got to be careful about what you do with that. Because there is so much attention on that if it's via your procurement teams, customer procurement teams. They all know the prices there or shoppers who get these sorts of goods every day. Their staple goods habitual purchases they know the prices of these products. So you don't want to move the price the prices around too much. But you do want to know especially I think just talking about the shopping experience. If shoppers do want to have promotions and discounts so you've got to know what level of discount to give them. If you give them too much you lose margin. If you don't give them enough, you don't get enough traffic. They don't buy it or that. Or if you give them too much they might hoard all those sorts of things. So a price algorithm will look at those things and these things are called conditions that are set in the algorithm. But ultimately, to keep it simple a price algorithm protects large accounts and products. So it doesn't do much with that. It sort of looks at them at the middle sort of range of your products and customers to see what you can do there but taking again a risk free approach but optimises the tail end of customers or products. Because that's your low-risk radar type of product group. But even then it's done with restrictions in mind between price parameters. It's taking tiny little clips of increase is here and there. Maybe adjustments and that could be lowering prices here and there just to drive volume. So it's looking at volume metrics, looking at the margin, profitability revenue, and the goals of the business will be set within that algorithm as well. These are called business conditions. So it is quite a sophisticated process and as Aidan says, there are a few leading pricing teams and experts out there that can do this for you internally and we know of those. But ultimately a lot of this area has been sort of managed by consultants and IT vendors. But a lot of that expertise is now becoming more widespread as more businesses buy these optimisations software tools. And some good pricing managers have been able to refine algorithms and even recreate them from scratch.

I think to some extent, it's a different approach than pricing strategy putting in place the value-based culture that you're looking for. There's a lot of data analytics here and using capacity and elasticity and those sort of aspects filter into this on SKU by SKU basis. Obviously, you still have to have the strategy in place, you have to understand stuff. But this is much more of an implementation aspect of implementation, optimisation. It's something that should be done on a regular ongoing basis. You can buy off the shelf software for more simple businesses. And then for obviously larger businesses, you'll be utilising your ERP systems and digging through the information that you have. But yeah, it's I think this is something certainly that will be covered in much more detail in smaller aspects in future podcasts. But it's just something we want to introduce a day to raise.

Feel free if you're thinking about price optimisation you've heard other business leaders using optimisation techniques feel free to touch base with us. We're happy to point you in the right direction. Give you some additional insights into what we know how this has worked out in Australian businesses. On what type of team can manage that sort of internal capability. If you need additional cash flow, it's a difficult time and a recovery. We're in the recovery stage. A lot of companies are thinking okay, we need to drive profitability. How can we get more margin in the next three months? A very difficult problem but achievable but needs to be done in the best way. So, feel free just to get in touch and we can talk you through some of those ideas. Yeah, that's it for me today. So yeah, that number-crunching to look forward I guess.

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In this episode we discuss the forex market and how that really highlights common issues with cost plus pricing.

The foreign exchange market - forex - changes millions of times a day, every day - and is a major cost input to lots of businesses.

If a cost reduces - should you reduce the sell price? Go on guess!

In today's episode, we want to give an example of why cost-plus pricing can create problems. This is relating to the world of foreign exchange or Forex. It highlights for us one of the major issues with using cost-plus as your pricing methodology.

Many of our clients and businesses that we've consulted to, especially in the B2B manufacturing and distribution space. Have led their strategy, their pricing strategy using cost-plus. At the beginning of the journey were very adamant that that was the best way forward. That it was clear. That it was going to be fair. And that was the best way to calculate costs. However, as we went further into the data, and to see the operations of their business. How it all works? Where do they get their products? Often we'd find for instance in a distribution business that they would buy their products overseas in China for instance. Maybe to try and get a lower cost, try and get a cheaper product. Then, when we looked further into that we found that the cost calculations were just an aggregate average of foreign exchange mechanisms. Which can change multiple times in a day. Often they'd find as a result of that, they're either overcharging or underselling their offers.

The example I would give is, just imagine you're a fancy restaurant in London or New York and you're serving Argentinian steak. Argentina is a country that's gone through a couple of regular, massive devaluations over the years. In theory, if you're operating a cost-plus environment. Whether you're the butcher shop, a hotel or a nice restaurant serving that Argentinian steak that's flown in that day. Say you fly and that steak and yesterday cost 15 American dollars for a steak. Then the next day the exchange rate collapses. But you're still buying them at Argentinian pesos. So what do you do then? Do you just do reduce your prices by 50%? Of course, you don't because logically that makes no sense. This simple fact can really be applied to pretty much any cost-plus environment. Just because your prices drop, should you decrease your selling price? The answer is clearly not. The customers are coming into your restaurant they're buying the steak not based on the cost-plus methodology. They're not researching Argentinian, Uruguayan farm sales prices. They're really just going in for a nice evening and experiencing the value of what they're purchasing. Which is unrelated to the actual cost of the production or delivery of the product.

To look at it the other way, as a business if you're setting your prices using cost-plus to understand to target some kind of margin. But ultimately your calculations on cost based on a fluctuating and very complex Exchange Rate Mechanism are incorrect. And pretty much you’re just aggregating sort of guessing using rounding things up and down just to suit. It is pretty much guessing what the costs are. Then, are you going to get the margin that you're targeting? Or, are you just hoping that you're going to get it? It just sort of lacks, it gives a semblance of rigour that isn't there.

I suppose another example I'll give is I previously worked in accounting, and we were doing due diligence on a company. It was an American toy company that was buying a British traditional toy company. That in reality was just a shell at that point or manufacturing or research or development. Everything was done in China. This is about 20 years ago now. The reality of it was they were reporting better and better results over that last year they had profits were up 50%. But in reality, when we looked through the books what had happened was, it was just a British Sterling versus Chinese exchange rate that had dropped or had to improve my British perspective. So they're reporting higher profits in reality even gone the other way. Nothing to do whatsoever with their business practice. It would have shown a major decline in profitability. So the American company walked away from that transaction. But you have to look into things, why are you making decisions? Why are you selling these at a certain price? You have to be aware of what it costs you to produce it. But showed that influence the selling price. I supposed and we're going over again, what cost-plus pricing the flaws with it. But we thought this was a great example of where the flaws could lie. The other thing we'll say is when you get into the realms of dynamic pricing where pricing changes multiple times a day. There is nothing more dynamic than the forex market. I think it's only closer to a couple of hours a day. Or when there's a gap in the world between maybe Tokyo opening and wherever is the last place to be closed over weekends. But the reality of it is for say 20 hours a day. It's been traded in huge volume globally, and so the price is changing, infinite times per day. Dynamic Pricing, obviously in a cost-plus model no one's going to implement that. Unless you're dealing in a Forex environment yourself. Unless you're selling Forex services. But otherwise, if it's a B2B, B2C environment, it should really be a very limited impact on what you sell.

I think if you're trying to maximise margins, simply by sort of outplaying the exchange rate. Or trying to utilise your view on getting a cheaper product via exchange rate benefits. Then you'd have to have good analytics as Aidan said that is a dynamic strategy in itself on the supply side. Often companies in B2B are really still using Excel. The excel just refers to the exchange rate now and again. They don't have a dedicated pricing function to manage that either. It's often done ad hoc, even I would say on a yearly basis, and as I said exchange rate can change millions of times. So just make sure if you're trying to maximise margins. It is not particularly risk-free just to do it via the exchange rate. You've got to be on the ball with that and think again about value. Try to think about maximising margins by looking at supply and demand dynamics. And that truly does require a dynamic pricing capability with a dedicated pricing team to manage it full time every day. So things are flowing and everything's recorded and the price-setting process is updated.

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Many CFOs love the numbers - and that often includes pricing. We have seen CFOs sign off on all pricing decisions in a business - but is that sustainable.

Would a smart CFO run sales or marketing - usually not!

We ask should a smart CFO run pricing?

In the previous episode, we have spoken about what a CEO should know about pricing. In this episode, we're going to discuss, what a CFO, the Chief Financial Officer in the business should know about pricing? And to some extent, what they should not do?

I think it's a difficult one when you go on what should a CFO know. Because sometimes the more they know about pricing, the less they are inclined to sort of, the less they understand it. Because it does take a different type. You've got very finance-driven pricing which I think most CFOs are very comfortable with. By that, I mean cost-based pricing. As multiple industries move towards more value-based dynamic pricing and explain that to CFOs that becomes an issue. Because it's out of the realms of knowledge. It's new. It takes a different kind of mindset. And it takes a huge amount of time and effort to learn expertise in the latest pricing strategy. Often, CFOs don't have the time to learn. They've got their own areas and functions to look after. So then when they've got this new pricing team in their function because it often is fit under finance. They're supposed to accept it. But often deep down they never quite can understand and further what they're doing. Often this leads, year on year to that sort of tension, not a good tension. It's a tension that sort of separates and splinters the pricing team away from the finance team. And also makes the CFO even more uncomfortable about what pricing is.

What I’ll say is sometimes we think just because something is similar or it reminds us of our realm of expertise. We think we can do it. Pricing is one of those areas where everyone has an opinion everyone has a view. But, how often do you see your CFO having a very strong view and marketing or a very strong view of sales? To be honest, from my experience is not that frequent. But they often want to have a view and often sometimes are the person completely responsible for pricing. The reality is if you are pricing but you're not involved in sales and marketing at all that is a red flag for me. That is a warning signal. Those three departments have to be working together. If they're not, look clearly there's something going wrong and going to miss. A CFO has a very job grip responsibility. Very many things to be doing. And pricing, if it's not their expertise if it’s not something they're focusing on they, should be aware of it certainly. And it's something we'll talk about in future episodes. Whereby senior leaders in the business should be having regular meetings with the pricing. Whoever the person charged pricing is. They should be having regular meetings. Be aware of stuff, be supporting, be championing in the business and support it. But we've seen many examples for every pricing decision has to be signed off. Every discount, every line has to be signed off by a CFO. But that CFO was not talking to the sales team. They're not really aware of the drivers, what the customer drivers are? What's really happening out there in the meetings and within negotiations on the websites etc. So they're really just looking at it from a cost-plus perspective. And they have this viewpoint that the last and again, this is a generalisation but bear with me. In many regards, they’re looking at the margins they made last year that might have a strategic idea of boosting margins or maintaining margins. That often is what is driving them to the back of their mind. That's perfectly fine. But the reality of it is that has nothing to do with it. The old saying is that in war, your objectives and reality hit each other very quickly and you have to make plans on the foot. So the reality of it is when you're in a sales environment. Things can change very quickly. When you put together your budget last quarter or last year. Then you're in the market today is completely different. Let's be honest, this is 2020 and we're in the COVID scenario. Things have changed to such an extent that the budget that was put in place and the CFO probably is trying to still maintain it. Do they have any validity whatsoever?

No, probably not. This is why a lot of companies are coming to us. Because they know the markets have changed dramatically. They know that they have to reconnect with their customer. To start understanding consumption patterns. Understanding the causal drivers of purchasing decisions. Understanding what customers value and what different customer groups value. And therefore reset their price levels and refine optimise their price-setting process. Not simply think about price ladders in terms of the cost base and a bit of value-added top. But really think about, how customers are buying? What they're buying? Why they're buying? And to integrate value within that price setting. Now, as I talk there I'm thinking, how many different types of disciplines have I just touched upon when I'm describing customer-focused pricing? So yeah, we've got finance in there. We've got maths, science because we’re doing this scientifically. We've got psychology, we've got marketing, huge value-based pricing ranges. When you start saying that, it becomes a daunting prospect. No wonder it takes a good 10 to 15 years to grasp that and also a mindset. This is why we trust that pricing executive in your business to give you those options. Because you know that they thought through it properly, that they've used data, science and rigour. Ultimately, as a CFO, if you start asking your pricing executive to explain, how they came up with it? You'll be bombarded with huge amounts of data and research and all this sort of stuff. What you really want to know is, Are they doing it correctly? Is it safe? Is it growing? Is it driving profitable and safe revenue growth? Are they achieving the outcomes that you want them to achieve? If the answer is yes to that, then that's pretty good enough. If you're interested as a CFO learn how they do it. Then you need to invest time in that area of expertise. But it takes time to understand. But this is also what a good pricing executive does. It builds organisational understanding of pricing. So as you work with your executive pricing team, you let them do what they're capable of. You'll start understanding the nuances of how they go about doing. Not in the same way as they do but you'll start getting it. That's the best way to CFO can work with and understand what real pricing is about.

I think I've got a couple of comments I'll make here. One of the things we see in many big companies is there's very limited delegation for decision making. In a lot of corporates, a lot of risk controls and at every turn were second-guessing. And of course, they seem to prevent fraud and prevent incorrect decisions. But often it means that this person has finally signed off on anything. Whether a purchase or sale or a discount can often be somebody so far removed from the decision-making process. That it's almost pointless. I've seen businesses where CFOs have to sign off on even smaller purchases for items such as calculators and these sorts of things. The reality of it is, I'll give two more points. If you thought about a company such as Apple, which we covered in the previous podcast. If the CFO of Apple was the person actually coming up with the price to sell a new product, a new electronic gadget. You’d question that. You'd be thinking you have the dominant market research. They have done the customer service analysis. They dug into drivers, spoke to the marketing and understand where stocks up. You'd ask those questions. Also, ask shouldn't the CFO of Apple be doing something else? Don't they have a very responsible job anyway? So that's the first thing I'd say. The second thing I would say is in a company, the CFO could be a very talented person. They could have the complete ability to be the best pricer in the world. But the reality of it is, take the American football example if you're the quarterback. You could also be such a great athlete that you could be the best wide receiver in the world. The reality of it is you have to make a choice and you cannot do both. You cannot throw the ball and catch it at the same time. So the reality of it is once a company gets above a certain size and in small companies in a startup. Yes, the CFO perfectly well can do this role. But once you get to a certain size we can’t say this is a rule but there will be examples that will go against this rule. But I would say you almost certainly should have somebody in charge of pricing. Who’s trusted pricing manager, pricing expert, pricing dedicated person. Once that business we're talking about a certain number of million dollars in revenue, it becomes perfectly sensible. Obviously, startups, new businesses, all that sort of thing, the CFO can have that role at the beginning. But over time you have to recognise that skill sets may align, but they don't always overlap perfectly.

That's right. I think after about 100 million revenue turnover that's when you need a dedicated pricing expert there managing things for you. I think we discussed the size of the pricing team and a previous podcast, so feel free to listen to that. But over 100 million you've got a lot of revenues to manage more risk exposure. As a CFO, you can't be managing that as well as doing your own job and managing your own teams as well. You need to trust that you've got an expert in the business doing it for you. Then there's no shame in that. The best leaders are out there ensuring that they've got a great team behind them. Everyone quotes Richard Branson, but he's the best example of that he always hires people smarter than him in different areas. People that have got strengths he doesn't ensure that his businesses empire are successful. Also that he can pivot when they're not successful. I think Aidan pointed out earlier, we've seen a lot of CEOs, not to mention CFOs that end up being the pricing manager. Whether they knew they were called the CFO, but they actually were doing pricing manager work. That’s an enormous amount of work to be doing on top of actually running and managing your own business and getting the financial outcomes that you need. You need to start thinking about organisational structure. What do you need in your team to drive things forward from a pricing perspective? How much margin are you leaving on the table by doing things the same old way and by not putting the right amount of dedicated resources into pricing? What you could potentially be earning with the right pricing support under you? Often all of these sorts of changes come down to the point where you have to accept you're not the master at certain things. Or indeed you are but you need some help.

Since the old navy ship obviously the captain of the ship is responsible for everything that goes on the boat. But you have to trust navigators you have to trust other people, the mechanics, etc. and you have to use that expertise. So the reality, I suppose, the great leaders out there are people who recognise that they need other people. They can use other people's skills. There's that old saying that, great leaders surround themselves with people who are better at stuff than they are. That makes them look good in the long term. When you see a leader who is so what's the word I'm looking for but almost jealous of authority and keeping everything myself and secretive aspects. Often that sort of business, there are other problems. I suppose we’ll leave in this it’s almost like a series of red flags. If the CFO was signing off and every pricing move I think let's put a little red flag up there. Let's come back and examine. Yeah, that's it for me today.

Likewise, look, again, feel free this big topic that we're covering, not an easy place to start with some difficult questions you may have and you just need some extra information. We've got huge amounts of resources on our website, on various pages. But if you just want to go straight to it go to our resources page. Feel free to download guides on organisational design, managing change, understanding what pricing is? What is the latest pricing strategy? All of these questions will be answered on our website on that page, so feel free to download them.

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We have seen it - and I am sure you have seen it. Businesses run on bizarre structures - based on States, regions or anything else.

What could possibly go wrong - well to be honest, lots!

When sales work regionally - and marketing and pricing work nationally - we predict lots of problems.

In today's episode, we want to dig a bit deeper into what we discussed in the last episode about companies driven by operations. I suppose one of the real signals we often see when we look at a company and look at a pricing optimisation or pricing strategy change. The first thing to look at is, how is the business structured? Is it structured by functional lines or operations delivery, sales marketing in that mechanism? Or is it done in a different way? Probably one of the most common mechanisms we see is by cost centres or revenue centres, by geography even by city. Divided up that way of where you might have and this is very common in Australia, certainly B2B. We'll have a state general manager or a city General Manager. That person will be in charge of seemingly everything in that area. So, say you’re the State General Manager of South Australia. You run Adelaide your account to your head honcho wherever they're based. And in your monthly meetings and you take responsibility for your P&L. We've heard said very many times, “I own my P&L it’s all my responsibility”. But we want to point out when we see that it's a real warning signal.

Often people don't realise how much organisational design can interrupt derail pricing strategy or price improvement programs. They have a huge influence. And largely because they can speed up implementation and thinking and strategising if designed correctly. Or they can seriously slow it down. Slow it down and make it completely ineffective. Because you ended up sort of bottlenecking at certain points in the organisational structure. Simply because the strategy or the key players the senior players are distributed across different states. Because we've got a different type of structure. And what we found overall is when you have like a number of key decision-makers who really have pricing control. Some of whom may agree to change others who may just comply and don't agree to change. What can happen are things slow down tremendously. Things don't get done basically. When you find that strategy is almost distributed across a number of different leaders in a region. Things get very, very messy. Innovation and problem-solving slow down. Ultimately you do need to think about centralising the process. Centralising that strategising initially straightaway. Then maybe decentralising the execution. That's kind of the way more flexible organisational structures are being built to enable pricing projects to succeed.

We see it so often whereby you have a marketing department or sales department, or Sales Department Local and National. You'll have a marketing department generally said nationally focused and then there's a real disconnect. There's almost like a disconnect between the head office and the people in that area when there's a geographic distance. But also when people do what they're incentivised to do what they're paid to do. If your boss is the person in that in your city, you do what they tell you fundamentally. Because they determine your career and your prospects. So you're probably not really utilising the marketing that's happening. The marketing became probably or distance from you and there's not really any overlap. Probably the pricing I'd be honest, is probably done very much on your localised basis. So, what's happening in central head office probably doesn't make much sense to you. With that disconnect, there can be become internal politics. They’ve become one against the next. It leads to value destruction I would argue in many regards. Because all decisions have been taken at a local level. There's nothing joined up. There's often a lot of duplication happening. It's very much based on this year's operational aspect. Especially when CAPEX is a big indicator of that. It's very much this year's financial. Not the future of the business. Not the value creation. Not improving the value offered to customers. It's just one of those red herrings. I don’t know if red herrings are the right word. But more alarm bells that we see and when you see it look a bit deeper. Because I'm sure there's going to be duplication. There’s going to be a misalignment of objectives. And almost certainly there's got to be value destruction.

Because you got to think about if you do pricing well and to get the sort of EBIT gross that you're expecting. The 10% to 15% EBIT growth from a pricing project. What you need to do is work smart and work I suppose, be agile. A pricing team need needs to do their job properly to get the money that you want. They need to work across the business to get key sources of information and support. They also need to work up and down the business. By this I mean, they need to work with executives to get sponsorship. To push the business planning process forward. To inform segmentation. And to inform business strategy because that too may have to change. Also down they've got to work with customer services. The sales team find out key business intelligence sources and information about that price-setting process. And also then further out they’ve got to work with understand customers get involved with that. Because ultimately their pricing is disconnected from the customer base it's just not going to work. So what I'm trying to say is if you're working, you can't expect to get the outcomes from the pricing. If you don't appreciate the agility involved in doing so. And if you're in a very traditional business structure, you've got to think of other ways to mobilise your pricing project. Because working within a broken or very traditional structure does not yield the results. And the speed of results that you're expecting, things are going to be difficult. There are a lot of ways you can get around this sort of thing. And one more we've got a lot of resources on our page just to go through some of those ideas. So feel free to download those resources on our resources page at taylorwells.com.au or free to get in touch. I'm not saying that it's impossible to do a pricing project in a traditional but slow-moving organisation. It just becomes harder and you've got to be more creative about how you do it. Because pricing fundamentally does require that you work across the business. If you have silos in your business largely created by your reporting structure or organisational design, you can't ignore it. You can't just say oh, that's just a people issue we can work across that because we're optimising prices. It's a pure numbers game that will not work. It just won't, you'll only get so far with that sort of stuff and then it'll just be left.

The last point I like to make is when we say, we have to be all moving in alignment. This does not mean at all that everything is centralised. You told your people, wherever you're located, you follow the script. At the end of the day customer focus really is if you're a salesperson, it really is your market intelligence. Your knowledge of that local market. Because obviously value can be very local aspects. It can be proximity, local competitors, what's driving the market at that point in time. That aspect of stuff really has to be taken into account. I'm a big believer that this should be on a functional level. If it's a sales thing that should be flowing through to the sales department. That should be flowing through to people who really understand sales. Have the ability to lobby for sales and to help out in the business. Then obviously, that should be working with the marketing, getting you the marketing collateral you need. So that it's working correctly. If it's done on a more siloed P&L basis in geography. And there's no direct contact between salespeople out there meeting customers to sales directors and sales leadership. That's where it falls down. So we're not saying it's the Empire that dictates what people do. It has to make sense. Does it fundamentally make sense to you if you kick the tires does it make sense and doesn't help? So when you're working when you're entering stuff into systems. Does it come back with benefits to you? Or is it just purely almost more work on your back that you don't get any benefit from? Yeah, that's it for me.

Me too. And as I say, you know, feel free to jump on our website, download some resources and guides they'll really help you in this regard. And also, if you're thinking about pricing, transformation or price change improvement programs. Lots of good stuff is there just to guide you through it.

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If you have ever seen Field Of Dreams with Kevin Costner - you will know the saying - build it and they will come.

This often seems to be the approach of many companies - where they build a product and then simply expect sales and marketing to sell it as is.

What could possibly go wrong?

Lots.

In today's episode, we want to discuss that very common type of business where how the businesses run is almost upside down or reverse. So rather than in the episode, we covered with Apple where it's all very customer-focused. And looking into the value that's provided to customers. It's done the complete opposite. Whereby it's almost like Kevin Costner in Field of dreams build it and they will come.

A lot of businesses have been obviously built in that way. We’re gonna set up our business in this way and our operations are going to be like this. Then from here, we'll set our prices accordingly to cover our costs. I'm thinking in particular, examples like fuels, postal services. Those two in particular even energy were all set up thinking about their operational network, the CAPEX, machinery, etc. And then pricing is sort of like an afterthought. Yeah, literally to cover costs with a margin on the top, simple cost-based pricing. And now we're seeing these traditional businesses that are very operational. Internal focused are now transforming. And this is having a huge impact on how they're priced as well.

I think a lot of these issues stem from a cost-plus focus. The currency driven focus is in a business where people go and spend the CAPEX. That means I'm very important. That means I'm in charge of stuff, sort of heavy machinery aspect. Whether it's trucks, whether it's factories, whether it’s docked. Whatever it could possibly be. But you're not really looking at, why does the company exist? The company does not exist to justify your position. It doesn't exist to justify CAPEX. CAPEX is only there to justify providing something that a customer is willing to pay for and once offer on an ongoing basis. So in reality, if you're saying build and they will come. Potentially that will happen you obviously have to build it. But there's no feedback mechanism. There's nothing the actual drivers that are leading to what's been built often they're quite opaque. If you're in charge of the CAPEX if you're deciding what to be built. How’re sales, how’s marketing, how’s pricing feeding into that? Or is it just that pricing and sales get beaten up if they don't sell enough of the product that you want to sell? And it's always their fault for not doing the job well enough. I think every salesperson knows this whereby their product or service is inferior. But they feel they're always getting shouted out internally or on the back foot. So, I think it's almost a new setup in the reverse order. It's almost an inevitability that the sales team will be under pressure and will eventually get burned off.

I think that's true. When that starts to happen rather than sort of blaming your sales team for not winning the deal. I think sometimes it's probably an indication that you've got to look internally and think, is our business model correct for the market that we're in? Are our operations antiquated and from a yesteryear model? Do we need to optimise our operations now? Is that why we're not getting more margin from our product from our main source of value from this company? I'd say maybe 70% of the time if you asked yourself that question. You'd actually find that that is the question. That's the answer that you have a great business. But now the operations are outdated. You've got to start thinking differently about how you're going to deliver that value to your customers. Because potentially what you're doing is too costly. This is why I mentioned fuels as an example. I mean a number of fuels companies around the world now have optimised their operations. They've changed how they do business. They've gone from a refinery business to now a more customer-focused retailer, that's a huge change. The reason being, why did they do that? Well, if they continue to think of themselves as a refinery. Its huge costs of operational costs, production costs, drilling, refining that oil. It takes a huge amount of effort and it gravitates the whole business into thinking, how are we going to cover our cost? So now what they've done they’ve like optimise the procurement process and source refined oil from around the world. And distribute it by boats across to Australia and various countries around the world to cut costs. So that made them also think, well if we've cut our costs, how can we maintain our pricing? We've got to think about the value of that product in the market and you've got to think of yourself differently as a business. What are you actually selling now? And they realised we're selling fuel but we're also selling convenience from our stores. People want to come in when they buy their fuel and grab products from our store, milk, bread, nappies, whatever. We should be pricing that accordingly and getting a premium. So it completely transformed the business. So prior to that the sales team from the B2B side would have been blamed for not getting the deals across the line in the old model as a refinery business. But now it's a seamless model and the whole business is looking at how they can optimise revenues by looking and by rethinking their operations rejigging things around. Rather than thinking about pricing as an afterthought. Thinking about as an integrated within the whole transformation process.

I think two of my points I'll make you at the end. I suppose the first one is a lot of people go oh, but you need to be a visionary. You need to come up with something new that the market will want. And that's where operational excellence comes in. Maybe some of the more scientific people and the real product improvement people come in. The old famous saying is Henry Ford, “if I'd asked people what they wanted, they would have said a faster horse”. And like of course, that is completely true and there are visionaries out there. What I will say is there aren't that many, there are very, very few. Those are the ones who built huge businesses that are incredibly successful with newfangled ideas. The reality of it is 99 point something per cent of companies aren't that business. And they are not the relevant topic obviously there has to be a feedback loop. The other thing I say is if it's purely run by operations and sales are not being listened to. How do you improve the process? How do you tinker with it and make it better? If there's no feedback into it, why would the operations improve it? Because obviously, you can from a CAPEX and accounting perspective it's cheaper just to turn out the same old thing. Rather than reinvesting reinventing putting money into R&D etc. Why would you do that if you don't have to? So, fundamentally, if you're not listening to customers. We always talk about customer-centricity, it's always a buzzword, it’s almost a cliche. But yeah and fundamentally, you only exist, we're only doing things. Because somebody somewhere wants their product or service at the end of the line and everything else is just a delivery mechanism.

I think just because I say that you can have visionaries and operations that transform business models and price integrates pricing within. That doesn't mean that the visionary didn't think about the market the customer. Because thinking back about the example I gave with fuels. The question I had to ask is, do our customers really value great quality fuel as much as we assume they do? Because that's what our old operational refinery models built on. We want to get the best quality petrol and fuel out there. What they found was actually no. Customers wanted the fuel that was good quality, good enough. But what they actually wanted was a better experience at the pump, at the petrol station. They wanted a store that could go in. And guarantee would stop what they actually wanted to buy at that particular time, was convenience. They want convenience. They want the experience. A good experience not just a transactional experience and a dirty suburb petrol station and they want it all. So these questions drove operational changes. From there all these other innovations in operations occurred. Then you get that sort of epiphany moment where you go, “Aha!”. This is where pricing actually drives and it's highly connected to the operational business model changes. It's not an add on thought where we just go over we've covered our costs and let's not just have markup to just reach our margins. No, it became a driving force, a factor, a driver that actually encouraged and influenced consumers to spend more. Or differently, consume more think differently about the product, think differently about the business. So that Yeah, I think it's a great question in terms of, how much do operations influence a business? They still do. I think the takeaway I would say is, don't let it overrule thoughts. Because, in a way, it makes you become more internal-focused. And all you think is I just have to do these operations well much better than anyone else to win the market. That's just not the case anymore. You've got to think about different industries, new innovations, what customers want. And then question how you function and work as a business and evolve.

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Apple is one of the biggest companies in the world. In this episode of Pricing college - we discuss what we really like about their pricing model.

We cover value based pricing, the ecosystem and customer loyalty and also barriers to competition.

In today's episode, we want to talk about aspects of the pricing strategy utilised by Apple that we like or think are noteworthy.

Apple’s a great case example for pricing and product innovation. Customers love it. It's very successful. But yes, it has had its fair share of challenges both in product lifecycle and even now in terms of business competition. But in terms of pricing, it was one of the first to do pricing really well. It was one of the first to think about pricing and connect pricing and value. To capture market share. To capture people's imaginations. And, to keep them coming back to and to drive profitability. So, I guess we’re going to talk about, how they really do that? To start on that I think that's let's look at the product. They've really just honed in on a very small number of products. Very niche looked and making these products beautiful, shiny, user-friendly, different. But in terms of range, just narrow in on the range. So they can control the cost element of manufacturing. Also in terms of customer demand, control that and price accordingly.

The first thing I really like about Apple is that it's almost the epitome of a company that thinks about value and pricing in their entire offer. Everything is linked together. It's the customer experience. It's the offer. It’s the value. It's how people view their product versus other products. Whether a Samsung leading other player or other clearly cheaper versions that can do very similar things. They know exactly what people like about the product through focus groups and different methods. They advertise aspects that lifestyle elements of the software or machines. Their telephone is catered to certain demographics and even like their computers. I don't know what the correct word is. I don't think they’re called PC’s because they’re Apple Mac’s I think. But those are aimed at the people who are whether in the RT community need certain software or just like that software. So they know they're demographic. They know their target audience. And they seem to know it better than I think any other company I know.

So relating to that, they know their audience. They've got a small product range. They know what people want. So what's their pricing strategy? Well, it's premium pricing. They pitch their pricing higher than everyone else. Because they know they've got a great thing that people want to buy. As I was saying before because they've got a smaller product range. They know that sort of the number of customers and their huge amount of spending. They're willing to pay for what they've got. They're able to control supply and demand for their products. So, just in terms of customer spending in that industry. I think last year it was something like half a trillion dollars spent. So it's huge, and they've captured a large share of that market. But in terms of their strategy, because they're going premium, they're getting value-based. What is their business strategy? Let's think about that. It's not necessarily market share they're really going for profit here. But in so doing, they're capturing more market share. Because they are honing in on what customers want to buy the perceived value. I suppose that has a knock-on effect on the share price. So yeah, customer value leads to shareholder value.

Another thing I like about them is they are an unashamedly value-based business. It's always in the papers everyone knows that their products are manufactured generally in China. I think they’re still made by Foxconn or one of those companies. And they are manufactured and created at let's be honest a much cheaper cost than the cost of the phone and the device are sold at. But there's no pressure in the business to lower their costs. There's no pressure when they bring out a new model to bring it out at lower costs. And it's almost as if cost-plus pricing isn't even on their radar. They're so far removed from cost-plus pricing and what most companies do it's not even a discussion point.

I suppose on that because they know they've got control and visibility on supply and demand, costs and production. And they've made their process so efficient. They have been able to streamline costs. But just because they have that doesn't mean they've reduced prices. Because they've got that premium anchor strategy keeping prices up. So they can continue to drive profitability, sustainable profitable growth. I suppose other than that what I like about Apple is the signature of note Apple is their ability to create closed ecosystems. That sort of capture either IP in terms of their development IP software. And in terms of customers, they've got focus groups forums. Apple apps store to really capture the customers becomes a sticky model. So it's very hard to get out of it that's what that close sort of whether it's IP driven or customer driven. They do want to capture and keep everything they acquire and that's a sort of interesting model. I think a lot of Apple customers are very willing and they love that kind of model. Because they get so much value out of it. I think the debate recently has been especially for the Apple App Store has been, Do developers creating those apps get as much value out of Apple as the customers do? And that's a sort of debate that's ongoing at the moment. Because I think developers are currently being charged something like 30% for being a part of the Apple App Store system. And starting to think, Am I getting the value out of it? Am I getting ripped off by Apple?

I think the beauty of the App Store and the universe let’s call it the uniform. The universe that they have once you're in it, once you invest in the product. You've made the choice that you're an apple buyer. You’ve bought the Apple Mac or your telephone. You really are locked into their system whether it's iTunes or whether it is AppStore for apps. We saw that even recently with an app or a game as popular globally as Fortnite. Whereby those legal issues etc over the split of revenues and monies from that sale. So, the beauty of the product is they have such a leading product. But also that anybody who invents a new product that wants to be sold through that target audience. Has to basically let Apple clip a ticket on it and make their money also. So it's just an incredible revenue maker. That also applies to iTunes whereby it will do that and also to the movies. Apple movies etc are through their services also. So it lets them latch on to so many other aspects that don't involve the creation of it. But they're the gatekeepers. They own the means of delivery. The mechanism of delivery because they are in theory own the software which is not using the usual system. So, yeah, it is a perfect model. You can see overlaps in methods such as the Nespresso pods. Whereby you're having certain pods to use that system. Even an older system, such as Xerox machines and printers where you have that upfront investment. Then basically you’re tied in as long as the machine lasts. I suppose if you buy an Apple phone you'd expect it to last two years or whatever it is. But then there's also the other aspect whereby people's lives are on their phones now. Which admittedly is quite sad. But they're tied into the phone based on photographs, messaging to friends and family history. If you've got a new Apple phone, you can transfer it across to the new one. So you're sort of locked in even if you're had that phone for two years. You're sort of locked in for much longer than that.

I suppose now people are tied into other Apple platforms, such as the Apple Watch, TV, iOS, their iPad, lots of different things. They said they've got multiple platforms that are feeding through this one closed IT system, coding system. They're driving huge amounts of traffic to these sites based on both in terms of the developers that want to get onto that to sell their apps. And customers that want to be a part of it. Just have that huge range and access to their IP, the whole ecosystem. On that, they've got like payment processing they host. And they don't have any hosting fees for the developers. Just that the marketing spent to advertise apps for developers is huge. They just wouldn't get that visibility to their customer base without Apple Store. But saying that great idea, Is it going to be disrupted? Yes, it is. Developers aren't fully happy with it. I think Apple has said that if developers are doing good business through them and their customers stay for more than a year or so. Then they reduce the commission for developers to 15% as opposed to 30%. I suppose that's better than nothing. But it's still pretty high. I think there's going to be no competition in this market. Because people want the IP and I think it's a battle now. Even Netflix is suffering the same. It has everything going through that currently but now Disney is going to go direct. They're going to take all their IP with them. Equally, this could happen in the app space too, and it is already. So there are things for them that they've done really well. They've overcome many challenges in terms of competition with product development, Android phone, Samsung, etc. Now they're going through business model challenges. They obviously always have been quite agile in their business strategy and willing to adapt and pivot. That is really one of the greatest achievements and features of Apple. I'm just excited to see what happens next.

I think fundamentally we've all heard enough about Steve Jobs to last a lifetime and what a marketing and creative genius he was. Fair enough a lot of the products and services and the beginning building blocks of this ecosystem was always in place. Before he left the business and left this mortal coil as well. So those are in place I supposed the question is, as Joanna mentioned there with Disney and these sort of companies going more direct the actual. Because at the moment, I suppose you could argue it's like the old cinema chains. Whereby Hollywood, the movie producers made the movies. But it was the people owning cinemas and access presented to the people. I suppose with the eyeballs is the same method now. The content creation people, whoever they are. They will be under moving more people like Netflix also so that's changing. But the content creation and then the mechanism of getting in front of your eyeballs, and who owns those eyeballs? who controls it? The gatekeeper that is changing and when a change, will the apple model be the same in 10 years as it is today? I would have to say it's unlikely. But at the end of the day, Apple has at the moment. An absolute golden goose. It is given probably what's called supernormal profits that you hear about in economics. To be honest, unless you come up with something better to replace it. You’ve got to keep up with that golden goose lays the eggs. And don't kill the golden goose until you absolutely have to.

One thing for sure, I suppose is in that space IP online Internet things move very, very quickly. Now at the moment, they're giant platforms leading the way. Taking most of the traffic but they too disrupted the brick and mortar real world. I think pretty soon they're going to be disrupted by new competition, new ideas. And as I say, it's an exciting space. I think I'm prepared. I can't wait to see a different set of brands in front of me, not just the usual for always out there. Even in terms of the Amazons, Netflix, Apple they are the best they’ve done exciting work. But it's time for a change.

I'm gonna go around and shop this idea for lots of private equity and venture capital companies. I'm gonna come up with a new groundbreaking technology business to beat Apple and make Megamillions. Does anyone want to invest? Yeah, give me a call.

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In this episode of Pricing College - we discuss whether there are any good courses at schools, college or universities that really cover pricing strategy in a useful way.

Many courses are as subsectors of marketing - but are there any courses we would recommend?

In today’s episode, we want to discuss, Is there are Pricing courses at a university that we would recommend?

Okay, I suppose to make it simple I would say no not really. They are lacking when it comes to strategic pricing and revenue management in so many ways. And generally are taught in a very sort of generalist broadway under marketing, pricing as well as the four Ps etc. No detail is given to how to integrate a pricing strategy into a particular industry. Very limited case studies. Limited understanding of price setting, strategic price-setting. And even how to build an algorithm? how do algorithms work with different systems? The benefits of different IT systems. How to even build a business intelligence system. I'd say just generally everything that you kind of wants to know. All the questions that somebody is keen on making pricing their career. Or keen on driving a particular pricing project in the business. He just won't get those answers from a generic pricing university course.

I think the vast majority of them are as one of the four P's of marketing as a sub-sector. Yes, taught by a marketer or taught by a general academics or someone like that. So you'd have to question the validity of what you've been taught. I would say, obviously, we haven't checked the entire market. I'm sure there are some out there. If there is, reach out to us shoot us across. We’ll certainly look at them and mentioned them on blogs etc if they’re out there. I think what I'd say is, it's not surprising. It is not surprising that there aren't that many good courses would recommend. Pricing is like marketing in many ways where experience is very important. Experience and learning on the job. So in that context, you have to know what you're doing. You have to mature learn different facets of the business. Understand customers. Understand how Corporation works. And, understand how you work with different departments Marketing. So you have to know a little bit about everything. You have to know how to fit it all together. Are there great prices coming out 21, 22 years old? I'm sure there are. But there are a lot of skills that take time to learn. You have to learn, what can be done? what can't be done? Certain things have to be done first, many steps etc. And that takes learning time effort and it is like marketing. One thing I'll say about marketing, I listen to the Neil Patel show and they often say, would they employ a marketer straight off a college course? And they say well, not. They probably just asked someone for practical results. Practical evidence of what they have done not textbook learning but actual reality.

I suppose when we look at how forming teams for different businesses in different industries. We spend a lot of time on that evaluation side of things. Like individual evaluation. Assessing individual capability with what the organisation needs. And we find these huge gaps in the talent market for pricing even people with pricing experience. If dedicated pricing experience was even 20 years there are gaps there. And look, do we say is that because of the university course? Or is it because there's the individual has the gaps attitudinally? They don't want to learn. Maybe their ability levels just maybe possibly want to learn but can't. So we spend a lot of time looking through to sort of shrink those gaps in the talent market and also in the business world. To find the right team who can really drive strategy. And almost we do a lot of work. Because there just really isn't the courses out there. And even if they were, are the right people going on them? It's a difficult one to discuss. But we are finding there definitely are gaps in both areas. And what we're finding ourselves doing now is sifting through both. And aligning, matching the right people to the right organisation to accelerate the IRI from the pricing. Often as a result of gaps in the market lack of knowledge and expertise and skill both inside the business in the talent market for pricing.

I think in pricing there are good courses out there, there are courses in most countries that are beneficial. Another thing I suppose at Pricing College and Taylor Wells we are working towards obviously it's been a bit interrupted by the COVID situation. But masterminds and meetups and those sorts of things. Whereby pricing leaders people involved in the pricing community can meet with like-minded individuals. This sounds a bit strange but can meet with people and discuss that got discussed the topic of the day. Discuss approaches, topics, new ways of doing things methodology. What works? What doesn't work? Change in the market. All those sorts of things where there's a limited form for that at the moment. So watch the space on in that regard.

I mean it was hugely popular before. People have a thirst for knowledge when it comes to the latest pricing strategy based in the talent market as managers and analysts. Also for people, firms and businesses that have had their lightbulb moment on pricing. They really want to get their hands on the best people, the best teams best systems and strategies out there. Often because of the lack of structured and good educational programs from universities. A lot of companies have had to resort to consulting based training. To some degree, it's okay but it's very one-sided. It's all based on the consultants’ view and what benefits them to get the next deal across the line. So, what we find consultants give you so much. But they don't give you the full suite. If they were to give you the full suite it’s going to cost you the millions. We would say that's an inefficient way to get pricing knowledge across and to bridge those gaps that we discussed in the talent and business world. So for this very reason, we find ourselves becoming that connection point for businesses and pricing talent out there. So we can really bridge those gaps and help both individuals and businesses have to drive their capability and get the results they need.

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In this episode of Pricing College - Aidan and Joanna discuss what a lightbulb or eureka moment is in pricing.

This is when you actually realise what pricing is and can be - and that it is so much more than cost plus in a spreadsheet.

In today's podcast, we want to talk about the lightbulb moment. The light bulb moment is the minute when people realise all of a sudden seemingly, what pricing is? I’ll be honest there is a before and after when it comes to pricing. In the world of pricing if you're a pricing professional, sometimes you need to help other stakeholders in your business have that light bulb moment.

I suppose the light bulb moment does depend on the pricing maturity of the business. If there's sort of level one or two limited pricing maturity in the business. Or no established pricing team there. Then it may not be the pricing team that had already the lightbulb moment. And educating stakeholders on their lightbulb moment to understand pricing. What it could be in the business. So really the light bulb moment can occur in a business, which let's say is a sales organisation with no pricing team. It may be a sales manager, it may be a sales rep, it could be the CEO. In many respects, they're very learned in the business when they have this epiphany. This light bulb moment. Because they're the only ones that realise that pricing is the number one profit driver.

I can certainly look back before I knew anything about pricing. My background was working in a bank. I then work as an accountant in different financial roles in companies. I'll be honest, I have never heard of pricing at all. And even when I first heard about it I thought this was baloney. To be honest, I thought pricing is putting a number into a spreadsheet or an accountant system. The cost-plus or some sort of maintenance of pricing in a system. I think if you look at a company and you go in and you're asking yourself, has the CEO, the Marketing Director, these big senior executives have had that lightbulb moment? If they think accountants should be running pricing. Well, I put my money on the fact that they haven't had a light bulb moment.

I suppose in a way that CEOs have had that lightbulb moment or an executive that has had it. Maybe originally thought they had it. But actually thought that the pricing problem they've got could be easily fixed with that silver bullet pricing system. Or Quick Price optimisation to drive an immediate EBIT growth. That really isn't a price bold moment. That's just seeing pricing as a tactical almost a bandaid to fix something that solved a headache or a pain. We need something like more money, more cash flow, increasing profit, or reducing risk in some way. That's getting to the lightbulb moment but isn't really fully the light bulb moment. A light bulb moment is when you realise that pricing is a process. It's transformative. It requires skill, expertise. You need to pivot. You need to take a broader, agile approach to Pricing. Then it needs to include your customers too. Understanding how your business can connect with your customers and their P&L. Their deeds and all of that sort of stuff.

I look back to when I worked in corporations, B2B industries. And you're trying to get people to come aboard the project. You’re trying to get them to understand stuff. I'll be honest, I noticed a number of major flaws. The first one is often senior executives just do not listen. Whether that’s a hierarchical thing or an arrogant thing or whatever it is. Or they're too busy often they just will not listen. Secondly, not everyone has absolutely excellent explanation skills, discussion skills, promotion skills. People always talk about in the company you need to be political and this sort of stuff. I'll be honest, a lot of people just are not focused on politics. Even if they are good at it. I'd often say that a lot of people in pricing that’s not what their focus is. A lot of their focus is on getting the job done. They're more practical and more results-oriented. Not so much in the top political stance and often in corporations. There's a gap there where you're not getting that message across. So like when I was there, I was trying to promote. I even give people books at one point in time. Introductory books on the topic, the William Poundstone big on pricing. Priceless I think was the name whether they read or not is a different question. But I suppose that's one of the reasons why we're doing this podcast to create easy listening, introductory stuff. We go into more depth on certain topics also. We cover the broader remit of this subject area. Hopefully, someone’s listening to one or two episodes. It will spark interest it will help them move along the line to full understanding.

Many of the pricing and revenue management teams that we build. Our clients drive a particular strategy in a particular culture and industry. I often find myself saying doing the pricing modelling and analysis are almost like sort of 30% of the job. The rest is educating stakeholders, driving change, and trying to crystallise that vision for change in the business according to them. So they can really get it. And so they can drive that lightbulb moment forward to the next stakeholder. Because the pricing doesn't just stop with the pricing team. It really is an organisational capability.

I think we're recording this podcast on the day of the US election 2020. I’ll mention a quote or I don’t know if it’s a quote of water days from a famous US politician Donald Rumsfeld. And his famous comment about known knowns known unknowns and unknown unknowns. I'll be honest, in a lot of corporations, pricing is an unknown unknown. They don't know it exists, let alone know how to do it. So when you're in that position, you have to somehow get people just having the awareness. The people don't have to know how to do pricing. They just have to know what it is and what it can do. Then leave it to someone else or work with somebody else or partner with somebody else to get it done. But if you're in a position where the quote Rumsfield is an unknown, unknown. There's a lot of work to do at that point in time.

So we've covered that lightbulb moment. Almost like the unspoken role of the pricing team to really drive that change crystallises the vision. But if you don't have a pricing team in place then really it's up to you to drive that vision for change. It is possible but again, it does require you to know, once you get past that vision for change. Then it gets to “okay, we need to do something about it”. We need to actualise that change. How can we build a pricing capability from strategy, from models and systems and structures? How can we mobilise people together to really get the outcomes that we want from that vision? This is where you do need that expertise. Maybe systems along the way and the right strategy. They use to connect that lightbulb moment, that vision for pricing to your business strategy. Are they in sync? Do they work well? Are they going to generate the results you really are expecting from them? And if not, you have to take a good hard look at either [A] your strategy or [B] your vision or even see the mindset of the business. Are they ready? So these are all key questions and they're big questions to ask yourself and to answer. So feel free to get in touch with us. You can connect with us via our website, taylorwells.com.au and just book yourself a time and we'll have a talk.

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In this episode Aidan and Joanna discuss why business intelligence and good data management systems are vital for pricing.

If you can not measure, analyse and slice and dice numbers - it will almost be impossible to perform worthwhile pricing work and optimisations.

In today's episode, we want to talk about something that is often, I supposed overlooked and certainly at the beginning of a pricing project. But it is one of probably the more laborious tasks that you need to build in a corporation. Before you can start putting in place improvements, optimisations and those sort of things. That is making sure that your data, the data in the company. Whether it's sales data from an ERP system, whatever it is. That is clean, it's usable, it's excellent. That the best intelligence has the tools or the data available for work to start.

A lot of you probably have heard of the term business intelligence. It's become quite widespread now and across a number of industries and firms. Executives and pricing teams are becoming very interested in business intelligence. But why? Because it informs pricing. It informs business strategy. It informs your response to competitor prices. If the competitor drops the price you want to know about it. I suppose that's the reason it's become quite important. It's also become important for improving price setting as well. So there are a number of benefits to understanding a bit more about business intelligence. And its impact on pricing and vice versa.

Nowadays, I think sometimes we feel like we're being overwhelmed by the amount of data that is available. It's been captured by so many devices. Especially now with more technology appearing trucks are recording stuff delivery times anything like this. But in many corporations, even very famous corporations they still utilise quite old fashioned and unwieldy data systems. Business systems that make it almost impossible to slice and dice the data, to download, to use to utilise, to manipulate, to get into that data and see what it means to analyse it. When you're thinking about something like dynamic pricing. Where prices change could be multiple times a day, could be even every second. I've seen companies for downloading data can take them a week. Just to get a spreadsheet of data into Excel. You're thinking that if that's the scenario we're starting from. Let's not even discuss dynamic pricing. We're kidding ourselves, you’re going to go nowhere with this. It’s the fundamental building blocks is like you got to get the data clean. The old saying and you hear it so many times, “junk in junk out”. I'll be honest, sometimes we can’t even get the junk in the systems let alone get it out. So you have to have a real cold hard look at where you're starting from. When you realise that you got to play the ball from where it lies. And that's where you start from.

I supposed there’s that Internal Business focused view of business intelligence and what that is. And fundamentally a lot of business that's their own costs base. It's all focused on their profitability and things like that. It's not very customer focus, it's not market focus, it doesn't tell you much other than that. So it's just really providing if you can get good and clean data out of the system. It's just providing you with one cost base input into the pricing model. Which is still very important to have. Especially when calculating your price floors. But not necessarily the inputs that you need to generate greater price premiums from your products. You need to look more broadly in terms of the market. You need to look at and even what your competitors are doing. When I say that there are a lot of pricing teams out there who have built some really good competitive intelligence systems. Just to extend upon their knowledge of the business intelligence systems. A lot of these are, literally homemade. They've done it themselves just to get a clearer sense of the market. But still, a lot of them as just giving them data on the competitor price points web scraping, things like that. And from there, they've just gone “oh, you know, we're going to do competitive pricing”. Where are we going to fit slightly above or below our competitors? Rather than looking at the value differential that they offer, us versus them? Why are our customers willing to spend more with our competitors versus us? Asking those sorts of questions that the competitor intelligence system doesn't address that. Looking we call that the value differential between you and your competitors. I suppose in all of this when you think about business intelligence. And this is what the new version of business intelligence is. It's looking at multiple inputs and then getting that together in a sort of data template. So then you can utilise those inputs. To understand what your customers are willing to pay within your price-setting process. And then tweak it or otherwise known as optimisation. Optimising prices correctly by different segments. So you know that the price that you're setting is reliable and you can be confident in them. It's not just simply cost-based pricing.

I think we covered some of these topics. We covered it in the previous episode about what a CEO should know about pricing. One of the things I'll say about data in the company is, Is your company a data-driven business? Is it run by hunches and just experience and gut feel? Is that how sales and marketing are working or is the data provided? Is it a value culture where senior executive meetings, business meetings, leadership meetings the numbers are being discussed as evidence? Or is it purely our sales went up because it rained more this month? These sort of things which to some extent, we see in every company. And of course, sometimes rain and weather can influence sales. Of course, it can. But it can’t always be used every month. And it can’t be used in that regard. So if the data is not there. One thing I'll say is it is often the CEO or the senior executives that they're so far removed from data manipulation. Digging through spreadsheets sitting there late at night trying to rectify numbers. Reconciling the numbers trying to make it all add up. They're so far removed from it. They don't even see the value in it to some extent. They don't see the value in investing in it and getting a new system. One other thing I'd say about this and I've seen this many times in corporations. Big IT departments have invested years and years over time in building in host systems, big proprietary systems. Systems that are supposed to be tailored to their business. In many instances, they're just completely useless, they're completely junk. But there's just a fixed cost fallacy whereby they spend so much money on them. And there could be SAAS service available straight out of the box. Developed by experts’ listed on the NASDAQ all that sort of stuff. They can make one and you can rent it for whatever, 100 bucks a month. But there's often a great reluctance to move towards these things. The problem with the existing system, it keeps rolling on rolling on. And there's more money spent on it more patches. It never gets rectified never gets fixed. But it's sitting on the balance sheet and the corporation. It is sitting there is as a multi-million dollar asset in the business. But fundamentally if you want to get rid of that system. You've got to write it off as a loss because you recognise is not actually an asset anymore. It’s worthless, in many instances is even a liability. So that's one of the reasons why I think these things happen. So you hear about first-mover advantage. I think in many instances in many companies nowadays their second-mover advantage. If you are the last of the blocks you could be ahead of the game.

I supposed if you want to get your pricing aligned to the market and you want to achieve business goals. And you've got metrics in place and you've got targets to hit, that will make sense. What you do need behind that is a business intelligence system that's aligned to your pricing. That aligned to marketing and sales efforts. Having old schools sort of metrics in place. Or inputs that are running into old archaic systems and flowing out is basically rubbish. Then rubbing your head thinking, how can I use this in terms of price analysis knowing full well that most of it is junk? That's not really going to serve you well. Or even giving you help when your executive or your boss or the CEO asks you. Is this price correct? Fundamentally, you'll know deep down it's not and so will they. So in the business case for great data, a great business intelligence system that's aligned to your market and industry and pricing is very strong. But it has to be done in terms of the so what for executives so they can really understand how it will drive the ROI on pricing and the whole IT capability discussion. Because a number of businesses at the moment are going through major IT transformation. Especially with digital becoming more popular. Both in terms of the channel to market. People prefer to buy online and prefer the pricing that's offered. So all of these teams are very critical to the back end of all of that. Which is, what inputs are you going to use to set your prices? This is the business intelligence discussion. So, if you want to know a little bit more about business intelligence if you've got it right? what's happening in other industries? Then feel free to download some free guides and reports from our website at Taylor Wells.com.au. We've also got some useful information on the homepage about pricing technology as well.

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In this episode of Pricing College we ask why charging customers more or less based on their location - i.e. postcode or zip code may seem like a good idea - but may create many more issues than benefits.

In pricing - it is vital to not annoy or alienate customers or potential customers - and of course - no one wants to feel discriminated against.

In today's episode, we want to talk about a pricing approach or concept that on initial inspection can seem a really good idea. But sometimes there may be more negatives than outweighed the positives. That is zone pricing. If you type into two approaches it could be on a store by store basis if it's a large chain. Or could even be on the internet that when you type in your address the price changes. It sounds great. You could charge different areas, different prices. But, are there downsides?

If you think about it, even as a customer you probably will think there is a downside. Customers may not like being charged more just simply because of where they live their postcode. Because ultimately this is where the information and this it's investigating where you leave. The affluence of your suburb. And ultimately, How much you'll be able to spend? It’s a great way to measure spending but, Is it fair?

Fundamentally, I think people have a real belief that they should be treated fairly. They should be treated equally to everyone else. Their dollars or pounds or euros going into the store should be equal to the next person's. Sometimes it could breed resentment that it's whether it's a postcode lottery. You might want to use that term. Or, it could be even like a tax or penalty on someone from a certain area. What would their reasoning for that be? Would it be a higher social socio-economic area with higher incomes? And their feeling could charge more, or whatever the reason? It could be in a cost-plus environment. There could be good reasons why a company may want to do this. If you've got regional, remote stores and shipping stuff to that location. That might make sense. But I think in many regards, people want dependency same price and believe that is their right.

If you think about it I suppose on the other side from a firm's perspective. They just really are keen to get the right metrics and measures in place. So they can understand the market. So to them logically speaking it makes complete sense to do so using postcodes data and all of that to understand spending. As Aidan was saying spending and willingness to pay seem to be well correlated. So, why don't we investigate one, if the other one willing to spend is too abstract and difficult to measure? We can use spending instead. But it just can be difficult when you start using that as a strict measure for everything else. Especially in terms of price setting.

I think postcode is a very blunt instrument. Depending on the country, or the city you're in. Postcodes can be small or massive. You could have huge numbers of varied suburban areas in those areas. A very diverse population. So there’s got to be more drivers than just simply your location. We always say in this podcast it's probably hundreds of drivers driving something. If you're trying to sell any product, do you think the postcode location is the biggest, most logical way to segment your market? I would suggest no. If it's getting down to a cost-plus mechanism where it's posting stuff out to people. There's a very simple way to fix that is you charge them a separate postage price. And when you get to the cart and checkout. People accept that if you live on an Island remote off the coast. It’s a bit different than being two miles from the depot. So I think people accept that if in those instances. But I think if you jump online and you type a different postcode and it gives you different pricing. Or of course, just read your IP etc as well and give you different pricing. I think that would start to annoy people. I also think you'd have a high chance of getting bad media coverage. If the newspapers got onto that. Because it’s a very easy spinnable story. If you want to spend that story. And make it look like big corporates or taking advantage of people in certain areas. I think you're walking into a trap if you try that one.

Maybe as if you're trying to calculate the cost to serve a customer it might be a useful input. But I suppose this is why in terms of price setting, businesses are moving away from purely that cost focus to a more value-based focus. And thinking more broadly about drivers of purchase. Drivers of demand to calculate the price asking questions such as, How has this customer group come to us? What are they looking to buy from us? Why are they buying these particular products and services from us? How are they consuming our products? Now, these are the more important sort of drivers of demand that you should be using in a value-based price-setting process. It’ll get you away from those difficult sorts of conversations and the issues with postcode and zone pricing that can get a bit messy. Also, it's quite limited. I suppose in terms of generating those additional price premiums that you are looking to find. But yet fairly and in line with what customers are willing to pay. So going down the value base route asking those questions about, why people are buying? It will help you generate more profit dollars for your services and products.

We all say common sense is required. I think common sense is not very common. But in this instance, it's a bit harder to explain. Obviously, in many businesses in smaller towns or certain areas, it's perfectly understandable that prices will be lower than the nation's capital or the richest parts of the country. This can go from restaurants to haircuts to anything like that. Whereby the price will be influenced by to large extent the labour and part of the people in the area. Then the employment process etc. So, of course, if you're in a smaller area or a more remote region you might be able to buy a drink in a bar for less than you would in a fancy bar in the city. It can also apply to haircuts. I think that's perfectly understandable. The difficulty gets into it when your segmentation or your matching local pricing or those aspects that are perfectly legitimate. You have to be just very careful that everything you're doing could not be perceived as in any way discrimination against people or exploitation of certain aspects. I think if you're trying to sell a consumer product that's the same item at a different price at different geographies. That you could get into some sort of marquee ground or could be perceived or spot different mechanisms. I think that's something that anybody sensibly would want to avoid and not get into. Just the potential benefit of a few extra dollars here just wouldn't be worthwhile. The potential downside in my belief. Of course, though, if you're trying to compete in a town your need to think about the value offer you provide. If the price level for takeaway sandwiches in this town is much lower than elsewhere. You probably have to match to market in that area. But again, that's a match to market it’s not a postcode lottery. It's not discrimination against on a postcode basis.

I suppose this is what a good pricing team would do they would look at a particular price point in relation to where they sit in the price structure. That is in between your floor prices and also the price ceiling. The price parameters for everything that you sell, then they'll look at, what is the overall business strategy? Is our pricing aligned to that strategy? And where is our price? What's our price positioning in the market? Just because we can price higher in one zone, does that go against our price positioning? our business strategy? Are we within our price parameters? There'll be asking all those questions making sure they check the boxes for everything. Because if you don't you can find yourself dealing with some very difficult issues. Using this as one measure just using, what customers are willing to spend? what they can spend? Zone pricing isn't bad, but it has to be considered in relation to a lot of other inputs. A good pricing team will do that they won't just lead with that input. Because it can lead to very difficult discussions and legal issues further down the line. So just bear in mind when you're dealing with pricing, having that internal expertise can be important. It just gives you confidence that everything that you're pricing is in order and aligned to your business strategy and everything else in the business.

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More and more services for business and consumers are delivered as SAAS - Software As A Service.

What common tricks and approaches in pricing can we see from these companies?

In today's episode, we want to cover one of the new more modern approaches to pricing that you'll see more and more. And that is the pricing approach used by SAAS companies or software as a service. You will commonly use their services in a B2B environment or many other scenarios. So in this episode, we wanted to cover five pricing techniques. Some of which we've covered in other episodes. That you will commonly see and experience if you deal with our SAAS company.

This is applicable for IT vendors who are used to dealing in terms of the old distribution method. Using tenders and fairly fixed prices to then. Those who are thinking a bit broadly now and thinking about new pricing and distribution methods models for their customers. Okay, so number one I suppose would be a subscription model is a fairly typical feature of SAAS. So this subscription model is a new type of pricing revenue model. Essentially, it gives customers a different option to buy from them. They could pay for the product service on a monthly basis. As opposed to, as I said, going through tender and doing a large deal at the enterprise level. They may do an enterprise-level deal. Or, they can choose to do, maybe as a team pay for it as a team deal or on a user basis. So it just gives the customer more flexibility with how they're going to pay for that particular SAAS offer.

The second one is very commonly you'll get a freemium offer. Just to whet the appetite and to give you the chance to experience the product or service. This is especially useful if it's a new style of product that you haven't used before. Or, that's quite innovative so that you haven't had the experience or know what to expect. One thing I'd say about the freemium offer is they nearly always give you the best version of the product. So you get used to the best option. They very rarely will give you a free experience at the lowest cost.

Okay, so the third feature of SAAS pricing would be tiered pricing, like a good, better, best approach. You might see that in terms of other names like price plans. And things that you commonly would see on mobile phone websites. Ultimately you'll see three different options. As I said good better best, there'll be all of them higher value offers. But there will be a distinct difference between the three options.

Okay, so the fourth option is, how are the offers differentiated? Nearly always because they're selling you Software as a Service and the differentiation is somewhere designed to segment the customer base. It is designed to charge larger companies or larger users higher sums. The tiering will be based on something along the lines of metrics specifically, the business. If it's a CRM system such as sales Salesforce or something like that it will nearly always be based on the number of customers you have in there. The number of leads, or it could be based on the number of users in your organisation. So you could have a small startup. You could have a business version or enterprise with the enterprise company 50 To 100 users.

The final feature for more sophisticated SAAS firms would be the use of price optimisation software and analytics. I suppose according to research companies and pricing consultancies in this space. Research has shown that make the majority of IT vendors and firms have been setting prices pretty much by guesswork. Or just using some inputs. Not fully confident whether the pricing is right. Possibly the best would be sort of a good competitive level pricing. I suppose now, real SAAS pricing for great IT vendors and firms is much more scientific, more analytical and they're thinking about optimisation. It could mean a lot of monitoring. Looking at different customer groups. Seeing what the price response rate is using price elasticity modelling. Calibrating that with market research. Then really determine price ceilings and determine the right price parameters for each of their offers. So we'll move away from fixed mainly cost-based pricing. Moving into understanding customer demand using real data analytics as well as multiple information sources.

That's it from me, that's the five and you'll see them more and more. Whether it's something like Spotify for home use. One big thing I'm a believer and I think traditional mainframe systems and large CAPEX will probably be a decreasing year on year in the business space. As we get more and more used to seeing this. The one thing I'm interested in always is, how do procurement deal with this sort of approach? Whereby it's very much a set rate card and they try to tailor to set systems. I wonder, will that undermine procurement strength and drive down costs. Well that's something for a future episode.

So if you want to find out a bit more about SAAS pricing, where it's going in the future? A bit more detail about the pricing mechanisms and the revenue model options. Then feel free to go to our webs website at Taylor Wells go to our resources pages. There you'll find documents reports and guides on SAAS pricing and pricing strategy.

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As they say - a fish rots from the head down - and if a CEO is not on board with a pricing project it is doomed to failure.

What should a CEO know about pricing - and we do not suggest they should get into the detail with pricing sheets!

In today's episode we want to ask the question, What should a CEO know about pricing? I'll preface this by saying, obviously in a big company CEOs have one of the toughest jobs. One of the best-remunerated jobs but also one of the toughest. But the question is, what should they know about pricing? In an environment where they have to know a little bit about everything. What really should a market-leading profit-driving CEO know about right the sector?

I think the first thing they should know is that pricing isn't a tactical numbers game. I think the pricing is a great way for them to get closer to their customer base. To deal with very difficult market challenges, competitive tension, margin pressure price, pressure pressure. It's a great way to galvanise teams to work together to align initiatives from sales, marketing, supply and pricing. So that you get the most out of each price and capitalise on your business and pricing models. I also think it's a great way, and here’s a classic a CEO should know that pricing is their number one profit lever if used correctly.

Yes, that's it. From my experience, a lot of CEOs are extremely good at talking. They're very good at talking. But in some context from my experience also they're not so great at listening. You can't be an expert in all areas. To build a value culture in a business, a great business culture where you understand, What the company's doing? What the company is trying to sell to which customer? What the value is? What is the charging model? Why do people choose you above a competitor? That fundamentally is pricing. No one expects the CEO to be able to drill through. Or have the time to drill through a pricing sheet or an optimisation sheet or those sorts of things. But you do want them to be considering, is it a rental model? is it a pay upfront and then you're locked into an ongoing business sort of model? what is the discounting mechanism? Are you up for tendering? Fundamental questions about the business strategy are, what they should know and what they should be interested in and engaged with?

From working with several CEOs and their teams now. I think an epiphany moment for many CEOs has been that pricing is not just an event. It's an ongoing transformative process. It's a process of continuous learning. There’s a lot of trials, there's a lot of error, there's a lot of mistakes are made. But they're also managed. I think at the beginning of any pricing journey that's just sort of like rhetoric. It sounds deep. It sounds meaningful. But once they're going through the process. It becomes something that resonates. And it's like, “Oh yes, I get it”. From there everything, we've just discussed is value and pricing being that connection point to supply-demand customers makes sense. Also, it raises other questions such as now I understand pricings or processes. Have I got the right strategy? what people do I need to drive this forward now I know it's a process rather than just a tactical excel spreadsheet game?

Whatever I've looked at a consulting project or any sort of project in pricing and you think, how successful is this project going to be? The biggest deciding factor for me is generally how engaged is the CEO. If a CEO is super-engaged in championing the project. Backing the project. Raising it every meeting. Pushing it forward it's a very high chance of being successful. If the CEO is not even involved, not in meetings. Delegated to somebody below him or her who may not even be a direct report to him or her. I'll be honest, the chance of success is low. The CEO needs to champion the culture they are the person most responsible for the culture in the business. The old saying is that a ‘fish rots from the head down ’. If the top people are not engaged pushing stuff, providing guidance, providing the culture, the objectives, etc. Things will not go in the way that you want them to go in. People at lower levels, they’ll work through the politics. They’ll work through how that works in any organisation. The bureaucracy people generally do what they're paid and incentivised to do. If they're not paid and incentivised to work as a team. To work towards business profitability to objectives of that nature. They won't do it. They will do what they are incentivised to do. And so, without the CEO backing, the CEO championing. A bit harder word to say than I thought it would be. Without those aspects, I think it will fail. So my big thing is, how engaged is the CEO? are they aware that they own the profitability of the business? It fundamentally is their responsibility.

I think that's a great point. From my experience consulting on pricing and pricing teams, what I've learned is that when there's a burning platform, CEOs become engaged. The burning platform tends to be either board pressure or a change or shift in the market, competitive pressure. Or their peers are doing something they're not doing, or they need to make money. So, money is a major driver. Pricing is the best way to get there. Internalising that expertise will deliver that full economic value from the pricing that you want. If you want to learn a little bit more about that. Just see where your businesses are in terms of being able to deliver the ROI from pricing that you want. Feel free to contact us, you can visit our website at Taylor wells.com.au. Click on download or your free pricing audit or contact us directly for our initial briefing session. We can just talk through some of your initiatives. See whether there are places that we can help or a roadmap in place that would benefit you and things like that.

I think just one final point I'll make and this is from some of my previous experience working in businesses. Pricing is a tough job, it's a tough gig. You're constantly getting a bit of pressure from your customers. You're getting pressure from internal operations. Sometimes you're seen as everyone's enemy. You're seen as trying to push up prices for the customer. And trying to sometimes decrease pricing or discuss that aspect with sales teams and marketing. That's a tough gig, and sometimes you can feel that you've got no friends in the business. If you're a B2B pricing person, you come back from a meeting and you might have got a deal in. But you may get smashed when you go back to the office. The other stakeholders in the company may not be very pleased. You need to have confidence that the CEO has your back. That the CEO has supported you and that you're aligned and you're on the same sheet. If that's not there I think pricing can be very unsatisfactory. Sometimes it’s heading to nothing, one way of putting it. So yeah, I think we'd leave it there. Fundamentally, if you're doing a job you need to be aligned with the most powerful person in that organisation.

Yeah, pricing is not just a quick fix simple price optimisation process. Or as easy as getting some silver bullet pricing software solution. It's a process. It's based on a value culture. And, it's very heavily reliant on both people strategy and systems. Good CEOs that sponsor projects based on that premise do very well. They do it very well consistently and over time. CEO’s don't consider it as a tactical move. Make some money over a short period of time and tend to lose it, very quickly too. So yeah, as I say, feel free to get in touch to get your free pricing audit, and we can help you.

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When it comes to pricing - we know that people want great results from day 1. However - what do you need to do first before trying to optimise prices.

Should you optimise - before you fix issues and build a strategy?

Often in life, people want to jump right into the deep end we cover this in a few previous episodes. But often people want to know, sometimes you can talk to a business. And they want you to start optimising prices immediately. And you say well, what sort of processes do you have in place at the beginning? They go, well nothing we don't have any pricing in place. So the question is, can you just start optimising prices on day one?

I think executives want to optimise prices. Because it does in theory, sound like a great way to drive profitability quickly. Especially maybe if you're in a tricky situation. You need to cash flow or markets have changed and you want to get ahead of competitors. Now, optimisation, if you look at vendors of optimisation software, will tick the box and all of that. Or, even consultants that say they can do that. Yes, they can. But I think it's really important for executives and pricing teams to just be aware of a few things before they do dive into price optimisation projects.

I think it's common sense if you've invested no time, no effort in your pricing department. If you don't even know who it’s run by. It could be the sales, it could be the marketing, it could be just discounting ad hoc of a list price. If you have no processes control systems in place, which let's be honest is a huge number of companies. You can start optimising but let's be honest what you're going to be doing is not going to be that useful. It may not fit into your overall strategy or your overarching aim for the business. It may not align with what your marketing departments doing. I'll be honest, it's probably not that beneficial to you. You may end up optimising changing prices communicating them to your customers. Then, when you start digging into your pricing has to undo it or do something completely different.

I think it's important to understand the pricing maturity of your company before you consider optimising. Good consultants will start any project with very thorough pricing diagnostic. Just to know if price optimisation is the right thing for you. Or, even to customise the right program roadmap for the business to ensure success. And to limit any risk exposure, especially profit downgrades, volume loss, things like that. But if you are going to look at this with this question very theoretically. And you say that the businesses are in medium maturity. There could be a possibility of optimising prices with some risk. But if they're managed correctly, Could you do it? Yes, if you've got say a list price. And you want that to be optimised in some way. Put some sense to the price category hierarchy, this year and last year sales. You're going to compare and do some price elasticity based on those very few metrics. Yes, you can do it. There will be some gains from it I would say maybe a 1 or 2% margin increase from doing that within the first six months. When you look at it there are only a few factors and variables to consider there. I think if you just do the bare basics, good sales directors and their teams can do it. I've seen see them do it. But I've also seen this optimisation being applied more as a blanket price increase. Or done very crudely because their segmentation strategy is also very crude. It's just a quadrant segmentation that lump customers into four groups. Then applies a very basic price algorithm on top. This often leads to a lot of customers complaining about the price. Because it doesn't apply to them they feel like they're being overcharged. While others feel like they're being under charge and they're going yeah this is great. But what happens to you? You lose money. So I think you've got to be careful how you go about this. I think having a crude optimisations strategy will get you so far but also lead you to risk. Equally having a crude segmentation strategy will limit your optimisation.

I think, in that context what we're talking about is you put make a call to someone. You say we want to improve our pricing. It's the consultancy model. Where some external expert will come in and do it for you or help you do it. Or, handhold you through that optimisation process. But then they’ll leave after the checks have been paid. They’ll leave and the skills won't be there so it's a short term thing. Or, do you build the internal process in your company that then will over time be able to continually optimise? Because let's be honest, optimisation is not a one-day thing set and forget. Business changes you've got to keep doing it over and over and over again as you hold in your strategy and improve the business and the pricing approach of that company. It’s the old cliche, do you want to fish today or do you want to learn to fish then eat forever. I suppose it’s not a philosophical difference but it's a business difference. My personal view is sometimes if you want everything immediately and all this great benefit today and free money. A price optimisation will help you but if it sounds too good to be true. The reality is it probably is. You have to put in the hard work. You have to dig through it. Have a plausible business plan business model which aligned with pricing. Then you implement. One of the big buzzwords nowadays in business and entrepreneurial stuff is execution. You have to execute you have to have the plan and the strategy and then executed. The pricing optimisation should be something that once your strategies are in place. You can do it down the line. If your business is in massive trouble and you need extra cash in the next three months. which nearly all companies do, it will help you. But bear in mind that it's probably you want both things happening.

I think that's a really good point. I think that speaks to the point I was making earlier. There's only so far lay people can go in pricing when they're doing optimisation. Because they just don't know they've got this playing with very basic variables. They're not doing full optimisation. They're just doing some analytics. It's just a basic formula. This is why a lot of companies now are building pricing teams to internalise and drive optimisation and analytics programs. Both in terms of developing the price algorithm. So it's not necessarily just the consultants who can do that high-performance pricing teams can as well. But also drive that program, tweak it. Optimise even the process. Learn from mistakes and mitigate risks. And capitalise on the value of the product portfolio or the services that the business is selling. As we've spoken a lot in other podcasts, a good pricing team is the glue in an organisation. It brings teams together to make pricing sort of more of an organisation or discipline. It's not just owned by the pricing team, or whoever does the optimisation. It's owned by everybody who gets involved. That's the beauty of internalising that optimisation and pricing capability.

I think in your business if you want to discuss this with us, reach out. Contact us all our contact info is on the website Taylorwells.com.au. We look forward to chatting with you through options, suggestions, all those sorts of things. So yeah, that's it for me today.

The best way is to go to Taylor wells.com.au, our homepage and click on Free pricing audit. We can help you with all these different optimisation and pricing, people and strategy issues and problems.

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In this episode of Pricing College - we discuss what a marketer should know about pricing.

Fundamentally, we believe they should be willing and able to work effectively with pricing.

To be honest - this happens too infrequently.

In many of our previous episodes, we have spoken about why pricing or good pricer need to work with other functions, whether finance, sales and very commonly marketing. So in today's episode, we want to discuss, what does a good marketer be? what do they need to know about pricing?

As you probably know pricing is one of the four Ps of marketing. Obviously, over years it's been part of the marketing department and still is, in some companies. But especially in the past two years, pricing has moved away from the conventional sort of marketing function. Which would be more involved in branding and content marketing, to some degree, and internal communications and marketing. Now pricing in the last two years, latest pricing is becoming very much in its own right. A domain, a discipline of its own. It's got specialist skills, specialist mindsets, different technology. A lot of marketers are becoming the sort of disconnected to, what that is? what does it mean? And if indeed they can learn those skills and whether they should? So, I suppose today we're going to discuss some of the techniques, mindsets and approaches. That is occurring or evolving in the discipline just to see what you can take out from that. And if you can apply that as a marketer in your business.

I think in some companies especially B2B and probably some more traditional or less advanced companies. You will sometimes see the negativity about marketing whereby it's seen as dollars wasted. I've even heard it described as the colouring-in department on occasions. Which is quite a disparaging way to look at it. I look at marketing and I suppose you can either be brand building. Or, I much prefer the direct response methodology where marketers go out there. Put out an offer and expect to get a response from customers or potential customers. I think a lot of that stemmed from people like Joe Polish. And some of the better copywriters back over the years. Probably from the 40s onwards that put out an offer. Expect to get a response. Get people to put their hand up and get something to happen. In that direct response environment, I always think there's a much higher chance that the marketers will be working with pricing. Because there's a real dollar delivery from that marketing. When it's more of a branding thing, sometimes I think you can be two steps away. But if you're building a value-based business that branding has to be very much interlinked with what you're doing. What I'm saying is you need to be willing to work with pricing. They have to work hand in glove.

Many years ago the marketer would do that. And in some companies, they do all the pricing. But I think tips that they can learn from pricers that are in a specialised. And dedicated pricing function, as opposed to a mix of marketing and pricing function, is the approach of value-based pricing. And how to translate value in economic terms in the price algorithm. A lot of marketers may not have that technical analytical skill set to turn what is fundamentally quite an abstract concept of value into numbers. Especially in terms of optimisation and dynamic pricing, where prices are going? And, why it's becoming a little bit more removed from conventional marketing? I suppose another area I think that needs to be developed is the understanding of branding. A lot of marketers are very caught up in brand power. And almost forget that underlying that brand power is customer value. They're very connected. When you disconnect customer value from brand power, you can't explain brand power very well. It becomes too abstract. So I think finally what marketers could learn would be more technology. Better analytics, and using data to justify the market research on customers. A lot of market research is very useful. It's very interesting. It's thought-provoking. But in terms of pricing, it's very difficult to use and translate that into an algorithm, a price-setting process. A lot of pricing teams have to scratch their heads thinking, what use can we make of this data, this research. Because there's not much I can do here. It's still too high level. So they have to go off and sort of do a lot of tests and learn themselves to make sense of it.

One thing I'll say is a lot of marketers like I say a lot, quite a percentage. Do not focus on the numbers. They do not focus on profitability, P&L, those sort of aspects. In an ideal world, yes we wish they would. But obviously, sometimes that's not the exact skill set. And of course, there's a lot of demand also for people in branding, visuals, campaigns that sort of stuff. What I look for somebody is the mirror image of what we say about prices. We always say that a good price needs to be able to work with different functions. The shoe is on the other foot also we need marketers who are willing to work with pricing. It's not a one-way street. You have to have that willingness to work. Willingness is not just to run off with a campaign and not think about how it integrates with the pricing department. It has to work together. I'll be honest, from my experience, a lot of marketers just don't do that. You can argue a lot of pricing teams don't do that. But I think a lot of marketers are also guilty of that weakness. And again if two horses are running off in a different direction it will turn the business apart. You need people to be running pulling in the same direction. Working as a team, without the one-upmanship. Sometimes when I hear the pricing works in the marketing department. I hear an alarm bell go off. Because it says to me, marketing holds the upper hand. Then the pricing aspect of it might not get the equal saying or equal listening that it deserves.

I suppose to sum it up there needs to be good working relationships between the pricing departments and the marketing department. But for that to happen I think the marketing department needs to learn, what real pricing and the latest pricing is. Then they'd be in a better position to utilise that information. To hone in and get an evidence-based understanding of different categories, different brands. Because as I Aidan says pricing is one aspect of the pie. You need promotions and marketing campaigns to be aligned with pricing and vice versa. To capitalise on the value you're trying to deliver. And the targets that you have to achieve. That's only done through education. Understanding skill sets. Understanding the changes in the market and working well together. Together in terms of teamwork and strategy, and finding the right people. If any of this resonates with you. Feel free to go on our website at Taylor wells.com.au. And fill in our complimentary pricing audit. We can cover all those things and get back to you.

We look forward to speaking to you. As we always say, you keep your eye on the focus. Keep your eye on the prize. The reality is for a marketer, the real long term price is not a nice logo or branding or imagery. The real long term goal they should be working towards is company profitability and success. Pricing has to be part of that. So yeah we look forward to speaking to you. Hopefully, you reach out and we will have a chat.

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Many companies in 2020 say they practise revenue management but do they really?

We ask are many of them really doing traditional pricing management and strategy?

In today's episode, we want to ask, do companies sometimes believe they're doing revenue management? When in actual fact, they're not really. They’re just pursuing pricing or contracting or tendering.

There seems to be a movement occurring in the pricing community. Whereby if you say you're in revenue management as opposed to pricing. This is somehow a more glamorous more scientific approach to optimising revenue to get more margins. When potentially you're still doing basic sort of cost-plus pricing under that sort of veneer of revenue management.

I think we've seen this in many sectors. I’ve seen it in the garbage collection. I've seen it in FMCG, foodstuffs and these sort of things. And we’ve even seen it in tendering for government contracts. To be honest, the revenue management I always think of it as through pricing your optimising capacity-constrained stuff. In reality, many companies if you're selling food, if you're picking up bins you're not capacity constrained. It's very rare for you to be at full capacity or to almost be a full capacity. If you want to produce more of something you can do more of it. And if you're tendering, you're not optimising. You're not using price into segmentation to optimise revenue. What you're doing is tendering to say yes we will do all this work if we win. If we don't and we'll do it at the price that through tender you ask. We've covered tendering quite negatively to some extent in some previous episodes. But I personally don't think that you can be doing revenue management in a classical sense with a lot of data analytics and big data if you're doing tendering or if you're selling to supermarkets all that sort of thing.

If you're looking at or if your perception of revenue management is one that moves beyond capacity utilisation. And now you're thinking about optimising revenues based on customer demand. Equally, I would argue a lot of teams are nowhere near that level of sophistication when they are optimising prices or even setting prices. Customer value drivers, forecasting and understanding of demand either past or in real-time is very immature. In both aspects of customer demand and supply, both areas are underdone. I would suspect that is because of the pricing model. As Aidan was saying is largely locked in by that sort of tender based approach.

Especially if you're doing tenders government contracting or even dealing with big supermarket chains. Where you're dealing with almost duopoly in your customer base. To some extent, you don't have the pricing power to differentiate and optimise revenue without in that instance. To a large extent, you're being dictated by the purchaser in some way. It's almost like the reverse of revenue management. It's almost you've been kept to a minimum level. We've gone through tenders and contracting this sort of work where procurement will try to push you as low as possible. You can look at an airline, where there is commercial travel. Let’s say a big bank or a big major corporation might get special rates on flights, etc. But that will be one segment of the market. If your main customers are say the big supermarket chain or something like that. They account for a very large percentage of your revenue clearly your be your ability to differentiated is diminished. I always think that you have to have that confidence to increase prices. To change prices, to move prices etc., to optimise and practice good revenue management. Most companies don't have that ability with their customers. Most companies are locked into longer-term prices whether it's over a month or a year or even longer. When you're in that scenario your ability really to optimise is minimal.

And as a result, because the whole relationship with a customer and that sort of price relationship are sort of limited by tendering. And that old fashioned approach what happens, as a result, is that you can't do revenue management as well as you would like. Then you end up sort of doing that more of tactical pricing and revenue management to optimise revenues. By that I mean, often you're given very limited options to play with the pricing playbook as it were. Especially in FMCG and go to everyday low pricing. Then try different discounts levels to push volume at different price points. To drive revenue and to get those margin targets. Then it just becomes a sort of pretty much the same in bouncing from different promotional prices and discounts to drive revenue to reach your targets. Unfortunately, that isn't good revenue management practice it becomes very reactive. It's stressful because you’ve only got a certain bandwidth price window to play. It does frustrate good pricing professionals quite a lot. Because they know the full extent of revenue management strategic pricing could yield much better results. Not just for the business they're working in but for their customers as well. But because of this old fashioned sort of ecosystem value chain. Which is a very limited value between the customer and the company. Everyone sort of misses out, unfortunately.

To be honest, I don't think I have much more to add on this one. I think we are going to end with an offer we have.

I supposed these sorts of problems are things that you're facing as a pricing manager or commercial executive. Feel free to reach out, go to our website and Taylor wells.com.au. On our homepage, you'll find the opportunity to start our pricing audit. It's a free pricing audit just fill in your details. And we'll get back to you and we can go through all of those things in more detail.

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In this episode of Pricing College - we continue to look at revenue management.

You may have heard that airlines can sometimes sell tickets at very low prices - and that it makes sense.

We look into this practise here.

In today's episode, we want to dig into a very common question about revenue management is the classic idea is, can you really sell the last seat on an aeroplane for $1 and be profitable? This is the concept where you come running up to the flights about to leave the gear. You come running up to the desk and say, Can I buy a ticket? The question is, what price could it sell a ticket out and be justified and be profitable?

It's a good scenario to think about. Actually, we've asked a lot of pricing analysts and revenue analysts this very same question. A lot of them have said, No, it wouldn't be profitable. But, is that the case?

I think fundamentally the question we're asking here is, how much money can you make? What's the most profitable price you can sell that ticket for? If somebody comes running up and they're willing to pay $1,000 for it. Yeah, sell for $1,000. But if they're not, there is a price that you could charge them that would be much lower than the standard price. Potentially, if you would just sell it or just make a few extra dollars. You know the other thing to bear in mind here is that you would probably bother with additional costs. I suppose the two things I look at are the additional costs in selling that ticket to that person. Are they bringing a lot of luggage with them? Is it gonna be extra heavy? Or, are they're gonna consume food and drinks that would have a real cost that wouldn't have been consumed on the plane otherwise? Would it take extra fuel to fly this person? All these things, let's assume a few dollars here and there. But broadly speaking, not a huge amount. So you’d want the amount of the dollar price to cover that amount. The other thing I'd think about it in any way shape or form is if people know that they can buy tickets at rock bottom prices at the last minute, would it cannibalise your actual normal sales? would people not book tickets and just chance and run around buying a $1,000 ticket? Would they chance run and turn up gate 10 minutes before take-off and go I’ve got 10 bucks in my pocket?

I suppose those are all the key risks you'd have to factor in especially if you're offering last-minute flights for $1 that does kind of high risk for future sales. But thinking about that actual scenario in terms of, what it is? The plane is about to leave, it's already scheduled to go. The companies made a commitment to fly their plane. People are on the plane and you just happen to turn up last minute. Yeah, for sure if there's no one else ready to book, and you're selling it to $1. It's still at a profit. Because they wouldn't have got that $1 if you not have gone to the airline at that point in time. It's all about timing, it's about customer segmentation and it's about, Where you are at that point in time? What the strategy is of the airline? the price parameters of their strategy? What are their price bands? Are they willing to go over or under those price bands to get that sale? And this is all involved in strategic price-setting and what a pricing manager should contemplate. As Aidan identified those key risks, you've got to cover your costs, you've got to ensure that any price point isn't going to cannibalise future sales. But are you thinking now, in terms of making immediate revenue? Or, are you thinking sustainably about safely making profitable revenue growth in a safe way over a 3-6-9 month period, and further.

I think there are two other things I probably add about it. If you think about it, it's almost like a time expiring product. So it's almost like once the door on that plane is closed and it pulled away from the gate it's expired. You cannot sell that product or that seat, you can't sell it again. In theory, it's a bit like food that's expiring, or any item. Once you go into a supermarket in the evening, often you may get a great discount on some of the food. But you have to consume it that day for its passing it’s the expiry date. In reality, that's the way to think about the seat. The other thing I say that might make it more clear to people that it would be profitable to discount. Think about a business class seat. Let’s say a business class seat generally sold for $5,000. And somebody turns up with a minute to go when they're willing to pay $3,000. It is a huge discount. But it's still obviously very profitable for the company and to the airline. Clearly, it’s just money that they wouldn't have had. And it would easily cover the costs, the additional weight etc of that person. It makes a lot of sense that the big thing to watch out for, would it lower the quality if people knew in business class that other people were coming in and getting a much-reduced price than there were? would it annoy them? would it stop them or would it almost think oh they're being penalised for booking early? They're being penalised for being loyal customers versus this last-minute person who just turns up? Those aspects you have to consider but ignore all those can make perfect sense.

I suppose that's what you've got to think of your brand. Your brand equity when you're setting prices and changing prices as part of a dynamic pricing strategy. Obviously, on top of that, there are going to be regulations and certain things that you can and cannot do. Maybe that isn't impossible to do that low in the airline's industry. But it's a scenario to think about. And I think there's a lot of businesses like last minute.com that have taken that idea of selling perishable goods. Sort of a later date last minute to make the most of inventory at a profitable price point. So obviously it's a concept that has done extremely well for businesses.

It is the bread and butter of revenue management. They're trying to maximise revenue for capacity-constrained services, this is a classic example. The other thing you’d be saying, a business or an airline should hopefully be selling all their seats. Otherwise, maybe their prices are too high or because of some other problems. In reality, they should not be every day. There should be, you know you're hoping to aim for 100% capacity on that flight. And if people knew that there was a very high chance they would get that ticket. Then it would start causing problems. The person is willing to turn up and pay $3,000. They've got that cash in their pocket. But at the same time, they also have to be willing to accept a lot of volatility. There's a high chance they could be stuck at the airport that night. In some way would you rather spend $5,000, you're a business person and know you'd make a meeting on a Monday morning? or spend $3,000 and be stuck in an airport over the weekend? There's a certain type of person that would in theory buy that ticket. It probably isn't as common as you might imagine.

So I suppose to know if a dynamic pricing strategy is correct for your business. Because a lot of other businesses outside the Airline industry are thinking about dynamic pricing revenue management. I think a key recommendation would be to diagnose your business, your commercial situation right now. Think about your customer segments, think about your brand and price positioning in the market. Then really test the pricing parameters of your current pricing model. Are they updated? Can you move the price ceiling or the price floors correct? Then start to test different price points, just to see what levels, you're getting more volume at more profitable price points and vice versa. All of this requires a good firm understanding of your pricing system and that requires some diagnostics.

I think that's it for me I think we're going to leave it with a call out. Whereby we're asking people if they would like to get analytics on their business or career. Reach out to us at taylorwells.com.au and sign up and you take advantage of that offer.

It's quite easy to do so you just go to our home page taylorwells.com.au. And click to get your free pricing audit today and everything else will and just book in. Easy as that.

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In this episode of pricing college - we take a look at revenue management and ask if your business really requires a complex IT system to implement revenue management.

Many companies are not at the pricing maturity to fully take advantage of a system of this nature.

In today's episode we want to ask, do you need to use complex computer programs and systems in a revenue management department? The question here arises because more and more we're seeing programs. A multimillion-dollar system used to just be used in airlines, hotels, etc, being suggested to many more different types of companies. And we ask, is that really required?

Well, I think people are investing. Companies are investing more in revenue management software to optimise their processes based on a lot of different types of criteria. In the past, 10 or 20 years ago and thinking about airlines now. Because they were the first to adopt more software for pricing and revenue management. But they started pretty basically. They would have certain price points. Three or four different price points per seat or flight. Then once the seats run out at a certain price. They go to the next bucket of the price which tended to be higher. In a way, it sort of gave that sense of dynamic pricing revenue management. But it was just a way of getting more yield in a very basic way at different price points. But I think now as the pricing management team expands the discipline evolves. We're finding now optimised prices for airlines or in industries with very slim margins. You may have to invest more in software to safely optimise prices and revenues. Otherwise, you could be at risk of falling loss.

One thing I’ll say here is often people think they’re gonna go 100% from day one. In many aspects of business and certainly in pricing revenue management, it's taken many steps. It's getting early wins. It's getting scores on the board or getting buy-in from stakeholders and moving forward. Going from a position where you've got no pricing department, no revenue management. Then jumping into a multimillion-dollar system. To be honest probably isn't the right way to do it. It's much better to get a lot of the benefits by spending very small amounts of money. People often think that you have to go 100% into something to get the results and there's no graded or step basis. But I'm a big believer in step by step. It always reminds me of people who say they’re going to start the gym. That they don't want to get too big. They always say not having the awareness as to how difficult it is to build muscle, etc. And they're almost like thinking they'll become Arnold Schwarzenegger overnight. In some way, I don’t think many people have linked pricing to Arnold Schwarzenegger before. But in this context, take little steps you will get a lot of the benefits. A lot of companies with very immature pricing revenue management systems. I don't think it's ready to jump in at the beginning. When you don't know what you're doing when you don't fully understand your pricing approach, let alone your optimisations approaches. I think don’t buy the big-ticket things immediately. Because you could be left with a white elephant sitting there not being used.

I think that's a good point, a lot of companies do invest in software as a knee-jerk reaction to a changing market or some form of price pressure from the competition. What they end up doing is going, oh, you know, I'll get that silver bullet solution. I'll get some revenue management software to optimise my prices. I won't invest in a pricing team. I don't even know, what a pricing framework is? But there's an assumption that that software has it all. It doesn't and if it does it's bare-bones. It needs to be implemented and integrated into the business. There has to be a pricing framework and algorithm to run it. That again needs to be adjusted according to the business various dynamics and factors. When I mentioned the airline's industry before that was quite a slow process to where it's where it is now. Initially, it started very rudimentary revenue management. Not dynamic pricing but given the illusion of dynamic pricing by moving to different buckets. That's not a sophisticated form of capacity utilisation or even optimising based on customer or consumer demand. Now, however, over the last 20 or 30 years, the airline's industry has learned a lot. They've cultivated their own business rules, factors and variables. That they'd like to study from a pricing perspective to optimise their revenues safely. That could be flights forecasting, network effect, the whole lot. So they're looking at multiple dynamics to optimise prices. Seat pricing, flight connections, the availability within the network and how popular a given type of flight, or system is? Also looking at ancillary optimisations of products as well as as a whole, of their food, the trolley cart and all of that perfumes. And all that sort of stuff that's all integrated within the system. So there are multiple variables to consider. In that regard, sometimes it could be data overload, just thinking through all of that. So a good pricing software system will be very useful.

I think we just go through there, a lot of the complex things that airlines and companies like really look at. In the airline industry, it's accepted revenue management and an accepted function. There are experts in that business and they're using tools of the trade. I'll be honest, a lot of the companies we look at don't have that level of maturity. So even going through those factors that we could be looking at. Such as competition on the lines, special events, connections, whatever else. A lot of companies in the pricing functions or well some of them don’t even have a pricing function. Let alone have that level of detail as to what driving demand and pricing. In that context, to be honest, I think an expensive revenue management system won't be useful to them until they're much further along than the maturity cycle. I think this back of the envelope stuff. You got to spend your money at the beginning to build your expertise. You probably get someone in there to run pricing for you, maybe a pricing manager, a pricing analyst. Get a good Excel system in place, a good ERP system maybe, or use a system that you do have. Why throw a lot of money into something, if you don't have the capability to use it? I think there's something we'll touch on in future episodes. But one of the big problems with revenue management systems is they don't just come straight out of the box. Especially if you're not in the airline industry. There needs to be tailoring, tinkering and making it applicable to your business. When someone goes for a job interview, you're often asked, do you understand this industry? The same thing applies to computers and systems. Not to be negative about it, they’re very useful tools. But I would say a start easy start in a way you can understand. Don't jump into the deep end.

Work out what your strategic price-setting process is, does it optimise revenues? Then think about your approach, is dynamic pricing essential for your business? or perhaps it's not? So it's thinking about your business, what works for your business now? Then have that five-year plan in mind. And being able to iterate as you go along. Because things do change, markets change, a customer base changes. We all know that going through COVID at the moment how quickly things change. How that impacts pricing and business models. Having that in mind, even though you've got that five-year plan but understanding your business. Your approach to pricing then building that pricing team who can figure that out for you. Then from there, making small steps to getting the system. Building on the framework as suggested. And working across the business to make that happen because pricing doesn't happen just within the pricing team. It’s a real organisational level commitment.

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We know that our listeners are interested in pricing, revenue management and boosting profits - but how many people really work as dedicated pricing professionals in Australia.

The answer is not very many at all.

Aidan and Joanna try to estimate the actual number.

In the last few months, we've all been experiencing quite a lot of change with COVID, the whole crisis and the government's response to it. One of those has been the serious economic challenges that we're all dealing with many people now have lost their jobs. A lot of people now are thinking about re-skilling. Some people are thinking don't know what to do and going for advice. We get a lot of people calling us asking us, “what to do next in terms of career planning?”. And it's brought on the question of, how many real pricing jobs and even executives are there in Australia? Are there as many as we think? A lot of people say pricing is very niche. How niches have that become now? Or is it a growing market that people should come to?

The other thing I'd say is we often see people saying, or they're moving to Australia. They're moving territory country. Are there any pricing roles available? I have to be completely honest, there are not very many pricing jobs available. It is a small profession. It applies not only in Australia but also in many other countries, it is a small profession. We'll come up with a number later in this podcast to what we asked to be. That's the first thing I say. The second thing I'll say is a lot of roles are seen as pricing or advertised if you went to jobs board and jobs websites. They're not pricing roles in the context of which we discussed pricing. You'll often get the classic transfer pricing and currency taxation thing which is completely different. You get pricing through commodities but more monopoly businesses, such as electricity, gas, water those sorts of things. Which again is different, it's more about government regulation. When we're talking about the stuff we talked about day in day out on our podcast that category of jobs is small.

Yes and even within that small category of jobs. You might see a few pricing analysts in B2B and B2C retail advertise say on LinkedIn or wherever. But when you look closely at the job description you'll find they are not strategic pricing roles. Those are considering data or customer value and trying to unpack that to drive profitability. They're still very much on the admin side. When I say price admin sort of level very operational maybe a touch of stakeholder engagement. But very much like just maintaining the price records. Extracting data out of the system. And doing a sort of very basic margin price cost analysis. Even going down the route accountancy doing cost accounting to then allocate cost to derive a cost-plus price. You'll see that a lot but it's still more on the maintenance of an old cost-plus system. Not what we discuss on the podcast and more advanced the latest pricing strategy revolving around value-based pricing and dynamic pricing.

In another aspect, pricing the closest thing to it is probably revenue management. Through the whole COVID the crisis and the government shutdown. Just almost as if the government believes that closing down revenue management jobs will stop the spread of the illness. When you look at how revenue management was most advanced in companies such as airlines, hotel chains, cruise ships and car rental businesses. Pretty much the people who've been ground zero for this shutdown in Australia and internationally. So, that is a sector that's very much under pressure. We have to be honest about this. The skills that they have and working at value for customers optimising revenue. Those skills are used less frequently in other sectors. They probably have been growing in the supermarket's potentially some of the major supermarket chains. We have to be honest pricing is still in its infancy. One of the reasons we do this podcast every week is to spread the word. Spread news about it. Hopefully triggered some people's minds to get that moment where they realise, what pricing is? What it can do? what it can do for their career or their business?

It has been unfortunate we've seen a lot of people, especially in the cruise line business been made redundant. As a result, this is what Aiden was saying there's only so long you can keep a large bank of staff. Even if they do have highly specialised skills after a time. The company just can't afford them. So, there's some great talent out there looking to apply. Some really good skills. We do see these skills could be applied in a lot of different industries not just people's go, “oh you know that's the cruise industry that's it, we can't use those skills”. I disagree with that. I think that they're bringing something new from other industries that can be easily applied to B2B. It's just a mindset change. And having that diversity and bringing those new skills in would be an enormous benefit. Especially for businesses with huge product portfolios. Just understanding and not just thinking about shifting stock. But thinking about the dynamically pricing stock. B2B is a very fixed pricing arrangement. I think the cruise line thinking could add value into more change into product and price segmentation tiers. Just logic I mean I can go into the detail. But there are so many different types of skills that could be applied. It is thinking differently now about talent. Because when you think differently about a talent you create more opportunity and growth. That's an important thing if we shut down opportunities. Then the number of people that are going to have a dead-end career in pricing is going to be huge. That doesn't need to be that way. They're easily transferable skills that can add value to different sectors.

I think certainly the cruise ship and this is one we probably cover in a future episode. That is very much discretionary expansion. People choose what sort of holiday or vacation they want to have. If COVID declines and we're back enjoying ourselves again actually living life. Why do people choose to go on a cruise? Why do they choose to spend their money where they're in an environment where they can only spend it with one company? The goal is they can choose the type of cabin they want. They can choose the number of days you want to go for etc and different locations. There's a lot of customer segmentation. There are a lot of customer value drivers that none industry has worked on and is knowledgeable about. Those concepts can apply to many other industries. One of the things I suppose what we often see as people are like when they're looking for someone to join their company. They want to see, did that person almost does the exact same job before? They probably didn't, to what benefit would it be? Well, you're not going to somebody excellent who's done something very similar. But even better elsewhere in another industry and they can bring those ideas. It's almost as if people are, you know, they're almost a few that their own business and their own industry is perfect as it is. Then the question is if it's perfect, why do you want to change it? do you not want to move to somewhere else? Having new ideas, new skills it may challenge you. But it should also add certain benefits.

It should. But I think when you bring in new skills, a new way of thinking. When you read about that in Harvard Business Review it sounds all very exciting. And you think you're that sort of person that's going to easily accept this kind of new and diverse people and skills. But then, time and time again when it comes to it. When there is a change management situation. When somebody is challenging you on a fundamental belief system regarding pricing, making money and driving growth. That disagreement can hold many businesses progress in pricing. And pricing improvement programs go nowhere that just revert back to cost-plus. But look, we're on a tangent now I'm going to answer the question in terms of, how many people in Australia do pricing? When I say do pricing, do pricing properly in terms of value-based dynamic, strategic, price setting the whole lot. I would say under 1000. People that are good possibly like 300 of those. People that know about systems like AI pricing, PRO, Zilliant all of those sorts of cool fancy systems are being brought over gradually now. I think now we've been getting to a handful of people that can do all of that. I would say overall Australia is not at level five price maturity on that well-known maturity scale from I think was pricing solutions made up. That's optimising prices using fancy systems statistical testing and big data. That would be more advanced or probably around about three sorts of managed pricing capability price management systems. In a way, a country's maturity does hold talent back. Because you can only do what you can do within a certain context framework. Whether it's an institutional framework or the pricing framework or system that you're using. But there's certainly a lot of great talent here. I can see it, we've assessed it and I have excellent conversations with people that want to try. And do their best that they can just give them the opportunity. I see some businesses are opening up the gates again looking at growth. Rather than just cost management which is great news for people in pricing. Because some great people want to do proper pricing and drive growth again. Driving growth is important for economic productivity and the whole thing. So the pricing industry and the community do a great job in building the economy. And we have to keep our mindset on growth. And value as a country to ensure that we do give people the opportunity to be productive and to do the best pricing work they can.

I think, reiterating some of those points I think in the course of COVID world, it's not going to be easy. Let's be honest we're facing an economic catastrophe. So we have to grow businesses. We have seen new businesses. We have to have that economic capitalism destruction and creation. Traditionally Australia's been seen as the lucky country in many sectors with a duopoly. Where we haven’t had new grown companies come in. And aggressive new companies with new value offer. That isn't something that I would characterise Australia as really having over the last 20 or 30 years. We do need to have that. With that, we need to be focusing on innovation. We need to be focusing on the value that these companies can offer to the customers. With that, we need to be thinking smarter, working better and pricing has to be a key part of that. Because if it's not we will have the remaining hoax to offer listed companies in every sector. That will just be a managing decline in those industries as everything else gets outsourced to be watching Netflix and getting Amazon shipped to our home. Yeah, it's hard work. But it's certainly, we will do it like a challenge. I'll be honest, nobody likes to challenge. People like to give it to them on a plate. But when a challenge comes along, you have to choose whether or not you make it. That's what defines winning or losing. So I think in this instance we need to be focusing on pricing. It's a small set of 300 jobs I think that’s the number Joanna give. There should be 3000 jobs, there should be 10,000 jobs. Because without those jobs, the companies won't be being profitable. And they won't be delivering profitability internationally and nationally. They will not be creating those great jobs in all aspects that companies need for a vibrant economy.

It's come to a point now where at the fulcrum point of, do we continue to reject growth and new ideas in Australia? Or do we actually go? There are people here that can do exceptional things to drive profitability using pricing by their understanding of value, by their understanding of the customer, and how they consume. I just don't know it could be as a CEO, as an executive in the business. I need that in the business to mix things up. It might not be what I agree with. But I'm willing to try it. I'm willing to see it through as long as there's a process. And they're going to put a roadmap in ahead so we can all agree on each step of the way. I'm going to accept that. Because we’re running out of alternatives. And I think the growth is so much better than cost-cutting when there's so much great talent out there that can give you the value that you want as a company.

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In Lady Windemere’s Fan, Oscar Wilde had Lord Darlington quip that a cynic was ‘a man who knows the price of everything and the value of nothing.‘ As with so much of what Wilde wrote or said, it’s more than just a nice turn of phrase – it hits at the heart of the problems of society. Lady Windemere’s Fan was written in 1892, but what Wilde wrote is even more true now than it was 122 years ago. We discuss what it means in pricing - and is it overused and cliched - or does it offer anything value.

If anyone has spent any time whatsoever in the pricing profession you have almost certainly heard the Oscar Wilde quote. I suppose it's a quote. It's actually from one of his plays that goes along the lines of, “what is a cynic?” A man who knows the price of everything and the value of nothing. It's almost been so overused, we want to cover it today. Is it a cliché? Or, does it have any value to people in business and the pricing profession?

I think it's only used because it's a well-known quote. It's only used to define a cynic because it's great. But it's kind of underused in the pricing profession. Yes, it does exemplify the difference between people who understand the value. And people who are passionately against the understanding of value. To the point, they're just not willing to even contemplate it. They're real personas here. I've met very cynical managers and executives in businesses who are just ardently just do not want to give up on cost-plus pricing. They say the bill is idle of everything and there couldn't be anything else that could replace it. Even bringing up a concept of value would be sort of pushed aside. Like almost something ridiculous to discuss in a meeting room. Even though everyone else can kind of see that there has to be more to life. Then just literally, the sum of the component parts of each different type of thing and cost. Then adding a markup to get money. It's just too simplistic for words. So this quote means it does mean a lot to the pricing people but I think it's not discussed enough.

It highlights for me I don't think Oscar Wilde would appreciate other people changing the meaning of what he or what he wanted to say into something completely different. But I think it does differentiate. There is a massive difference in price and value. They're completely polar opposite things whether we want to call the person who sees that as a cynic or whatever else. On the flip side, of course, Oscar Wilde play was also a sentimentalist. It’s the flip side of that coin. But you will see in companies where the company is very much focused as Joanna said on cost-plus or some other method. They will not invest in building the perceived value of the product. Increasing the value of the product, product innovation, those sort of aspects. They don't see the value that the product can offer and see as it is a marketing airy-fairy sort of nonsense. I work in companies. I'm sure many of you have where it's just dismissed. It's just dismissed by the old school accountant approach. And again I preach it was accounting so I'm not bashing that profession. But it's almost a negative side of that profession. Whereby people just dismiss the concept that value even exists or that value can help the prices increase. It's seen as either too complex or just fluffing mountains.

When I look at that quote, “a man who knows the price of everything”. In terms of the business, they see the product portfolio as literally just stock sitting there on the shelf that needs to be moved. It's very transactional everything. I'm sure a great accountant would know all the prices very well. Have them catalogued, recorded and can model them. Can do all of that stuff. Have all in the mind or all in Excel. They can just quote it but that's it, that's what as far as it goes. In terms of the last statement of the value of nothing, or a person that will just see it as a very transactional thing. They won't think about okay, why are people coming to the business to buy these products? What is the value of it? Why are people consuming? That's a question that a good pricing person will ask, and many accountants don't ask. Again, I'm not bashing accountants. It's not their area to ask. But at the same time, the good ones do. And it just opens a whole different realm, a different subject, a different discussion. That is much bigger and that's where you can find greater price premiums to drive profitability. If you just stick in this volume game. These are the stock we need to push out the door. You're limiting yourself and that value equation.

Sometimes in many aspects of life, the truth can hide in plain sight. It can be so obvious that people can't see the wood for the trees, to use other literary expressions. We might start doing literary expressions or quotations on this podcast also. But sometimes it's so obvious to some people and so almost invisible to others. Even if you question stuff for a minute it becomes certainly clear that value can drive price. Say a wine business. You went to any wine shop or bottle shop and you're selecting a bottle of wine for a dinner party. There are very different products on those shelves. They might be in this same style of bottles. There may be the same ship, even the Label might be very similar. But the price from one versus another could be infinitely different. It's not just the tiers that people just talk about tiers. In an aspect, there are hundreds of differentiators. You look at champagne versus any other sparkling wine. You look at a cava, prosecco all these different things in all Australian sparkling wine. In many instances, champagne from the true shopping in France will sell at a premium. And it may not be that people purchasing the bottle prefer that flavour without tiers there could be other aspects too. It's been wine was more of a sensory thing. But obviously, this applies in pretty much every industry. Literally, when someone's denying it to that extent, they're not a cynic but they are being willfully blind to the truth.

I was trying to think of it a different way. The cynic can be a great person to have on the team. That is if you've got a diverse mix of other personalities and opinions on the team as well. Because a cynic almost makes you passionately reject. Sometimes that unwillingness to push the frontier. And think about a different topic in a different way just through the way they perceive life and the fact that there can't be any alternatives. A good pricing person will always sort of think that okay we're up for debate now when a cynic comes along. What Oscar Wilde says here about a cynic, I think it's interesting. Because a cynic does provoke a lot of great conversation through their unwillingness to sort of debate. But they do change as well. I know a lot of great cynics have done great work with pricing once they've got that outlier moment about value. Thinking about the market in terms of, how people behave and respond to their business? Why do they value their business? Not even just the product when they see doing business with them as something greater than just the sum of its parts. It makes their life and their role in their own business as an executive more rewarding as well. That's when you start getting meaningful partnerships with your customers.

I think we need pricers to be cynics. When we say that, we need them to have that skill set knowing the price and value are completely different. They need to question everything. They need to question, why the value should be this? What do we want it to be? Why the price is this? They need to be cynical. They can’t just accept the status or whatever the company mantra. Many companies have what used to call Yes man. I suppose the yes culture in the corporate is still very prominent as much as ever. To transform a business and to increase profitability, you need to question things. To question things, you need to be cynical about stuff. You need to question to tick the tiers and see if it stands up to scrutiny. That's it for me I think.

I think a good cynic is a great scientist. I think we all know now that more scientific processes are coming to pricing. More data, more analytics, hypothesis testing, and a good cynic will impose the null hypothesis. Give you reasons to reject or accept our hypothesis and this is great. But we've got to have diversity on the team. Have that creative ability to construct alternative hypotheses that people hadn't thought about in the past. In terms of value, in terms of demand, in terms of what drives people, their behaviours, and their psychology. Because all of these things are related to the financial outcome businesses want to achieve. So yeah, I think I pretty much said all I wanna say. I think it's important to have that diversity. I think Oscar Wilde did say a great and very relevant quote from him about pricing, about life in general.

Oscar Wilde is not one of those people if you've ever said we're short of words or short of opinions. It'd be very interesting to see how he would be coping in 2020. It'll be legacy what he would have to say about the current situation.

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In this episode of Pricing College - we discuss what a bubble is and why we do not really discuss speculation, investment or pricing options or financial instruments. Often what is described as a bubble is not a bubble - but rational demand driven prices for a hot item or service. Today we're gonna talk about a slightly different economic topic on like bubbles. But bubbles in housing, bubbles in IT, all those sorts of things. And we're gonna just talk a little bit about kind of why they're not talked about in pricing. Sometimes they are in certain industries and just go into a little bit more detail about them. Explain why we don't generally cover bubbles or pricing speculation, or those sort of things on our podcast. I suppose fundamentally the reason is that we specialise in pricing products services to either B2B or B2C consumers. Generally, we don't focus on investments. Whereby you think a product that you buy today for the $100 would go up to $500 in the future. Or, even a store value that might maintain its value over time. So that's not where we focus. There still is a transaction approach but you're not buying that item, that share, that dividend whatever it is that commodity for the usage after the value place out. You're buying it to potentially keep it in your portfolio or selling it later on. Hopefully, a price increase. At the same time bubbles has some kind of human element to them, in terms of their relationship with consumer confidence, consumer demand, supply and demand. So there is that sort of I suppose general theme with bubbles that still related to human beings. But at the same time, it's quite hard to measure as a price-setting metric or even something that you can tangibly use to search prices for products and services. Yet in the real estate industry, people follow bubbles as one leading indicator of where the markets going. So it's not something that we completely ignore. But it's still for like products and services in B2B and B2C, it's still not useful enough to determine as a metric.

I think there is an overlap in the psychology of pricing in any aspect and the psychology of bubbles also. Generally in bubbles, when we're talking about speculation whether that's a Dutch Tulip Mania, the Japanese property bubble in the late 80s. Or, anything else based on some aspect of shortage or perceived shortage, some increase in demand. And people say just a mass-market belief that is going to increase. Whether that's supported by media coverage. Cheap money through very low-interest rates. Or something along those lines pushing people to think things that happened yesterday will continue in the future. Obviously with the sort of bubbles and speculations when it gets to the end. Often the price increase can accelerate. Because people want that increasing acceleration in price almost out where the perceived risk assuming when prices get higher. The risk of them collapsing increases also. The psychological aspect of what people look at. There certainly is overlap in that regard. I suppose, in our podcasts, and blogs different content we generally focus on products that are tangible usage. Or, some sort of usage to the customer, whereby the value the customer places on them is actually in line with the price they pay. Words and speculation of bubbles I think I'd make the differentiation that the price people pay is fundamentally, there's no other tangible benefit to it. In many cases, think of Bancassurance, one of the big four banks. There's no real value in having and accepting the actual price so the price and the price are the same. The value of the price is fundamentally the same thing in a modern environment. So it defeats the entire point built of advertising, marketing, value culture those sort of aspects.

I think when there's a bubble there's some kind of I think people like to relate the bubble to the price. I’m thinking here in terms of real estate when there's a bubble. You see prices going up. People think that is a direct correlation between or a direct link between the two. It's more just a correlation. So when there's, for instance, a speculative bubble in the housing market you'll see more activity in pricing. There'll be more variation in prices, broad prices tend to go up. Also, there's more like bids and an auction as opposed to direct sales through the real estate agent. When there is speculation for instance that the bubbles burst. What happens is less variation in price. Everyone's more nervous, consumer sentiment goes down, and real estate agents tend to do sort of more direct selling. You even get cold calling. More bids and all the auctions are close to that the pricing becomes more secretive. I think because of that sort of relationship between a bubble and pricing especially in the real estate industry people think there's a direct link. But it's just more again on that myth like sort of just a correlation. It's speculation. It's more confusion and people leading with their gut, as opposed to any evidence. That's still quite relevant in a lot of industries. A lot of pricing especially in the real estate industry when it's related to that bubble type of concept. It becomes very much a guesswork and gut feeling.

The other thing I would say is very often you'll hear popular players or even just people talking and they call things bubbles. In the reality, they're not a bubble at all. Prices can increase in short periods of time. And there are very often real value-based pricing reasons for that. The Superbowl Sunday say if it’s in Miami. Hotel prices will increase for the weekend before that game. That's perfectly understandable. Just because it increased it doesn't mean there's a bubble in them. Unless the only way it could be a bubble, in theory, will be of people booking the rooms. Then subletting them or renting them out to somebody else. That's in a secondary market prior to that which could happen in scalping for tickets to sports events and those sort of things. The other thing I'd say is the price in Australia and I believe other countries have covered real increasing prices for puppies. Recently during the whole COVID crisis. Prices for dogs have gone through the roof for certain suitable dogs that can live in cities and apartments, etc. Is there a logical reason for that to happen? Yes, of course. People are stuck at home. There are a lot of people lonely. There are a lot of people looking for a company. Obviously, dogs are real living animals. So you can't produce an infinite amount of dogs in a week. Then much lower amount the next. So it's very much a demand-driven increase in a commodity or capacity-constrained environment.

In a way, people's discussion of bubbles is almost a misunderstanding of supply and demand. It has a mythical status for laypeople who potentially don't know as much as pricing experts about the dynamics between supply and demand. Customer demand driving up to various industries, various products. Then there's a decline. Pricing people know that. They make money out of it. They do yield management and such. But maybe other industries aren't sophisticated in their pricing knowledge. Then they use this sort of bubble as the soothsaying sort of mythical bubble as an explanation for price increases. And consumer demand it could be that.

I don't think, in general terms, our podcast is not focused on pricing areas such as stock valuation, is not focused on derivative valuations. Often you'll see job ads and you'll probably see as many job ads for pricing people in banks. That is a very different skill set. Very much more evaluation based aspect. Or looking at, should you invest in companies, etc, which is a very different thing than what we talk about. We have mentioned Warren Buffett on the previous podcast when he looks at a company. He looks and sees the pricing power of the business. So even the best investors are looking at the pricing capability that a company has. That's different to them. That will help them form the valuation for the company that they have. But the pricing, they're looking at is a great different aspect and I think we should keep that in mind.

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In this episode of Pricing College - we cover the trend for many manufacturers of food products to produce very similar unlabelled or supermarket own brands.

We discuss how this can be a problem for your business in the longer term.

In today's episode, we are going to look at “own brands”. And how own brand in the world of food fast-moving consumer goods, those sort of items. How can damage the actual brand?

Thinking about how it all started with its own brands. It came about through a sort of private label strategy to supermarkets. Favouring Private Labels in a way help with everyday low pricing. Consumers and shoppers wanted a bit more variation when they were buying. They were saying the price was a major driver. Then, from there supermarkets came up with that pushing private label. Often a part of that strategy was to ask every supplier providing the branded goods to make their own brand. A cheaper version of an own brand to compete or add depth to the category onto the product assortment. In theory, there are positives. It's giving consumers sort of what they want or what they think they want. But in a way, it's also damaged the supplier, supermarket retail relationships on a number of levels. Suppliers have lost a fair amount of margin over the years with their own brand private label strategy. Yes, in the short term they did have sort of some kind of spike in revenue and volume, which I'm sure that they enjoyed from their brand. But at the same time, over time, a lot of the brands have worked too. But bite them because now they're being asked to put the well known branded goods on to a program called EDLP, everyday low pricing. And overall I think this is reducing sort of the value of the category year on year. And consumers are not nonplussed about it either. So I do think there have been some negative effects.

I think you can understand from a manufacturer's perspective why they will look at their brand or unbranded version. So let's say you produce any sort of product whether it's washing powder or whatever it is. You’ve invested in the brand. You spend money on television adverts and it's a very common item in people's minds. You have a target market out there that want to purchase that product. Buy it every week when they do the weekly shop and they want that item. There's pressure on you and from the supermarket or the retailer to lower prices. Fundamentally, you don't want to lower prices. You want to keep your star product where it is. And to keep it seen as a prestige product and keep those prices up to keep profitability and margin high. Potentially, launching lower value, unbranded, unpackaged or whatever, it is the cheaper version of the same product. In many instances, they’ll come from the same factory. I think we've all heard of examples whether it's a loaf of bread or you know whatever it is. The item will be coming from the same place just go down a different shoot in the factory and different branding going on it. You can even see examples of this in re-badging in the auto industry where the same product is sold. Fundamentally just with different badges at very different prices. But certainly, in the supermarket food categories or household cleaners, etc., the item will be very similar. There might be small differentials in the actual content. But in reality, the biggest difference will be in the packaging and what it looks like. It could be sold at a price differential of a third of the price of the original. With that issue, that might be your margins in the meantime. But over time, as customers who always shop for seeing this item on the shelf next to it. They might start going to I'll try the cheaper one I'm saving X number of dollars each time, why not give it a try? If they do try it, fundamentally, are you producing a product that you don't want people to buy? That's a strategy that over the long term there's an issue there. So if you're producing a product in theory you don’t want people to choose. But you can't make it inferior and still has to be as internally as good from a health perspective from the food requirement perspective. You are gonna be facing issues. Over time a certain percentage of people who are either price-aware or value shoppers or just, to be honest, don't care about the packaging. You will see a large number of people choosing the cheaper option. And you’ll cannibalise your sales, your margins and your profitability.

In the early days, you're right. It did provide some kind of price structure customer and segmentation structure by offering private label. A few years ago, I'm thinking Kellogg's for instance they were leading in the market. Everybody went to the Kellogg's brand. But they needed to be more variety within that sort of category for people. So offering that own brand was a good idea especially for price-sensitive consumers that wanted that Kellogg experience. But they just felt like they weren't willing to pay. Couldn't afford it for some reason. In the basket of goods, total spending went up so they wanted to make allowances and wanted to then go to their own brand. That makes complete sense there's logic. You've got a good better best strategy working quite well. But what's happened over time is just yet another own brand, another variation. Let's just use the Kellogg example here, what you end up having is just a huge amount of assortment of one product. Just think about the supermarket aisle when you go through the cereal aisle and the snacks aisle. It's row upon row of the same sort of stuff. This is the negative result almost of own brand. Where you just keep on competing with that expanding that same product category. Just keep working and working until there's no variety left in the supermarket. This is a major issue for customers going to the supermarket now. This is why a lot of consumers and shoppers are going elsewhere for their basic groceries. Because there's a lack of variety in the supermarket based on private label EDLP strategy. So they go to niche, smaller businesses that provide them what they want and they're willing to do the homework for that, and surprisingly pay more. It's not a surprise because people do want diversity in their grocery goods, as well as in their price points. The business that provides that and the pricing team that sees that is going to win that market share. The niches that arise as a result of all these different strategies.

I think a lot of this is short-termism versus long-termism. In the short term, an own-brand strategy can seem sensible even if you're producing branded goods you can justify yourself why you would go along with it. But if you're not differentiating the value. Understanding the drivers of why people purchase your product. Especially when something let's say that you're not showing the people that are not prestige items. Let's say a washing powder where theoretically there might be studies that show a branded washing powder performs 10X better than an unbranded version. But if one costs three times the price of the other. I don't believe for a minute that one performs three times as good as a similar one on a similar shelf. And at least you've worked out for one or two tries. So you are going to undermine your brand offer. If you don't invest in the value that you provide. If you don't protect that value through moats or some sort of mechanism. Where the unbranded version has to be discernibly inferior in performance, reliability or some other aspect. If it's not discernibly different people over time have become aware of that, just choose the cheaper one.

I think my point here is as well that supermarkets and suppliers due to the same brand issue they've been stuck in that one category. They're not forgetting that they're just working that product in that category to death. To the point that there's no other choice for consumers and that's driving them outside of the supermarket. Driving to other suppliers that provide a variety in the range and assortment. So what I'm saying is sometimes own brand and that sort of competition to compete based on price not only do cannibalise your own brands by doing that. You've stopped thinking about the market and what customers want to buy. Yes, you may provide them with all the cheapest possible product variations of the same product. But yet they still don't buy. Why? Because they want to buy something else. This is where big leading brands are now finding that it's the smaller entrant, providing that are the big competitors in the market for them now. Even their lean down cost-focused and streamlined manufacturing is not enough to compete with them. Because the product innovation from leading companies is too slow. They're not thinking about, how people consume? what do they want to consume? They're just thinking about that sort of private label, a typical sort of strategy. Because their whole manufacturing operational capability is based on a very small range of brands that are almost yesteryear brands. Unfortunately, consumers and the market are moving on. And it's the agile smaller startups that provide exciting new tastes at price points that people can afford are the ones that are winning now.

The other aspect of it is if you're investing in a brand that takes years and years to do it. It takes years to gain customer awareness. There's a large upfront expense of product development, distribution, advertising and marketing getting to where it needs a mass brand. You don't want to kill that golden goose before it pays off. If the entirety of the supermarket in the industry is dedicated to as soon as possible pumping out cheaper alternatives to your brand. Why would you even invest in developing new products or services through that sales mechanism? It's almost doomed to failure. I think when you’re going to the supermarket and you're thinking, what would you have for dinner. You think there are limited options. To some extent, it seems sometimes everyone just eats chicken, and there are limited options to some extent. You’re thinking there’s got to be more than this but if there are no financial incentives for people really to pursue it. I think to some extent, it is logical that over time it becomes more just similar similar stuff.

And I think a lot of suppliers, new entrants, new startups in the grocery game look at a potential relationship with a supermarket retailer. And think you know what I don't want to go down that same old groove like everyone else is doing. They buy my brand because it's something new, it's something that people like. Then within no time at all, I'm told to reduce prices. I'm told to provide an alternative and own brand. A cheaper variation to provide some kind of distinction and attraction mechanism for price-sensitive customers. Then over time told to promote and fund that promotion. A lot of people just like you know what, I can do my own distribution, I can do my own marketing, I can target the niche audiences that I want online, and I'm going to invest online to find my niche, find my customer base and give them what they want. This is exactly what's happening now. What's happening to the supermarket retailers and leading suppliers that serve that old fashioned market. They're struggling and they don't even have that sophisticated online strategy by segment, by price point to attract the right customers. It's a long story that all comes from that interesting private label issue and I suppose it all ties up together. What is clear? Things have to change. Distribution is changing. There are new entrants. And having an IT capability is going to be enormous for everybody leading companies, smaller entrants. They've already got a niche foothold in that market and are pulling that. They're not going down the private label own brand. Because they know over time that's just going to ruin their business. Not just their brand, their business. And it's going to upset the customers. There's one thing that startups do only focus on and that is customers. Because they know if they don't hit it with their customers and give them what they want when they want it. Then they're not going to survive. I think there's a lesson here for leading businesses too.

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When companies buy lots of brands - they sometimes have real issues integrating them and differentiating their offers.

This can create real pricing issues - by dragging pricing down to the lowest rung.

We discuss this issue today.

In this podcast, we want to follow up on our last episode about segmentation and branding. And ask the question, what problems can arise when a company has too many brands or too many legacy brands?

We were talking before about how businesses now through disruption, through market competition, aggressive pricing and downward pressure on pricing. That businesses are now acquiring lots of brands. Lots of different businesses may be thinking about product innovation. And creating new brands to compete in the market. We were wondering, what is that doing to a pricing structure? Do companies know that buying these brands or having these different businesses in their portfolio can have a tremendous impact both positive and negative on the pricing structure? In particular, when you have a pricing structure you need order and logic to that pricing structure. To ensure that you’re getting the most out of each price point. And, the price aligns with the market and customers are willing to pay for these different brands according to how you hypothesize these brands. You bought these brands for a reason. And you want to make money out of them. You don’t want to make to cannibalise your product portfolio with competing brands. So we’re thinking very much about pricing structure, what do you need to look at? How can you improve that? What are the problems?

I think a lot of people become attached to brands then over history, the legacy. With a brand to build it, you have spent a lot of money in advertising, customer service over the years. You can't build a brand overnight. With all that effort there's often a reluctance on companies or anyone else to stop a brand. Or, to shell a bit or to integrate it into another brand that you may have. But the issue would be if you have two brands that are in the same sector. And you haven't invested in the value differentiators between the two. You don't have that value culture in play. There is the real danger that what will happen is the two brands will become confused in the customers' minds. If they are saying similar items let's give an example of maybe tools or something like that or even vehicles cars. I will give the example of this car company of Hyundai and Kia owned by the same Korean larger company. I believe chaebol I think is the Korean sort of term for it. But over time those two brands have sort of become similar. You'll also see the same in France with that Peugeot and Citroen. I'm sure a French person could tell me which has historically had the higher brand recognition. But a lot of people who weren't very into cars that this sort of integrated into the same thing. And what would happen with that is if one is on sale for a lower significantly lower price than the other. And there’s not about brand recognition the real appreciation of value or perception of value between the two. Generally, people will either be the more cost-effective or the cheaper one. Or, there will be pressure on the salesperson to reduce their price on the higher branded one to the lower price. So it's almost a race to the bottom.

That's a really good example of when the higher business strategy or requisition and buying brands is misaligned to the sorts of pricing strategy and the pricing structures. Often it's symptomatic when that happens that (A) there's not even a pricing team on board managing the show or (B) they've got the pricing team but they're not very strategic. They're more of a maintenance operational pricing team making do with what they've got sort of second-hand news of the wider business strategy. And they're sort of a very loose term about how they're supposed to implement strategy from there. I often find when there's a major consolidation on a sort of higher-level from a strategic acquisitions team that they're often been done. Because they want to increase the product portfolio with the idea to upsell and cross-sell to more customers. In some people's minds at the executive level is enough to go on. Surely the hypothesis here is we have more products. We've got a huge market presence in one country, surely we'd have the same market presence in another. There are a lot of assumptions here that are untested. It possibly is true. But from a pricing perspective you've got to think, Is that true? Can we test it? Is that cross-sell strategy the right one for us considering we're going for a more value-based approach? Another thing to consider is, Is the brand that you're acquiring competing with the local brand? And then inadvertently, are you competing with yourself on price? You've got to have those clear fences between brands from a pricing team perspective. A pricing team will look very closely at that. Because otherwise really what you've got is you're playing with is a volume game. Just based simply on revenue and volume. There's no real tiering system based on value. From a market perspective and a customer perspective, it indicates that (A) you don't have that market Intel (B) you're not sure what your customers are willing to buy and you don't have a leadership position. You're just playing it on a very tactical level.

I think it all comes back certainly in branding to this concept of the value culture that should be embedded throughout the business. Certainly in the pricing perspective. It's one thing for the company to understand their brand. To know what it is to emphasise those aspects. But at the same time, you also have to make sure the customer knows as well. Educating the customer and getting it across to the customer. In many instances, there can be confusion in the customer mind. If that message isn't getting across perfectly it can create issues. One example I gave is the luxury watch market. So everybody's heard of Rolex I was heard of certain brands like that. One of the biggest or most luxurious brands in the world from a technical perspective is the Japanese brand Grand Seiko. Which is probably more famous for the lower end brands Seiko. So just a small one-word difference Grand Seiko versus Seiko, there's probably a price differential of 10 times. But in many people's mindsets if you want to watch aficionados there would be confusion added. With that outside of Japan and some Asian countries, Grand Seiko may not have brand recognition. Or the acceptance as a luxury competitor to people like Rolex. The technical specifics etc of the watch are very similar. But to some extent, the branding, the image, and making people aware through the marketing of that value differential. What it does is breaks down the potential differentiators. The potential division between the two brands. Would they do better if they're distinctly different names? It probably is a good question. There’s great difficulty in making the choice about changing brands once you’ve built them both up. And that's something that really should consider from the beginning.

I think that's the point when you consolidate buy new brands to existing portfolios. You've got to understand on a very detailed level or like on a skill level. What is each of those products? What their value profile is? Where do they fit? Is the hot product price hierarchy built based on an understanding of the SKU’s profile? Now I'm getting quite detailed here but this is what the good pricing team should do. When a team doesn't know what to do, there's no pricing strategy. Because the business strategies are vague. It's hard to sort of translate into a value-based strategy. And, the team is just all of a sudden giving a huge product portfolio that's all in a mess. It comes down to serious hard work. It comes down to understanding what you're selling. From your perspective first, and then you've got to then test all those assumptions in the market. Because often what you find is like an important high-value product or fast-moving it may be. That's such a vague definition. It's not good enough to say oh this is fast-moving, therefore, we’ll price this. You need to know, why people are buying? how do people are consuming your products? This comes down to B2B, from tools. You've got to say yeah we've acquired this brand. But, are these tools the same as our tools, our existing tools under this brand. And you can't just say… “oh yeah we think that they are, we think that they're all the same”. It just doesn't work like that from a pricing perspective. You need to create some order in the price structure to make money out of them. That does require a lot of work from a line item analysis.

I think, one final point I'm making in this instance is it highlights pricing is not a distinct function. It needs to work hand in hand with other functions. So let's give the example of starting a brand, building a brand, and understanding the brand. You have to be working with whoever's designing, building and developing the service. Whoever the marketing people, advertising and sales. You have to be working with all of them. Because your message from the marketing department is not completely congruent with your message from the pricing department. It just won't work. What are you hoping to achieve? This is why we say the value culture has to be embedded throughout the entire business. Pricing is one important aspect of doing that and it is seen as a specialist skillset. But that skill set massively overlaps and one of them falls. It just isn't going to work. So yeah that's about it for me on this topic. I'm gonna say Have a nice day.

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In today's episode of Pricing College - we discuss how brands can help a business segment their customer base by value drivers and ability to pay.

We look at brands in the hotel industry and also in the car industry.

In today's episode, we want to cover how different brands can help you segment your market.

Have you ever thought maybe that you've got some brands that I'm thinking now of like hotel brands? And how they can help position a business in the market. But they also can help position your pricing in the market by having the existence of three or four different brands. So like I'm thinking about Accor brands. You've got Sofitel, you've got Novotel to make your brand under that business. They really help to define the pricing, and also price positioning, the tiering system, and customer segmentation.

Yes, In theory, what we're doing is we're segmenting our customer base and our customer base are people who want to stay in a hotel in this instance and there are other examples we can give also. But in this instance, there are people who want to stay in a hotel. That is the main item they’re purchasing. But their drivers will be very different. Some will want a romantic weekend away, or this will be a family holiday. Other people might be workers in a city for a couple of days and just want somewhere where they can prepare their meals, etc. So there are slight nuances to the drivers that are making people choose that hotel and location. But I suppose in America they're probably the most advanced in that you have a huge number of very micro niche brands even under the same larger brand. Whereas under the Accor brand common in Australia we have Sofitel, the top five stars going the whole way down to a Formula One which is a one star. I think America is probably the most advanced in that. And have done even more market research on the customer base to tailor in.

I was thinking about that. They've done a lot of segmentation. A lot of customer and market research to define those customer groups and price groups. But they're almost like micro-segmentation, and they're far more developed than in the US. They seem to know each of their customer groups. Then they market to these various hotel brands according to what they want to hear based on the customer experience, their online experience. They want their customer value drivers to direct them to the right offer. Then from there, they provide promotional offers that are tailored to that individual. It is a very personalised offer. So you can see this almost like a layered approach. You've got your price and your customer segmentation aligned to brands. Then from there, you move on to personalise promotion to sell more. To ensure capacity utilisation, and to drive up yield based on customer demand.

From a pricing perspective, what are the real reasons why companies do this? I suppose if you take an example wherein a world that this didn't occur. Where one hotel company just has one hotel brand. Basically what they'll be doing is they’ll be charging the mid-market price. It'll be too much for some people and not enough for others. There will be enough luxury and value-added there. So really what you're doing is you're segmenting the offer. You're tailoring the exact offer that you're giving to customers to maximise that willingness to pay. And meet that willingness to pay in those different categories. So you're providing a basic service to people who just need that. A stock up for the night somewhere to rest, maybe they're making an early morning flight. And then if the whole way up the Echelon to people who are willing to pay. The once in a lifetime trip to a real luxury hotel. It could be fancy restaurants that go with it, and you're maximising that willingness to pay. There's a threshold where you can't have an infinite number of hotel brands. But it's certainly in the American method they’ll tailor it. They’ll be of little value. You can pay extra for certain things like wine etc or maybe use the hotel spa and these sorts of things. So it is tailoring the offer into the value drivers to have maximised the willingness to pay that people have.

I suppose this is really a wider business strategy in terms of consolidating. Buying up relevant brands and businesses that complement your business strategy. Aligned to your pricing strategy. There's no point for instance buying brands that don't fit your pricing strategy. Or, could be at odds with a pricing strategy. Because it's very hard to then capitalise and monetise your business strategy you can end up almost sort of diluting your price point. So, here you see two very important things, the impact of pricing on your business strategy and how the wider business strategy in terms of acquisitions and mergers is linked to your pricing strategy as well.

You see this in many different areas not as advanced as in the hotel industry. But the classic example of airlines in Australia is Qantas. Which is at one point in time was the dominant player in the market and is still. To a large extent, they then launched a lower-priced version of Jetstar. You'll also see it even in the car companies. Hyundai, the Korean company they are moving up developing from being a bargain car to sort of a modern mid-market car. Then launch a lower price entering into the market also in Kia. The American market is very large, with 300 million people with a lot more similarities across the different states that you might have than across European countries. You can have more brands under the same company. An example again will be General Motors were obviously through a long history of 100 years or more of acquisitions etc buying up different brands. They operate a huge number of branded cars tailored to certain niche segments. They take advantage of what people want from a vehicle. Whether its history, the brand and logo, comfort, status, sports appeal, all these different things. Knowing the customer, knowing what drives them, and then providing a product with barriers against the lower-cost competition. So you can maximise the profitability in that sector by potentially selling something at a cheaper price to somebody else.

This is a great example of strategic acquisitions where the strategy team is thinking commercially about future acquisitions. How are they going to expand the brand and product portfolio? Then working with the pricing to monetise that. And then the pricing team needs those different firms to then help position the brand using, I think we've discussed this before frame and anchoring techniques. So that they know that tiering system is correct. And then they can adjust the price bandwidth and price tiers according to Business Intelligence that flows through the business through the pricing team. Then they can optimise their prices, their promotions on an ongoing basis.

On this podcast, we often talk about a value culture and understanding the value that you offer. I think in this example of different brands tailored to different segments, this is of paramount importance. The only reason to have the different brands and hotel industry is because of the value it offers. There's no other reason to do it. If you've got an understanding through market research or whatever else of the value that you offer matching a consumer demand. That is the entire business model. I suppose it's a good way for people to remember when you're thinking about a value culture just think of these hotel brands, why they exist? and the fact that they purely exist to meet that pricing requirement.

Remember this very much applies to B2B because they too are going through a lot of consolidation. They’re thinking about buying up various brands either as a competitive tactic or strategy and even to expand their product portfolio. But it's remembering very much about positioning, tiering. How you're going to structure your pricing to ensure that you do make money out of the brands. And they don't end up biting you and leading to margin loss over time.

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In this podcast episode of Pricing College - we ask would you actually pay more for fewer movie options on your streaming service - or would even paying a nominal fee let you enjoy the movie more?

We've been talking a lot about movies, the movie industry. The differences in pricing between Netflix and potentially Foxtel and also cinemas. We're thinking greatly about how pricing now determines a lot about the way we consume movies. Netflix is a great example of our new habits as movie watchers. It offers us infinite variety at a low price. We like cheap and it's offering like pretty much infinite movies, documentaries, the whole lot in a way for free. Many generations like the younger generations now have been brought up on this new way of consuming movies. Now there's a real difference between the sort of the older generation who used to a more event-based cinema-going movie experience. And younger generations who are used to just like consuming middle of the road stuff at the drop perhaps there's no experience behind it. So we're interested today to talk a bit more about the consumption of movies. And the changing of those types of patterns over the years.

My personal view is that Netflix, obviously is very successful. It's always gain a huge number of customers, a huge number of paying customers. One of the things or issues about it, I do think that they could push the perceived value by slightly changing the pricing mechanism. Let's say you currently pay 15 bucks a month, whether you watch a movie or 1000 movies it's the same fee. Too many ways of looking at it, you always see your TV bill as a utility. Think about it when you're watching the movie so you do perceive the movies as being free. In the world of pricing, there's the old saying… “ that if you sell something for one cent versus for free”. The demand for that product will drop infinitely or hugely. If you think about it in your area. If a restaurant gives free smoothies, free burgers, or free sandwiches as one day as a promotion. There'll be a queue around the block. Even if the people will queue for half an hour to get a free sandwich if it even a cost of $5. They wouldn't do work for $5 for that half-hour. So the demand for free, seemingly free things go through the roof. But with that, there is the side effect that people don't appreciate what they have. It's almost as if it's worthless because the price tag makes us seem psychologically worthless to them. And one of the big complaints here by people on Netflix is they can't focus. They can’t choose a movie and stick with a movie. Or, they'll spend half an hour flipping through movies trying to pick one. Then end up not picking any. So I believe that is a factor of not having to pay. Not psychologically having to give a fee in your mind for making that choice.

I suppose when people do have too much choice. The value and the enjoyment of watching that movie do decrease. That higher price point makes people pay attention. Makes their brain switch and think okay, what am I actually watching? why am I watching them? And make them ask those questions. Then having that sort of lazy movie-watching experience. It’s uninquiring and you sort of laying back popcorn not thinking about it. It's more like background noise and moving colours. I honestly think that's what a lot of people want. They're just relaxing, they're switching off, and Netflix sort of does the job. But there's another segment of the population that has got an inquiring mind. They want a little bit more curation with their movies. They want to know, what's good? and why it's good? Like the old fashioned movie critics, Barry Norman I don’t know if anyone can remember them. He might not have been the best critic. But he was there at the time of critiquing different movies for a reason to cater to people. That had an actual interest in the films and that has just gone.

I do believe that it has gone. I think there's no real, like you look at Netflix. There are categories etc but there aren't the top 100 movies recommended by this critic or that critic. Or, there are very limited aspects of that. There's not even periods or seminars where you have the great directors, there are movies and you can go through them. It's sold as a popcorn consumer and easy consumption mechanism. But I do believe people if you ask them, do they want infinite for free? They’ll always say yes, people will say yes indeed. I always say, imagine you're on a cruise ship. Hopefully when this whole COVID crisis ends and cruise ships are back running or even an example of a Las Vegas casino. In the buffet, first few days everyone's eating as much as they can get their hands on. They're consuming way more than they would usually do. Give it another week or give it a couple of weeks, people will probably revert the normal consumption habits. Probably they could choose infinite amounts. But they probably just have an egg on toast, or who you know a bowl of cornflakes. That's what life is about and to a large extent people initially or for holidays want infinite. But in reality, if you give them too much, they don't appreciate it. There's that saying with children if you give them too much early on you'll spoil them, young sports stars are a very similar concept. Again this is a value judgment, getting away from pricing but it overlaps into pricing. When people have to work for something and put their money down to get something. It's sort of signifies that they've made a choice, and when they made a choice that means they're committed to it. When you commit to something you have a natural willingness not to back away from it. So you start the movie, you've paid for that movie. Even if it's just $1 you pay for that movie, and you're much more likely to see it through. And watch the whole movie than you would if you had nothing.

But the interesting thing here is generations are now being brought up with just Netflix. That's all they know, that's where their minds are at. They don't know that there was anything better. I think we were discussing this before and they probably don't even know, who Tom Cruise is? Their knowledge of actual movies is very limited. So they won't ask those questions. They won't be prepared to pay that money because they don't have an alternative. They don't have something to compare it with. When I think about the Netflix pricing model, their criteria is based on the quality of the picture. That's what their audience wants. It was a high definition of quality picture and fast download speed on multiple devices. That sounds to me like it is appealing to young people. There's no value fence based on what they're watching. I suppose even how they consuming it. They've already got that for free so it doesn't matter. So they’re not thinking about that, so they can get whatever they want. It's just a quality that's the younger generation wants. They want lots of it, they don't care what they're watching, and they want it to be on multiple devices. I think that Netflix has encapsulated that. If I compare their pricing model with something like Foxtel. The Foxtel is appealing more to that old fashioned sort of movie as an event. People who like watching movies or have an interest in something such as sports, such as movies, documentaries. Their pricing structure is based on bundles and add ons based on somebody's interest. The thing is if you have no interest in anything. Will that pricing model that is Foxtel using over time become obsolete? Because at the moment people are just content with watching the middle of the road nothingness. Over time if they're not exposed to anything else. That's all they'll know and that they'll be satisfied with that.

I think that's true. To some extent, the production companies like the Warner Brothers, 20 Century Fox they're almost cannibalising their offer. What their golden goose is the long term value of the big business, the star system. I think a large amount of these have been just ground down. There's been a huge investment in television series over the last number of years. I even remember, it shows how old I am when George Clooney was cast as Batman. Which was quite out of character I think he'd come from the TV series ER. At that time and people asked him, did you see any difference being in the movies? He said it was a whole step up because people viewed TV stars as a lower level than movie stars. That might have changed nowadays. But I think a lot of young people almost view YouTubers. The YouTubers who self produce using their telephones and put stuff up on YouTube for free consumption. They're seen as big stars by many kids and teenagers, etc, or young adults as traditional movie stars are. You can even argue that the Hollywood star system is almost broken down. There haven't been big movie stars created in the last 10 years. To the extent that there would have been in the 80s and early 90s. It's almost as if that conveyor belt of stars has stopped. And, is that because people don't appreciate, they're not investing their own money into the product, perhaps?

I know we argued before that Netflix is a dominant player but maybe not so for long. Because we've got Amazon Prime coming into the picture and they may dominate. But interestingly, it'd be something like YouTube completely free access content from anyone and from anywhere. That is the market disrupter here. Because younger people are even thinking about Netflix is old hat now. And they are just watching YouTube and Tik Tokers and that's what they want to consume. When you think of what Tik Tok is, it's pretty very short like up to six seconds, up to a couple of minutes of individuals doing various odd things here and there. But that’s the attention span. That's consumption the people want to watch six minutes of something nothing too high brow. But at the same time, it's still specialising. Because that person can choose areas that they're interested in like dance, comedy whatever it is, and there'll be something available. Saying that even Amazon Prime might be old hat in a few years. And that YouTube and Tik Tok are the things that they should be watching out for.

I think that's it for me. It’s an interesting sector and I think everybody has fundamentally some interest in movies and cinema, and entertainment. Whether you're prepared to pay for it or not or whether you're prepared to go to the movies or not is a different question. But, whether it's the gossip magazines, or watching the movie itself. So yeah I think it's an interesting topic and we'll probably revisit it in a future episode.

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In this episode - we discuss whether the business model and pricing strategy of Netflix will let it prosper in the long term.

We look at the penetration pricing strategy currently in use - and ask if it is best for the long haul?

So we were talking a bit before about the cinema and movie industry. And it sort of made us think about the prevalent, the dominant player in the market now Netflix. The value offers to the consumers and we're thinking, What value does it offer? Is it sustainable? Will it be long term? Will we value Netflix as much as we do today? Or, Is the lifecycle with Netflix?

I suppose people say I've got Netflix, I have a subscription to Netflix. What is the value that Netflix provides? I'm one of those people who even remembers its original incarnation before it was a tech business where they email you CDs or DVDs or, through the post. You had to select the ones you wanted to watch. And in that context, the appeal was the obscure movies, the foreign movies, the war archives movies, that was the actual appeal of the business. In a weird way, it's gone completely the opposite. Now it's more generic, popcorn style movies, some the 80s classics and that sort of thing. That you can just consume whatever you want and you pay a flat fee depending on the territory you're in. Something like 15 to 20 bucks a month and you can watch the movies. What are they providing is the question? Are they providing you access to movies that you wouldn't otherwise have? Or, why even the studio's use Netflix? Because it's a market to some extent there are two sides to it. The consumer should watch the movie and the studios who choose to distribute through them. So we're going to dig into that a little bit in this podcast.

When they are launched and still today one of the major value drivers have been the price they've been competing in the market based on price. I think they offer a tiered pricing model, it's very simple, it's very cheap, and it's easy to understand. I think it starts at like 9.99 it goes up to 13.99 and max 15 something like that. So, they have gone with a strategy of low price and looking at the pricing model, it's low price. Whatever you can watch on on their platform and sort of like good quality. So, there's those sort of segment price segment based on the quality of the actual movie. High Definition via streaming and that sort of thing. They've thought about the customers, what do they want? Customers want lots of sort of average stuff to consume in an instant. But they want it in high quality, high definition, so they want to watch it without interruption, even if they're streaming it. That seems to be a major value proposition that Netflix offers us today.

I can understand if we look at their pricing strategy which has been you can argue a penetration pricing strategy to get people to try it. I suppose there is a question though, Is it a penetration pricing strategy with the expectation of increasing prices later? We covered this in a previous podcast. I personally don't believe that there's that large an opportunity to increase prices. I believe a couple of years ago they did increase prices. And saw a large drop off in their customer base, which we'll probably cover in a future episode. But one of the big things I'll say about Netflix is, there’s a classic example of the British railway network. In many instances, there’s a first-mover advantage but there's also a first-mover disadvantage. With Netflix, they have shown the way and they've built a streaming model which was very market-leading. But one of the big issues is in my view is there are very few buyers to enter into it. It doesn't build an ecosystem such as the iTunes and App Store. You're not built into an ecosystem surrounded by Netflix. In theory, there’s nothing is locking you in. You can consume movies elsewhere, whether through YouTube, Stan in Australia. Or, different streaming platforms or directly with the studios which we're seeing increasingly. To some extent, it's almost as if his business has shown the way. But not locked in any network effects that would stop people shopping around.

They're probably a bit feeling vulnerable about their position in the market too. Because they're more than willing to partner with people like Foxtel for instance. I suppose they're keen to keep customers like Disney. Because they literally give them the content even though they do produce their stuff. But I do feel now more than ever that they are more vulnerable to that feeling. And they're trying to create a more reliable ecosystem. Because they know the one that they have got is quite frail. It's very flexible and gives people options. But at the same time doesn't lock you in as much as they probably hoped.

In 2020 Disney is going direct so they're withdrawing a lot of their content from these distribution platforms. In my mind, I don't understand why any major studio where there are movies that you want. It’s not any easier typing something into Netflix and it is typing into Google. If you can just buy it or get it from this from the studio directly, why would you pick it from Netflix? I can understand speaking of ecosystems a lot of modern smart TVs would have Netflix built-in. But we're a year or two away from where you’ll just have whatever you want to build into them. If Netflix has built-in, Google is also on YouTube with different things. So I don't think Netflix will exist in its current format in 5 to 10 years. I just don't think that they have value-added. Fundamentally, the people who can produce the content are the Masters in this genre. They're distributing it all over the same mechanism which will be online. It'll be the cinemas or online. And they said the online mechanism will be like we might want to direct, why would you pay a margin or give it to a middleman? It doesn't to me make any sense at all. One other point I'd make is that Netflix has been trying to add a bit of AI and give you suggestions and these sorts of things. But basically to my mind all it does is suggest the same stuff that you watch previously, popcorn style movie and it's just good to kind of suggest another one to you. Over time, if we still believe cinema is an art form we're going to be looking more deeply for the content that we spend our time watching.

I think it started as a value proposition to have as much content as possible that it would be a platform that would enable the user to take control of the TV watching experience as opposed to being told what to watch or have any sort of guidance around that. They said, “oh for the first time, we'll put you in charge of that”. And I think that's some people like that other people don't. As you get more and more content that sort of pretty much the same sort of thing. You kind of actually does need more guidance about what to watch. Netflix on another issue has been a great test case for movie producers like Disney. To see how well people would respond to watching films and content at home versus the cinema versus Foxtel sky and the whole bit. It's been a great test case almost like an agile sort of test. And learn for these bigger movie producers to see how their content, how people respond to and consume movies than ever before. In a way, it's helped people understand the entertainment industry. And think about micro-segmentation than ever before.

In the previous podcast, we talk about the current blandness and sameness and stuff like that. We were talking about the Golden Age of Hollywood which was a bit more artistic. Movies were original and based on the director's vision. Then from the 80s, 90s onward has moved into a focus group. You produce something and you tailor the ending to what people want. It does become bland. It's like the rule of politics that the middle person is what decides the election. So people tend towards the middle but in entertainment, I'm not sure if that's the right way. Because when it tends towards the middle and the sameness and everything’s the same. And you've seen this before, you lose interest. When you lose interest then you stop going to the movies. Your willingness to pay and differentiate decreases. Then basically convenience seems to be the only value driver that you have. That's what Netflix focuses on, convenience and lack of barriers. When we talk about barriers to entry, you want to watch a movie today, there is no barrier to entry. You sit on your sofa and click a button and infinite movies will come up. So yeah I think in 5 to 10 years Netflix will not exist in its current format. I think it would be something along the lines of a Yahoo or AOL, a business that's still big still. A lot of money capital but will be decreasing from its current height.

I think so too, look it pivoted before from its older business model when it was a mail DVD and mail in the post business. Then it transitioned to this more platform business and has done very well. I'm sure that they're thinking about it now building their ecosystems which indicates that they're probably thinking about business model adaption, reinventing, innovating, something in the next 5 to 10 years. There does seem to be a need to do that and things aren't moving quickly but it's shown us some great possibilities in the entertainment industry as well as some gaps in the market as well.

It's showing the way but it's also created some big powerful enemies or competitors. When you look at amazon on who has infinite money from funding and also profitable who are also entering Amazon Prime. In a direct competitive system with Netflix, the real differentiator that Netflix has is likely to decrease. I can also imagine, you will see national champions designed around promoting national products will start coming on board. I think sometimes in a market when you do show the way all you're gonna do is breed competitors. So you have to make the money in the short term. It was a very brief penetration strategy. It will probably still grow as they get towards complete market dominance in many geographies but my guess is it's going to be just one of a number of competitors that people will consider in the future.

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In this episode of Pricing College - we discuss how Hollywood studios used to discriminate based on willingness to pay and use different distributions methods such as cinema release, video stores, pay tv and finally free to air tv.

This has of course changed due to technology - but is the new system any better?

In today's episode, we want to talk about movies. I think everyone's probably sick of staying at home and watching movies over the last six months. But it's made us think about the changing business model. And potentially the pricing model of Hollywood and global cinema from the 1980s to today.

Remember back in the day you’d be so keen and excited to look forward to the new movie release. That you'd be prepared to queue around the cinema block just to watch the latest blockbuster movie. But we wanted to look at this as a sense of excitement, willingness to pay, prepared to wait for something exclusivity as a way of customer and price segmentation today. And, how effective it has been for the movie industry.

I think a lot of people talk about the Golden Age of Hollywood, they're often referring to the 1930s until the 1950s. For me, the Golden Age of Hollywood is when I was a kid that runs from probably the mid-1980s to the late 1990s. Interestingly, some people argue 1998 was the last great year of Hollywood but I would say that getting old. But if you look at how Hollywood movies were distributed in that period. Let's say the mid-1990s was a classic example of using the technology at that time to segment the market based on customer willingness to pay. So basically providing the same services or media, which was the movie. Some were shown on a big screen, some are shown through videos etc, but the content was the same. But what they did was they had very strict. A very regimented system of delaying release on those movies on different platforms to take out every possible dollar from the customer, based on their willingness to pay. It would start from the cinema so, you'd open in the cinemas. Once that was exhausted it would then move to the video store, to Blockbuster etc, which we covered in a previous episode. After that was exhausted, they would move on to Pamper television, satellite or cable. And once that exhausted, it would eventually drop down into normal TV. Or, free to air TV for the people who weren't willing to pay for it. But there were still a few more dollars to be picked out of the product.

And if you can recall there are much more like restrictions on the movie IP because of the sense of exclusivity in a way. There be lots of anti pirating laws. There be lots of rules and regulations prior to the movie starting both in the cinema and also on the video. You'd see those big quack signs going whatever you do just don't copy this film. That was all because they had that very strict guideline as Aidan was talking about release dates, about protecting IP. Making it a very special event for people. But also you've got to consider making the movie itself is a very high cost. They've got to think about covering their costs and making money on top. So this type of segmentation strategy based on time and exclusivity enabled the cinema industry and movie industry to do it at that point in time. They didn't have the customer insights and analytics to then really drive further into the price and customer segmentation which they're doing now. But at that point, this is what they did leverage.

I think on the protection of the IP and the building barriers around the product. If we said the cinema, they did hammer home that Intellectual property theft. All those things were pushed. There used to always be stories about people videoing using camcorders in the cinema to capture that. And trying to sell bootleg copies of the movie. There are a lot more strict controls in place. I can't remember the last time I saw one of those trailers before a movie whether in the cinema or on Netflix. I don't think I've seen one in a number of years and to be honest that has changed. I suppose the whole system with digitalisation did change, with Napster, downloading, pirate bay and these sort of websites. I can't remember what they were doing but they were sharing files from the early 2000s. This all started began to change with the demise of the traditional video store. The blockbuster collapse and the introduction of Netflix and more streaming services over the last 10 or so years. That model has changed. My question is, has the industry got to a new level or a new platform that it's used to that is profitable in the longer term? And I'll be honest, I don't think they are segmenting by the customer willingness to pay, as well as the way that traditional or older model.

I think about that older model I suppose it's very one-sided it does protect the interests of the movie industry. As Aidan was saying, people are trying to go outside of that system and trying to watch the movie before the official release date. That showed that the model itself was inflexible and it wasn't appealing to the audience. The audience wanted to consume that movie beforehand. But the movie industry wanted to regulate everything. It just shows that sometimes business model has to adapt in a way that does not think about your audience. And what they want and keeping it from them can be detrimental in the long term. Even though it's profitable for the business in the shorter term.

I think this is going to be one of the few times where I disagree with Joanna on this one. I think there's a famous concept that scarcity leads to people wanting things more. I do think in the movies where it's seen as a luxury thing and night out. It's a Glamorous Night at the movies and that's promoted with red carpet, premieres and these sort of things. Where the celebrities get to go in before you do, even before the cinematic they get to go first. Those sort of concepts lead to it as being glamorous or a big night out. An acceptable way to spend your Friday or Saturday evening, whether like a date night or whatever with a family, etc. But I think it's that scarcity leads to the hot new movie to see. The new Tom Cruise movie or whatever, again I'm showing my age about the early 90s. I do think that glamour about the movies even led to the next when it went down to the video store. You went to the blockbuster. Say you went in on a Friday night and you're hoping to get the copy of the limited number of VHS copies of that hot new movie. And even then people were still clamouring over to get those movies. Personally, I think in this aspect is to create a sense of anticipation on scarcity leads people to almost want to watch it more.

I’m not disagreeing with you. I just think in terms of scarcity what we're talking about is segmentation here of experience. Through having that older inflexible model what they found is some of their audience wanted to consume that movie. And they didn't want all the glamour glitz and sort of red velvet rope experience. They just wanted almost like a Netflix experience or lazy experience or just wanted to watch it, and then move on. There was nothing particularly special for them they just wanted to consume it. So even with the experience what I'm trying to say is that the older model did appeal to people that were interested in the movies that couldn't wait to see it. I loved the anticipation that in itself is a segmentation of a particular customer group. But there's another type of group that just wanted to consume. And disregarded any of the Hollywood glitz and glamour that you were talking about. In a way, they're sort of the more in my mind Netflix people. They would like to love movies and consume them. But they wouldn't bother going to the cinema. Don't like that sort of Hollywood experience and can do without it. For that reason, we have got all these different types of businesses.

I think that's true. I think you could almost argue. Does life follow art? or does art follow life? Certainly, at the moment we're in more of a kind of disposable culture and the movies we watch people surf on Netflix to find the one to watch. They don't commit a large dollar amount to it and watch the movie. I don't think they were excited about it in advance. They weren’t seeking out that movie. So my argument is that the movie industry has almost worked itself into a scenario where a willingness to pay is very different difficult for the companies to eke out or to maximise willingness to pay. It's very difficult for them to delay and put the barriers around the different methods of showing the movie. The runs in cinemas now are shorter than they used to be in the older days as there's a rush to move things as digital will become available quicker and quicker. And obviously, the world is now a global market. And so even keeping slowly releases from one tab to another has decreased which used to be very common. So, my personal view is it has flattened the market, and it probably has flattened the market and are willing to pay is quite low. With a willingness to pay to being low, does it feedback and through the feedback, mechanism into to be honest, not very good movies. That's again something this podcast doesn’t cover but as a movie fan myself, I would argue it does. And with that lack of willingness to pay from consumers the quality of movies has become much blander and popcorn-esque.

That's why Netflix is becoming more popular when you think about what it offers. The type of films, general interest, documentary as a whole but it's all very middle of the road sort of stuff we're not appealing to the extremes anymore. Maybe cinema 20 years ago, as Aidan was saying that does more highbrow even though it was still appealing to everyman. But over time the fact is people are just interested in consuming films. It's more disposable it's very much like I can see trends with films and diet and how eating it's all coming to that very sort of almost lowest common denominator. And we are missing out on sort of introductions to better thoughts better idea as a result.

I think that's it for me. I think we're going to do a couple more podcasts around the entertainment industry and movie industry. So I think we'll leave some of the other concepts to them.

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In this episode of Pricing College - we talk about what to do when someone just has to have a discount.

We love not discounting - but sometimes you have to recognise that their are dedicates hagglers out there - the type who enjoys getting 1% off on shopping at the local market.

You know the type!

In today's episode we want to cover, what do you do when you're selling to somebody, a person who just insists on getting a discount? Who will not sign on the dotted line if they are not given a discount or less price?

According to Cialdini in the psychology of selling, he says that people feel better when they get some kind of compensation discount after a negotiation. So there's rule of thumb he's saying whenever anyone does price negotiation at the back of their mind. What's going to make them feel better physiologically, emotionally, and intellectually is if the seller offers them a discount. It doesn't have to be a huge discount. But people want to feel that they've got something in this negotiation that they haven't been had in some way. So that's an important concept. Now, the question we want to pose is, should we factor that into the price? And how can we do that?

I’ve enrolled in the past, I've met people, and it’s just who they are, it’s their self-identity. In the same way, there are people who self identify as salespeople. And there are people who self identify as bargain hunters and negotiators. They will haggle for anything. They’ll go to the local market and they'll haggle over 1 or 2 cents. It's almost the fun for them is in the haggling. To be honest, at pricing college were also the view that you should try not to give discounts. And shouldn't discount a list price. Because really what you're doing is you're destroying your margin. But there has to be a time when you recognise certain people will not buy from you if they won’t get that discount. And I suppose in this context really what you want to do is segment the market. Don't give that discount to everybody. Make a decision that if you're willing to offer a slight discount or whatever discount is required. I'd also say in this context, a small discount can often be as good as a big discount to people. It's just the fact that they get a discount is all that matters. Because often what they're seeking is not the monetary value but just the psychological win. They can put that flag up and say they achieve victory in this negotiation. So, how do you set about segmenting that customer from 99% of all the people who don't? And, how much discount to give?

Because often the prices are optimising the price and looking at segmentation willingness to pay. But often the discount mechanisms and bonds are a little bit like an afterthought. Almost based on just literally volume and quantity. It's not based on that emotional response. People have to price negotiation and that rule needs some kind of compensation and discount like they're driven to do it. There's like psychological or biological dopamine hit when they get that discount. And as Aidan says, it doesn't have to be big. So, from a pricing perspective, we spend a lot of time looking at that price point but not factoring in that need for a discount. And often just putting a sort of a very crude three-level discount. Often starting from that 10% and then quite harsh restrictions thereafter. What we find even is that salespeople on the ground who've sold to customers know that people ask for discounts quite a lot. And maybe they don't know why that person psychologically wants that discount but they know that they do it on a behavioural level. So they instantly, rather than just give like 5% off they go to the max and they give that 10% off. That's not a good practice. So I think what I'm trying to say here is that there has to be some greater awareness on the need for a discount on the consumer and customer perspective because it happens in B2B as well. People just need that discount and also what we're going to do is prices about it, and the guidance and the floors and fences around those discounts. So sales know what they're going to do in response.

Traditionally, this is one of the big issues or cruxes or problems between the pricing departments and sales departments. The sales departments are having that conversation, they're speaking to the purchaser or the customer. It could be an individual, it could be a company and it could be a procurement person. And oftentimes pricing is sitting behind a desk or in head office or somewhere else. There's that view that maybe pricing doesn't get that human interaction. There could be a personal relationship over years between the seller and the buyer. It could be a long term account management aspect. If you're a B2B salesperson or any salesperson and you're driving out to their location if this person’s haggler they're going to want to haggle all day. Let’s be simple about it. If you're selling a car and you know the person you're going to sell it to want to haggle. If you want to sell a car for 1000 bucks. Maybe it's not silly to quote an initial price above 1000 bucks to give you that haggle room we'll call it. To give the person the price that they are willing to pay. And also the little victory that they want.

I think it's important to factor all of this in the price waterfall. Often you don't see it's just like as a discount. But there's no explanation for it, it's just all promotional discounts whatever. But that extra insight into that price waterfall helped. Because, ultimately, if you don't acknowledge the fact that people want a discount. It's going to come out of your margin anyway, the pocket price. So, I think it's important to factor in. So textbook wise like I can hear prices saying, never give discounts. If you're going to reduce the price. Let's look at negotiating the value trading, value price and all of that stuff for sure that's textbook. You shouldn't necessarily resort to giving a discount. But have we addressed the real problem or issue here is that people like discounts. Why wouldn't we want to please our customers by providing some kind of discount? If we had more control of our discounts based on more research into how people respond to them. And why they required them. Then, I think we can optimise our discounts and drive more revenue as well.

Here at pricing college and Taylor Wells, we always talk about is not just the product, it’s the periphery. It's the other stuff that goes with it like the customer services, the experiences, the shop, the after-sales care. To some extent, the actual selling process is one of those things too. If you're friendly with a salesperson that can be of value to it as well. If you know a person over the years, that'd be an experience. Like a lot of people like going to traditional markets. They’re like going for the bows, the colours, the experience, the haggle. That aspect is very different to the modern sanitised supermarket experience. People put a value on different things. What you want to be doing is understanding why and segmenting your market. So that you're only giving discounts to people where it's necessary. And understanding how much of a discount is being given. Have some guidance. Trust your sales team a bit and don't dictate to them what to do. Have that guidance that they know there's a little bit of wiggle room when required but only in those instances. I think, otherwise as long as the discount is not huge. And if it gets you across the line. Ask yourself the question… “are you happy to get that sale in at a slightly lower price?” And if you are then there's no negative from it. The other thing is this applies in any aspect of life. If you are saying no to people, it's a monumental final no. There's no room for negotiation, no wiggle room and if you do that it’ll quite often people backs up. It could ruin a relationship slightly. And from trying to argue and maintain that 1% of margin could end up getting no sales at all.

I completely agree. I think you've kept it off well. I think saying no is very final and people remember that “no”. They won't remember all the services that you provided before at reasonable prices. Or the discounts you offered in the past, they’ll just remember the last thing. That's the way human minds work. They remember the beginning and the end not so much the journey. So yeah, just bear in mind the realities of how people like to buy. It's not always as sanitised as we liked to think. Applying a lot of logic to pricing is critical. But we've got to address how people respond to price and that's often not always irrational. People do buy emotionally as well as cognitively and both can be easily distorted. But having that more discipline around discounts and more flexibility around your pricing structure. If you know your ranges and you know your price bands you can do more creative discounting without necessarily giving all your offer away for free. So it's a win-win for everyone.

Many companies and people talk about the personalised service that we know our customers. If you know them, show them that you know it and put it into play. At the end of the day, it's an asset to you. This should not be a downside for you or negative this should be an asset. If you have customers you know well, who you understand. You're much more likely to sell to them on an ongoing basis. The lifetime value of that customer is likely much higher. And you might even enjoy your job a bit more. Let machines do what machines do well, let people do what people do well. Empower your sales staff with good guidance and good structures. So that they know they're doing the right thing and they know where they can go and what they can do.

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In this episode of Pricing College - we ask are there new magic numbers out there and if so - what are they?

Are people so used to 99c that it has stopped working?

Is 37 the new 99? So many questions!

In today's episode, we want to ask, is the price of 99 cents and magic pricing is that all hot? Has it expired? Has as it passed? Has it been used by date? Is the world of pricing when you're doing a pricing optimisation, does it simply mean adding 99 cents down the list of all your SKUs? Or, Is that how we move beyond that?

To a large extent, people are much more aware of magic numbers, especially that odd 99. It's appealing to our cognition. It is trying to bypass our human brains to trick us in some way to think that numbers are smaller. But over time, when you're more familiar with these sorts of techniques, your brain looks out for them. And when it becomes a matter for your conscious brain you alert your logical brain. Then you're more likely to go off, this is a trick, and not buy. I would say Aidan yeah, I think magic numbers could have adverse effects now on some products. And people's propensity to pay for something.

I’ll be honest, I don't think I see 99 cents in many places, maybe I'm just not looking for it. When you go into a shop or cafe you ask for coffee, very rarely will someone say… “ oh that's 299”. I think that's has expired to some extent. I think it's almost got a bad reputation. It might almost twig people that think they’ve been to some extent manipulated. Joanna you mentioned previously, there are other numbers. Maybe more modern magic numbers that are not on everyone's radar at the moment still will be used in the pricing profession, but for the same purpose.

I think even prices then have got probably feedback by monitoring the data, that price and volume elasticity is that these magic numbers, 99 cents isn't working as well as it used to. What you may see and what's more common nowadays is to add a new magic number at the end of 37. Or, even like 39 happens to be prime numbers. Prime numbers are in trick the brain to some degree. The principle behind that at 37 is very similar to the 99 principles. It's assuming that the brain is looking from right to left. It's only looking at the left number quickly to get a sense of anchoring of the magnitude of the size. And then quickly attention is drawn to the right and the brain likes to sit there longer. That 37 I supposed to have the same impact on bypassing our cognition as 99. As I said before, isn't going to have the same impacts were used to it. What they’re doing in pricing then, by using 37 is mixing it up so it has the same impact and bypassing our cognition.

Personally, for me, I think 37 is almost like the most random number you can think of. It's almost one of those things if you ask a child to think of a number between 1 and 50 and will pick 37. It’s seemingly random ones. What it also seems to do for me is that if you said a 4.99 or 5.99 to somebody is very clear to them that that is not a number calculated based on a cost-plus mechanism. And sometimes a number like 37 or a very random number like 4.57 or 4.42. It can almost insinuate that there's been a very complex cost-plus mechanism going into the calculation of the price. It almost tricks the customer into thinking that maybe this is a highly complex calculation that went into this price. And they're not trying to manipulate me. They're not trying to maximise revenue from me. So it's almost a reverse psychological trick, at least sometimes that's what I think.

I think this is a good point you’ve raised on the topic of an informed buyer that knows somewhat about pricing and psychological pricing. The comparison with that which was in terms of the original psychological research is the uninformed consumer who buys based on their predetermined, pre-wiring their brain and how it's all set up. Because originally psychological pricing was invented to almost compliment the blind spots that we have. And sort of bypass cognition or effective emotional responses or accentuate. That's how psychological pricing influences us. So yes, we can be influenced by our logical brain if the buyer is into cost-plus. And thinks that's a fair way to go about it. Then having that dissonant 37 at the end of the price point will be useful to bypass their logic-brain. Or, make them think more logically and think it's right. Unlike the consumer who would be thinking or won't be thinking that at all because they're uninformed. But just be thinking that by putting that 37 at the end, the price seems smaller and I like that.

Another thing I often think about is some of these prices 95, 98, and 99. If you're increasing prices it gives you a real nice little opportunity just to round them up. If you're at 19.98 round them up to 90 or to $1 I don't think anyone's going to notice. I don't think any customer was going to complain too much. We often talk about them psychologically rounding down to some extent maybe they've already psychologically rounded up. But if you increase prices from 98 up to $1 flat, that's a small 2% increase, isn’t it? My mathematics is poor but it's just over a 2% increase. And so 2% increases often quite a lot if that's what you're aiming for in the price rise. There are upsides to everything as well and when people round it down potentially in their mind somewhere, they've also rounded it up.

If they’ve rounded it up just be careful, this is an individual thing called psychological reference price. Every buyer has that in their mind when they're looking at buying a price in mind that they're willing to pay. Above that, they're unlikely to pay but below that, they start thinking the price is too cheap. So, if you round it up you might be going into the buyers over that threshold and then they'll just not buy. This is important, even before we get into psychological pricing, why do you need to look at your price ranges? your price bandwidth? This is what prices spend a lot of their time doing because they optimise prices based on ranges. The psychological pricing techniques are the rounding of the end, it's the last consideration of the price point at the end of a process. It's not the beginning of the process so just bear that in mind. When you do all of these things just remember, what products you're trying to sell and use different tactics to suit. Odd works well for so everyday products groceries such like. And that whole numbers sort of worked well for luxury pricing shoes, handbags, jewellery, for instance. But just be mindful of what you're trying to do and the techniques that you should use at certain points in time.

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In this episode of Pricing College - we look at the concept of magic numbers and using 99c and even options like 95c or 90c.

Does it really help you sell more than quoting full dollar pricing.

Is the market moving beyond this type of pricing nowadays?

In today's episode, we're going to cover that most fundamental or maybe most famous pricing technique or strategy. The magic number such as 99 cents 90 cents or something like that.

For pricers out there this is an important topic for everyone, not just consumers. Because often you do a lot of work on figuring out price ranges, price bandwidths. Then often, the afterthought of, what is the actual price going to be? What should it look like is an afterthought and often rushed through. So, we think it's an important concept for both consumers and pricing professionals.

That's right. This may be old hot for some of the more expert listeners. But I think for the more general listener, it could be quite interesting. There is a lot of literature probably more literature than any other area in pricing on those 99 cents and magic numbers, do they actually work? We've gone through some of the literature and like anything in academics, there's pros and cons. Fundamentally, what we're talking about is charging either $1 for a product or 99 cents for a product. There are many reasons why this myth has grown. why this habit may have appeared to begin with? Some of what we've read is that initially, it started to stop theft in shops. So when you went in to buy a product for $1 the shopkeeper or the shop attendee could just take $1 and pocket it themselves. If it was 99 cents they have to open the till give you a change or a cent. And it was a much more safe mechanism for the shop. There was a lot more research about whether or not there are psychological aspects for the number.

In terms of the psychological aspects that mean, how do our brains think when we look at numbers? How do we process those numbers? What do we like? And, what our brain doesn't like? And apparently, we like the 99 cents. Why? Well, I think it's because according to research when you put 99 cents there it increases demand. People buy more. But it also has the effect of reducing the size of the number of prices. So, it makes the price seem cheaper and the brain processes the 99 cents quicker. It also reduces rounds down the number at the left, it rounds it down. So, it could be rounded down by 10, it could round it down by $1. But whatever, it reduces the price, even though the price is roughly the same. So for instance, $4.99, the brain would reduce it down to say $4. But if you have it at a price point at $5 the brain goes… “Oh, that's expensive”. There's a psychological threshold between the two.

We still see this approach being used, even though the original mechanical version of the sense, the change and all that has expired. But we still see it in iTunes where you can buy songs for 99cents. And Spotify is coming to her back but you can still buy songs for 99 cents. You can see it on Kindle for their specials with 99 cents. So it still has been very prominently used by major tech companies where there's no mechanical reason for it. So, it must be the psychological aspects. I think some of the best literature in the market is from the University of Chicago at MIT, over a period of years, which did look into it. And did show statistical evidence that people did view the putting of 9 at the end could boost sales. As Joanna said, it could make people see the prices lower. There's even some evidence that putting the price of 39 could even sell more than something at 34 because even the number 9 insinuated so more psychologically that it was better valued.

In terms of the price of 4.99, I think it's important to say there's alternative research that shows. Yes, you can have 99 on the right but that's not enough. You've got to think about the digits on the left because the digits on the left can potentially anchor the eye and the customer to buy more or less. It's important to have your whole price position correctly. Especially, when you're comparing the retail price with a discount price. Like for instance, don't just have like 80.49, and then 80.29 it's better to have, 79.99 versus 80 that's what the brain likes. It likes odd and even different so it can contrast. I think there's an important thing here, odds and evens. The brain thinks of odds is sort of in some way it reduces the price. It thinks of it as bit as cheaper. Whereas the whole number, it thinks of it as more expensive. So what you'll find is that sort of more luxury products will have that whole number, it won't round down, it won't go down to like 99 because that insinuates cheap, it insinuates a sale or has been prior sales on the price point. There's some kind of gating process here when you have a whole number that they don't want to be considered as cheap. So they keep at that sort of rounded whole number and that's important for the brain. As a consumer, you think, Okay, this is something good versus something cheap and this is all called price signalling.

I think that is clear. A lot of the academic evidence does suggest that when people see anything within 99, or 98 it insinuates it’s has been reduced. There's also evidence as some of this started in American department stores, before pre-World War II. When full price items were sold at $1, a flat dollar, or $5 and then discounted were sold at 98 cents almost as a ticketing system to indicate to the shopkeeper that was discounted. There is academic evidence that people see 99 cents as a discounted price, then psychologically take away that luxury aspect. The other thing I always think is a lot of times when you're shopping specifically for non-essential items you try to justify to yourself that you're getting a better deal. If you weren't supposed to buy something and someone ask how much did cost, rather than saying $5 you might have said 4 if it was 4.99.

7:05 In just little techniques like the size of the actual price, research shows that if it's an expensive price, make the number smaller. If you're discounting off the retail price, make the discount bigger, so you're drawing attention to the discount. Other people argue the reverse. They say if you want to show the extent of the discount the value that somebody is getting from that discount what you should do is increase the size of the original price, and make the actual discounted price smaller. It depends, there's research for both. But the overall size of the price and what you're trying to do is very important. And this comes down to sales and pricing execution. For instance, when you see one of those sale boards put out on the shop front with 50% off. Be very clear with the sizing of that 50% off don't have contrary sort of double offers on one board like and make sure that your call to action is very clear and concise. No longer than seven words. Again research shows that consumers will ignore a long call to action. And will only take action when the action is clear and concise and they know what they need to do. Makes sure that everything on that sale board is in line with the psychological research on pricing magic numbers. And literally, this all comes down to human processing. How do we think about numbers? What do we remember? And, what takes our attention?

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In this episode of Pricing College we look at the importance of branding for retail products - and we look at Coca Cola.

Everyone in the world knows Coca Cola and sees it everywhere we go. Does the huge spend on branding produce a customer view on the brand as a premium product?

We argue that the branding positions it strongly as a middle and mass market product.

As we say in the world of podcasting and busses you wait for one bus on three come at once. So today we're doing a third in a series of articles or podcasts about Coca Cola.

Right, we've been discussing coke quite a bit. We're saying like everybody knows coke. We all know the brand. We all know the colour even we don't say Coca Cola we say coke. It got us thinking about the branding behind Coke, its powerful branding and its works. So today we just want to discuss the purpose of branding, how it's working so well for Coke? And potentially, does that brand power give them more pricing power too?

I think branding is one of those things that a lot of marketers and business people don't get. In many instances people will say, small companies cannot focus on branding. Branding is where you have Megabox. You can invest hugely and hit all platforms like TV, radio, billboards, internet, whatever else is new nowadays. With Coke, they are spending huge amounts of money globally and in any geography to get it across in your mind and to imprint in your mind what coca-cola is. One thing about their ads, they never talk about promotions in their ads on television. They never talk about pricing. They never compare their prices to somebody else's. They're selling the lifestyle. They're selling the experience. They're selling the refreshment, the fun, and all those good things. And of course, they've also got niches as well with their branding such as Christmas. There’s that story whether it's true or not that Santa Claus wears red and white because of Coca Cola ads. When you think of branding, you think of coke.

Their branding comes out of what they call their trade spend that sort of like a 50/50 split between advertising, pricing, promotions, discounting, and price positioning. That 50% of trade spend on marketing and branding, obviously has been doing a lot. As Aidan says they keep the two very separate. One, I think the branding is there to set the brand positioning in the market, as the number one premium player in coke. That's been a repeated message with Coca Cola over many years that they've got the expertise. They're number one. And, they’re the go-to top of mind choice for any consumer. That's what they try to push with their branding.

I think to some extent it's quite old fashioned nearly in all segments from toothpaste to household cleaners to washing-up liquids, and all those sorts of things. Even 10 or 15 years ago there was the market leader that heavily promoted brand whether by Reckitt Benckiser. Or, these sort of people or we would push with a lot of advertising spend. Many of these have been undermined to some extent by discount supermarket chains and your brand competitors. Coca Cola and the world of soft drinks is one of the stranger ones whereby the traditional I suppose the king of that market still is the king. That's what we want to discuss today, why would that be? Why would it be that when I go to a cafe or something I generally don't ask for a cola, you ask for a coke, don’t you? I know that's also in our markets such as VHS was before it became extinct. And also Hoover is still a very common word, even though probably people who don’t buy by Hoover when they're buying vacuum cleaners. It can be very prominent in other areas but coke seems to be the greatest example of it.

I think it comes down to that repeated messaging over years. That they're the number one premium and that they're the go-to sort of choice for a drink. That gets into the heads of consumers. But at the same time over the past decade or so, has that brand message been diluted to some degree? Potentially it has. Yes, it's still strong we'll still know Coke, but we may go to other types of drinks when we go to the café. We might not just order a Coke. We might choose a smoothie now when 10 years ago would have been Coke or Pepsi the whole bit. Now people's tastes have changed and I think that's changed their brand messaging too. Because before, especially 80s and 90s it was very sort of companies centric. It was all about them. It was all about how great coke was and we had to fit in with the coke lifestyle and ecosystem as consumers. But now I think things have changed. The tables are turned somewhat. Now it's the consumers who have the front foot and coke is always catching up with that. Yes, we would still go to coke and think of it as a premium drink, but now there are other alternatives. So that's an interesting sort of dynamic to this brand positioning and brand power.

I personally think of the coke branding, it protects them on the downside. I think obviously there are alternative drinks. Let's give an example if you're going to somebody’s house for dinner or even to a cafe or restaurant when you ask for some food and you ask for Coke or a Cola. If you see them serving their own brand of Cola, which from an own brand, logo and label. Potentially, you wouldn't know the difference if you hadn't seen that logo. Some people would argue differently but we don't know if you would or not depending on how much you like your coke. What I think would happen is if you saw them and you say… “ oh they're cutting corners, they're saving a few cents here and there on that drink”. Which is in many regards a nondescript drink. What are they doing to the other? to the salad or the meat? What were the cutting corners elsewhere? It almost insinuates that they're just cutting or shaving making those little services here and there. That potentially you'll see down the line. To serve you a more premium soft drink, batch made soft drinks etc, that question doesn't arise but Coke is such a generic product. It protects them and the downside where I think a lot of the competition is certainly in supermarkets. We've seen over the years many alternatives attempt to combat the coke field. Virgin coke and Britain. And there have been more own brands that have not gained acceptance to the point where they're acceptable to serve them in public or certainly at a dinner party.

I agree. I think Coke still dominates within the coke category. However, they are the go-to choice whether it's because of prestige, status, habit, whatever is the key, consumer driver here. But with changes in diet. I do believe that the bigger issue is with healthier alternatives, that's the bigger competition. I don't think the brand messaging around that is clear and as a result, coke is acquiring a lot of healthier brands, waters, fruit drinks, the whole a lot. But the brand positioning around that is less clear than the brand positioning around, Coca Cola. As a consumer, you don't think of the alternatives that they've just acquired, the healthier alternatives you still think of coke. Which demonstrates or indicates that the brand positioning is still confused across their portfolio.

I think we often think branding is promoting the premier or premium sort of concept. I think in this instance now that as time moves on to 2020. I almost think that the branding is to keep stability in that mid-market share to protect it on the downside. To some extent, leave the top end of the market open to batch drinks and very niche sort of product or service. Where people are prepared to pay more to look cool or to look like they're on the cutting edge of stuff with people. Which coke will never make you look at the cutting edge or make you look unusual. So, to some extent, it's a protection from society shooting you down. If you seem to be cutting corners and being cheap with your guests. It's a strange model that would apply to any new company coming up. Probably not, but they have that legacy business as a historical company such a strong brand. And then, the money is there to protect it and keep it in that mass-market area

I think, in the 70s, 80s and 90s, the brand positioning around Coke was really strong people used to drink Coke, much more than they do today. It was competing with one or two alternatives based on superiority, expertise, and brand positioning and it did a really good job. However, the message now is still pretty much the same as it was then. But now the market is saturated with new entrants. It's more fragmented that people want different things and it's much more consumer-led. So I think Aidan said about the prestige value of coke at a party. I think, again, even that is not as much as it would have been. So, probably if you had a new entrant in Coca Cola and it had a new spin on it which was healthy. It was kid-friendly. It was good or kinder for kids' teeth they weren't going to ruin their enamel etc, Moms would be okay with that. They'd be like, what is that new brand? They wouldn't be thinking you didn't give my kids a Coke or drink. I think they'd be like, actually, it's better for the kid thanks for introducing this new brand to me. I think even in terms of status, that's changed too.

I think it is. Kids birthday parties can be a minefield if you think dinner party guests can be problems. Yeah, parents of kids at a birthday party can be even pickier than at a five-star restaurant.

Even so that if you have Coke at the party. Some people will be like… “ Oh, she's got coke at a kids party is not that's not very health-conscious”.

I think it highlights how branding and the value of a product are determined very much by the time, the place, the niche and all the details you have to dig into it the value drivers of that product. That can be value in one instance, could be negative in the other. Yeah, personally think I've covered coke as much as I want to cover it this week so I'm done.

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In this episode of Pricing College - we discuss why Coca Cola did not increase their pricing for almost 75 years.

This goes against the common perception of Coke as a business with great pricing power - that can command higher prices.

We dig into the reasons behind this surprising fact.

In the last podcast, we discussed an interesting case study with Coke and we just wanted to extend that a case study with Coca Cola. Because it's a company that when you think about, it's a huge global brand, it's got amazing pricing power, it shifted so much volume at different price points. But, did you know that in the early days they found it incredibly difficult to increase the price? In fact, they didn't increase the price of coke for about 75 years. So we just wanted to explain some of the challenges they had. We think it's closely aligned with a lot of businesses because people commonly say… “ it's difficult to increase prices”. Now we just wanted to talk through this Coca Cola case study to show you some of their challenges and how they got through those pricing issues.

I suppose when we talked about a company that doesn't increase prices at all for 75 years. Maybe we can say they didn't get through those pricing challenges. I suppose it's very interesting considering that Warren Buffett, the famous Ambassador always talks about Coca Cola and their pricing power and their pricing moat. But I think from the period of like 1875 to roughly 1950 in the United States, where Coca Cola was pretty much only sold in the United States. And it was growing into the major brand we know today. The price of a serving of Coca Cola was stuck at a nickel which is to my understandings I’m not American roughly is five cents at peace. So at that period of time, you would buy a serving of Coca Cola either from a vending machine. Like a primitive version of what we know today. Or, in a fountain where you fill up a cup within a set amount, and five cents or nickel was the flat price.

In the early days, they're quite conscious of how people consumed that product. They weren't quite sure whether people would take to drinking coke in a bottle though they’re used to drinking Coke from a fountain taking as much as they wanted. They weren't sure as well once consumers got used to drinking Coke from a bottle whether they'd be interested in paying more just for having a coke in a bottle. There are lots of issues about how people consumed coke, in what quantity. And still, these very issues are top of mind for Coke and Pepsi and like, how people consume coke, drinks and snacks? what do they eat and drink with coke? These are all very key issues when in regards to bundling, price tiers and the whole lot.

There’s a lot of marketing around. And there are a number of reasons why the price didn't change from nickel over that incredibly long period of time. I think we need to point out that in that period in American history inflation was much lower than what it has been in recent years from the 70s. So, price stability was more possible to maintain. There are legal issues around the bottling contract and things like that which we're not covered in this podcast. We'll get more into the mechanics of it. But one of the big things, it was the marketing, of course, promoting your Coke was a nickel. And people use to that, whether you were a kid or you’re family buying a drink. When we get into the actual vending machines, we have to bear in mind that at this point in time vending machines were not able to give change. You had to submit the exact amount of coin required to purchase the drink, and that was a nickel. Obviously, if the technology at that time is what is as it is. Coke doesn’t have the ability to create a new modern electronic technology that doesn't come on board for you know another 20 or 30 years. Fundamentally, they cannot increase prices unless they double. Because the coins are nickel. The next size up is another nickel. If you want to push to a price rise is you have to double the price of the can.

This is something that companies are experiencing now with vending machines. A lot of people don't carry coins at all and cash around with them. And sales at vending machines have gone down as a consequence. Now what you're seeing is a lot more vending machines having those card swiping devices pushed on them. Just so it's easier for people to buy. Have prices gone up with that? I don't know over time we'll see probably marginally is a purchase cost of improving the vending machines. Similar issues today as coke experience with a vending machine, and changing the currency people were used to paying for it with just a nickel. Coke wasn't sure whether they should change. Because they thought consumers were sensitive to those sorts of things and would stop buying.

I supposed once time started passing and the price comes noticeably at the price that they’re selling at inflation. Adjusted terms was becoming quite different. Coca Cola did attempt a couple of methods to try and increase prices, one way or another. And I suppose bear this in mind next time you're a pricing management planning about the difficulty of pushing through a price rise. Just be thankful you're not Coca Cola in the 1940s. The first thing they did was they considered putting in blank or empty bottles in the machine. So every ninth time you bought a Coke, they will come out empty. As you can understand or imagine this wasn't that popular with consumers, especially with kids. When you go to buy a drink and every once in a while you're playing a reverse roulette system where you lose, so that was phased out. And then the next one was they even tried to lobby the US Treasury in Washington to mint new coins. They wanted them to mint, either a six cents or a seven cent 50 coin. The lobbying part of Coca-cola is very powerful. I'm not sure if it was as powerful back then as it would be today, but the Treasury did say no to that. But that was the extent that they were trying to push through this price raising. This thing only adjusted itself when in the 1950s when technology came on board and enabled them to give change.

I suppose from then they're able to sort of track how people bought from vending machines different areas, different regions. Whether they should discontinue the fountain. And just put more money into bottling and the distributors' system. Then from there, you see what we've got today. The ability to increase prices based on location, geography, and product type. There aren't as many constraints as they were after all of those different sorts of fiscal, logistical and operational issues were removed from the equation. That is so interesting that they thought, after thinking about the consumer so much at the beginning. And how they consumed their product that they would take away one in nine bottles. That would, in turn, affect your brand reputation and price positioning in the market. People would inevitably not trust a company that did that. So, no wonder they stopped that strategy, not a good one.

I think this is a real example of the peripheral values of products can be very different to the drink itself. And also the technology and the delivery of a product to get it into your hand can influence things. In this example, we've moved from the mechanical era to more of the information technology era. One of the more interesting things also is, I was watching a video recently about Coca Cola development plans and how they're moving forward. This was before the entire Coronavirus thing and that may influence stuff. But they're big trends we're moving back to fountains. You'll see these on sort of cruise ships again before Corona. And also in theme parks where you get a cup and then you can fill it with the drink you want. You’re not buying a can or a bottle but the fountain is filling your drinks. With that, there were a lot more options for flavours, mixing flavours varieties, etc. So you're having non-uniform products. It was making much more tailored products to your individual needs. This is obviously something that people back in the 1940s and I couldn't even imagine.

Interesting that they're going back to fountains when we discussed the issue of shrink inflation. And diet becoming an issue for consumers today and a key factor in purchase decisions. The fountain concept is pushing bigger sizes. And drinking more in volume in a world that is going to smaller sizes and thinking about health well being.

That's it for me. It is getting warm so I'm pretty sure I'll be consuming more Coca Cola in the next few days. And yeah, I've made sure I've got the change in my pocket or the card. Exactly.

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In this episode of Pricing College - we discuss the suggestion that Coca Cola considered altering prices depending on the temperature.

We discuss whether this approach would work for a business and what things should be considered.

We also ask would there be negatives to business reputation.

Today we're gonna talk about quite an unusual case study involving Coca Cola. And apparent allegations of Coca Cola increasing prices when the weather gets hot.

So at the moment today in Sydney is the first day of spring 2020. We're very thankful that the weather finally heating up. But there is, whether it's an urban myth or a story that there's not much evidence of both. But in the late 1980s, Coca Cola attempted to increase pricing. Or, at least test the increase in pricing for their products based on the temperature on that day. It's a form of dynamic pricing based on ambient temperature. I supposed in this podcast, we want to discuss, could that have worked? Wouldn’t work? And, what should have been considered?

Let's think about it. Would you pay more for cans of Coke when it gets hot? Potentially, let's think about it in terms of where you are. For instance, are you in the theme park? Are you with your kids? Are they demanding some Coca Cola? Maybe those are the instances where you go… “you know what, I would pay a bit more for an ice-cold can of Coke. It’ll keep everyone happy, we're thirsty it gets the job done”.

I suppose in practical terms, obviously, there's the operational aspect of this. And it really could only have worked in a theme park or a vending machine system outside. The machine must have had a temperature gauge. And also given Coca Cola corporation itself complete control over the pricing. The ability to set the pricing in convenience stores and supermarkets couldn't have worked. So, on paper, it does seem to be sensible. When you think about it, at least a first Inspection when the temperature increases, you're walking around a lot. You're probably thinking… “ I'm getting dehydrated, I could do with a nice refreshing soft drink”. That is the initial impression. There's a lot more complexity to it, that we really would need to dig through.

So, evidence, price elasticity modelling and connecting that data on price and volume increases based on the weather would be quite difficult to track and monitor. So they'd be that sort of data-driven elasticity modelling occurring. But they'd also need information and consumer surveys directly from people at that time. And connecting the two would be quite difficult. And getting that sort of price point based on that evidence. I'm not sure how possible that would be.

My personal view is that if they did do this exam or this testing, it didn't work. Because obviously, we don't see this in operation, currently, in 2020. Almost 30 years after this was supposed to have been experimented on. The only thing I would say is potentially when we think, yes, we will drink more when it's a hot day versus a cooler day. But the reality of it is you don't go to Disney World in the middle of a Siberian winter. You go to Disney World in Florida or I can't remember which is Disney World and which is Disneyland. But you go to these locations when it's nice weather. It's sunny and it's quite warm. So you're already there on a good weather day. So the temperature differentiator will be small. I can potentially believe that you will consume more soft drinks. And you're getting more dehydrated quickly when there's a temperature difference of 20 degrees. When there's a temperature difference of 3 degrees or 4 degrees, etc. It probably isn't statistically valid that you would drink that much more soft drinks. And so that aspect of driving demand for the soft drinks I think is quite limited. The other thing I say is, let's be honest, the average person visiting Disneyland does not have to be encouraged to consume. They're generally quite famous for consuming a lot of soft drinks and fast food and those sort of things. I don't think there's ever been a major problem at the theme parks, and not getting people to eat enough or drink enough sugary products.

At theme parks, I think there's like a price premium added just as you go and walk through the theme park gates. And you know that you're gonna pay a price premium for every single thing that you buy up throughout the day. People are sort of almost not willing to pay those prices but they acknowledge that will be the case. And then adding yet another premium on that just because it's hot. Maybe they did get some elasticity data from that and just saw the volume drop off. And that's why they don't do it anymore, who knows? There is a certain point that you can't go over and maybe the people responded badly to that. But at the same time, as Aidan said, I'm not sure that is something that probably worked well for Coke can also. Let's think about it, in the theme parks, they tend to only sponsor maybe one or two products. For instance, one theme park would go for Pepsi, the other would go for Coke. So putting a premium on that when there's no alternative may not be a good idea either.

I personally don't think you're going to be swapping between different brands like increasing the price. I don't think that the elasticity of demand would be hugely different. Or, I don't think there will be a great slope based on temperature. And certainly when it’s a certain bandwidth. I personally think people will consume roughly the same amount of beverages. And I think if you try to increase that price too much, you will probably decrease the demand for the drinks. People might go and just get one instead of two may share one with the kids, etc. So my personal view is that it's probably isn't something that would have worked. On initial inspection, it sounds good. But I think what you're doing almost you're taxing people for a driver of why you're purchasing the drink. It's been sold as a refreshing product when you're thirsty. It's almost like you're penalising people for the value add. I would almost say it is a marketing negative. And certainly, people became aware of it. I think there could be bad marketing and reputational impacts from that. One of my favourite aspects of Coca Cola is they're often credited with being these marketing geniuses. And for anyone interested in that there's a famous conspiracy theory about the New Coke conspiracy. We’ll not be touching that, this podcast is not a conspiracy theory podcast. But it's a very interesting one from a marketing perspective. And we'd be interested to know if people believe it's true or not. So that's all for me today on the coke and temperatures.

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In this episode of Pricing College - we discuss why it is so vital to really plan out a pricing role before starting the hiring process.

Being honest - so many pricing hires fail to deliver on their promise - and this can usually be prevented by scoping and planning in advance.

In today's episode, we want to cover a topic that sometimes people don't consider before making their first pricing hire. That often is when a company employs the first person in a pricing department or kick off the pricing project, oftentimes, they can be disappointed in the first year with the results. They can think they might have achieved more or they hope to achieve more. But in many cases at Taylor Wells, we think that is down to at the beginning before you start the employment of the higher of the person. You haven't scoped out the role, and you haven't timelined what you hope to achieve in those first 12 months.

We do see a number of assignments. A lot of vague job descriptions are being handed over and an expectation to get that pricing superstar that can do everything. Even though, just because on that job description got literally every skill and task known to man or vice versa is just too vague. And it just indicates that there's absolutely no scope has gone into it. And it's just like… “oh, we want that person to make the role their own”. Yes, that's a nice thought but it's either you want the person to take the role, their own, and it's so vague that they can do everything and then they sort of like anchor us. Or, the job description is so tight and restricted and full of like requirements that they have absolutely no room to breathe, create and drive strategy. So we're finding either end of the spectrum is occurring and both indicate there's a real lack of scoping out the role. Scoping out the role, not in terms of what the strategy is. The problems have got to be solved, the cultural issues that are occurring in the business, the change management requirement, the project management requirement and the EBIT expectation. How much profit do you want the team to make? Then the ability to say… “okay we've got the best pricing people on board we're going to allow them to do what they can do best”. I think there's a reluctance to let good pricing people do it. Because often, maybe the business don't know what they can do and that’s indicated by the scope and the lack of diagnostics prior to the hire.

I think there are two fundamental problems here. The first one to me is when you're employing a pricing person let's say you realise there's a problem. But just because you know the problem, it doesn't mean you know the solution. Oftentimes when you recognise a problem such as we have no pricing strategy that insinuates that you do not know the solution. When you draft a job description, and we'll see these oftentimes when companies are so committed to annual reviews, metrics and this idea that if you can't measure the accounts, you can't track it. What can happen is people are tied to ludicrous metrics that have nothing to do whatsoever with the job. So, the metrics can be set and the job description can be written by people who fundamentally recognise they don't know what they're doing. What that will do is lead people, lead the first person to come on board or the pricing person leads them down the wrong path. They'll know what they have to do but their actual contract may state the complete opposite. So that's a fundamental flaw. The only thing that’s strange about that is you can come on and start a company and be presented with your metrics and your KPIs and the person looking at them can think this is ridiculous, that's the first law. The second one I would say is in a timeline when you started pricing role in any company. Specifically, if it’s the first time it's happened in a company there can be pushed back. We've covered another podcast, whereby, everyone knows a little bit about pricing where everyone has a view on it. So if you start in the pricing company. You will get pushback, you will get people issues with sales, marketing and operations, with the people who control the P&L. And that pushback will happen and unless you have easy wins. Timeline produces and shows those easy wins to the company that push back will get more and more. And sales or people like that who want to protect their turf, there's nothing they welcome more than the opportunity to say… “ Oh, this new department is useless or this new department is not cutting the mustard”.

Often people say to me, how can we integrate this new pricing team within the business without disrupting our operations or our other teams? I suppose it's the same answer, you've got to understand and scope out the team structure, the role and understand the problem. As Aidan says, some people do understand the problem. But I mean understand the problem in detail like a pricing expert. I mean, even get the pricing person to do another diagnostic to show you how a pricing person views your business problem. Not just from a strategic high-level strategy from a pricing perspective because then, you'll see it in a whole new light. I mean I speak to a lot of CEOs and they often say to me, that we didn't realise we had a pricing problem until three or four years down the line. It cropped up in other ways. We only started realising it could be an issue when we saw the amount of discounting that was happening. And our sales team saying we don't trust the price list other than that, it was just like the way it was. I didn't even know there was someone who called a pricing manager to fix a lot of these issues. People just relied on legacy priceless, it was just what happened and nobody questioned that. Everyone just assumed, “oh we know we can solve the problem may be by just consolidating or buying our competitor that will solve the issue”. Temporarily it does but then a new one crops up. What do you do to compete? You've got to review what the value of the business is in terms of, how customers buy and consume your products? Is the price therefore right? That's called the pricing discipline. This is where it's evolved. And pricing people are good at that, that's where the depth and breadth of expertise lies. Their job in a way is to show you that different view. We don't expect CEOs and CFOs to be pricing experts, that's why you get a pricing team. You want that fresh perspective. Because that fresh perspective will help you with a whole heap of problems and stop margin erosion from occurring because of pricing.

That's certainly true. I suppose my final point I'll say about pricing is, no matter who you hire, no matter if you employ the greatest pricing expert the world has ever seen and put them in a company. And you put them in an office then they're not getting any support, the CEO, the chief executives and the big senior executives in the business don't listen to them. If nobody listens to them, if nobody supports them. If there's no forum for discussion of ideas, if those structures aren't in place, if there's no support given when needed and if the other stakeholders in the business believe they do not have to listen. Or, even communicate with this new department it's almost guaranteed to deliver no value whatsoever. If you add on to that metrics that are valueless or metrics that do not help or even go against what is the department’s trying to do. You're almost locking in failure. And so it's like building a house if you want a house to last you have to build a great foundation. But you plan and build the foundation before you start in the building that's how I'd set it out. With any pricing department, it’s a great opportunity before you hire the first person. You'll save money down the line by spending a little bit of time and effort. Scope it out now. Get some expert advice whether internal or external, or you’re just doing your reading. But think and dig into, what you want your team to do? What do you hope them achieve? What you and your senior leaders will do to back them up to ensure it happens?

In many ways, if you have experienced a series of bad hires in pricing and a series of failed price implementations. This isn't because of the individual pricing manager or because the sales or marketing team didn't work together. This is indicating problems at a systemic level. The structure is not working, the organisational design is not working, the price system is broken down. Individuals don't matter how brilliant they are can't fix a broken system. Putting just yet another person into a broken system won't work and won't fix your pricing problem. We have to rethink all of this. We have to go back and think, what am I doing? Have that pricing diagnostic re-scope the role, and rethink your business operations. Businesses at the moment are going through complete pricing and business transformation. Because the markets moving forward very rapidly. Digitisation is taking hold. It's not good enough not to have an online solution. It’s not good enough even in B2B to not think about your only channel direct to market solution. Because a lot of B2B are going direct to market now, they have no choice. With all of this, think about the future of it. Think about where you are now, the problems that you face. And start building your pricing team according to these realistic problems because there's a lot of things, a lot of problems at the moment that they need to tackle. But not thinking about getting that expertise in because you think you can fix it with what you've got is not going to work.

I don't think for a minute that this is purely a pricing function issue. I'm a big believer that in 2020 and over many years, the business has become almost dictated to you by human resources. Even the hiring manager, the person in the department they want to hire somebody and they want someone to do the job. But often the gatekeepers at the human resources department fundamentally do not understand in many cases. I'll caveat that in many cases do not understand, even what the department does, let alone what they want this new function to do. This applies to any expert function that's not run at the mill. If you're trying to employ an expert engineer or computer software designer, a great marketer, even a great lawyer to get you off from an accusation or anything like that we need expertise, that's niche expertise. There's an issue, how do you know what you're buying when what you're seeking to buy is knowledge? If you're seeking to buy knowledge, it's very difficult and we’re not a labour-oriented service. If you're seeking to buy expert knowledge, expert assistance, you need to know a little bit about what you're buying in advance, otherwise, you make mistakes.

I completely agree. The pricing disciplines moving on. You need somebody who's got the knowledge, can do something with the knowledge. Build new structures. Build a new architecture and extract value for the business, and value for the customers. And only then, will you get the results from your pricing team and manager that you expected from them when you first start setting up the team. Up until then, if they haven't got all of that, then you are not going to get the results. They need to be set up for success.

That's it for me, I think there's nothing more satisfying than seeing the money flowing. Seeing profits increase, the business improves and seeing a project happen and work. Fundamentally, you got to plan if you want that success, you've got to start planning today.

What does that mean in financial terms, it can be 3% to 7%, additional margin every single year when you get your pricing team set up and cranking according to the market, the business strategy. And everyone knows and is fully aligned with the business and know what they're doing.

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In this episode of Pricing College - we discuss the potential problems when you only have one person in a pricing team.

One person may be able to do it all for a short space of time - or in a small business but overtime problems will arise.

Number crunching and strategy are different skills - and people can get burned out doing too many tasks.

In today's episode, we want to play a thought experiment. You've just made the decision as a company to employ your first pricing professional. You're probably thinking of this as a great step, and untold riches and profits will inevitably flow from that. But we need to point out that there is a one almost inevitable problem that will happen to you. And you will see it, whether sooner or later it will occur.

That problem is hiring that superstar overpricing manager and expecting them to do everything. Strategy, stakeholder engagement, dive into the analytics, build the structure, build the price architecture, redesign the product hierarchy. Do it all. Do it all up to high capacity, full of energy for the entire employment. And not to expect them to be tired out or anything that's what the job is. That's what the role of the pricing manager is for and that's what they're going to do. But unfortunately, that's sort of Fantasyland, it doesn't work that way. Thinking of that person, that superstar even if you could find them, and yes there are those rare people that can do everything. Would they want to do everything like that all the time? The answer is, absolutely not, and they often won't do it at a salary most companies are offering, which is too low.

Obviously as a company or any company and you're making the argument to implement a pricing strategy and a pricing manager. The first thing would be let's keep costs down, let's employ one person, and then let's step it out from there with easy wins, and that makes perfect sense. The problem is, and we all know this, at least in the pricing profession. Pricing is a very varied and multifaceted skill set and area. It covers stakeholder engagement strategising, building systems using computer programs, working with sales teams, getting buy-in from ops. It's involved in every function of the business. I haven't even touched on marketing and the commercial aspects and working with finance. So, you want somebody who is competent and capable to drive that, to implement it, and be an expert and champion for change. But at the same time, you want them to do the number-crunching also. And with that, there will be an inevitable tension.

We’re not arguing that the tension is wrong, it's great to have that tension. It creates energy, creativity and thought. The pricing manager role is varied, and we're not saying it's not and it does range somewhat. But it's the expectation that they do this role on their own for a long period of time, it's unsustainable. They’ll get burnt out. It's a margin risk because if you've got huge amounts of revenue. You've got like 500 million to look after, you want to make sure that you've got the right support and resources to ensure and protect margins. And also, you've got your eye on the market to find new revenue and margin potential. Even the best of us won't be able to do everything all at once and this is why ultimately you need a team and a team that complements each other. So yes, a pricing manager should oversee a lot of areas. They should have competency in all of the areas so they can identify quickly any of the mistakes and correct them but they shouldn't be doing everything. This is why they need to hire correctly. Get the right analysts, support and look at the analytics and maybe a different type of business partner to do some of the stakeholder engagement. Because there's a lot of across the business vertical stakeholder engagement, especially for the large price change and price improvement projects. Then the pricing manager can run all of this and oversee it. Then consider all the options and make those options and present them to the executive team and the board.

I think it's vitally important when you're implementing a pricing project, and we've been through this process many times. Companies are aware, they've got sign off from their internal process that they want a pricing professional, but they haven't under scoped out what this role will do. There's a number of issues with that. Firstly, the people scoping out the role do not work in pricing so they don't know what this person really will do. Because if they did, they would have done it already. And they don't know the issues and taxes that would be involved. Secondly, when they're not scoping it out at the person they're describing probably doesn't exist. Somebody who has the capability to do many things such as be an Executive leader, come up with a strategy, go through the numbers implement stuff, all those things. People may have that a billion skill set, but just because you can do something, it doesn't mean you're willing to do it. When people want to be executive leaders, often they won't want to do the hard work. The analytical work would often say in a bank or financial institution will be given to more junior people. Try to find one person to do all, that it's almost impossible. So when you set out a job and start the project plan for this, the new strategy and the new function you need to have a timeline. You can ask someone to do that for a certain period of time, but that person needs to buy into the project too. They need to see opportunities to go up, to progress in the company, to get acceptance from stakeholders. And they also need to see a timeline when they will be getting assistance when will they have that support and when that support will come on board.

That's a large part of their job, they develop that roadmap to show you what they're going to do. Where are the price improvements going to come from and so you know you're going to get the ROI. How can they do all of that? How can they build a roadmap? If they're varied deep in analytics detail all the time, they can't possibly oscillate between the two. So they need support to be able to give you the full ROI on pricing that you would expect from them. And they know that they can deliver, only if they have support. Now a good pricing manager, like a good pricing executive likes detail, all good pricing people do. But as I said, that doesn't mean they necessarily stay in the detail all the time. They oversight the team, and they can spot and identify opportunities and this is their skill, they don't necessarily day in day out crunch the numbers that's analyst work. We've got to be very clear about the role demarcation just to ensure we've got everybody doing the right things. Working in unison not working against each other and slowing the mission down that's not what we want to achieve. So having that real good team structure role definition in place prior to hiring is essential to make sure that you get the right person. And that the person that comes into the role is going to stay in the role. Because you may have a huge range of expectations of what you think a pricing manager or executive will do. But they have a completely different set of ideas and if they clash and they find that there is a clash within the role, and pretty soon you'll find that they'll leave. And there are lots of options for great people. And what will happen is that you'll be left with a big gap in your pricing team, and no one willing to fill it.

The analogy I use is like building a bridge, fundamentally, every company wants to spend as little money as possible, and hope things will work out well. With pricing, it's almost like building a bridge, if you want to build a bridge across a big river you need to make sure spend enough money to make sure that bridge last for 100 years. It's functional, it's sturdy and it will withhold everything. If you don't spend enough money building the bridge and cut corners, fundamentally, you won't get the longevity and the support out of that bridge that you want. If you do it quickly and cheaply, potentially will only be a short term emergency fix. When you set out to build the price department, you want your company to grow over time throughout the life of the business. It's not something you can implement immediately. With any pricing project and any business improvement project, it's continuous. Business doesn't stay the same, the market doesn't stay the same so you're constantly needing to reevaluate, reset, develop and move onwards. It’s not as if something that’s been done, let's move on and then the project is finished, the project will never end. You need to keep people motivated, you need to keep people fresh, you need to have the thoughts happening, the analytical rigour, digging into that detail to find value and implemented. With that, you do need to support them, you need to stand behind them, give them the analysis, and analytical support they need. And also one other comment I make in a company, people are very good at being aware of where people stand in the pecking order of the hierarchy. If a GM or an operational manager, and they're talking to a pricing manager. If that pricing manager has to go back and then do all their number-crunching, to some extent, it will undermine them a little bit. So there's a status aspect in all aspects of human relations and it’s specifically in business. Ask yourself the question, Where is your present department? where's your position? how do we see them? where are they seen in the echelons of the company?

With all of this, we're trying to say like, do you want to set your new pricing team or your existing pricing team up for success? or have you actually in fact set them up for failure? Think about those scenarios, think about where they are. Are they delivering the results that you want them to deliver? If they're not, just ask yourself is this because of the role, the accountabilities, the structure, there's something wrong with that, we're keeping holding them back in some way. Is there something that we could do to improve that? Because often there's a lot of clues in just that area, ask your pricing manager. Are they feeling overworked? What is it that's on their plate that's not making them or stopping them from delivering the results that even they want to achieve? Because all good pricing managers want to add value. They do not want to be a cost centre, and sometimes the very issues that are holding the business back. So it's having that open frank conversation asking the question, and being prepared to listen to them, change and adjust the team structure. Because often that will create huge benefits in the short term.

I’ll finish up with the old saying that “failing to plan is planning to fail”. We always talk about return on investment, if you do not resource your team and your people enough, the return on investment will inevitably be zero. You will not get a return, you will not get results. Getting results from price transformation is not a guarantee. It’s only a guarantee and highly likely if you do it correctly and resources it correctly. It's like a football team if you don't train, you're not gonna win games, and that's fundamentally for me.

It makes complete sense like why people are risk-averse, it's an area that a lot of leaders and executives have got functional expertise in different areas. Pricing might be a new area, especially customer focus pricing. That's where the markets moving, pricing is evolving very quickly so a lot of people get a little bit risk-averse when it comes to building the team and hiring somebody. If you don't know, ask the questions. Be willing to admit that possibly not sure about how much should allocate to the pricing team. There are resources out there available to you. And the best start is to diagnose the issues and work around your commercial requirements just to ensure that everybody's working to the same tune.

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In this episode of Pricing College - we ask how many pricing analysts your business really needs.

When launching a pricing transformation or improvement project - obviously, many businesses seek to keep costs low at the beginning - but if you under resource a team - that can have real issues also.

Today we're going to be talking about what is the ideal size for a pricing team. We get asked this question a lot, especially when companies are building their new pricing function. It’s a new team, and they're trying to align the new team to strategy. How many people do we need to get the job done?

This depends very much on the type of business you are in, what sort of products you sell, etc. Because that drives the margins, the potential for uplift. And also, how much work there is to be done? As a very broad rule of thumb in the industry, we said one pricing analyst per $100 million of addressable revenue.

Obviously, if it's quite a strategic mission problem that you're trying to solve. Maybe it's not just one pricing analyst that you need, even if they're only managing 100 million. It could be, in fact, that you need a more strategic pricing manager. So even we'd say, if you've got a business, for instance, which is managing with revenue of 500 million. You could say one strategic pricing manager and then one pricing analyst to support them.

Fundamentally, some companies will just be too small to warrant a pricing team or pricing manager. If you're a business doing $1 million, $2 million and $3 million in revenue, it's highly unlikely that a pricing professional will pay dividends for you. The uplift potential from the revenue increase, won't cover their salary to get a good quality person. So, there is a lower threshold of what sort of company can employ a full-time pricing expert, full-time pricing analyst. And you are getting into larger companies where the uplift, where you're adding 1% or 2% to profitability. That's a huge amount of money and it will easily cover the costs of the project. And give a lot more of your value to the business.

We see from our consulting engagements that businesses get the most value from a pricing team when they have revenues of over 100 million. Or, they're a business that is growing quickly and they anticipate quite large revenue growth. And that they need someone to manage that, as well as other projects. We have to be very careful here, what is the role of pricing because they're not project managers. They're pricing managers with a very dedicated skill set and dedicated experience in a specific area. So you have to utilise and focus them in the right area to get the maximum value out of the team.

Obviously, in most smaller companies growing businesses many people are jack of all trades. They have to focus on a number of areas, and that just makes perfect sense. If you're a one-person operator, you have to do everything. Then as you grow the business you add in people who are experts and take control of more and more segmented areas of the business. Obviously, with pricing good pricer they're not cheap. To get a good pricing professional there's a certain lower threshold you would expect to pay to get somebody competent and capable to do the job. And to deliver the value to you. We have to be honest, there is a certain size of business that is just too small to afford these costs or to warrant them. That does not mean for any minute that you shouldn't focus on pricing. You should learn about pricing. But probably employ a specific and directly employed pricing professional, that's probably outside your budget at the moment. The biggest companies, obviously, and we'll cover this in a future episode. You need someone to drive pricing strategy and also to analyse and dig into the data. Once the revenue gets over certain sizes 100 million, 200 million, 300 million, clearly the workload increases. As a rule of thumb but it tends to stack up that 100 million is a good threshold a good step to move to an extra assistant or pricing analyst to help.

What we also recommend is that at the beginning when you're setting up a new team the size of the team is probably going to be a bit bigger than what it will be over the course of the next two to three years. And the reason being is that everything is new. The price architecture hasn't been established in terms of a formalised disciplined approach. There's probably unlikely to be much logic or in the pricing structure and that's the very reason that you're getting a pricing function. Ironically, however, we find that when people do decide to recruit pricing managers or pricing analysts. They tend to just do it in a very risk-averse way. They just go, oh, we'll get one analyst and we'll just see how it goes. But that isn't enough to solve the huge problem that you're facing. This is an education process in itself. But what can happen is that you don't solve the problem and you think that the pricing team isn't the right solution. But it's because you've under-resourced in the problem and the team. So we highly advise that you think closely about your commercial requirements. Get some expertise to diagnose the problem. Then from there, you can build the right team structure for you and it doesn't have to be big. We're not saying you have to have a big team, it has to be agile, it has to suit your strategy, it has to suit the culture of the business. The team needs to get buy-in from everybody else that can take a little bit more time than people anticipate. A bit more skill than you probably thought at the start. But the team will change and morph over time. Gradually, as you build a new system, new logic, the pricing frameworks and models get slicker. You won't need to recruit as many people.

I think my final point I'll make is it's like anything else in life there are economies of scale in nearly all aspects of the business. If you want to open a factory to manufacture any product, you need to build a factory at least one factory, to begin with. You can then scale up until that factory is at full capacity. It’s the same to some extent in the pricing profession, you need to start somewhere, and the first investment you make would be one pricing professional as part of your team. There are economies of scale and as the business grows, clearly those become more and more visible. The people you will bring on will be more analysts to help your team leader, but just as the business grows. I suppose the first step is pricing focus integrating that into your company, integrating a value mentality. And that does not require a private professional to do that. It just requires senior executive leadership, and which is also a topic we'll cover in a future episode.

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In this episode of Pricing College - we ask a big question. Can you business simply say no to tenders?

Do you have to take part in tenders - or can you simply say no?

Does your business really want to take part in tenders as the normal option - or is there another way?

We've been talking in the past few episodes about tenders. And generally speaking, I think you can get the picture here that tenders, can be quite a negative and painful process. So we did touch on the idea of, what can we do differently to make tenders better? And what we're going to debate today is whether companies should just say no to tenders. Is that the best solution?

Clearly, this would take a very brave company. It would take a company very confident in the value they provide. They’d have to be aware that they're either super-sharp pricing or a differentiated product or service and more reliability etc versus competitors. This could be for new business, or it could be for existing B2B style business also. Would you have the guts? And is your company set up to just say, we don't have a tenders department and we do not do tenders?

When you think about tender in your company that is agreeing to go through the tender process, and other persons tender to process. What you're agreeing to is you're becoming beta to the alpha, it's their process. They initially came to you because you have the solution to their problems, yet, you're the beta in this relationship. It's completely dysfunctional. If you truly are and do have that solution. You should be driving the whole process.

In any walk of life if you want to buy a product or service that you like, what you do is you go out and you do the legwork. You research it, you spend a bit of time, and you find the one that you want and the one that suits you. This could apply to anything from buying a car to buying a house to buying a puppy dog, a pet for your kids, whatever you're going through. You do the research, you find out the one that suits you and you make that specific choice. The person who bought it from or the supplier that you buy from will be confident. You want them to be confident about what they're offering. You don't want them to be desperate to super keen or super desperate to get the sales in. Because otherwise, you'd be suspicious in your mind. You'd be like, what's going on here? Are they selling me an inferior product? and you think, why would that not also apply in many regards to a B2B environment? We're not foolish we know in a lot of scenarios that are the way industries are run and that's how they operate. But if you even take a bit of what we're saying here on board, you can hopefully minimise that aspect.

I think it comes down to the idea of reframing, a dysfunctional and largely unhelpful process so that both the seller and the procurer get a better outcome. I think that is essential, this is what we're trying to say. And so, what can you do? Somebody comes to you with a tender, you read through that tender often it's nonsensical. You don't have an idea of what they're trying to buy, their business, their agenda, their strategy, and things like their financials. How can you truly help them? At that point, just disrupting that dysfunctional sort of process is advisable. Because by saying no, they'll come as a shock to them. They'll not have heard that before, because most people just jump to and just provide a generic response to a generic RFQ. But you're going to be doing something different, and the reason you're going to be doing that is that you care. You care about delivering good outcomes for your potential client or customer. And you also want to understand whether you actually can serve them well. Why would you agree to a job with a customer if you can't deliver? At that point, you would recommend and maybe come up with a solution, another partnership or whatever but what you're trying to do is understand that problem. By saying no to the tender process is a real sign that you care.

When we said say no to a tenders or by no means saying do not discuss, do not provide communication, do not talk about pricing, do not cover every topic under the sun. What we're saying is do it better, what you want to do is have chat with the potential customer. Talk through what you have, you do not give them cookie-cutter style information that to some extent is useless. Give them the information that they need. If it's an existing customer, in any negotiation, there has to be a pro and a con. If there's no cost to doing something people either won't permit or avoid doing something. So in a theory, if you've had a customer for 10 years in a B2B environment, and they are saying oh we're just going to go to tender. I think any supplier would be fine and that's perfectly fine. There's no actual penalty on that supplier or that customer in doing that instead of you saying, “well we don't do tender so we won't be taking part in that tender process”. In the customer's mind, are they going to rip off that 10-years relationship just on a whim? Or, are they going to discuss with you and have that discussion like the adults about the situation? I would suspect they will be adults, at the end of the day.

For instance, if you then decide, I'm not going to take part in that process. Because we've got another way of doing it that will ensure that we both know where we're at with that situation. Then we're very clear that we can serve you at the level that you want and give you the prices that you want. Would you like to choose that as an alternative to this process because we know it works? If they say no. Aren't they destroying not only their value but sort of fighting themselves in the foot a little bit here? Also, you get an insight into what they would be like if you work with them over a longer time. They're gonna just say no, you've got to do it this way even though you've got a better way of doing it and you can show them that will get them better results. And then they say no to it, then I think you've got an insight there about whether you want to work with them. That's the point. Then you can go back to management and go maybe this isn't the type of customer that we can deal with and may have a higher cost to serve. May be quite difficult to give them what they want and at that point, you move on is called segmentation. You want to work with people that you can work with, at that point you're being able to give them. Especially if it's a sophisticated solution that does require more than just transactional buy, sell, you do need to have that relationship.

I worked in a B2B industrial business previously and one of the things that I noticed was they do tenders for anybody. They do tenders for a 50,000 deal, they do tenders for a $2 million deal, they do tenders for a $50 million deal. At what point in time are we segmenting the market? At what point in time are we thinking, this isn't the customer for us. Or, what this customer looking for is not something that we want to want to be in. It was almost like a one size fits all environment. Whereby we were putting the same effort into the tender, which was a lot of effort but not much thought to it. To a large extent, the company wasn't differentiating and it wasn't thinking what this customer wants. Because so much time and effort were involved in putting together documents. You're almost kidding yourself, staying busy but not being productive. What is more productive? Increasing value in your company, and marketing that value to the market so that they will come looking to you. Or by being reactive and answering questions when a tender is sent out to 10 potential suppliers. And you’ve no ability to differentiate yourself. Always being differentiated, it's always beneficial at least people will know who you are, you want to differentiate yourself in a positive light. But my personal view is in many regards if you can't say no to tenders I think you should consider it. At least for certain segments of your market. Of course, we are always aware, we're not foolish either there are certain markets where tendering is required. Such as government-mandated areas or where this legislation requires but if you can reduce tender whenever possible. I think you really should.

Yeah, I agree. So I think what I’ve learned from all of this is, saying no doesn't mean having an antagonistic relationship with your customers straight off. It means the reverse. It means that you do care, they want to learn more about the problems, you want to help them achieve their outcomes. And you want to make sure that you can deliver on what you're saying. You want to make sure that you can serve them as best you can. And from the customer is a good time if you say no, let's do it this way it's better. Listening to the feedback from your customers and hearing what they would say in response to that will give you insight into long term sort of relationships. And business deals that you're going to have posted at that point in time, especially if it's your new customer. And if it's an older existing customer I think they'll be quite happy to go through that process. Especially if you've done the hard work and you've delivered on your promises in the past. Why wouldn't they?

I think this is all predicated on you being a great company. Your company provides great service, great pricing to the customer. At the end of the day, if you are a trusted supplier, if you've been given great service they're more than likely to listen to you. People don't want to get rid of what they're used to that works well for them. If you're a shoddy below power supplier, this technique or this approach will destroy your business, you have no room to be using this. When you know your value when you are capable when you are competent. If you know your own value, the customer should also know it, how would have customer know your value if you underappreciate yourself also? As Joanna started the conversation, who's the better alpha in the relationship? If you doubt yourself and just think you're the lowest cost provider that is inevitably where you'll end up.

This requires a lot of backing from stakeholders and executives in the business. You can't do this as a solo player it just won't work. You'll be considered like a lone wolf and unpredictable and all those things which you're doing great account management. But it needs to be a strategy, it needs to be agreed upon. And, it can only work if you have data, you've got insights that you use to improve your account management and pricing capability. But you've got to learn and trust that as well. That is taking time in many businesses it's like, how do we use this data? A lot of CRM is still really not filled in, not very helpful. It's a working progress. I take that but if people are coming to you and consistently that the business delivers on what it promises. Then maybe it's a strategy that suits you.

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In this episode of Pricing College - Aidan and Joanna discuss why you should seek to avoid tenders whenever possible.

Your key account team and sales team should focus on preventing existing clients on going to tender - and work with potential clients to discuss value in a more productive manner than tenders.

In the last episode, it's been pointed out to me that I sound very negative. So in this episode that regarding tenders and why I dislike them will say. And so in this episode is like, you dislike something, what are you going to do about it? And in this instance, I think our messages show how to avoid tenders whenever possible.

I think avoiding tenders is probably the conclusion to all of this. But I know what you're thinking, it sounds a little bit too difficult. What are you supposed to do when there's a process already set up and we were sort of made to do them? Well, again I think it comes down to understanding the value that you offer and segmentation. Sometimes you need to know who to sell to and who to walk away from.

In many companies, I think we have this concept that tenders are inevitable. They're part of the job, they want departments to do specifically in B2B companies. I know I previously worked in a company where we were looking after major national chains and tendering was a very large part of the job. To some extent, I would think we should almost view ourselves as if it goes to tender that is a failure. The senior management gets excited about tenders and doing tenders. My view will be, we should get excited about preventing tenders or not going to tender. We should almost describe ourselves as, which will have metrics. Which tenders are we avoiding this year? Which customers have we kept by not going to attend or by not going to market through ongoing value and delivery? This was a different way of looking at it, but it will over time in my view lead to keeping customers longer and higher profits.

I think you're right, Aidan. To a large extent, the tender process is a habit for businesses. It's a routine that teams go through and it's an expectation that management has. It's like we don't go through it, that’s going to disrupt the relationships that we have with our customers that we've built up over the years. But therein lies the question, you built up a relationship but yet you still have to go to tender with that company? Surely at that point, you have to question the strength of that relationship. Would you call a relationship with a customer a partnership when they routinely ask you to go to tender, but you have been known to deliver on time? They keep coming back to you but yet demanding a cheaper price. I wouldn't call that partnership. And I think at that point, you've got to reevaluate that relationship and get real with where you're positioning yourself with your customers. Then start asking the question, Am I a vendor? Am I a supplier? Or a partner here? And if I want to be treated as a partner, would I be going through this tender process? The answer is no.

I think if you look at the time and effort invested. When I say invested I mean wasted on both sides on the company selling the product and service and on the company buying the product or service. The other thing I will say, if you've got a long term procurement deal with a supplier, it's almost a bit like a long term relationship or marriage. So you're working towards common goals, you're part of the supply chain. If you view it as what you've done, you've outsourced your supply chain as a company. Then the company who won the tender goes and supplies that service to you to help your company deliver what they do to your customers and the supply chain. If you think about it, every three years or every four years we're going to go to tender, that's our company policy. What that theory does is it means for six months or a year leading into the tender. The relationship will fragment, the amount of productivity delivered will decrease. And specifically, when the supplier knows that you’re either talking to competitors and that your entire proposal is to downgrade to water down your offer. To hammer down your pricing. There's going to be damage in that scenario. So that the first six months leading into the tender, and even if you keep the supplier on. Six months after then there's a kind of reignited relationship again trying to get things back to normal. So what you're doing is you're undermining the relationship for a certain period of time.

Sometimes when the customer comes to you or a business with a tender, what they're probably saying is that the relationship has broken down. They're not telling you specifically, directly, verbally to your face but they're giving it to you in that document. That's the sign that something's wrong. Because they wouldn't have come to you in that way if you were a partner. So what as a business should you be thinking about a tender when that's handed to you when you think that your business customer is a partner. You should be thinking, what have I done wrong? Have we delivered on time? Is our supply chain that efficient? Are there any points in the last two years that we've been working with that customer that we've failed them in some ways, they've been some product failure? Has anything happened and do they like the trading terms? If you found out that's true, then you can address it. But I think there's a lot of instances where companies don't ask those questions and don't have the detail on it. So things just get sort of ignored and daily operations continue. Your customers put up with maybe services they didn't want in a way. And then they don't want to tell you either what the problem is, so then they politely give you a tender document at the end of the contract, just to show you that things aren't right. So sometimes that's another way of looking at it. The point of all of this is you've got to start looking at your business in terms of data, understanding where you deliver. Where you possibly are underperforming? And then address it. You raise the question with your customers. So you have that feedback regularly and that conversation with them so where you stand.

I think that is fundamental account management if you have a dedicated account manager on that contract. Their job is to deliver increasing value to keep the customer happy. To keep your business profitable, to keep prices up and revenue and profitability for your business up. But at the same time is to keep that relationship growing, hopefully, expanding customers making with you. And if there are bumps along the road, see them as far as possible and prevent them. It’s proactive, not reactive like tendering is reactive. If you're already been working with a company for 5 to 10 years if a tender comes up. Why could you not have prevented that? What could you have done in advance? We'll be completely honest, of course in some companies there are procurement teams who just love a tender. There's nothing you can do about it. And you can try to explain and use your relationships in that other company, explaining the value, but sometimes it just happens. But there's a certain percentage, pick off the low hanging fruit, the more you can prevent the better. If you can prevent more, you know what your customer wants, you can embed yourself more in their organisation. They become dependent on you more and more, and hopefully, over time they’ll see you as trusted. If the customer wants something else that they're not getting from a supplier. Be open and let them talk about it, discuss it. Theoretically, if they ask for lower prices and you say no. The last thing you should do then is a tender process given lower prices. Why did you not get them in advance if that was possible or that was on the table? So if it gets to Tender, what you've done is you've weakened your negotiation and bargaining position. And undermined the relationship so that over time they won't even see you as a strong partner. Yeah, it's a negative all around.

I suppose, and that's what position on this is like, why bother going to tender if you haven't done the work in advance? At that point, you're both going to lose out. You're going to commoditise your service. And they're going to get something suboptimal that they don't want and expecting possibly it's going to be something else. So have the conversations well in advance. I mean, always have the conversation so you don't even have to get to Tender. If you're at the point of a tender, then have meaningful conversations, not like just two weeks before the tenders are due. These conversations occur at least nine months before. But what we're trying to say is, if you keep having these real conversations about the value that you're offering and the problems that they have. Then you're very likely not to go to tender, it won't go there. There will be exceptions as Aidan pointed out, it might be just procedure. But very often, they won't want to go through the cost of the tendering process either because it's costly to them. They're not getting what they want on time. The total cost of a tender process is quite substantial, so it's a cost that they wanted to avoid. And they would avoid it if they knew that they were getting what they wanted from you.

I think that's all I gotta add on the topic. Let's put it like this, going to tender is a crisis. Let's avoid crises by preventing them, putting in place preventative measures, and things should not come to that. Things should come to discussion, communication, if there's problems or something's not going where people want to go, that's the way it should be. If your competitor supplier has come out with innovation or a new product and your customer has expressed interest in it. Go back to your own company and see what you can do or why your product or service is slightly better, or can you provide a similar service also. So be proactive, think about the bigger picture and fingers crossed if you do that you should avoid the cost. Always remember that running a tender from a supplier or a customer basis, costs time and effort. And time and effort is something that nearly any sensible company wants to avoid because it's unproductive.

Apart from just account management, I think, account management needs to work with the pricing team on this one. And the pricing team needs to have all the facts so they can give account management the right information and tactics to go back and inform the customer about various things. Especially in terms of trading agreements and things like that. But key inputs that all businesses should know, was like, what prices are other competitors charging? I know that can be difficult in a B2B environment. But roughly people do know, they do talk, and often account managers, circle around the same businesses as well. So there's an understanding of, what the average price is? What are the key value drivers that your customers keep mentioning? Put that in the CRM. So, if an account manager leaves, the new one will know key things about that account. And then can ask questions probe deeper into it, and key metrics. What are your customers trying to achieve financially? What cost reductions do they want? Is that possible? How do they want to buy from you? Do they want to buy from you using the maximum annual or two-year long term contract? Did they just want to try? Or, do they want a non-commitment sort of contract month by month? Is that possible? Why is that not possible? All these sorts of things lead to very meaningful discussions which you can track and monitor using data and then translate that data into conversations. Okay, Thanks a lot.

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In this episode of Pricing College Aidan and Joanna talk about tenders - and why they often destroy value, and any interest you may have in working with a company.

Tenders have lots of clear flaws - and whether they get the best price or the best supplier is far from certain.

What's the number one thing that you love about pricing, perhaps that you don't like so much about pricing? When I asked this question people generally tell me the negative, and B2B, guess what it is? Tender pricing. People hate going through the process of tendering with the customers. So today we're just going to talk about some of the frustrations and problems with pricing and tenders.

If you think what we're doing here is moaning and complaining, you will be exactly right. That is the entire intention of this podcast today. The thing that gets on my nerves about tenders is, in many instances, they're pointless. I'll give you an example if you think about a customer buying a product or service, say you're going out to buy anything. What you generally do is, you do the research, you find out the answer, you compare, you ask for reviews, you kick the tires, you do the legwork. You make an educated decision and then you make the right purchase. The tender process in general does the exact opposite of that. What it generally does is, it does no work or pretends to have done no work in advance. And sends out a list of questions that they want to be answered. Then basically the marketing department combined with the sales department and pricing department in a company, fill these things in. It's almost like the worst possible way to find out and to inform yourself about buying any product or service.

In a way it's really like a guessing game for everybody concerned. It shows who’s an informed buyer, who’s an uninformed buyer, who’s an informed seller, and who's an uninformed seller. But unfortunately, it doesn't give either the buyer or the seller a chance to have a meaningful conversation about the number one thing, customer value. And how the sales team can help deliver on particular problems a customer may have. It also doesn't give them the real opportunity to discuss specific things that the customer needs. Often in this process, it's a very one-sided process, with not enough questions and not enough communication. So I think the communication breaks down completely.

What we can do is go through what we think are some of the more annoying or nonsensical aspects of the tender process. I'll start with number one, say you're going to buy an industrial product widget or let's just call it widgets. I have no idea what a widget is but let's say that. So what you do is you go to the industrial company who specialised in making widgets. You ask them to provide you with a colourful document with nice photographs describing the products and services. Are you honestly telling me that you are going to look and compare the quality of the brochure, and the type of photographs? To me, that's ludicrous. If someone can provide the service, a tradesman could do a service but that does not necessarily mean they can also fulfill and fill in complex data documents.

I think what you're touching on is a good point. I think often we're using sort of old school marketing techniques to promote our goods to customers. Sometimes the customers don't care either about how fancy your marketing brochure is. How colourful it is and how glossy and thick the paper is. They want their problems to be fixed. Often in the past, they would have gone with leading brands who could have perhaps given them all of the above. And that glossy brochure, however, that's debatable now. Very often, especially if it's in niche B2B products and services, you have to go to a smaller player who does specialise in specific products. They may not have all that glossy brochure. But they do have the insight. They have the knowledge of your problem and they have the solution. But the problem with the tender process never gets to that point where you can have a meaningful discussion about the problem or the solution and get that right mix and fit.

The second clear nonsensical aspect of tender processes to me, is that what you're doing is they’re saying, I don't know research, this is the procurement team. I don't know what the product or services are. You tell me about it but only in this very strict regimented system that I want you to tell me about. If you don't know what you're buying, should you be dictating to the person who’s telling you what they can tell back? Look, I'll give an example. Say you're up on a murder charge and you're looking for the very best lawyer out there. You're not going to go in and start dictating to the lawyer what they should tell you when trying to convince you to buy their services. There's an arrogance in it, and to some extent it's, it's just foolhardy.

I've seen quite a few tender documents now. And often a lot of them have been put together badly. They're often just cut and paste from older RFQs and put together. They don't go into detail about what the customer wants. They're just given out and sent out to lots of different selling organisations and businesses. The pricing team and a sales team have to work with that document. And put something together that's meaningful in terms of pricing, the business executive summary, and all the value you can offer. But really, the tender document itself was put together in literally five minutes. There are many mistakes in them, so it's very difficult. Again, how are you supposed to have a conversation and build value from here?

Another aspect I'll say is the ability to add value through a tender to differentiate yourself. Tenders often seem to be set up on a very much a price drilling down. I'll get onto the pricing card last because that's my real packet. But the one whereby your ability to add value to the process is just incredibly limited. You’re trying to ask really strict questions, are they ever going to read or compare? I have no idea. I can't imagine they are. A lot of your ability to say, why are you different? Why should you not be in this category? If there’s no room to excel, or to do, or to take part in it. So, it's a bit like the old saying about the rat race, “the only way you win the rat race is not taking part”. So it's yeah, it's a tough one.

The last quite annoying thing about tenders would be that idea of, who are you competing with? Are you competing with anyone? You'll be told that your price is too high. It's an inevitable outcome from the whole tender process. They'll come back to you and say somebody is competing and giving me exactly your offer. But for less money and you're supposed to believe them. It's debatable, no two businesses are the same. Operational costs are different. How businesses run are different. The pricing, therefore, is different, the value offered to them is different based on supply. The quality of the products as well as the insurance of any risk happening. Tons of things that could be involved in that pricing and they come back to you and say, “your price is too low, you've got to lower it”. I call this to some extent, procurement technique, it's a phantom bid. So why would you go through a whole six to nine-month process with a tender, and just be told, your price is too cheap. Then you've just got to lower those prices right at the end of the tender process makes no sense.

Fundamentally, the pricing card makes no sense on many levels. As Joanna said, it does make a lot of sense if you've completed the entire document. If the entire document shows your differences, your pluses or how you're stronger or better than other competitors. Why then is someone in procurement coming back to the end of the process, saying you're slightly higher in this area. What was the point of the differentiation in the entire 100-page document prior to that? The other thing I'll say about it is tender documents, they've already said upfront we do not understand your business. Tell us all about what you do, but then fulfil and complete this red card. We will dictate to you how you should fill in and how you should charge for your time. It's like telling again the example of the lawyer, the Johnnie Cochran character trying to get OJ off. It's like, are you going to dictate to anybody who's an expert in their field how they should charge for a service? and what they should do? It reminds me of the classic example. I think it was Nikola Tesla, the famous inventor who was in a factory. This is probably not a real story but I think it was Henry Ford who said, oh there's a rattle in the wall, and he goes how I sort of to charge you to fix the rattle. So, Tesla walked along and he touched the wall once. He got a hammer, and he put a hole in the wall and the noise disappeared. Henry Ford was hammered with that cost and went to find the hole 20 bucks and to know where to look for another 20 thousand bucks. When you're an expert in any field, you determine how you charge. You don't let someone who doesn't know the product or service dictate this to you. So that's all I could add on tenders. I'm going to calm down now because even the concept of tenders winds me up.

So from this what I've got is obviously, it's a dysfunctional process. Something has to change, sales, companies, businesses, obviously don't like it. They've got their sales team on one hand going through the pain. And yet that procurement team is probably giving other businesses equally annoying documents and processes to go through. Let’s think about how we can improve it through business. And also, do procurement enjoy going through that process too? Is there some other way that they could think about making that whole process more meaningful? Having that better discussion. Asking better questions just to get cut through that process. Get to the point where you're fixing real business problems, making money, lowering costs, increasing revenue. Because that's really what all of this is about. The tender process doesn't fix any of that.

Just one more thing sprung to my mind there with tenders and again it's a nonsensical thing. How often do you look in newspapers and you see a major infrastructure project has blown out costs wise to huge degrees from a billion dollars to $3 billion. But the same person building it keeps going, and to some extent there you go well, how did that tender process work in the beginning? Did they just dictate what they wanted to be told? They didn't want to listen to other maybe factual truths from other suppliers, and they picked the lie that they liked the most. Basically, you're not lying to the procurer but to some extent, you can't tell them the full truth. Because they've already told you they're not gonna listen to it. So, yeah it's people who get what they deserve in many regards, and that's all I got to add.

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It of courses seems to make sense - that you should check on what your competitors are charging - and base your pricing somehow on that metric.

However - can there be drawbacks in this approach and if so what may they be?

Just because someone is a competitor - does it mean you should charge the same. Should a convenient late night corner store - price match against an out of town hyper market?

Today, I want to talk about a different form of pricing. We talked about value pricing before and what it means and cost-plus pricing. But we haven't covered competitive pricing, I think that's an important one. Because what we've noticed especially in our consulting is looking at price points just generally in life, is that a lot of businesses are very very keen on wanting to know their competitive pricing. It’s almost like this fixation with setting prices by knowing what someone else is pricing. We just wanted to look into that, and see whether that's a good approach. Look at the pros and the cons.

We’re seeing it even in job descriptions and in pricing departments, we're seeing more and more web scraping. IT software is being written to go out and look through all these different competitor websites and compare the prices and match to the market. All this stuff is almost as if it's the only way to do things. First of all, that's quite good technology. It's good to know these sorts of things and of course, there's a lot of shopping around the software now. If people are trying to buy on the internet, price comparison websites are prevalent in nearly all industries. Certainly from hotels to insurance markets. But let's dig into this a bit more and look at it from a probably a brick and mortar perspective a bit more.

What is it? I mean, you'll hear so many different terms bonded around competitive pricing, match to market, and market-based pricing. They’ll have subtle differences but let's just go through very quickly what those are. In a nutshell, I suppose competitive based pricing is thinking about your pricing in relation to other people's prices. What people do like Aiden just mentioned, a lot of companies now web scrape if they can. Then just then line up all their competitors' pricing for a particular item, or product. Then they go, this person's five, that person is like seven, we're gonna then set this price for this product around here. It could be in the middle, it could be slightly above, whatever. But that's essentially competitive pricing and that's what all sorts of systems do.

This makes a lot of sense in the Internet era, or when you're reselling a product. When you're reselling a branded product whether that is a watch, a bottle of perfume. Those sorts of things that customers know that they're getting the item that is the same. And they can compare and contrast with different providers. Let's say, for example, supermarket chains if they're based in a large hypermarket store on the edge of town. And their competitor is also based in a large hypermarket location on the edge of town. It does make a lot of sense for them to be tracking what the competitor is selling it at. At the end of the day, you can't be a little bit up, or a little bit down but within a bandwidth. If you're selling it at two to three times the price, the educated customer is not going to come to your store or your website.

I think another example there would be petrol stations, you can get two on the same street one across the road from each other. So having one like pricing way up from the other one, people will notice. So, having that sort of competitive understanding when you're setting prices in petrol stations makes sense. That would be called a micro-segmentation strategy as well, which we touched on before. I suppose the other sort of different approach would be market-based pricing. And essentially, what people do there is looking at supply and demand dynamics. What it costs to make and the demand for that certain time. A petrol fuels industry would use that type of pricing, you can price high if you've got a new product. Then, over time, as you get to know the market, you can gradually bring the price down. That's a form of pricing strategy that people use there. And then you can gradually bring it up again based on demand and supply.

What I'm going to say here is a couple of concepts to keep in mind. The first one is the bandwidth, you can charge more or less within a certain bandwidth. How big is that bandwidth? It depends. It is important to bear in mind that no product or service is ever the same. Nothing is ever the same because of customer service, because of the exact location. And because of potential payment plans credit cards you can use in that store. The example of a petrol station, one petrol station cleaner than the other one when you go inside. You can collect point miles with them. I'll give you an example, nearly every petrol station there will be a price difference even just a little down the road. We're used to seeing that which is a mark to market environment or, competitive pricing environment doesn't make a huge amount of sense. The other one, I'd point out is, even if you're selling the same item, convenience is a massive thing. So, who are you comparing your pricing against? The example I'll give is, let's take a corner store convenient to your house. You have a late-night emergency or something like that. You need to go out and pick up a bottle of milk, or kids diapers, whatever it is. And you just want to pop out the door, run to the shop and buy that item. Is it a Corner Store, are they comparing themselves to a hypermarket half an hour away that sells the same item but half the price? It wouldn't be very sensible if they were. Because the bandwidth in that instance could be hugely different. What you're seeking to buy is convenience. The solution to your problem is that it's not worth you jumping in the car and driving for half an hour. Bandwidth is something known about but the size of the bandwidth. And who you're comparing against those are the important things.

Thinking about this, when you track your pricing against somebody else's. You're sort of making an assumption that your business model, your cost of operations, and your way of doing business is the same. No two businesses are the same even if you're selling the same stuff, you're doing it differently. Operations are different. Your cost base is different. Your customer base could be different, and they’re willing to pay. So you’re making a whole load of sweeping assumptions by literally bringing your price close to theirs when you do that. So I think it's important to know that when you're using competitive based pricing you are in a way capping your revenue potential. We said that before when we discuss cost plus you're anchoring people, even your organisation to cost when you're using cost-plus. Equally, when you're using competitive base pricing, you're anchoring your total economic value to your competitors and it could be greater. Therefore, you're reducing your pricing power. It becomes a very confusing market when everybody's following everybody else, who is the price leader? Why are they the leader? Should they be the leader? Is everybody second-guessing each other and everyone’s just following you? Who knows? It just becomes quite a confusing game and this is why we need a pricing strategy. You need to know your value so you can with confidence go out in the market and rightfully, set your price positioning the market based on one value. I'm not dismissing your competitors' price point, competitive activity and tension are important to note down. But what I'm saying is costs and competition are just two of the inputs in setting a price. And the value of your business to the market and your customers will give you more pricing power.

I agree with that, I think, fundamentally, one of the roles of pricing departments should be to increase that bandwidth size, the bandwidth we have spoken about. Make it as big as possible, offer as much value as possible to the customers. Educate the customers as much about your specific value. Educate them about your reliability, your convenience, your trade agreement terms, your payment terms. The pleasantness and the friendliness of being in-store and any offer sales pushed that aspect. At the end of the day, there's a real value people know about these things to put that value on them. So, the better you do, the better your customer service even selling commoditised items. Let's say an example of a watch or any item like that, the better you sell, the more value you invest in your sales team, your marketing, your opening hours. And whatever it possibly could be that will serve to increase the bandwidth that you could sell up and down versus your competitors.

To sum up, competitive pricing is the next step in the evolution of the pricing journey. You move from cost plus, now you're looking outward to the market, to your competitors. But at the same point, it's still quite a tactical pricing game that you're playing if you just stop there. It indicates to others that there isn't a strategy and perhaps that you are disconnected from your customers. Therefore, relying on other benchmarks like competitive benchmarks, indexing and things like that. You're also reducing your pricing power by going out oh they’re seven, the other ones are five. We're gonna be somewhere in the middle when potentially. You've got so much more to offer, what you're doing by that is underselling your offer.

My final point would be, say you're competing in a market against one competitor. What if your competitor is just making crazy decisions? What happens if they're driving their business into the ground? You should certainly not try to replicate that or try to compete with them, a race to the bottom will destroy you both. So, just because someone else is doing something. There is this concept of intelligence in which crowds of people make the right decisions. I'd also argue that crowds of people make the wrong decisions so you'd have to think through, why are you making that decision? At the end of the day, everything is down on your own, what you do.

I agree with that. When you start looking to others for everything, it becomes quite cheap. You don't have that 360 view on the market, you're just always faced with the immediate. And everything becomes a sort of firefighting. We've heard our competitors have just raised their price and everyone goes rushing to either raise them higher than that or lower than that. That's the small end of town, you've got to think bigger than that. Have a broader view and a game plan that is a little bit more than that just day to day sort of tactics and reactive pricing. And that in itself will give you so much more confidence when your competitors do raise prices or they launch new products you'll have a game plan in mind. And that will give the whole pricing department so much confidence which in turn will feed into the sales teams, and the tactics and guidance you give them as well.

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We are always used to thinking that the more you pay the more you get of a product or service.

However - have you ever been in a supermarket and found that a 660 ml bottle of cola costs more than a 2 litre bottle - why could that be?

We discuss pack sizes and value based pricing - and what may be driving this seeming error.

Okay so we've talked before about how products are actually getting smaller and yet the price is roughly the same if not increasing for a smaller product, that's shrinkflation. And so today, we'd like to focus more on whether people would pay more for a smaller product just because it's smaller. And we're just going to go into that using various examples of different sorts of FMCG products, drinks, snacks, things like that.

Yeah, we're gonna workshop that idea. Sorry, that springs back bad memories from conferences. I think a classic example is let's take a very common soft drink. You take very common soft drinks like Pepsi Cola and Coca Cola. You go into the shop, the average supermarket and this applies to Australia, but I'm sure it applies to many other countries. At the front of the store, you get a can or a 660-millilitre bottle. And it might be in Australia around the $3.50 mark. It's refrigerated also so that is a value add. You walk away from there and you go down into the shelves with the fizzy drinks. You probably get a 1.25-litre bottle and it may be on promotion around $1.80 or $2.50. But quite often there you'll even get a 2-litre bottle that might be cheaper than the 1.25-litre bottle. But both of those bottles will be cheaper than the smallest unit sold.

So, what's going on there? I mean, it's sort of different variations on the theme of convenience. You've got the smaller drinks in the fridge that are being chilled because people like that, right at the counter, they're easy to take. It could be the people that walk in just want to drink and they just want to walk out there. Possibly, the assumption here is that they could be willing to pay more for that can. But then you've also got the slightly bigger bottles of drink in the fridge, slightly more, though not always they are more expensive than the small tin cans. Because those tin cans have got smaller and bottles are actually in some way bigger. And you often get that buy one, get an extra one free offer going on with those bottles of water and Coca Cola and things like that. From what Aiden was saying, you walk back one or two aisles to the major aisle, the food and drinks aisle. And you can just see how the price points are like everywhere. What is the distance between the price points of the refrigerated cans versus the refrigerated bottles of drinks versus the bigger non refrigerated just almost household good type drinks? I don't know if they are logical, or whether they've thought it through.

I think there is a sense of segmentation going on here. And clearly, the sort of people I think consumption of large 2-litre or 3-litre bottles of fizzy drinks is decreasing and for a number of reasons. You've got decreasing family size or household units, more people living alone, more awareness of health. And not drinking bucket loads of fizzy drinks with sugar and high calories. So, I think those things are decreasing. People are probably segmenting into certain groups where you just want a little snack, an impulse purchase near the counter. You’ll buy a small kind of drink because you don't feel bad about yourself but you may feel bad if you buy a bigger one. I can see the segmentation of the larger bottles. Potentially, even though it's the same product and the same material in those bottles are being offered to a very different market. At the end of the day, there's not much point in buying a 3-litre bottle of Coke. If you're only going to drink a litre of it or in that week, the rest will probably go flat or be leftover. So, you're segmenting by potentially family structures or household structures, and also, where the person is? Are they walking home shopping and they don't want to carry a big bottle? There’s a lot of those factors that go into it, whether or not the shops thought about them all, that's a different question

Yeah, I suppose that's a question for the suppliers. FMCG as well inform the supermarkets about how the end consumer and shopper consumed these types of products. They're the ones that should be doing that sort of research and informing the supermarket. So they can, in turn, present a clearer strategy pricing to the end consumer. But from an end-consumer perspective, it can be confusing, these price points I mean. For instance usage, we know we would buy a bigger bottle of Coke or Pepsi if we were having a kid's party, then it makes sense to buy bulk. But a confusing promotion I saw recently was between Pepsi and Coca Cola bottles. It just seems the promotions oscillate between the two, if one's being promoted the other one's not. Coke was promoted, and then Pepsi was cheaper. It just seems to be that there's no sort of strategy other than it's all about trade spend. If one's pumping money into trade spend and the retailer will promote that one. And put the other one back on full price hoping that people will grab the promoted goods. I mean that in turn, it just destroys any sort of value base or consumer-led strategy. Because they're just going on an impulse buy based on price. Whether the price is recouping the money from that promotion, or looking at the data, stats and even people grabbing the items. I would say people still prefer to go for the one that they like. It could be in the taste, or it could be because they trust it. I don't know, what do you think?

9 out of 10 Cats prefer a Pepsi Cola, apparently our first taste that was a famous example. Not cats but human beings.

Because it was more sugary.

Something on the first sip. But, yeah, we'll cover that in our other podcast on fizzy drinks, we don't. So what I would like to point out is, I think there's a lot of value that can be added in pack sizes. Certainly, people on diets have portion control, I think it's the term used in the diet industry. Knowing the size of the portion. And the smaller account is a fizzy drink that treats size or fun size which it used to be called. It really makes people feel better about themselves. They're buying that smaller can, they're probably prepared to pay more. Because of the ancillary benefits to their self-esteem and their mental approach to life. So, I think I can understand and to some extent, smaller package sizes that will be chocolate bars, fizzy drinks and those sorts of things. As long as they give the calorie intake or the kilojoule intake, people will pay more for that.

What I'd like to clarify here is that I think that they would pay more than that, but that you need to have your promotional strategy clear as well. It can't confuse that strategy. If you're going through a pricing strategy based on usage, how do people consume? how people go through the supermarket and what do they grab? You need to get your promotional strategy in line with that strategy.

One point to add in and this is something I had thought about, one industry where it’s bad for your health and it's got high sugar content, is the wine industry. If you go into any ball shop or off-license, you will see that it's pretty much the same bottle of wine size covering 95% throughout the shop, which is, I think it's like 750 millilitres is the global standard. You do get a larger bottle more I think magnums and special promotional things, and you can sometimes get smaller ones, but I would say 90% of the bottles sold are the standard bottle. You look at the size of coke cans, the size of those bottles, wine to my mind would be perfectly applicable to that if a person lives alone. They say I’ll just have one bottle of wine or one glass of wine for dinner, then you don't have that temptation with the second one so it’s in your calorie portion control. It takes a decision out of your hands, and this would even be more beneficial to people because obviously as we all know about wine, there's a slippery slope if you have one and then the second one becomes more appealing. So, yeah, that's out there to the wine merchant to the world to give me an answer.

I think the same goes with chocolate, there are some real chocoholics out there. I questioned whether reducing the size of the chocolate bar tends to only happen with value packs. When you look at chocolate bars, say at the counter, they're still the same size. So, in relation to the argument about reducing pack size purely for our health, I debate that because the ones that are in counters are still the same size, single purchase ones are the same size and it's generally the value packs. So the value packs, who are they aimed for? It could be sort of a younger segment of children. I wonder whether it would control people's consumption of chocolate or reduce the consumption of chocolate when you reduce the family value pack size. Kids like eating more from what I've seen, they do eat more and obesity levels are rising so I think the value pack is very similar to a selection box of chocolates. People are just eating more of them because they're smaller, it's almost the reverse psychology that because I know it's smaller, I'm going to eat three times as much because that equals one normal chocolate bar. So I think it's increasing the consumption of sugar.

One final point I'll make is that this is a very modern problem if you think back to what sweet shops, lolly shops, and your local grocery store were 50, 60 and 70 years ago, it was somebody with a white coat, pulling things and weighing them on a weighing scale and giving you the exact weight that you wanted. In theory, pack size is a modern issue created by modern supply chains and supermarkets. 50 years ago, you'd say I want X amount of these sweets or these lollies and it was you would get into the exact amount. It's funny how things go in circles and though we're probably moving back to some extent to that old deli-style approach.

And also, if we're noticing, even if it's on a latent subconscious level that things are getting smaller, what does that do to people? It breeds scarcity. It breeds a sense of loss. People then end up buying more, say the chocolate or whatever it is because they feel they're going to be missing out, they're going to be losing out if they don't. All the while the price point is the same for something that is shrinking, if not getting more expensive, and people are consuming more. So, they’re consuming more, there's a higher volume of that consumption and the price points are going up. Overall, just based on that sense of loss not having it, that could also be triggering the rising obesity levels as well.

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In today's episode we look at the practise by food product companies to reduce pack size - sometimes without the customer noticing - rather than increase the price.

Have you noticed that some items - like cereals etc or the number of bags of chips in a multipack is getting smaller or fewer?

What would you say if your pint of milk (or beer!) gets slightly smaller every year - but the price tag stays the same?

This is called shrinkflation

Have you ever thought about pack sizes getting smaller? Have you thought when you're eating your favourite cereal or drinking your favourite cans of Coke got these packs are getting smaller than they used to be? Maybe it's just me or is it happening, our packs getting smaller?

So obviously, inflation generally affects the entire economy in the basket of goods that we purchased. We are used as people to sing what $1 bought last year or $1 bought 10 years ago, it doesn't buy the same nowadays. In the post-COVID World, deflation is starting to impact a lot of countries, which has impacted Japan in recent years, but still, fundamentally we do expect prices to increase year on year or every couple of years. So, you might have bought a large box of cereal for the family might have cost $2 and then somewhere down the line you expect to slowly increase. Sometimes those companies rather than increasing the prices actually just make that box slightly smaller.

This is a concept called shrinkflation, it's a term that people use just to describe products pack sizes getting smaller. I suppose a good example of that would be cereal. Cereal boxes have got smaller and often when they've got smaller they've changed the bundle or the mix of products. For instance, kids products now offer a range of smaller pack sizes for one almost like portion control but seven of them in a packet. But all of them are much smaller than they used to be so there's a mixed thing happening here as well as shrinking product size.

I think different value drivers have smaller packages and I think we're going to cover that in a future episode. But really in this episode, we want to drill into is the right choice for a manufacturer of consumer goods, food and drink is what we're talking about. Is it the right thing to think that customers would prefer static prices? A dollar today is a dollar tomorrow, or would they just more happily pay the 10% increase? A lot of companies fear putting through price increases, the fear that there will be a drop off in demand and the price elasticity will mean that demand will fall. Is that true? Or, are they tricking the customers? or are they tricking themselves?

Well, I think the assumption here is that customers are very price sensitive and if they were to learn on a price increase that they wouldn't buy the product. Therefore, manufacturers are making pack sizes smaller to prevent that from happening. Is that true? Has it been tested? No, because what manufacturers tend to do is avoid that sort of awkward conversation with consumers and, in turn, they reduce the pack size. What does that reducing the pack size mean? They're trying to increase margins on the cost side by reducing their costs as opposed to thinking about pricing and demand for their product and having a frank conversation with consumers saying, if you want this product this is the price and we'll have to increase the price if you want more or less. These are the reasons why that sort of conversation hasn't happened so people are now focusing on maximising margins by reducing costs.

I personally think the companies are kidding themselves a bit with this. The example I always give is if people are used to buying things in certain amounts or sizes, like a pint of milk, or a pint of beer. If I give you the example of a man who went to a bar or a lady of course who went to a bar and bought a pint of beer and if year by year that pint of beer was getting smaller and smaller but the cost is staying the same, at a certain point in time they would think it's getting ridiculous. I think that applies to most situations. I also think that when pack sizes decrease in size customers aren't going to or if you decrease the packet of a box of cornflakes by 10%, you're not going to an average buy an extra box every 10 boxes, you are in theory you’re just going to buy less of it. What the companies are doing to some extent is, they are just decreasing the volume and putting a cap on the sales and the monetary value of the sales also.

I suppose another assumption here is that a lot of consumers maybe don't know that the pack sizes are getting smaller, it's not a massive concern of theirs, they sort of overlook it from day to day, and through that sort of psychological humans sort of just getting used to things day-on-day. You don't notice manufacturers could cut costs by reducing the pack size because nobody's making a complaint about it. However, I suppose like everything, there are different segments in the market and some customers do notice. The question is, would they be willing to pay more even for a smaller pack size versus a bigger pack size? And the answer is, manufacturers don't know, they haven't asked that question because they keep sidetracking.

This shrinkflation was the word Joanna use, my personal view is that this stems from a real dedication to the cost-plus mentality. Fundamentally, you're not thinking about what the customer wants, you're purely thinking about cost and margin and accounting and those sort of aspects. Why is the customer buying that pack size? Why is the customer buying that pint of beer or that box of cornflakes? The cost comes in but it's the value that they get from it. So, are you shrinking the box size based on the value to the customer? or are you simply shrinking it from a cost-plus accounting approach? I can understand with family sizes and household units, it might make more sense to have seven disposable units in your box of cornflakes that you open morning today if you're one person, but shrinking it by 10%, tricking the customer. Fundamentally, think that's you’re only tricking yourself.

I think there's one company that recently came out Mandalas, about the reasons for shrinkflation and they associated the smaller pack size with the new trends for health, we're making this smaller because people need to learn how to manage their diet. They need to know what calorie counts are in each of these boxes, we need to get that chocolate bar under 100 calories for instance, like portion control. But other than that, I haven't heard of another manufacturer using that sort of customer value driver for health as a reason for shrinking the box sizes, that's a sort of a new announcement really in FMCG. It's probably something we're going to hear a lot more, it's for our benefit. It could be like a tokenistic phrase but, is that the reason? I think it's still about reducing costs to maximise margins as opposed to demand.

I think in that instance that the example given of the calorie counting etc. I almost think that's a value add, and I think a lot of people will pay more for that. It's almost like having a personal trainer, looking over your shoulder and saying no-no to that extra piece of rice or that extra chips. So to some extent, I would say you should have increased prices in that scenario, but I think that's a topic we intend to cover in a future episode.

I suppose this last example I'd like to give is that there are some packs that have been reduced in size and I'm thinking even household goods like washing powder, they're getting smaller in size too. Over years they get smaller and then after a while you get a value pack with 20% more introduced but actually, that value pack is the same size as the original size when that product was first launched. But the price hasn't changed, you're not getting 20% more, you're probably the price is sort of you're paying more than you would have done before. So, even though they're shrinking products when they reintroduce value packs it was sort of that the normal size pack that you would have had three years ago.

Yeah, so, let's all go to Costco and stock up. I've been doing that over the last few months in my bunker, but I don't recommend it to everyone because we don't want panic buying. So that's it for me today.

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In this episode of Pricing College - we discuss how pricing software tools work for a business - and what they actually do.

They can be very useful tools with huge forecasting and calculation ability when they are correctly configured.

Obviously - the devil is in the detail as they say - and these tools generally are not the immediate answer to all pricing queries.

Today we're going to talk about pricing systems and what they do. The reason I suppose we're going to talk about that is that a lot of leading companies are buying pricing systems. Some of which I say would think about pricing systems as a silver bullet solution to that price setting and management of prices and revenues. Other businesses are thinking in terms of efficiency. And thinking about how you can integrate people intelligence from the pricing team and the sales team with an added juiced up pricing system. As I suppose today, we wanted to talk about essentially, what it does? Because a lot of people I suppose on the ground, wouldn't have as much insight into what it does. It's generally a top-down sort of decision to buy a pricings system, especially if it's expensive. And often there's sort of a disconnect that happens. And hopefully, we can fill that gap and just explain what it does in a little bit more detail. So, if you're in a company that uses it, you're going to know kind of what's around the corner.

So pricing software tools are becoming much more advanced. They become better at what they do. And they're becoming more accepted as obviously information technology is taking over the entire world. The amount of data that's being captured in every walk of life with the internet of things, etc. More and more items and machines are capturing data at every turn, from customer data to sales data to repeat purchases, all those sorts of things. And so these machines, I would describe them as very useful tools to help pricing teams or pricing managers make the right decisions to help optimise profitability. Fundamentally what these software tools do is crunch huge amounts of numbers and data based on the criteria that you select and that you plug into them. They crunch it in a way that's much more efficient than any human. Much more capable of analysing data, and coming up with suggestions. And recommendations based fundamentally on the criteria that they were programmed to do.

I would always think about a pricing system in terms of three main elements. So, typically, it has a forecasting element that will look at past data to predict the future demand. But as the machine sort of learns and collects data, they integrate real-time data on-demand with past data just to refine any assumptions that are made. So that's one element. The second element would be called the price optimisation module, that's the price-setting component. And here they'll use price elasticity modelling linear regressions to set prices. And then the third element would be, let's call it the company financials. The benchmarks and the revenue targets they have, the margin targets they have, and the costs that they need to consider. And that will help feed into the price floors and from there, the optimisation part of it will optimise the prices based on their sort of baselines.

That's right. So, even just hearing some of those terms I'm sure it makes a lot of people shiver with fear, pricing elasticities and regression analysis. These are things that you certainly can't run just with a quick back of an envelope calculation. And as things get more and more complex, a number of factors can be included in these algorithms. I don't know if it’s limited, it’s unlimited. But it's certainly huge. You look at it could be competitors pricing. It could be the day of the week, it could be capacity left in the warehouse, it could be the date of delivery, it could be any number of things. When you know your business and when you know what drives customer activity, and how it's working these tools can be used to do all the legwork. All that hard number-crunching work and optimising things, then this can feed into more dynamic pricing systems that can feed into pricing at times of day, stuff that any team will just be exhausted by doing so. It gives you that real capability of optimising pricing, doing the number crunching but you always have to remember that it can only really do what it is told to do. It doesn't know who your customers are, it's never met them, it doesn't know their real drivers, and fundamentally, it doesn't know whether your product is of higher quality than other products. So, it's what you teach that will crunch and will regurgitate to some extent but with a lot of detail, and expertise.

A lot of pricing teams have mentioned this to me that went well. When we got the system we didn't fully appreciate how much that system needed to be taught because without our input. And it was constant for the first two years the machine would just produce like literal garbage. It was just priced that could not be rolled out in the market, they would be instantly rejected, it'd be a laughingstock to do it. So the pricing team had to spend a lot of time teaching the system, changing the numbers, and altering the business rules. Because often with pricing and when you're setting up a new pricing system, a lot of the logic you have to learn as you go. A lot of the assumptions that were made in prior pricing models and frameworks no longer worked especially as market changes. This is why you do need human intelligence when you're working with AI or new pricing systems. Because the computer won’t think about the market like a human. And will just keep plugging away no matter what you put into it and the rules you put into it. So, the pricing team's job is really to keep things on track. But also the pricing team isn't the only one that uses a pricing system because the sales team have to use it in its various forms. They'll use it in terms of a quoting tool so there are different sorts of dashboard interfaces on the front end that people will see from the pricing system. And all in all, you may even get a quoting tool that's made to look like Excel, but behind it is the juiced-up pricing system. All of these algorithms and assumptions are being made as the tool is producing their quote for you. But again, the pricing team and sales team are really important in this because their feedback about the system, good and bad, about the price points it produces and their knowledge of the market, all have to be fed into the system too. So good companies take that on board to improve the pricing system, they don't just let the pricing system run on its own without any guidance from pricing or sales.

I think when you know your business, when you know what you want to do, and when you have a strategy that works in marketing, sales, product development, implementation, all those sorts of areas. When you have your actual business model, this can be a great tool to help you implement, to calculate, to optimise. But I don't think it will come up with a strategy for you. If you think that's what it's going to do like a black box I think you will be let down by it. But it's fundamentally a tool that will help you get the job done, and it's gonna save you a lot of time, and it's gonna save you a lot of effort and potentially will reduce the need for analyst and number-crunching from a human perspective so, it could be cost-effective also.

I do see it transforming the pricing department, to some degree. Once it gets used to doing a lot of the simplistic, data entry or price reviews or that sort of thing. Or even the sort of more mundane, everyday sort of analysis there will be less need for people to do that sort of stuff. But there always be a need for people to think through complex problems, to adjust the system to the market, to readjust an informed strategy, and most of all segmentation will not be static. And I think we made this point before a lot of these systems come with their pre-programmed segmentation just to break up the market and to make all these analyses and algorithms make sense in terms of different groups. If they make the market smaller in terms of groups, then they can check the math is working outright and that's literally why they use segmentation like that. Sometimes, yes it works mathematically you can check your answers right but it doesn't work in the market and people don't buy like that. This is a problem that is still being worked out between pricing system software, and the market and segmentation, and I'm not sure it's completely figured out, but again, this is the job of a good pricing leader and a good pricing team to work with vendors and also sales and other factions of the business, to come up with a better solution.

I think finding the point I'd say it's the old mantra junk in and junk out, but if you remember that you have a pretty good guess as to how the system will work so I think we'll have good stuff in and hopefully good stuff out also. I think I'll leave it there from my side, and thanks and have a great day.

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In this episode of Pricing College - we discuss the concept of price match guarantees.

On first inspection - you would think a price match guarantee will reduce prices - as you match a competitors price.

In reality - there is evidence that they have the opposite effect - as the stop people shopping around due to a false sense of confidence.

It can also be a useful segmentation strategy.

Today we're going to talk about whether price match guarantees decrease prices. Now, we're talking about that because in Australia, in particular, there is a sort of a big focus on pricing and customers like to get a good bargain and also stores like to say that they will compete with anybody that can provide the lowest price. We're interested now in terms of if you're going to do that, Are you going to make money? or is it better to do something else?

You can see a price match guarantee and you see them commonly in any store, major stores. What I'm thinking of in Australia is Bunnings, who have a price match guarantee on hardware, drills, hammers, that sort of item. You also get them in an alcohol tick or a bottle shop they’re called in Australia, off licence in other countries, a liquor store in America, and they have a sign up in their window I can think of saying, we will match any published price in the local newspaper. The question is and there is a lot of debate about this in the literature and media. Does that sort of guarantee, How frequently do people come in and ask them to reduce their prices? or do people just slide over them and people forget about it?

Surprisingly, even though people are kind of obsessed about prices here, very few people go into the store saying, I have found a cheaper price elsewhere. I think it's around sort of like 90% of people just don't. Yes, there's going to be a small percentage of people that do their research or their homework on different products or on the same product, they'll get the receipt and they'll go into the store to prove it and get the price discount back or a credit note or whatever the store has in their policy. But I think the majority of people, it's enough for them just to know that store is giving that price match guarantee and they sort of almost forget about it, like it's some kind of psychological sort of trick almost but it's sort of appeases, any sort of loss that they would have felt had they not have provided that offer or guarantee.

I sometimes think of it as that it's almost like a psychological assurance for people that they’re not going to be paying significantly more in this store than they would in another store. So to some extent it takes away the pressure on them that they feel they should go and do the hard work and the footwork and run from store to store to try to save those extra dollars. Particularly if it's a really small item, the bottle shop example we give where a bottle of wine says the bottle wine is $20 in this store, how much is it going to cost in another store? Even at the very minimum or on a special promotion it might be $10. But, are you going to run from store to store to save that money for the chance of that and to do the hard work? Probably not, so it gives people assurance and there's a lot of suggestions in the literature that it stopped people from shopping around, it makes them lazier because somewhere they think it's already been done.

So to some extent, the price match guarantee is also something that stores or businesses use to signal to other businesses that they are willing to. It's collisionally signalling to other businesses that don't compete with me on price because we will take a move and what are you going to do next? It's a price war sort of thing, preventing it may be, but also signalling that there is the ability to move if necessary.

I think that's a great point. Another thing I will say about it is, it's an almost false guarantee to some extent. Imagine that you are in a hardware store, and you know that one of the roads sells the same item. Say you're going to the store and in that store, a hammer drill sells $300 and in the store next to it has the price match guarantee and they're selling it at $400. The logical person would just buy it in the first store. They’ll buy for $300 rather than going to another store proving this to them, printing off some form, and then just getting the same price. To some extent, that's ridiculous. You will just go to the store that sells the cheapest if you're aware of it. The only case where you wouldn't do that would be as if you valued the store with that price match guarantee, you were somehow already in that location, the other store was hard to access etc, but I think that's a very small percentage chance for the vast majority of cases.

And also there's been some really bad press on price match guarantees. Like people have gone into the store, they've got their evidence, they've got their dockets to show that they are more expensive and they want their money back. Often there's been sort of very long, arduous sort of pricing policies and it's almost been too much paperwork and too much of a headache for customers to get their money back. This has happened on numerous occasions, so I think overall, customers are now a bit wary. Yeah, it might have given them at the beginning when they were first introduced as a concept, some sort of assurance, but now it's a bit like, are they going to give me the money back? or is it just another gimmick?

I think the final thing I learned on this one is, it can be seen as a form of segmentation strategy. We often talk about segmenting, when you're running a retail business and you're selling, you know the bottle of wine or the hammer drill for example. Simple segmentation could be somebody buys one item or a business customer who buys 20, but at the same time, there are other customers if you look at the segmentation. It could be somebody who shops around, who prints off coupons and who really will do that legwork, and let's say that's 10% of the market. The other 90% they won’t bother, they go to the store and they want to take it away immediately. So with this segmentation strategy, you can appeal to both, you will sell to 90% at the published price, and then that 10% who potentially you wouldn't have been able to sell to, you can sell to them also. What you do is you're protecting the other 90%, you're still selling at the price you want to sell at but you can give these people the discount because they have done this legwork. So to some extent, it's an unadvertised non-marketed discount that appeals to a certain niche segment of people who maybe have a lot of time in their hands.

All data is good data if they're giving you accurate insights into your pricing and your competitors' pricing, and if you haven't got that, then that's great for you because that’s another data point that you can calibrate in your system and readjust your prices.

That's all I want to add today, I'll be honest, I'm not a big shopper around. To be honest, for big items yes you will go and compare big items but for the smaller items, the everyday items under a certain threshold you have to weigh up the time and the effort versus the money you potentially save. And also, do you want to be negotiating every single time and asking to speak to a manager, and showing them a printed piece of paper? Life can be stressful enough without that.

Life is short. I don't think people have the time or the inclination to collect all the dockets anyway. Tax is bad enough.

That's certainly true, so we'll say thank you very much for listening and see you next time.

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In this episode of Pricing College we discuss the concept of a loss leader.

You may be aware of supermarkets and similar businesses selling very common or staple items at very low - or even loss making prices.

We discuss the rationale or this and what they may be hoping to achieve.

We also ask whether it is something that non retail businesses can use.

So today we're gonna talk about a concept that everybody knows and it's called a loss leader. So we're going to be talking about, What it is, Why do companies do it? Is it useful in terms of attracting more customers?

So what is a loss leader? I think any human being who's ever been to a supermarket is probably aware that some shops and some chains will do very low pricing on staples and obviously in different countries, that staple may be different. It could be milk, it could be bread, it could be a can of beans or a can of peas, and whatever it is. It’s the staple that a very large number of the population buy on a very regular basis, and it's a price that they're commonly aware of. I even remember back in Britain years ago, when they wanted to prove how out of touch politicians were, they would ask them how much is the price of milk? or a pint of milk? And very often, they wouldn't know.

Often these loss leader products, if you're thinking in terms of supermarkets, can be that sort of private label product in terms of milk, margarine, butter, obviously growing in popularity in supermarkets. So, we're going to just look at, why that is? One reason would be the assumption that people buy on price and low price brings and attracts people to the store. Yes, to a certain extent there are some people who will be attracted to a supermarket or buying these sorts of goods because of price.

Certainly, they will be a shop around and when we say a loss leader, we don't know what the shop is making a loss on every can of beans or every bottle of milk, but what they're doing is they're cutting the price below what they would like to sell that. If they were only selling that bottle of milk and didn't think they'd sell anything else they wouldn't do it, but what they're doing is they're selling one item at a loss, hoping and being quite confident that they will make up that profit on the other items that customer buys. The big question is for a successful loss leader program, once you get them in the store, you need them to buy other items also.

And often these loss leaders are designed and produced based on things that people want to buy, and there will be a competitive product at a slightly higher price which this loss leader is competing with and that's putting in the mind of the consumer a question, which one should I buy? Should I buy on price? or the assumption is, should I buy on quality? Now, of course, many of these loss leaders aren't necessarily cheaper or worse than the competitive product. So you asked the question, are loss leaders loss-making? Well, initially, perhaps but they've recouped their money by optimising price across the customer and product lifecycle.

I don't know the answer to this but I'm pretty confident that supermarkets in most countries nowadays they're getting bigger and bigger. Certainly the out of town store, so once you make the effort to go, there's a time and effort invested. It's almost like a queueing system and the old Soviet block. So you've driven to the car park, you walk into the store, you avail yourself of the advertised loss leading bottle of milk for $1 or whatever it is, and that would have had $4 elsewhere and then when you're there, you think I might as well get the rest of my groceries or the rest of my items. You're focusing on that loss leader and there’s a psychological aspect to it. But you're buying those other items, maybe a packet of lollies, a newspaper, whatever it is that you probably still come out of. It may be a little bit ahead of what you would have done at your local corner store but the supermarket certainly is on average making profits.

A loss leader is very similar to the Startup Platform freemium model, it's like give it a go try it. It's not gonna hurt you, it's low cost, and it's not going to take a big hit on the bank account. And as you do, you try something and you go back if you like it, then you might buy an extra two things and put that in your basket because you bought a particular product. So here they're thinking not just about one product, they're thinking about frequency coming back to the store but they're also thinking about what other things you would buy if you bought that loss leader product.

One thing I think we can all learn from this, we obviously don’t run supermarkets but sometimes in the pricing community, it's hard to get it across to management why potentially you should make or should consider making a loss on one item or one SKU if you stock thousands of SKU’s. This concept of bundling, or baskets or the common shopper and what they will generally buy, that's a message that I think we can all take away from it. The supermarket analogy is a clear and easily understandable example that nearly everybody will get.

I think another key takeaway from this is if you're going to do it, you must make sure you monitor your customers' response to the loss leader. There's no point introducing loss leaders if you're not going to track. What are your customers' responses to the price? Are they going to come back? Are they going to put other stuff in their basket? I mean then that would be unprofitable, so it's understanding your product portfolio and understanding your customers' response to the product and the price.

One thing which we'll cover in future episodes is obviously in supermarkets, they're very keen and they'll probably be some of the earliest adopters of loyalty cards, you scan them and collect certain points etc. So generally, they know exactly what you're buying, exactly what you're bundling, and what you're buying instead of something else. If you're buying a bottle of milk, you're not buying soy milk or almond milk. So there's still some of that big data that they have also available and that really can help them track, monitor and have a good estimate of the profitability of these projects and promotions. Not every business can do that but we can all move to some extent in that direction.

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In today's episode of Pricing College - we discuss the broad options available to a company who is considering a pricing transformation for their business.

The broad options available to any company generally include:

A - engage pricing consultants to advise your business

B - employ a proven pricing manager to implement change internally

C - utilise a pricing software system

And the winner is.........

Today we're going to talk about options for you if you're going through a price improvement project or you're thinking about improving or changing prices and you just want to know, what the options are out there? What should you do next? So just to start on that, I think Aidan I would like to give you the three examples and the first one would be consulting, you can invest in external consultants to come in and set up a new pricing system for you. Consultancies like top tier ones like McKinsey, Bain, Boston's and Simon Kutcher. People like that can come into the business, they can do some diagnostics of your current pricing situation and then advise on what you need to do next, what strategy would suit your business and industry, and then potentially think about the analytics, and the people required, but they won't necessarily do all the pricing for you, they'll be more advisory.

A second option, and obviously, all these options have to be looked at from your own corporate requirements where you're starting from, you have to play the ball from where it lies as the old golf says. A second option would be to build your internal resource. Do you have a pricing department right now? Do you have pricing expertise? What you can do rather than bring an expert advisory on a freelance or contract basis, you can employ an expert in your own business, and then build that department, grow that business and seek to internalise that expertise in the company. They will likely require more resources, it may not suit every budget etc, but maybe in the longer term, that will help internalise that and build relationships and stakeholder contacts inside the company. So that's option two.

Option three would be to buy a pricing system or software to install in the business to then algorithmically price your goods, services and products. For instance, you could use software from price intelligently for the SAAS community or technology community, you could use a Zilliant or PROS for B2B and B2C pricing needs, they're very popular and quite expensive pricing software, but they ultimately implement dynamic pricing in B2B and B2C settings and to some degree customised pricing to suit your business.

That's right, so those are the three broad categories, which one is most appropriate and maybe it's not just one, maybe it's a mixture of all three that are appropriate to your business. But I think when you start to look at a transformation project, you should be aware of the options available, the cost-benefit analysis of what it would cost upfront? What will cost on an ongoing basis? What immediate short term and medium-term and what ongoing benefits will you get from it? and it's only then that you can make the right choice or the best choice.

I agree and then underneath that, you can think about suitable change management approaches just to underpin each option because you have to think about each option just not in terms of what you're buying today to fix a specific pricing issue that you have now but thinking about building that sustainable pricing capability. As Aidan says, that could be a mixture of all three, or just one so it's just getting that diagnostic right so you know where to take the next step but yes, those are your options and I hope that's helped.

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In this episode of Pricing College we discuss some of the biggest frustrations in the pricing community.

Whether it is people expecting far too much too soon, or people simply not listening at all to advice - we discuss some of the annoying parts of the job.

In today's episode, we want to talk about those frustrating things about being a Pricer or Pricing Manager and the things that annoy you. I suppose is a bit of catharsis, is that the correct pronunciation for all of us or something that will be cathartic, but I think we've all been in meetings or done presentations or spoke to the board, and seen it fall flat and so today we want to cover some of those.

If you've been listening to our podcast before, we've gone through a lot of different theories, different ideas and proven concepts in pricing but many of those concepts, I think, are very new to a lot of people, not in the pricing world perhaps but maybe to senior executives or different functions in the business. So all of these things, what does that mean? It makes your job as a Pricer very difficult and sometimes frustrating. So I think Aiden's got something to say.

I think the thing that annoys me the most when I worked in companies in pricing roles was that fundamentally people just didn't listen or didn't care. And one of the most disheartening things I think in my professional experience was, we did a presentation to the board or the management team. There were 20 people in the room. We'd spent a couple of weeks putting together all the information, all the detail, and a big presentation. It seemed to go down very well. Everyone seemed very engaged and very interested, and then 15 minutes later, a very powerful man in the company, started speaking and said, completely ignored what we've done and said the only thing we can do with pricing is drive cost to zero and I think at that point you realise, you're on a hiding to nothing so yeah it's just when you can bring a horse to water but you can't make a drink and sometimes people just do not want to listen or be engaged.

Yeah, I think that comes down to you've got different areas of the business, all focused on what's most important to them even on that particular day, at that particular moment. So when you bring up a new pricing concept to a different approach, maybe that traditional cost-plus or even competitive pricing that people are used to in the business, it creates a little bit of a rumble in the organisation. Some people go, nope, not gonna do it and other people just go yeah maybe we'll do that next week and sort of like brush it off but, where does that leave the pricing manager? Well, speaking to a lot of pricing managers in my daily work and a lot of pricing managers feel frustrated sometimes even defeated. So I think, as a pricing manager, you need that impetus to keep positive. That positive frame of mind to know that you just have to keep edging forward to sort of change other people's mindsets because, ultimately, it's a mindset change.

I think when we look at companies from an advisory perspective, one of the most important things is, if you're not speaking to the top dog, the CEO or the general manager or whoever the boss is if you're not speaking to him or her, I'll be honest the chances for a pricing transformation or change being successful are limited. Anybody who's worked in the corporate world, in any country will know that it's a bit of a political environment, there are political animals there and oftentimes, it's not down to who does a better job? who's with the better advice? Oftentimes are purely political decisions. If you're trying to suggest pricing changes, working in that environment between sales, marketing, operations, where impacts profitability and impact whether working. You do need to have the most powerful people in the organisation backing you and on your side because unfortunately, otherwise you'll end up frustrated and going nowhere.

So a large part of this frustration in terms of pricing, the pricing job itself doesn't fall into the technical aspects it largely falls into that human change management aspect of the job. Sometimes I think a lot of pricing managers come in and think pricing is very technical, very numbers-driven, and they don't realise that the full impact of the job entails a lot of changing of hearts and minds and I know that sounds cheesy but it does. Often, people can go into the boardrooms, they've got that golden opportunity to speak to a senior leader as Aidan said but often bombard them with facts and data that maybe people are not ready to listen to at that particular point in time. Often there's that opportunity there, sometimes just to listen to the objections to them reframe what that business case should be at that moment in time and that can be a good way to influence people in the right direction with pricing, rather than sort of telling them by data ad nauseam when they're not interested. So I don't know, maybe that's an element that people can use to just reduce that frustration in the job. I think it's important for business leaders to go away from that top-down change management strategy, and start thinking about pricing in more of an open-source change strategy and we can go into that in a little bit more detail in another episode.

I think the other example we wanted to give all frustrations can be overinflated expectations as to what a pricing team person machinery can do at some points. I think the first example we gave was people, don't listen at all. The second example can be, you've been here three weeks, how come we're making millions of dollars? That inflated expectation, you can't win in that environment either, in the real world, the laws of physics and gravity still exist. We all know what pricing can do but we have to bear in mind that a company changes, transformational changes take a long period of time, and that will not happen overnight.

I think pricing managers and good teams could make money quicker than they do if they're given or people listen to them more and that's a change management approach. If you're expecting as a leader for the pricing teams to make that money within the first three months, sure then give them the leeway, let them use their expertise to drive that initiative, and listen to the feedback, good and bad, success and failure because learning from mistakes leads to that revenue margin opportunity much quicker. That's all I'm going to talk about for today. Thanks a lot.

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In this episode of Pricing College Joanna and Aidan discuss what sort of skillset a great pricing manager or leader should have.

Whilst not saying one needs to have all the skills mentioned - pricing is a very varied discipline.

Numerate, driven, smart, good team worker - the list goes on!

Now if you're thinking about a career in pricing and you're wondering what type of people go into pricing, Am I suitable? Would it be a good fit for me? We're going to just go through all of those and address those questions for you today and talk about a profile of pricing managers today that are successful in businesses and do get the outcomes that businesses want from the pricing. Now to start, we'll go from the basics, pricing by its very nature and even the title you can see it is a numbers-based career but it's not all of the careers, I would say because of the change management aspect of the job, it would sort of be roughly 40% of the job, however, you have to be good at maths and data, good with numbers, figuring out, sorting out the data, manipulating data, analysing data, and then interpreting data. All of those three areas of data analysis are very important to pricing managers, now you don't need to be a mathematician, no you don't, but you do need to understand what you're looking at.

Okay, so point two, we've covered the numbers but you also have to have a real sales focus. In many companies, we separate salespeople from financial people but pricing sits between the two, you need to know how to sell, why big customers buy and how to emphasise the value and the pluses. So, yeah, have you sold anything in the past?

Number three. So as you listen to us before, there's a lot of psychology involved in pricing, especially in value-based pricing, customer focus pricing and as businesses try to reconnect or connect closer to customers to think about their pricing, you can understand that psychology in pricing is becoming a key skill. So not only do you need to be good with people and data, you need to start to understand people, why they buy from you? And that's another key aspect.

Vote for me. Are you a politician? Are you naturally good at stakeholder management? Can you build relationships internally with accounts, with finance, with marketing and with senior executives? Do people trust you and want to work alongside you? Because being a Pricer sits you know, it's everywhere and is nowhere so the real skill is to not be isolated, you have to have that buy-in from the key stakeholders, make them feel that you're working alongside them, and that helping you will help them.

Another key skill mindset would be that entrepreneurial mindset, always thinking ahead, what's happening? How do I make more money? Where are the opportunities? Where's that margin opportunity? Is it where it used to be? Where in the market should I be focusing? Looking at segmentation as a key driver to fulfil that curiosity and entrepreneurial spirit to find those revenue opportunities for the business, but when we say entrepreneurial but do it in a very safe way that is always checked by data and systems peer reviews. So yeah, that would be another skill and I think that's something that senior management respects in the more successful pricing managers, all of those characteristics are quite dominant in successful pricing leaders and I wouldn't say any one of those attributes would be greater than the other, it’s a real sense of balance. And I think finally I'd like to just mention that personality that's almost the energy, successful pricing managers have this innate burning energy to just succeed. They're very positive, they're not tired, they look after themselves both physically and mentally, they know it can be tough, there's a lot of objections and questions that they have to address daily as a lot of firefighting happens, and a good pricing manager is always positive up for that discussion, and never closes down conversations and, yeah, always looking for the upside.

Sometimes I think the perfect pricing manager is somebody who should be an entrepreneur but doesn't want to set up their own business. They almost drive a business, they look at the business model that hopefully improves it, and they get involved in all the tough parts and places where you can’t hide, the customer negotiations, the pushing back on price negotiations, those sorts of things. The place where no one generally wants to go is where you have to go as a pricing manager. So it’s somebody who could potentially be a great business owner themselves but just for whatever reason doesn't do it.

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In this episode of Pricing College - Aidan and Joanna discuss whether a pricing guru and a great pricing strategy can rescue a bad or outdated business model.

We discuss the examples of Blockbuster Video, Virgin Megastores and music retailer HMV.

We state that pricing generally can not rescue a bad business model - but can help a value based business pivot early enough to survive and prosper.

Today's topic was suggested to me by something I was doing during the lockdown, we were watching a bit of Netflix, with the kids. I thought to myself, God I remember the time when we used to go and rent VHS or a video at blockbuster, and I wonder, what happened to Blockbuster?

What happened to Blockbuster? Well, nothing good happened to Blockbuster and what we wanted to talk about today which relates to that story is that sometimes you can't fix a bad business model or a dying business model by simply pricing your way through it.

At Taylor Wells, some of the queries we get through are from new companies and companies that are mature and want to improve, but we also get queries from customers who are looking at pricing as a silver bullet. Basically, as a solution to their problems, and they're hoping that this magic box of tricks will unleash new profitability and rescue them from failure.

Often these companies are ones that haven’t considered the business lifecycle, or their customer lifecycle and both of these concepts and measurements are important to pricing, because good Pricing Managers will always look at the impact of pricing on a business model, and they'll look at pricing within a business in terms of what pricing power they have based on the total economic value a business can offer to customers and in the ecosystem. So, to go through what that means because there's a lot of long words and concepts there, we'll go back to thinking about a business of the music industry, for instance. HMV and the virgin megastores from the 90s, extremely popular for a good deal at a time. But, what happened? They didn't think that their business would ever die, they thought people would keep going back and they had a very staunch view of business strategy. They were almost, one could say they feared the pain of losing that business strategy to inevitable changes that were occurring in the market. They were even resistant to changing their pricing strategy. They kept their prices very high. They assumed loyal consumers would keep coming back and they disregarded the fact that in their field, new entrants were coming in to provide consumers with cheaper DVDs. I’m thinking they were the supermarket's who started to offer customers DVDs and music at like half the price of HMV or Virgin. And another thing they did, they didn't think they should be getting online, they assumed people would always come back into the store to buy deep expensive music and vinyl simply because they loved music. All of these assumptions were proved incorrect, and at the very last minute, only then did they slash their prices to keep their doors open, but by which time it was too late because the business lifecycle was already at its end.

I think you can look at these companies, blockbuster HMV etc. They had a very successful business, you could almost say it was a goose that laid the golden egg. Every year they're making profits, they were selling and renting out DVDs or VHS or whatever it was at the time but technology moved ahead basically without them fully being aware of it. There was a competitor growing somewhere where that was streaming or satellite television or something else, and that was growing in the background. Spotify in the world of music. When that came along, it wiped them out because these companies were focused on what they were doing at that time, that this massive technological change and we can't say something's right or wrong and they should have moved ahead or they should have surfed that wave when it came because that would require great entrepreneurial flair, etc. and that's not for everyone. But the concept was when they saw that the writing's on the wall the question is, could the pricing change have rescued Blockbuster Video? Could have rescued HMV music virgin megastores? That's a really good question.

Well, it could have been for a time. They could have optimised prices, earlier than they did but saying that, the business life cycle would have come to an end, so it's sort of optimising to an inevitable end. What they didn't do was capture the EBIT opportunities throughout the lifecycle, they did at the beginning, but then they just kept their pricing strategy and price-setting the same. From that, they didn't optimise and then they lost volume because the traffic went to supermarkets, the traffic went online, so they lost a lot of their customer base, they lost market share, they lost profitability, and then they didn't even collect the EBIT that they deserved. So, they could have done more price optimisation through the business lifecycle which they didn't. So yes, there was an opportunity, what I'm saying is yes, there's an opportunity for dying business models, but you've got to be smart about it and you've got to know what you're doing to capture those EBIT opportunities. Because in each phase of the business there are different types of opportunities, and a good pricing expert or manager will know this and they will optimise which means they'll adjust prices accordingly. Whether this is across the product group or according to different customer segments or price segments, they'll do whatever it takes. However, the important point to make here is that pricing is always connected to the business model, and for businesses that don't see that they're the ones that suffer in the end, and they don't get any additional profitability and they lose volume.

My personal view is pricing could not have saved these businesses, they would have required a massive pivot, a term we use in startup businesses. You're looking at those huge brick and mortar stores, most of them were in very prominent town-centre locations or easy to access suburban locations and an example of the Blockbuster video where people could go easily. With that, they either own the stores or rent, so massive rental leases have very large salary costs, and a lot of them would have a debt as well which they would have used to expand or to buy more premises and grow their business. The big issue with business and life in general is, you can only see so far ahead and we tend to extrapolate. Who would have thought that Netflix and Spotify were coming so quickly and have dominated the market so fast? It’s not these things that happen to any industry, but I suppose the lesson I will take from this is, in industry pricing has to be focused on the value, the value you're giving to the customers. At the initial stage of seeing these challenges come along and seeing these challenges appear, I don't know the answer to this. Did those companies think let’s ignore, let's keep the golden goose laying eggs for us as long as possible? or did they think let's just go up against these guys, let's try to challenge them, and let's see where it could go? But we don't know the answer to that but I would have to say when you have a very successful business, it's very difficult to get buy-in from a company to pivot to a less profitable one in the short term.

I think the answer to that is that I think a lot of businesses fear the pain of loss, they fear that they've made you know when you make such large investment and effort into a certain strategy, and then you decide to pivot, you feel pain in the fact that you've made a wrong decision in the original strategy, you invested so much in it so you don't pivot. So that's almost like the opposite of agile, what I'm trying to say here is that it's okay to fail but you have to understand that quickly before you can use pricing more effectively. You've got to know when your business model is failing because otherwise, you're just pricing for the moment, and yes you'll get something in return if you're doing your price optimisation right but it's not a long term strategy. So, I think, if these businesses have used a value-based pricing approach at the core of the business but obviously, they didn't. I think this would have informed their business strategy and it would have helped these executives understand a bit more when the problems were occurring. I think this is a lesson that a lot of businesses can learn now as we are all disruptive with the crisis of COVID, this is kind of a massive implication and change effect on how we price. I think those that have a very value-based pricing model will be two steps ahead if not five or six than those that have a fixed cost plus approach, who have an insular view of their business strategy, who are not looking out for better examples across the industry about what other people are doing and who are not looking at their customer base for cues about their pricing. So, take this on board, think about your customer lifecycle, think about your business lifecycle when you're pricing, and never look inward, always keep looking outward.

I wrap up and I think nearly every country, certainly Australia, the United States, the UK, there's a huge amount of government support for companies which is a plus because in the medium phase it preserves employment but also in a capitalist society, companies have to fail, businesses have to collapse. They will have to move on to new business models and new companies, no company will last forever, some do last a very long period of time, but the majority of companies last a lot shorter period of time than we think. We need corporate failure to drive innovation and to drive new business models. Pricing can help optimise things along the way and can help people focus on the right business model but if a business model is failing, there's not very much you can do with it.

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In this episode of Pricing College - we go back to University for Economics 101.

If you increase prices - how much will volume fall? Is that something we should know or care about?

Is there anything we can do to influence elasticity - or is it a given? Why does the Tax man care about elasticity - or in-elasticity?

Today we're going to talk about a very popular concept in pricing called price elasticity. Now price elasticity has an important role in pricing because it's a measurement, which tracks consumer demand or responses in relation to a price. So, if a certain price is high, what happens next? Does demand go up? or down? Does volume go up? Or down?

I think we need to be clear that in this podcast, it's a variable method of spreading information so we're not intending to give you mathematical formulas or look at it in that concept, but we're just going to give an introduction that any marketer any salesperson and certainly any pricer that should know.

It's an interesting concept because a lot of pricing managers use it, especially in say more consumer-focused B2C industries like airlines, cruise ships, the tourism leisure industry, and even cinemas, things like that, especially ones which have a capacity restraint of some sort, goes with dynamic pricing quite well. However, in B2B, a lot of pricing managers don't use price elasticity, maybe they should say they don't need to because there's very little difference, however it's a good measure to always track volume and demand according to price changes, whatever industry and sector you work in the market.

I previously have worked in a B2B environment, and we will put through annual price rises and I'll be honest the very concept of price elasticity was never even discussed. The company would have had an overview that a certain number of customers would leave business price increases, but they wouldn't have had a calculation, they wouldn't have had a forecast, and it was all very mathematics and almost as if the cost of the price elasticity did not exist.

In B2B, it's an assumption that it tends to be a cost-plus price-setting sort of regime, most customers are sort of on the same price, with different rebate structures. So, why do we need to monitor the elasticity? We need to monitor the elasticity because your customers are different and what that shows when somebody says that to me is that you haven't segmented your customer base, you don't report on price response or neither do you understand it.

I think in this topic we'll give an example or two. In this instance, it's very much commonly used in economics and academia or our government who likes to tax things and maximise their tax income, they certainly know about elasticity and inelastic products and services. If you ever think about where the government puts taxes on or what consumer products have been taxed, it's always something that if you increase the price, the demand will stay relatively stable. Think of cigarettes, think of petrol for your car, think of alcohol, those sorts of things tend to be very inelastic, obviously up to a point that some countries have lifted minimum pricing for alcohol. But if you're going to make a car journey, if the price of petrol goes up a couple of cents it’s probably not going to make a huge difference to how much you consume.

So it comes down to when a customer needs a product or service, then they're likely to be more or less sensitive to price, and think about other things rather than just the price point. They're thinking about the value the product has to them, whether it solves a specific issue, like everybody needs to put petrol in the car for the car to move so they can go from A to B, so to a certain point, this is why it's inelastic. But I suppose in terms of B2B, you've got to start thinking about those drivers as well in terms of when I put my price up, what happens when I put my price down? Does it change?

That's it and obviously, every instance is very different. The reason the government can do it is that they’re part of flood increase across the entire economy for petrol or alcohol or whatever it is. When you're an individual business the elasticity will likely be much more prominent because people could swap out for other providers, they can swap for another similar but slightly different product. So you need to consider the exact instance of your business, know that value drivers as to why people buy from you, and then you should be able to overtime as you builds up a history of knowledge of your customer base, you should be able to have a reasonable estimate as to the elasticity of prices that you will make.

Also remember I suppose this is a tip, yes the price is important and it does drive demand, but it's not the only thing. I think sometimes in pricing we get fixated on the power of price to drive demand when sometimes it's more than that and we've got to refocus that back to the customer, what is driving the behaviour? Yes, it's price. What else is it? Why are they buying from us? And then when we read our pricing elasticity is measured with that frame in perspective in mind, then we can start working out. What drivers we talked about before about loss aversion? and what the drivers are price elasticity? The number one driver of price elasticity is that loss aversion concept I do recommend going back to that podcast. So it's not just price that drives demand in other things too.

I sometimes see price elasticity, not as a standalone thing but it's almost a result of your business. We talked about pricing power, when a company has an off-brand reputation, trust relationships with customers, those sorts of things they have pricing power and the pricing power goes hand in hand with price elasticity. If you have pricing power, it means fundamentally you can increase prices, and hopefully not see a large drop off in volume so they go hand in hand. The pricing power and pricing elasticity, I think, are the different ways of looking at the same thing. If you have a great business if you work hard with your customers and your sales team marketing, everything's working well, I would be suspicious that you could see your price elasticity become more favourable to you.

I agree I see price elasticity as an important measure to monitor the market and to monitor different segments. It becomes more useful when you've got your segmentation worked out, and then you can start looking at different customer groups and their response to price by a group. And then after that, it's one of the measures so there are multiple things you can do to interpret price elasticity because on its own it's just a basic measure, so we want to get to, why it's happening? we can see it's happening with the price elasticity, so why is that happening? because from there we can start to reset prices according to value.

I think if you look at the example we gave of where you have a better relationship with your customers or your product is much better. If you take a real extreme example of that where there is no competition, you look at monopolies or, companies with huge market power oligopolies etc governess jealousy to control those because those companies can increase prices for electricity or water or whatever it is, railway travel, and there's nothing the customer can do they still have to buy. So, in those instances, it does lead to price gouging, which again we covered in a previous episode. When pricing power is unfettered or uncontrolled, you will have certain problems in the market, and that is something that a lot of government agencies seek to control as well. So it's a topic that covers business but also economics and a lot of government interference.

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In this episode - we look at the concept of loss aversion. It is an old saying in gambling - that money lost hurts twice as much as the pleasure of money won!

This same concept should apply in your sales meetings and sales discussions.

If your product is more reliable and less risky than alternatives - then you should definitely be discussing that - and maybe charging more for it?

Today we're going to talk about loss aversion and the role of loss aversion in pricing. Now, loss aversion is an important concept in pricing yet strangely quite underdeveloped. So we're just gonna go into the theory in a bit more detail, that theory is called Prospect Theory and then just provide a few examples.

There's an old saying in gambling that money lost hurts twice as much as the pleasure of money won. So when a gambler loses money on the roulette table in Vegas that hurts them much more than the benefits they might get in winning a similar amount And that's something that we can factor in if you're selling a product, think about if your product is more reliable, less likely to break down and longer-lasting, that's a real value to the customer that you should make them aware of.

In terms of the theory, it was a guy called Kahneman who developed the Prospect Theory and like Aidan was saying, what they discovered was that people feel the pain of loss twice as much as any gain or like the pleasure of gain. I think that's quite interesting in terms of pricing because often people price or develop pricing strategies based on people's, I suppose feelings of reward as opposed to the feelings of protecting themselves against loss and risk. And I suppose one industry in particular that thinks about risk and a little bit more detail is insurance, and how they price, the policies, the life insurance, car insurance, they are always all thinking about risk in a different way than I think other industries can learn from.

What I like to think of is if you're selling a product to a buyer and your product is more reliable, it's a better quality product, in theory, what you're doing is you're selling built-in insurance in that product, the chance that they'll have to pay for repairs or pay for replacement is much lower. So if you think about it, you should be able to charge a premium, in theory, that premium would almost be equal to a third party insurance contract that they can take out. So, if your product is more reliable, it's your job as a sales team and a marketing department to make sure that people know that, to make sure that they factor that into their buying decision. And when you're asking them to put pen on paper, sign on the pricing sheet you want to be asking for a little bit more cash.

An interesting point from the research is that, to what extent do people feel the pain of loss? Everyone does but the important thing to note is that everyone does feel the pain of loss but very differently. So this is when you need to think about loss in terms of different segments because they're going to be some people who know that that can almost withhold the pain of loss more, I'm thinking of gamblers. Why do people keep going back and gambling? Yes, they're almost like gambling through the risk because they think they're going to recoup their money lost or they're hoping they're gonna do it, but they've got a higher propensity for loss than say the gamblers or the tourists that just comes in and plays one or two games and then is almost too fearful to keep carrying on, even though probability would say if they just kept on a bit more, they would have won. So, there are differences and very important differences to note within customer segments in terms of loss, and with all of this as you can see, it's very customer-focused, not only are we talking about their behaviour and response to prices. We're also talking about their internal feelings to price, and in pricing that's called the reference point, and everyone's reference point to different price points is different and as I said, shifts, so it's a very complicated thing to measure but yet a very important one and one that can be trapped if you do it properly.

I think we're talking really about the psychology of the buyers, psychological mindset when making that purchase decision and sometimes people don't think about what can go wrong and they only think about the upside and the benefits of it. But sometimes it can be important to have your sales team ready to not be negative but push, make sure the customer is aware of the potential negatives, and as I always say compare apples with apples, we look at the negative sides too, not just the pluses. When you're making a purchase decision it's the pluses and the negatives and it’s the weighted average of all those things that you're looking for, and that's something a sales team needs to know about. Yeah, that's all I've got to add today.

And as a pricing manager, I think it's important to remember that when somebody looks at a price they can feel both mixed emotions. They can feel the pain of loss, but they also can experience the feeling of pleasure and reward from that price. It's how you frame your prices which is that marketing aspect. But thinking about pricing, how do you set prices? Price is a summation of the value you offer and if we think about value in terms of the reward value in use, but also at that risk element, then you can start almost like quantifying different elements of your service offer not just the product, the service offer, how you deliver it to your customers? By thinking about the pain points you're helping them avoid when they buy, and this comes down to observing, understanding your customer base, and trying to hone in on those risk drivers as well as the value drivers. But yeah, we'll go into this a little bit more in more detail. It is an interesting, fascinating topic that does require a little bit more thought and what we'll do in later series.

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In this episode - we look at whether a smaller consumer products business can say no to major supermarkets and retail chains and go direct.

A move like this is a complete business shift and means you need to invest in distribution and shops.

However - the upsides can be huge - and profits can follow!

Okay so today I'd like to talk about a business model that I respect for many reasons and it's called Haigh’s chocolate, it is a competitor to Lindt and everyone knows Lindt may have heard of Haigh that's a conscious decision on their part and their business strategy. So today I just wanted to go through their business strategy, the pricing, and the distribution because I think a lot of fast-moving consumer goods can all learn from Haigh and what they've done, especially in terms of their choices to work with, or not Coles and Woolworths.

Yeah, I think in many walks of life pricing managers their role is to go in and have a procurement meeting with someone whose job is to force them down a price, make them feel bad sometimes and get the product or services at a lower price. There's an old saying in any negotiation that the person who has the hand, or the power in that relationship is the one who is prepared to walk away. The issue in many cases when dealing with procurement is that they know that you cannot walk away, whether you're a major corporation, such as Unilever, Palmolive or someone like that, you still need to distribute your product and service, and of course, that applies also to chocolates. If you're trying to sell chocolates in Australia, clearly through the major retailer's Coles, Woolworths and IGA those are the companies that's how you get seen by most people.

But because of that a lot of businesses get overlooked because maybe the supermarket retailers think they're too small, their staff won't be popular enough or they don't think that they should get the front shelf space that may be other biggest suppliers should get because they're known brands and they know people like so they don't get the small ones a chance. But really what Haigh showed us about their strategy, they decided that they were going to go a different route, that they weren't going to be distributed through Coles and Woolworths and they were going to own the distribution themselves. So, what was their business strategy from doing that? They weren't going for a market share approach, but I think their business strategy just wasn't simply thinking about market share and margin. I think they were thinking deeper than that, they were thinking about the value to their customers, what they represented as a brand? and how they could best do that on their own? Because as Aidan was saying, they knew if they went through Coles and Woolies they'd be a mass market. From there, they'd be forced to promote and ongoing promotions can destroy a brand, and they were very clear in their mind that they wanted to be high-value premium chocolate that everybody could afford. So, how do they do that with their pricing? we'll go on to that next.

Speaking of promotions, one thing when I'm in Coles and Woolworths I'll often notice how chocolate and you have the major brands in the Aussie supermarkets. Lindt seems to be the certainly the biggest component and then secondly if you'd like green and blacks who at one point time were seen as a premium product but the discounting is almost predictable every month or two there will be huge discounts which will drive sales during that period and then I assume sales will drop off slightly. And what I ask is, what does that do to the brand image? the value of the brand? and also the profitability of that company? By going directly, completely changing the game, it gives you complete control over your distribution and you're taking on the capital expense of maintaining stores, etc. For example in Sydney stores, you've got prestigious locations such as the QVD building and with that prestigious location, nice packaging that creates a very much a high-value image and offer.

When I saw the Green and Blacks, yes they discounted and promoted quite regularly, what happens then is that customers realise that they can reload, they can anticipate the next promotion and that devalues the brand, the price points and overall the retail price point then gets lowered and you promote again, it's sort of a vicious cycle. But also what I've noticed is that Green and Black shelf space over the years got smaller as it's probably been through some tough negotiations with Coles and Woolworths. From that, they derange and then they’re given them smaller shelf space and they have put Green and Black higher up, so not in the prime location, not the middle shelf where everyone can see they've replaced Green and Blacks with some sort of Lindt, who's agreed across the board to promote everything. There are so many different varieties of Lindt now and a very small space for Green and Black so you can see that Lindt is accommodating that mass-market share approach, but for how long? Because equally just like Haigh, Lindt was supposed to be premium, but what's happening with promotions now is people don't trust the promotions and people thinking, what is it really premium? or is it just standard milky chocolate? so it's low the benchmark I think for Lindt.

I'll ask you this yourself if you received a box of chocolates as a gift for a birthday or an anniversary, etc, and nicely packaged in Australia, obviously, people overseas do not know these brands but to be equivalent in your country as well I assume. So, if you received a nice nicely packaged box of Haigh’s chocolates versus a supermarket-bought major brand the impression that you receive will be very different and people will perhaps respond differently also. With something like chocolates, there’s a feeling to it, it’s more than just the actual product. There's the feeling, the image, the luxury aspect, how people package them up and the fancy bow put all around them etc, almost like a Christmas present. So there's the paraphernalia that associates the product and when you stack those on supermarket shelves, you shouldn't be surprised that the impression decreases and sometimes the buying experience is also important.

In terms of what Lindt has done, I mean they've got that value proposition is to provide high-quality chocolate to as many people as they can but what it's done is owned its distribution and thought carefully about like, do we want to be a mass-market? I think they've decided it is not, let's think about Victoria, more people would know about Haighs and in Adelaide, than they do say in Sydney, the brand awareness for Haighs is not as high here. That's something they're fine with also they've gone into thinking about, what their value proposition is? They're sort of a very family orientated brand. So they've opened up their site to the public to visit the chocolate-making factories and they put a story behind it. They've shown the family history and they've given that sort of provenance and credence to it to just build that that image is an authentic one too. In terms of pricing, the price points range from about $15 to a maximum of $100 when looking at the store. So yeah, you can go as extravagant as you want and get that $100 box with all the bows, all the whistles and all the different assortments and truffles, or you can go smaller. But what they've done is they didn't want people that couldn't afford the premium chocolate to have anything less than premium. So they decided to go with a unit sort of weight base, a pricing metric. So, if you can't afford the $100 big box of truffles, you can still afford the smaller box, maybe one or two of the same truffles but just obviously less of them. But overall, everyone can still afford it. Whether that's right or wrong, there are other things they can do which they have. They have a great online website now that you can order customised boxes and things like that which is great during COVID, they've seen sales increase in chocolates through that. So they've always thought well ahead about online, securing their distribution, thinking carefully about their customer segments and their price segments so they've done a lot of things right.

It's interesting to point directly to online sales because one thing I was conscious of is that through COVID these prestigious distribution stores that Haigh’s operate will be under a lot of pressure. The fall in those areas will be monthly reduced, and many of them wouldn't have qualified as essential service or essential distribution. So, without the online aspect there, the sales would have been under pressure. One thing I would say is we're not proposing this mechanism for every company, every retailer because, fundamentally, every product is different and every customer base is different. The idea of chocolate is a prestige product, it is a luxury product and it's not something you buy at least, not everybody buys every day, and it's often bought for a third party for somebody else. So that luxury aspect doesn't apply to all the things, you can't do this for tins of peas and tins of beans etc so we have to bear that in mind. I'll give you another example of what I used to work in a previous existence. We're visiting a chicken and egg farm, and I was there for one year. The number of eggs was huge and a huge number of employees. I went back a year later, and there were a tenth the number of employees, and hardly even saw that the business was in trouble. I talked to the owner. Instead, what they decided to do was to go upmarket, organic free-range eggs, much higher quality welfare for the animals, and that required much fewer people, what they told me was seals were dying, but profits went through the roof. So really if you look at what you're doing oftentimes, sales revenue and profitability, they're not always they don't always go in the same direction, and what drives one doesn't drive the other.

I was reading recently about Nestle and their KitKat brands and they've done something similar to Haigh because they've had some, let's say, heated negotiation price discussions with the major supermarkets. They are trying to find different ways to deal with thinking about distribution, product innovation and pricing. One thing they have done like Haighs is that they've opened up a Kit Kat prestigious premium or Kitkat store. Now I know Lindt has done that KitKat who isn't considered to be in line with Lindt or Haigh's have decided to do that, Haigh’s could have done that and have been doing that for years and all three are doing it for what? Yes, price positioning, brand positioning, but Nestle has come out and said they want to do it for future product innovation and price positioning as well so they want to see and get more connected with their customers to see what type of chocolate combinations that customers like. Then sell it to them so give customers what they want, rather than just simply guessing and then giving them the old school sort of KitKat that everyone's used to that they know is year on year sort of decreasing in people's tastes have changed people are not buying it as much and this is happening quite a lot in FMCG across the board. Whether it's peas, whether it’s chips, or whether it's chocolate. You've got to protect your brands, not just by pricing but also by thinking ahead in the future and then aligning your price to changing markets whether that's online, whether that's distribution, whether that's product innovation and getting that together but only by looking at the market and segmentation of your customers and your prices.

I have nothing more really to add for this to this one today. All I say is for any family members who are intending to buy me chocolates or presents just bear in mind that I am picky and choosy, and I will put my nose up at the wrong product so have a great day.

All right, so that Haigh’s all the way. Well done Haighs.

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In this episode of Pricing College we celebrate getting back to restaurants and what tricks of the trade you can notice in restaurant menus.

Whether it is priced at $4.99 or just 5 without a dollar sign - the menu may be trying to manipulate you.

At least you have a defence now for eating too much at lunch!

Today we're going to talk about tips and tricks about menu pricing. Now when you go into a restaurant or when you look at a menu often you don't realise as a customer that there are certain things like pricing cues and psychological triggers being used in that menu price list. So we're going to discuss some of those tips because some people are good at that in restaurants, and others are not so good and it seems like they're just guessing.

Yes, I suppose, we're now in July 2020 and this is a point in time where many people have not been in a restaurant for a number of months. So maybe it's a good time as restrictions are easing in many areas to look and see what tricks potentially could be being used, whether they're making you buy more regularly or even just adding an extra dessert to your order.

Okay, so the first one I'd like to talk about is one related to framing and anchoring. We discussed that in an earlier episode. What researchers of menu price pricing have found is that people prefer or will spend more when you put the higher price item right at the front of the menu, rather than leaving it at the back on the back page. So for instance, say it was a chef's special with all the entrees, expensive entrees with the higher price. A lot of customers you would think would not want to see that but research shows that if the restaurant puts that right at the front, that sort of Prime's, the customer will spend more.

Another simple one I like and you see this a lot more often nowadays is psychological research shows that when people see a number without a dollar sign, a pound sign or a euro sign and if they just see a number, somehow they don't see it as real money, almost like Disney Dollars and potentially, they may spend more. You'll also see more of it creeping in whereby to even decrease the real monetary feel to the number, you will see it just written as the number five, not even a dot of zero. So if you're in a restaurant see five or six or seven, start asking questions.

Different research to debate that flat point, which says people don't want to just see the number, like $6 or $10 they would prefer to buy and more likely to buy if you put $9.99, or $5.99. So if you're going to put just the number like $6 or $60, remember you've got to take the pound sign off and take the tens and the units off as well to make it completely abstract. At that point, they're more likely to buy but if you're going to have 10s in units, then put the 99 on it, or the point 47 which is another psychological price point.

Related to this, you'll also sometimes see the numbers not written or the prices will not be on the far right side of the page, whereas traditionally it would have been all aligned so you can compare prices. Often you will see the number will just be, Chicken Maryland and then little space and then number 5 or number 15 or whatever the price is, so that makes it a little bit harder to compare prices. The actual psychological mentality behind this, I'm a bit uncertain about it but it is supposed to make you not compare prices as much and just pick the meal that you'd like the sound of.

In terms of the actual price points, and the distance between price points this isn't really important because what people often do say if they're looking for a glass of wine, you may have five or six bottles of wine that are got bought by the glass so what people tend to do is they look at all of those by the glass drink prices in a line, and look at the lowest price point and the highest price point, and what they're doing is that they're making a value judgment about your restaurant based on that relativity. You have to make sure that the space between those numbers represents not just good value, it's not cheap, we don't want it to be cheap, this is where you need to know where you fit in the market. So, yeah, just think about that in relation to your brand and your price positioning and in relation to other people's competitor's price points too that will be a good reference point, but always think about who you're trying to target when you're thinking about that glass of wine because that glass of wine is an anchor point for the rest of the drinks menu so be very careful about how you price that glass of wine.

When people go out for dinner, they often like to believe in their free will and they're very interesting individuals but it's amazing how frequently we don't want to choose, we want to be guided, or we are open to being guided as to what to choose. Very smart menus, they will highlight certain items and they will call them house specials, chef specials, and special of the day, they highlight them in a certain way that even if you don't know they've been highlighted, you'll be driven towards them, your eyes will move towards that selection, and you will end up choosing something that the house wants to sell. It could be because they've made a lot of it, it could be because the chef made too much of it and they need to get rid of it, be aware that you can be guided, even without being suggested, you can be pushed to a certain product or service that the host wants to sell.

I can remember a good example about the wine concepts and what price points were right when I went on holiday to Fraser Island. I went to a very nice Fraser Island's quite a chic place and people go there, I would say it was an expensive holiday. Very exotic centre, the standard night's hotel accommodation would be from a thousand plus in some of the hotels, and often it's like an all-inclusive sort of deal but the restaurant you would have to pay for. When I went into the restaurant, and looked at the menu prices, especially at the drinks price, I looked at the range of prices for a bottle of wine, and it was something like starting from $47 up to $150. And I thought to myself, how strange that they only went up to 150? Surely people in this hotel spending at least $1,000 a night would be prepared to pay more for a bottle of wine, and at that point, I realised that they hadn't thought through their menu pricing and that they were underselling the value of their drinks menu. But also the whole experience of the holiday in the resort made me think oh maybe the resorts are not as good as it supposed to be or maybe they were thinking, oh you know what, it's an expensive resort we'll discount off the drinks menu. But they don't necessarily have to do that, people are already willing to pay so here you've got to think about your menu pricing, your drinks pricing in relation to your target market.

I think that is a form of segmentation. An example I think that reminds me of is, probably more famous as a restaurant critic than as a movie director Michael Winner, who used to write a restaurant column in the London Times. He also made a number of forgettable movies called Death Wish but forget about those. He famously was in a restaurant and so a very expensive bottle of wine at like 2000 pounds per bottle, he was an expert and he knew that he could sell those over 5000 pounds a bottle so he famously bought 10 of them. And again, that highlights that the restaurant is not segmenting their customer base, and potentially they're just not knowledgeable about what they're selling.

So with all of this yes there are tips and tricks with menu pricing as there are in pricing in general. But to make the most of them, to be strategic and make money from all of these things without gouging your customers and without underselling yourself, you've got to think about your customers and segmentation. Unfortunately, there's no silver bullet solution but there are things like those tips that we've just gone through like the psychological threshold, pricing and even thinking about the weight of the menu itself, apparently, people will buy more if it's a heavier menu. Things like that do work and have been proven over time but it's always better to think about your customer group in detail, rather than applying tips.

I'll finish up with an anecdote because I'm better at anecdotes than in actual detail sometimes. But infamous Parisian restaurants in years gone by, I don't know if this is true but the story was there were two menus one for the lady and one for the gentleman, and the lady’s menu would have no pricing at all and then gentlemen had to face the pricing, obviously is 2020 and so that those times are gone. But the question I'd like to ask is if we could do a statistical analysis, if the lady didn't know what the price was, would she order more expensive products? or would she order less? And what would that say about the date and how much he liked the partner?

Good point Aidan, who knows it depends on where they are in the relationship, would she even bother? Would she even raise the comment? or would she just pay the bill herself nowadays?

Time has changed and it is now 2020 So yes, I suppose she would.

Alright well, I hope that's helped you learn a bit more about menu pricing, and we look forward to speaking again so thanks for listening and goodbye.

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In this episode of Pricing College - we discuss the segmentation strategy known as good, better, best.

It is a simplified strategy that helps companies begin a sensible customer segmentation strategy.

We discuss products and services such as whiskey and SAAS providers.

Today we're going to talk about a price segmentation concept called good, better, best. The reason we're going to talk about that today is that often people use fixed pricing, one fixed price for their customers, and because of that they have to discount and sometimes you don't have to discount to drive volume or revenue. So today we're going to talk about pricing segmentation in terms of good, better, best and what it is.

In a previous episode, we had covered an introduction to price segmentation but one of the questions we had back was, where do you start if it's your first introduction to segmentation of your customer base? where's an easy way to start? I suppose in Good-Better-Best (GBB) you can always argue the simplistic method of segmentation really with three categories. It's something that we're nearly all used to seeing whether online through software as a service system or in many other systems like a car or, gold, silver or bronze categories.

Just think about it in terms of when you get your car washed, they’re using Good-Better-Best (GBB). There is car washing plus that'd be the good version, the better version would be plus wax, and the best version would be all of those three plus a polish and maybe a clean inside the car as well.

The segmentation strategy certainly in the software as a service, it's often tailored by restricting numbers or usage or some measurement component, whether it's the number of times you're on the website, the number of users who can log in and the number of pages you can see etc. That method is restricting people to tailor through a segmentation strategy to the size of your business to your exact requirements. That's something you should look at, and that is a simplistic watered-down version of more complex segmentation, but something that can be very applicable and quite easy for you to understand when you're starting.

So, why do companies use it? Well, it's a good way to spread out the price points across different products and basically what you're offering is the same sort of service or product, but with add on benefits and add on value. What you're trying to do is rather than a discount from your higher value, the best version, you're showing your customers that there are other things that they can choose if they're not prepared to buy the best version, then maybe they should go to the better version and that way you don't have to discount.

There’s a couple of things I'd like to cover on this topic, it can often give people an introduction to a product or service that can select the good, or in other words, the worst version, and they can go with that, get a tester and then potentially upgrade to business or gold or whatever the higher category is, that's the first thing. The other thing I'd say about this is, and you will very often see this online. It can be an anchoring component with this approach whereby as people go through the buying cycle, you are being presented with three options, and with those three options whether you like it or not there will be an anchoring concept.

Just thinking about whiskey and tequila brands that have done this. Initially, they launched many of their products with the highest value brands, that’s the best. What they found is that people didn't automatically understand completely before drinking, maybe they’re new to whiskey and they were probably waiting for promotions and discounts to buy. So what they do is they bring out the lower-grade versions that were still high quality but not as good as their best version. And what they found is overall it increased the value brand perception of the brands as more people got into tequila again, they started to consider these brands as more of an artisan by simply adding three or four more types of variations of the product.

I think a famous example of that is probably the scotch whisky brand Johnnie Walker, which I think is one of the major mass-selling brands in the world, and they operate at a colour-coding scheme. I think I pretend not to know too much about whisky. It might say too much about me, but I think red is the standard or what do you call the introductory version, then you have the blue label and Black Label. I can't remember which is more expensive there. But it's almost the red is the mass market one with which you'll get people knowledgeable about the product, and in theory, you're moving up the value chain if you can progress people into the black or the blue labels. The interesting thing about whiskey in this kind of context, fundamentally you're selling. A procurement professional might even tell you it's the same product you're selling, a volume of a liquid that looks very similar from external and the actual differences in it to the naked eye is quite small but the differential can be higher as age, that log was capped, was its single malt, all these sorts of things. So when you're looking at segmentation it's about, what is your product? Why are people buying it? and how can you use a simple segmentation strategy to implement that?

Looking at the advantages of using Good-Better-Best (GBB) as opposed to fixed pricing. You can drive more revenue by offering more choices. You can also take a more defensive approach when your competitors have launched a similar product to yours at a reduced price but when you look at their product it's a lower grade version of what you're offering. So you can demonstrate that by offering more range but in a very structured way, you can say yes Mr customer if you want that product you can have it, but it doesn't have these extra benefits or features. So there you don't have to discount, and you defend your value. And then finally, the advantage is that from a consumer psychology point of view, you're offering your product in a very structured way. Often in B2B, customers bundle a lot of value into their offers, and as a result, they undersell their offer, and the customers don't know what they're buying and all the extra benefits and features and value drivers that they're receiving. You don't get paid what you should be getting paid.

I think in a future episode, we're going to cover menu pricing and I often see that the Good-Better-Best (GBB) strategy can often be presented in a menu format. One of the things with that is you can often be driven psychologically subliminally to the middle offer, that can be something that the company who's selling can use techniques to proactively move you into the middle offer or it could even be the highest offer which is a decoy pricing method that we'll cover in a future episode. But what I'd suggest to anyone listening is when you're looking or buying any new product or service just look at the Good-Better-Best (GBB), the three-tiered pricing approach that is offered to you and think why are they doing that? What is the methodology? And are they using psychological nudges etc to move into a position that potentially you don't need to be in? Another classic example of this that we will probably mention in a future episode is a mobile phone plan where people are through a sense of fear or shortage that they'll go over the limit, tend to buy packages with much higher data amount than they ever require.

So overall, Good-Better-Best (GBB) is largely applied in B2C but there's no reason that it can't be applied to B2B, there's often a reluctance to do that as fixed pricing is the only way forward. But just remember if you do that fixed pricing, then it doesn't give you much room to do anything else and then you're forced to almost discount and promote segmentation in terms of price and your customer groups are essential here, and there's no reason why B2B companies can't do it.

And this approach can be tailored, it can make you invest more in the value of your product offers. The classic example was the Johnnie Walker whisky were slight changes, things that might seem slight but to aficionados that can be huge, those changes by evaluating products you can help solidify this segmentation strategy. And the other thing you can do is simply tailor it by taking things off the table for where more of service where it's more like, that the software as a service approach, it could be taking things away rather than other things in and so you can work with data for both ways, and it's something you probably need to spend time working on and developing.

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In this episode of Pricing College - Joanna asks whether making a loss is a viable pricing strategy for any business - and of course startups.

Many famous startups from Uber to Amazon have made losses for many years in a row.

We look at the Australian business Canva - and ask if the pricing strategy makes sense. Is loss making an extreme form of penetration pricing or is something else at play?

So many of the world's most valuable startups have never been profitable. So today, we're going to talk about the freemium model that many startups use as a good approach to take.

I think we read in the paper very recently that Australia has a new tech unicorn and that is the online marketing system Canva. Canva is a system that I personally use, I think it's great. It lets you do lots of different things such as design graphics, posters and anything from a visual perspective that is super beneficial for any company. The thing about canva which is interesting is it’s valued at billion American dollars, I believe, but the vast majority of users never pay a cent. And I use it nearly every week, and I very rarely pay any money to Canva.

This is quite a common model for a lot of startups, their product or service is free. So where are they going to get revenue? In regards to Canva, there are a few templates that they charge for but there's a huge host of templates that are free and good to use.

I suppose this is an extreme version of a freemium system, I think we're all used to getting a tester or a sample for a new product. Sometimes this can be very sensible, we covered penetration pricing in a previous episode, and obviously, a freemium system is an extreme version of that. I suppose the only more extreme version will be if they paid you to even use the software but when something so new that you haven't used before, you're not aware of it sometimes, a freemium or a free test, is an old fashioned way of getting you used to it, get you aware of it, and becoming accepting. Hopefully, the idea will be that as you become accepting, you use it, then you start paying, you become accepting of the value that you get from that product, and you will pay for it.

Yeah and this is quite different from the usual strategy for a novel or new product where if we look back in the textbooks, they say if you've got a new product, what you really should be using is a skimming strategy price high, and then work out what the willingness to pay is, and go from there. When it comes to startups, however, they've done the reverse, they've given it away for free and then determined the willingness to pay after that.

I can see a lot of people famously talk about the dropbox system whereby it led to a viral marketing method. In this sort of industry in startups, you need marketing of one format or another, and word of mouth for someone like canva is great. There's a huge universe of users, and they talk about and recommend it to other users, and then a certain percentage of those users will pay to use it. The dropbox example was if you referred a friend, they would give you extra storage or free storage and that would have the word of mouth viral nature of it. With Canva, one of the things I'll say about it is the vast majority of people can get everything they want from it without ever paying. How are they going to move people? Obviously, over time, they will justify the valuation that the potential user base will cap out somewhere, but they will need to get a certain percentage of people paying, either paying a subset of the subscription model or paying bit by bit. And the question is once you're used to using it for free. Will you move towards a payment model?

The same would apply to Google, they're offering pretty much everything they've got for free and then there's almost like this side business model to Google, where they're getting their money from ads, the pay for clicks. The strange thing about the way they sell the ad pay per click model is very much old school sales: they get people on the phone, calling you up to drive or to make you buy more of their ad space. And that's quite ironic I think, they give away stuff for free but then they use an older sort of sales and business model to fund their tech startup platform.

In the world of pricing, there's a couple of things people say when you don't pay for something you tend not to value it. There's a very famous analytical case study done where if you change the price of anything from zero to even 1 cent or 10 cents the actual demand for that will drop hugely. Way more than the actual value of 10 cents just even paying anything whatsoever will hugely diminish users. I'd asked that question about someone like Canva, if you just even charge a very minimal fee like $1 a month. What would be the percentage decrease in users? Would people move to other services? I can think of one that is not the same but things Stencil and other products like that. If you have to pay $1 a month, what percentage of the customer base, the user base on Canva would move elsewhere?

I think the pricing is connected to the philosophy of the startup, and the tech startup is all based on the idea that we give more value to more people and from that belief, it's made it very difficult for them to monetise and capitalise on the value that they're giving because that's the thing that's supposed to give away for free.

It is. These companies are clearly burning money and that money is coming in through investors' startup rounds of venture capital. We look at people like Amazon and Uber, who've gone through 10 years and I think in both cases of massive losses before they start to hit profitability. That's based on the market being sustainable, they'll have significant market share, and they'll be big enough to dominate that market. In the instance of Amazon, we see that now they're hugely profitable. When the company gets to that stage, will building that market is it a plausible scenario? I suppose there are overlaps in the world of pricing and also the world of business models. What we're talking about is offering a freemium service to grow market share to try and get market awareness. Is that a pricing strategy? or is it just giving away a great value for virtually nothing? Of course, if you give away a great value for nothing, people are going to use it. I don't know if that qualifies as a pricing strategy because it's unsustainable, it's not optimising profitability and it's almost as if profitability is not being considered. So, it is usable as a short term strategy to get towards your goals which may be growing market awareness, growing that viral aspect of it, but there has to be a drop-dead zone somewhere down the line when we start charging somewhere, or in some way.

The stock markets are very sympathetic to these pricing models even though they don't drive profitability. So there must be some doubt in the markets that these startups are going to capitalise on their huge user base of millions at some point in their life cycle. And it just seems I suppose from looking at it objectively from an outside position that often pricing isn't considered right at the beginning of this tech startup business model, it's sort of considered, further down the line, how can we use pricing now we've got these people on board, we've got these massive user base, and make money from them. And that seems to be things that all tech companies do maybe three to five years down the line as opposed to in the first year, maybe that's a strategy in itself.

Yeah, I think I just wrap up my comments here I'll say one of the big dangers is we tend to look at the winners, we look at the survivors in the tech industry or any industry I remember reading an article the airline industry after the Wright brothers invented the first plane and there were 1000s of airline companies, we only think of the two or three that even survived. That's the same in the tech industry, we think of canva because they're valued at a billion dollars but there are hundreds of smaller startups out there trying to pursue this freemium model, trying to pursue giving away this great value for nothing, and hoping that over time it will grow quick enough, they'll be able to charge charging before their funding runs out. In a company like Uber, yes they have a massive runway and the funding seems to be available but for many small startups, it didn't hit a crunch, and what can happen is that the runway can shorten much quicker than you expect. So you have to have at least a private strategy in your mind, have a time frame when are you going to start at least when will that start charging and when will that get you to a breakeven position?

Now I think that's a great place to leave it because I think we're going to talk about what startups could do in terms of pricing revenue models to ensure they can make a bit more money upfront, rather than leaving it too late, down the game in another episode. But for now, thanks a lot for listening.

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In this episode of Pricing College - Aidan and Joanna discuss common ways to incentivise a sales team and why this can create issues if not not in a strategic way.

Is your sales team incentivised to sell volume - or with pricing targets or metrics. Does your sales team understand and articulate value?

What can go wrong with a shoddy incentivisation plan?

Today we're going to talk about sales, incentives, and plans. I suppose the reason why we're going to talk about that is there's a bit of a debate about whether sales are incentivised correctly, mostly this debate happens outside of sales. The sales tend to think that they are incentivised correctly and doing a great job and often they are. Other people in the business, however, believe that the way they're incentivised is driving profitability down, and it's not producing the best results for the business over time.

I worked in companies where the sales team were incentivised not by profit, not even by the price that we're selling out, but purely by volume. We spoke about cubic metres of product which was what the whole driver was and somebody would go out there and sell a lot of volumes, and the price that we're selling out was not analyzed, it wasn't looked at, and it's almost as if nobody cared. There's an old saying that anybody can sell $1 for 90 cents and to some extent, that is true. The real skill in selling is selling a lot of products at a good price, at a profitable price, but doing that is harder than selling at a low price. The thing I always say is, Is your sales team incentivised to hold the ground on price? Are they incentivised to not drop the price just when asked? Because if they're not, why wouldn't they? Why wouldn't they just reduce the price to get across the line, be friendly with the customer, and move on to the next site?

So, just to ask that question and I suppose, let's look at some of the incentives and plans that most salespeople are on and let's think about, do they drive profitable revenue growth? or do they just drive revenue? There's a difference between the two. Okay, so the first, incentives are things like sales quotas, it’s when a salesperson is being given a target set by their manager and they're just got to hit that. And after that, they get things called accelerators which kick in after they've reached their targets and it's the percentage free on top of that, on-target earnings again another percentage rate free add on to their salary, and they may even have things like contests in a month to drive revenue in that month. Now, these are different from sales plans, you can have salary base plans, salary only, commission only plans, salary plus commission and as Aidan was explaining that volume-based plan, which means you sell as much as you can and they're incentivised on doing that. And the final one, which is a new type of plan which is a gross margin commission plan. That's when they are not just selling as much as they can, but it's based on the margin on-sell and the profit they get from each of the sales that they make.

From my experience, an awful lot of sales incentive plans, to be honest, are almost sales disincentives plans. We've seen examples where people are capped certain at amounts, capped at certain commission levels per month, it leaves the items just sandbagging when you're moving sales around month by month. Sometimes there's even jealousy in the accompany by management if a salesperson is making more money than them, that's seen as a bad thing. What I would always say is, I think Joanna touched them the last one she mentioned there was the margin was taken into account. When you're putting together your sales incentive plan for your team, what are you trying to achieve? what do you want those salespeople to do? what price do you want it to sell out? Are they working in line with the pricing strategy that the company has? and if they are those the incentive program, does it align? does it make logical sense? or is there so much congruence that will lead you to a situation where at the end of the month or the end of the quarter, you're hitting numbers in one area, you're hitting the volume metrics, but you're not hitting the profitability metrics.

There’s a lot of finance managers, and even pricing managers would argue for the last plan for salespeople that margin, that gross margin plan because they think it discourages discounting. They think that discounting just thinking about revenue-driving, revenue incentivises sales to discount to hit their sales quota. However, there is some complexity with the gross margin plan which salespeople don't like and for good reason, it's very hard to measure. The product base is shifting, distribution costs change, rebates are changing, territory changes and customer value drivers change and it's very hard to measure margin based on that. So often salespeople say, well actually, we're driving more revenue and margin but you're just not accounting for it. I mean this is a fair enough call, and also it's a very complicated way of measuring so I always believe you need to be got to keep things simple. I don't think that looking at the top-line revenue is a bad thing for sales to do. However, what I do believe is that the pricing manager or maybe the finance manager needs to get better tactics around discounting, and around margin management. In the first place, that's not the job of a salesperson that's the job of finance and pricing.

I think, you can never say the exact system of incentivisation indeed that will be determined by the company, what you sell, the selling structure, teams and how that works. But one thing I'll say from my experience is sales teams are very logical people, the right logical people often have a very much target oriented mentality, and at least the good ones do. And with that, they're pretty good at thinking through scenarios and what would benefit them. Logically in a company, if they're incentivised to do something that is what they will do, so are they incentivized to discuss value? are they incentivised to say no and push back on discount requests? Because if not, they will do the logical thing which is just getting the number to wrap up the sale, reduce the price, make great friends and contact with that customer that will lead to repeat business. But there's no point in having repeat business if it's at a margin or a pricing point that is damaging your other sales teams or damaging your other products and your profitability. So you have to look at, what you want to commit to achieving and this way the pricing manager or the pricing team really should be involved in setting the incentivisation programs, at least at a discussion level with the sales department. What are you trying to achieve? what metrics? what incentivisation program? whether it's commission, whether it's at the end of the quarter rebate or something to the sales team, think through how it works and then put it in place.

That's right, it's the role of the pricing manager to show what the real situation of maybe the discounting behaviour is what's the result of certain sales behaviours. Why just looking purely at the top line is detrimental to setting profitable revenue growth? or why the volume-based approach is not good long term? Often salespeople don't know that, they don't have that information at hand, so they think they're doing a great job and they are. Some people innately do know to sell on value and think about margin when they're selling, other people don't do that naturally, but again it's the role of the pricing team to inform the sales team and provide those tools.

Yeah, I think that's it for me today. We just reached the end of the quarter, the June quarter a lot of salespeople would be rushed to meet targets, and hitting up their lead base those sort of things. And when you want salespeople, you want them out there, you want them hungry and you want them to be desperate to get that sale in, the incentivisation structure is a key component for that and that's where pricing becomes motivational. It helps you lead the company and helps you set the mentality of what to have, it's not just about taking with numbers on a spreadsheet, but there's that human element also that's you know, as important.

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In this episode of Pricing College - Joanna and Aidan discuss the concept of Total Cost Of Ownership.

We all know that Duracell batteries claim to last longer than other batteries - if it lasts longer - could it be cheaper in the long term versus buying cheaper options more frequently?

We look at this concept in the world of procurement, value based selling and sectors such as cars etc.

Have you ever been in a sales call with procurement and thought, Gosh, I want to get out of this price unit price discussion, but I just don't know-how. Or perhaps you are in a discussion with procurement and you've given them the lowest price, and you're thinking, why don't they go with me? And then they call you up and say look, we've decided to go with another supplier. So, today what we're going to do, we're going to talk about another important procurement technique and measurement that we believe suppliers should know about and this is called the total cost of ownership measure. Now, this is an important concept for suppliers because often this is something they will judge you on. So, yeah, we're going to talk about what it is and why it's important.

I think anyone who's ever had an addiction to shopping, or buying clothes etc you can often justify buying more expensive items. So say you go to buy a new coat, you can buy a fast fashion coat that may cost you $5 or $10. It sounds cheap on the initial price tag, but you might only wear it once. After the first wash, it might look terrible. The alternative is a much more expensive coat, something that looks great, but you could keep it for 20 years. You could wear it to important meetings and you might even get a better job from going to an interview in it. When you look at the cost of owning that coat over the 20 year period that you have it in, maybe you have to buy 20 times the cheaper coat, and the actual more expensive one, on a price tag basis might work out cheaper. The other classic example I'll give is batteries for your remote control of any electronic device, famously Duracell batteries are supposed to last x times longer than a cheaper alternative, so you may buy a cheaper battery, but how many batteries do you have to buy over the lifetime of the supposedly more expensive Duracell? Realistically it might be cheaper and save you the hassle.

I suppose to summarise the total cost of ownership looks at the complete costs of owning something once it's bought, like from purchase to disposal. When procurement listens to your sales calls, they're not just looking at the unit price. A lot of salespeople think procurement just wants the lowest price not necessarily, some are looking at the recurring costs involved when they buy your offer.

I think we're all used to saying you go to buy a car, and now with a lot of cars, specifically some of the newer entrants to the market. I'm thinking of people like Kia, which has built a very big presence here in Australia. 15 years ago I didn't even know they exist, but they're certainly unheard of. They have offered things such as seven-year warranties, whereas a decreasing fixed price servicing. Math is the decrease in the total cost of ownership for that car over the lifetime of the car. The initial upfront price tag that you pay is only part of the actual cost. You have to look for a car, and you have to look at ancillary costs as well things such as insurance and fuel consumption. Does one car cost a lot more to run than another one? In some countries, there are even access fees you have to pay for environmental performance. The real cost of owning that car is related obviously to the component of the price tag of the initial purchase, but there are so many other factors to factor into it that you’ll only become aware of what we have to make the cash payment for years down the line.

Another example could be, I'll take one from my own experience when I was buying a water filter. I was looking at a couple of different suppliers for this water filter. The cost of one was like $485, the cost of the other is more expensive at $695. The cheaper one could do the job but when I look closely in terms of doing a job, it could remove heavy metals, etc., filter the water tasted okay but when I looked closer, between the two of them the cartridge of the cheaper one was much smaller, so that would mean, I'd have to replace the cartridge, more frequently. Also, both of them had to be installed by a plumber. The first one didn't have a free assessment to see how it fits into the house, the second one did the more expensive one did. So overall, even though the upfront cost of that filter was more expensive at $695 overall, it had a bigger cartridge. I didn't have to change the cartridge as much over time, had free installation from the plumber and a free assessment. I thought you know what, that's great because I also get advice from the plumber, is this the right one for me?

I think if we wrapped it all up where are we trying to go with this, I think the point of it is when procurement teams are buying any product or service, they're tasked with a couple of things. The first one is to get a great price, and a great price is a low price. They want to pay less. But the second thing is they want a better quality product, better quality service and reliability and a low-risk supplier for their company. In the negotiation, they're probably trying to push you down on price, but what you need to be doing is a skilled sales team, a skilled pricing manager, you need to be aware of the concept of a total cost of ownership, the awareness that what you're delivering might be cheaper, and you need to go to the purchaser, you need to go the procurement team in the direction that I suppose benefits you takes awareness of the pluses of your offer. If you have a much longer-lasting product that has been tested, some of these, say a tire that will last $1,000 versus one this test for $500 you need to get that across. You need to be discussing the total cost of ownership and the benefits of your product, not just the upfront price tag on which you could be pushed down on the apples to apple comparison situation.

It does help both the supplier and procurement to understand, upfront and longer-term costs direct and indirect costs, and hidden obvious costs. The limitation of this concept is that yeah, it's very cost focused. It doesn't go into all those risks involved in buying a particular product, delivering on time, supply chain issues, does the product work better than another product and product innovation is the downside. But this is something that good salespeople person will go at, I can add to this total cost of ownership concept by discussing risk, by going back into the procurement officers problem, escalating that conversation to real needs and not just gravitating to cost, thinking about how the product boost their revenue not just cut their costs, thinking about how working with you ensure that they have a safe and protected relationship over time that you'll help them if they need help, the support is there, it's not just about the product that you're selling.

On this podcast, we talk an awful lot about value, but realistically you can only really dig deep in value when you put yourself in the purchaser or the user's shoes or seat. Why is somebody buying your product? What do they want from your product? How do they value it? When you look at it from that perspective, that's when you can start mapping out the actual total cost of ownership, the benefits, the negatives, and the cost savings that a product or service delivers. When you can do that, then you can discuss it with them, and you can discuss those plus’ that make your product better versus others. I think we'd cover this much more in all aspects of this will be covered in future podcasts, but I think that's all I've got to say on this one today.

Just remember that you can use concepts from procurement to get out of those difficult sorts of price unit price discussions, you don't have to be framed by them if you can control that conversation and turn it around to an advantage to benefit you and the person who's buying from you.

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In this episode of Pricing College - Joanna asks a question that every CFO wants to know - can you increase sales by increasing prices?

Aidan discusses the concept of a Giffen good in economics and whether anything similar occurs in the 21st century.

Ask yourself - have you ever assumed a product must be better just because it costs more? We look at the examples of toothpaste and a nice bottle of red wine!

Today, we'll be asking the question. Will people buy more of a product that costs a lot more?

I'll kick off with this one because I want to reminisce about my university days and when doing economics, there was a famous concept of a Giffen good or a Giffen product, which I believe stems from a couple of 100 years ago in France where people say they had staple goods, such as flour bread, potatoes, that sort of thing rice and the poor people could only afford and that was their staple food and the concept was if you increase the price of that food, there'll be even worse off, and so they'd have to get all the nutrients from that one product. So in theory, if you increase the price of bread in pre-revolutionary France, the theory was potentially people would buy more of the brand.

As we reminisce about university days maybe I'll reminisce about my psychology course and talk about price perception. It's quite a common theme in psychology like people perceive prices in different ways and research shows that when a price is lower, people perceive that products to be maybe inferior cheaper, and maybe not aligned to their needs. Equally, if a price point is higher people tend to perceive that as having more quality, more value, something they want, and even down to those status sorts of drivers were talking about in earlier episodes, they want to align themselves to that product.

Yeah, I think there's a very old common saying that says, If it seems too good to be true, it probably is. A lot of people, there's a couple of things they don't have specific knowledge about the product they're buying, especially if it's a little bit more complex like a chemical product or even as simple as a toothpaste it was something like that they don't have that knowledge. But there's also the safety in crowd's mentality, there's an idea that if you go into a shop and see a price set at a certain price point and other people have already purchased at that point and so you feel they've already made the choice, and it makes you feel more content and comfortable in the choices you make.

And looking at that example of toothpaste, there are so many different types of brands and versions of toothpaste. But toothpaste is an interesting one because it's a high-risk factor when you buy toothpaste and there's a lot of chemicals that go in it, especially if you've got yourself, your children, your family, you want to know that the toothpaste is not going to kill you. It has good qualities, it got the right chemical components and the right balance. We're not pharmacists or chemists, we don't know what we're buying here, it’s a lot of trusts involved. When you buy that toothpaste you can be sort of split off into groups, and we're talking about that before, segmentation. What type of buyer are you? Are you going to go for that sort of lower-priced groups segmentation? or are you going to go for a more expensive toothpaste that you believe is more trustworthy, it's not going to kill you, it's got all the research the latest research around it, and the price point is high, and that therefore, you align yourself with a higher price point based on all those value drivers combined.

I think you go into a supermarket say in Australia or most countries there are probably 10 or more options for toothpaste. I don't think any more than 1 in 100 people would read through the chemical components that make up that toothpaste. In reality, we've no idea what we're purchasing. The price differential can be very large, you could go from like $1.50 for a tube of toothpaste to even up to 10 or 12 bucks. Fundamentally, it's a small difference in your weekly or monthly grocery bills so a lot of people think they risk it, think of the money they're going to see if down the line is better teeth and a brighter smile, etc. So they pay more and they choose the better one, and they think, it costs more, so it must be better.

Yeah, in terms of that toothpaste example we touched on the health, people buy because they're risk-averse because of the trust. We also buy as Aidan mentioned there because aesthetically they want brighter teeth. You can see some of the brandings on toothpaste boxes a Hollywood smile, and those types of products have a higher price premium on them, even more so than health and chemical production and everything being sort of scientifically examined. I think the ones with a cosmetic appeal on top of that whitening, it has a higher price premium you could even get up to $12 a packet for those type of products. Even often with those, they have an additional sort of attachment like maybe a special toothbrush that works well with that toothpaste to get you that brighter smile. So that goes into a premium, higher price and price bundling to appeal to a certain segment that wants that Hollywood smile. Maybe they're thinking about a Hollywood actress, their favourite and they want to be like that, who knows. But that price premium is all based on those particular value drivers.

We go from teeth whitening to a product that can make your teeth darker, and that's an example I think of is purchasing red wine. So say you're going to visit a friend or family, you'd be invited over for dinner, and you think I have to bring something I have to bring a gift with me so I bought a nice bottle of wine is a classic example. I'll be honest, I put my hand up and said, I like wine, but I'm not an expert, I don't know the vineyards or I don't know enough about where the product comes from to know what a bottle of wine is worth. And if I'm going in to buy a bottle of wine to bring to as a gift, I'll be honest, I'll be picking very generic, I know Shiraz and all this sort of stuff, but I'll be very much guided by the price points in the shop. I don't want to embarrass myself or come across cheap and so I won't buy a very cheap bottle to bring to my friend's house, I'll have a price point in mind that I'm not ashamed of and that hopefully will reflect well on me. I'll pick one of the shop guides, for all I know that wine is not a great wine but the shop is selling it at that price and so I assume, or they sell at this price more knowledgeable people than me or you know crowds, the statistical validity of crowds purchasing this bottle of wine must be good.

And the same would go for like you're inviting some friends. You want to take some friends out for dinner. The question is where do you take them? They might not be your best friends, we want to make a good impression. So you'll be thinking about what restaurant, what experience would suit us and would identify with and I'd want them to understand me within that context. You’re even then thinking about anchoring yourself, sort of like framing value in terms of the restaurant that you choose. So within all of this when we asked the questions, would people pay more for products? I think they would, but a lot of techniques are involved in this like framing, anchoring and segmentation. Do you agree with Aidan? It's not just a simple question.

No. I think this is segmentation why are people buying. I certainly do believe that by increasing prices in certain areas you will sell more of a product and its other products or just standalone, like the examples we give are two tangible ones I think there's a whole fleet of other examples. Even buying batteries, so you need batteries for your remote control for your television set which we covered in the previous ad or episode, this simple example you could buy a branded battery which will be Duracell which will be sort of be at a price premium to some of the cheaper brands. For all I know I don't run statistical tests I don't know if its battery last longer, or it's more reliable. It costs more and they claim on the label it does. I don’t know if it does or not. So yeah, generally, I will pay more for the Duracell branded battery and I do believe that the higher price point of Duracell is pushing people to buy more of it.

I suppose you probably wouldn't buy it if you then learned after you bought it, that it didn't meet its service. It was broke down, all the guarantees that were given weren't abided by and the company just didn't do anything those sorts of things, then you would think, I will switch to another brand and I think this is a problem that is occurring, I think a lot of brands say one thing, but they don't live by that, and customers are quite savvy and they will work out whether you know the value proposition is real or not, and if they find out that it's not, and then they'll try alternatives.

Yeah, I think even just discussing this topic I sort of have the opinion that people will buy more of an item if it's more highly-priced in the area where there's a lack of expert knowledge. They're not experts in what they're purchasing, we cover procurement in a previous episode, and I think this is where procurement comes into its own. If you're choosing two types of toothpaste, and the procurement people were experts in toothpaste and chemical make-up, they could get a great bargain by choosing the cheaper one. It's almost like a premium you're paying to compensate for the lack of knowledge or the time that you would have to invest to know which is which. The same way the battery, in reality, we all expect batteries to give out sooner or later and so, as long as it's not immediately, a couple of weeks, a couple of months that battery gives out, we're not going to complain, and we're not going to notice it, it's not that important to us. So I think we pay that premium, we trade premium, we trade money for the time that we would need to invest to research the product.

This is common in pricing strategy, new novel, unusual products tend to be priced using this scheming approach and then, products that we kind of are aware of, they're already out in the market, companies usually use a penetration pricing strategy for those types of products which is quite a more competitive pricing strategy. But yeah, overall, I think people are willing to pay a higher price when the value is there when it's proven, and they'll continue to pay that price within reason. I mean obviously, there's going to shift in the economy and crisis but we're all aware of, and we're living through right now. But still, people will pay for value because it's meeting a need, it's serving a problem and it's addressing a problem that customers may have. There's nothing worse than having to go back into the shop, rethink this all the way through, fundamentally, we're all quite lazy we want things to work, and it's better just to pay a little bit of price premium for that convenience.

You know we are pack animals at the end of the day, and we move in crowds it's very rare for people to be real lone wolves to use another example. So I think if you have a high price tag, the price tag on a product or service is a price, it’s the number you pay but it's also some form of branding, there are also other psychological aspects with that. It's a confidence in the company selling it to put that high price on that product. It insinuates that this may not be for everyone, but this is a high-quality product. And I think that translates somewhere into our minds and we will buy more of these products, under certain circumstances.

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In this episode of Pricing College - Joanna and Aidan talk about 5 things to consider when selling anything - and take the example of a TV set.

TV watching is still a common pass time - even if it is now more Netflix than broadcast channels. However, when selling any item - what are common value drivers that should be considered.

The TV set has technical criteria that customers want - but we explore other value drivers that may be less obvious.

Today we're going to talk about value, what 5 things should you consider about value when you're setting prices? Now, value can be quite an ambiguous term, so we thought today we'd go through an example of pricing a TV set according to its value and when we say value, I think we're referring to customer value, how customers buy and perceived the value of this particular TV set.

Yes, we want to give an example of the COVID and lockdowns etc., certainly, people know about the TV set and the value it provides. But we're going to give an example of stuff you should be considering that isn't exactly the size, the technical specs or the TV set. Other stuff that customers will value but then you have to put yourself in that mindset to think of them and explore them.

Yes, I'm not saying that technical aspects and visuals are not something that people do consider they do when they buy, but that's only one tiny aspect. So we're just going to explore some of those other aspects that could be tradeable, it could be some of those value at risk principles that we touched on in earlier episodes.

That's exactly right. When you go to buy a new TV set or any electronic product really, there are certain things you look at. You probably want to know the colour of those sort of aspects that it will fit inside your house, that it has the latest technology and it does everything right. But there are other things you're also looking for, so we're going to do five things to consider and again, Joanna's drawn the short straw so she has to cover three, and we'll kick off with number one.

Okay, I'm going to do the simple one as we've sort of touched on it already, just looking at some of the specs. Look, I know these are not some of the things we want to emphasize, but I have noticed in Australia that people do like big TV sets. So we can't ignore the fact that the size of the TV set in Australia is quite important. It's much more important in Australia than it is in the UK, TV sets there are small. So, compared to here, I don't know though, what 50 inches? 60 inches long? Some of them they’re huge. This is quite commonplace now, so that would be considered some of the sort of more tangible aspects of a value driver that people buy TV sets based on their size.

Yeah, true. Second, what I'm going to go with is the branding. So, I think a lot of people probably recognise that manufacturing has been outsourced in many industries so when it's a rebadging principle, you could buy fundamentally the same television set at very different prices with different logos or badges. But when people come to visit, when family and friends come to your house if they see a more prestigious brand, such as Sony, LG and those sort of things. They might think you're a better person, ridiculous as that seems they may do so and you may have to value that. So people may pay a premium for a nicer brand.

When I go into the shop to buy a TV set, which I've done fairly recently. I'm not a big expert on TV and I’m quite a risk-averse buyer, I want to know about the guarantees, are they extensive guarantees or one year warranty. I'm worried about whether it's going to break down, I've made the right decision, what if there's a problem and I can't fix it, or someone comes to help. So those types of aspects guarantees, warranties are really important to me when I buy a TV set.

I just follow up on that point, it certainly is and even in Australia the Harvey Norman store offers a lot of their computer programs and systems replacement warranties which is a very valuable thing. Okay, onwards to my next one, which I think is point number four and deliverability, is it actually in stock? If anybody has been shopping over the last few months, in 2020, you're probably aware that stock is highly volatile. Shops may have the systems you're looking for, or they may not. So when you're looking to buy a product like a TV set, are you prepared to wait a month? or do you want it right away to take away in your car? It's that sort of availability and deliverability options that can be very valuable.

The final point that I often think about, especially nowadays with the advancements in technology. Does this TV fit with other systems that I'm using, Netflix? Does it fit with my surround sound? Things like that. Is it easy to use? Product innovation is also useful and because I'm not very good at that sort of technology side of things I want to know, Is there any system support? Is there anyone I can call? Perhaps that can help me with some of these integrations between systems. So, those types of things I'm looking to as well.

I think in Australia there used to be the concept of a Holden family or a Ford family and people were aligned with those brands. I think you could almost argue now you're a Samsung or an Apple family or an Android versus Apple Mac family and fundamentally if you're trying to sell a TV set to somebody it's important to know what systems they use. Do they use Chrome? Do they use you know Google Home? etc., and if they do, they're almost certainly more likely to be Pro. An Android stroke, a Samsung style television set versus one that’s more aligned with Apple so those things should be considered and it's the ecosystem I think is the term used. Products we buy now are not stand alone, they fit into wider ecosystems, and knowing about that will help you sell.

I suppose this comes down to people buying TVs based on brand, but what does that brand power mean? It's because these companies made brands that were reliable that you could trust based on all these different value drivers that we've just looked at, and literally, they just ticked the box on that and over time, we've just got used to accepting that client value from certain brands. We should never ignore the fact that underneath those brands, there is still innovation in terms of product innovation but there's still, I think a lot of brands now need to rearticulate the value that they already deliver to their customers and just remind us sometimes of why we buy.

Yeah, I don't have very much left to add all I know is when I choose a TV set, I want the biggest one possible because it makes me feel more important.

And it's also great that you have a salesperson that can just hone in on all these sorts of key questions that the customer may have in the store because these things are on our minds and asking the customers the right questions can bring out these value drivers and help us, select the right TV set for us. But anyway, yeah, I think, I think hopefully this example has helped unpack customer value, and this logic and framework can be applied to all products.

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In this episode of Pricing College - Joanna introduces and explores the concept of segmentation.

For the vast majority of businesses - whether selling to consumers or to businesses - you will likely want to tailor your offer, and charge varying types of customers different prices.

This could be due to some customers buying much more - or requiring additional services or value adds. Segmentation is vital as a step to understand your customers - and charge the "right" price.

Today we're going to talk about segmentation. What it is and why it's important? The reason we want to talk about that now is that a lot of companies and pricing departments are now investing in pricing technology and new systems and a lot of these new systems require segmentation. A lot of advances have been made in segmentation, but we're just going to talk about what it is, and some applications.

Just this week we had an inquiry of a startup business, and the inquiry was, we have different types of customers, we have large corporate customers, and we have smaller customers, mom and dad stores. How do we segment our offer to those businesses? How do we deliver different services? and fundamentally, how do we charge them differently to maximise the potential revenue to the business?

A lot of companies are struggling with segmentation at the moment because they're using fundamentally quite outdated segmentation principles and approaches that are largely derived from demographic segmentation. That's usually things like postcode or location, geography, and country. They split the country up in large chunks, but the problem with putting a lot of people in large groups, is that you don't get the subtlety in terms of pricing, in terms of understanding their needs, and why they buy?

I would even say a very large number of companies in Australia and globally don't segment at all, they fundamentally sell, you know we go back to the apples, you come in to buy one apple, you come in to buy 10 apples, you sell it at the same price and under the same circumstances, whether this is online or delivery or through bricks and mortar store. A lot of companies don't segment, either offer to their customers.

That leads to a lot of problems because they're not addressing the customer's needs and they're not giving their customers what they actually really want and they’re fundamentally just pricing using cost-plus. I think we talked about it before, they worked out their cost, they just added up the percentage margin on the top, and then just rolled it out. No segmentation at all. Other companies are a little bit more sophisticated and they have been using that geographic segmentation principle, but there are other things that people are doing now, especially with online businesses in fashion. They're looking at price segmentations in terms of their customer's behaviour. They track what customers are buying in real-time. They're trying to use more analytics to understand different customer behaviour so they can split people off into different groups, which is quite useful. Then there's another new type of segmentation that's called psychographic segmentation, and do you know what that means?

That’s a little bit more about value-based pricing, it's more aligned to that. It's when your customers have a specific value principle in mind. They buy because they like to be healthy, they believe in a cleaner ecology and things that are important to them, they're motivated by people in companies that have a similar value system to them. It can come down right to the food they eat. I'm thinking now like grilled burgers, we've all had a nice grilled burger. Why do people go there? They're trying to segment their customer base using that psychographic segmentation, where people go there for a healthier burger and Greenburger. They treated their animals right before slaughtering them and customers like that. They put a lot into that sort of ecology motive.

We've covered a lot of what segmentation and the factors to look at, a good question is, Why would you segment your customer base? What is the reason for it? This is the discussion we had this week with an internet startup. Fundamentally, the reason is if you treat everybody the same and we'll give an example of an airline. Let’s say you're flying to New York, some people want to go in coach, some people want to go in premium economy and some people want to go in business class, and if you charge or try to charge everybody with the same price for the exact same service what you'll fundamentally do is undercharge, or leave a lot of money on the table to certain customers, overcharge another segment of customer base and just through pure luck you will be hitting the thing they’re right to value spot with certain customers, but what you're doing is you're underpricing or overpricing, and completely misaligned with 80% or so what your actual market.

In doing so you missed out on a lot of revenue opportunities, a lot of margin opportunities because there are going to be some customers that buy your products that are willing to pay more. Then there's going to be other price-sensitive customers that are not willing to pay the price that you're charging at all and will go elsewhere. I suppose this is why segmentation is important because it's identifying those different customer groups, so you're aware of what they need, and you know what price they're willing to pay and what they value, and this is how you determine your pricing power.

But I think the actual, you know, Joanna went through a lot of what you look at but there's no easy answer, it's not one size fits all, the segmentation strategy really is a completely different business to business, product to product or service to service. When you're looking at a business, you have to think, what does that business provide? What is its value add? Who is the customer base? How can we break it down? How can we use, what was that complex word, psychographic analysis? all those sorts of things. When you're trying to sell a luxury car, an airline flight, or even just a fancy hamburger to somebody, you need to know what that person is buying. Is it a corporate account? Is it a private person? Is it for entertainment purposes? Dig into it, and when you dig into it deeply, you can get great indicators as to why they value something, and then that gets the next step. How do you segment that base? The Internet version, everyone’s used to seeing it. If you buy software as a service, SaaS stuff. You’ve probably seen thousand times the menu page, where you have a starter, Professional Enterprise, categorise segmented offers that standard but you probably won't even realise how many times you are being segmented.

I suppose this comes back down to my original point when I open this discussion about people, pricing departments and companies buying pricing technology. A lot of this technology comes with its own approach to segmentation. A lot of companies choose technology before thinking through their segmentation and their offer, and then they buy this software and it's not quite aligned to their business and go to market approach, or even their value profile. And often it can be very difficult for them to then unwind the segmentation that's already pre-programmed in that system. So, just to note here, be very careful about the technology that you choose, and always think about your pricing framework and your segmentation logic first, before actually buying technology because it does come with its pre-programmed segmentation.

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In this episode of Pricing College - Joanna covers the concept of framing - and how it can benefit you in a negotiation.

With framing - you can assume dominance or the moral high ground in a meeting or interaction and this can be used to great benefit. This can be a tactic often utilised by procurement professionals.

What can pricing managers learn in this regard?

In today’s episode we want to cover the concept of framing and framing in any sort of environment such as an interview, any negotiation, but in particular, discussions with procurement.

Alright, so what is framing? This is a very important concept. It is used as Aidan said a lot in negotiation, it's when one perspective and another perspective clash. Because frames in a sense our points of view, perspectives that everybody has when they interact with another person. So, wherever you go, there's always going to be framing occurring. So it's important to know how to utilise that to your advantage.

I think everyone has been in discussions or meetings with people where there's a clear power structure or pre-stated or unstated mechanism where one person is in the morally correct area versus the other. You can think of, even in a courtroom where a judge sits high up on the stage, or much higher up than the lawyers and the people in the court, that puts a much stronger moral position for that judge. You probably also have it when you're a school kid and you're calling to see the headmaster or masters. An all piled office with a nice big desk and frames the entire discussion in a way that may not benefit you

I suppose it goes back down to our evolution, our history of being people. Framing comes down to power status, where do we fit in the pecking order? Are we alpha or not? And in any discussion, that's kind of what's happening, especially in negotiations. So it's important to know where you're sitting the power control in any discussion. An interesting book on this that describes this well is a book by Oren Klaff, Pitch Anything highly recommend that you read that.

I think people are very aware of the way things are positioned and the way things are framed. There's always the concept that if you're the buyer, some people think they're almost the boss of the seller, there's almost that mentality, and they can push prices down or be tough. Try that if you want to go in and buy a luxury product, like a Ferrari or a Lamborghini from a prestigious dealership. You may find the old framing slightly changes, but I think people are used to that. I’ve got a horror story that I want to bring up, but I think Joanna is going to cover a few more items regarding framing. Sometimes you can find yourself being framed and you have to wonder, how do I get out of this situation?

It's a really good story that Aidan's going to talk to you about and maybe just to give some context that it made me think through the story are some four very typical frames that people use during negotiation so maybe think about these different frames when he talks through his story. Now, these four frames are called time frames. That's the first one, do you know when people often look at their watch or cut a meeting short or say, I'm going to leave if you come too late? They're using what's known as a time frame. The second one is the power frame like big bosses or CEOs, they want to be powerful and come across and show their power. So, they will use that to their advantage in a conversation in a meeting, maybe they'll sit in the power position at the top of the table, maybe they'll talk more, those sorts of things. The moral authority frame is an interesting one. It's when you have the moral high ground in a conversation, and we all know those people that go, you may be right but the good thing to do here is X, Y, and Z. They've completely undermined what you've just said, by using a moral authority frame. And the final one is called the analyst frame. When they dismiss what you said, using things like facts, evidence, and maybe using logic as a way to undermine emotion when both coexist in this world, that's the final frame.

I've learned quite a bit listening there and I can even recognise some of them in this story. This is from a couple of years ago when I was a pricing professional and I was helping a sales team in a B2B environment. We were selling to a French multinational. We got an email on a Friday evening, demanding that we jump on a plane on Monday, and fly off to meet somebody who was jetting out from Paris. This was in Australia, we flew off to Brisbane on Monday morning, we did not know what the meeting was for? They refused to give us any information in advance, clearly keeping us in the dark. I can feel that there was pressure on us, we had to get up early, we had to get there. We arrived at the location of the office and we were kept waiting more than I think 45 minutes beyond what was required. In the meeting ahead of us, there was like a stream of different people going into a meeting and I could hear shouting coming out of the meeting. You felt like you're a small kid back at school getting shoved up. Eventually when our time for the meeting came up. We went in to meet somebody who introduced themselves as a very important person jutting out from a head office in Paris, and that we were framed as a very unimportant people. I think the initial thing was, How can you explain yourself? was almost the first question. And we were like, I don't even know how to answer that and so you know you start talking through the meeting. The meeting was incredibly awkward, the gentleman from Paris was badly dressed in unironed clothing, four days on the shift, looked like he hadn't slept, and to be honest, had virtually no idea as to what we were even selling. It was more than just accusations. I think one of Joanna's points there was about an accusation that you're not being moral and the accusation was you're ripping us off, you're ripping us off, repeated four or five times and demanding explanations for it. When we tried to give any explanations, and discuss things the answer was, I'm too important to know this detail. You can work on it later and send it across to my assistants. The meeting was ridiculous. I'd be honest, I still don't know what they hope to achieve from it. I think the highlight for me was when the gentleman shouted at me, you're looking at your watch, you're looking at your watch, you're so desperate to get out of this meeting, that's a sign of guilt. And then when I pointed out that I wasn't even wearing the watch, I think that was the final straw of the meeting. Yeah, I think it stands out to me as a comical example of probably somebody going through the motions using these framing techniques, and I think we can take all four of them off, just from what Joanna mentioned. Yeah, I don't know what was achieved in that meeting. I think as a sales team we have to learn from that and try to reframe it.

And the interesting point about that is when you meet somebody who's using all these framing techniques on you, it feels really bad, it feels uncomfortable and often if you're not aware of framing existing then you're not going to respond in the right way. What's just happened then is you've been framed, you’ve been controlled and you are then beta, you're not alpha, and they've won that particular discussion. However, the good thing about this power is, it's in flux, it changes and you can get that power status later. But only if you know how to use brain control. So I highly recommend that you learn these techniques, because it'll make you feel much more confident about yourself and where you sit in that situation in a conversation, and then you can start having really meaningful conversations with your peers, your managers, and your customers.

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In this episode of Pricing College we discuss 5 practical things to consider when entering a negotiation or meeting with procurement professionals.

Procurement is becoming more and more common in B2B environments - so ensure your pricing and sales team are ready to negotiate effectively.

In today's episode, we want to talk about five common mistakes that salespeople in a B2B environment often make when going in to discuss projects or tenders with procurement.

Negotiations, everyone knows, can be quite nerve-racking. But we want to get to the bottom of what you can do to make things a bit better. But to do that you've got to understand some of the common mistakes that maybe you or salespeople make. So I'm just gonna cover some of those.

And Joanna drew the first or the short straw, so she has to cover three topics whereas I only get two.

The first point I'm going to talk about is often salespeople can go into a negotiation with their heads full of details about the products, they think about the features and the benefits of the product, they think often about the value in use, I think we've covered this before in a different podcast rather than maybe some of the problems that the customer may have and that's why they're asking for those particular products. I also think that a lot of salespeople go into negotiations trying to make friends with the other person. When this isn't the right time to do that, they often waste, maybe a quarter of their time, and you've got an hour to get to the point of wasting it on trying to be likable and being liked. It doesn't work in that context.

Number 2, and this is so much based on personal experience. In many B2B companies, people in the sales area often do not know the pricing shape, certainly, in a tender environment where there are many products and services. They can go into the meeting, they've come from maybe a lower level of sales where’s more personality-based, and they have a red card, and it has been provided to them by the finance department or some other department, they really don't understand it where they don't have any ability to move or negotiate on those prices, if there is pushback, they will have to leave the meeting and discuss it with somebody else and that leads us on to a very unsatisfactory meeting. It gives them no real room to negotiate. But one thing we often see is the finance department is very wary of many companies that go into these meetings they tend to be a little bit fearful of that confrontation.

Right, so maybe another point I'd like to make is that often salespeople can go into meetings with a light fuzzy idea about the customer's business and that's unacceptable. You should be completely across what your customers do. How do they operate? What their problems are? An excellent area to break the ice, to get to the nub of the problem, to see how your products and services can't meet that need? And a lot of salespeople just don't know what those problems are, they don't know the objectives and so then, therefore you have very limited discussions that don't mean anything to either party and maybe we can move forward from there.

Point 4, my second point. I often think that the sales personnel in that meeting, they're feeling they're between a rock and a hard place. I think the concept of the complaining salesperson is very common, but in many regards it is correct. So if they go into that meeting, they are given a red card, or to discuss the tender, they're almost going into their bright-eyed bushy-tailed hoping that the customer, the procurement team will just agree to that red card. If there is pushback in any way to the salesperson company, there are other stakeholders, you know, operations, etc. They will likely be very negative and bash that salesperson. So, the salesperson feels that it's confrontational both ways. The procurement team, there's a confrontational aspect to it, and then their own company when they get back to head office they're in trouble there too.

That leads to knock-on effects like they go into the negotiation with pricing that's very similar to everybody else. Everybody's trying to get the lowest price, therefore commoditising the whole market, the industry and it makes the negotiation quite pointless and difficult. From there you can seem kind of needy because you kind of know that's what everybody else is doing, so everybody's competing into the bottom result and race to the bottom. And then, in so doing, you don't know subconsciously, that looks quite needy in wanting the business the procurement team knows that and then you fall victim to all their techniques.

That's right. And I think techniques and framing is something we will discuss in our next episode. So, from today's procurement lesson let's leave it there.

And just remember where we were going over some of the mistakes. I've seen some excellent work and negotiations being held by sales teams as well and also cover that in another episode.

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In this episode of Pricing College - it is not exactly about knowing the enemy - but you have to know the enemy.

In reality - when selling in a B2B environment - any pricing professional will meet with and build relationships with procurement teams.

We ask what is procurement and what should pricing managers know about the procurement approach.

In today's episode, we want to cover a topic that will probably strike fear into the hearts of many experienced pricers, and that is the dreaded word procurement. So Joanna, what is procurement?

To summarize, procurement is a fairly new function and the main purpose is to buy products and services for their own business to operate or function and these could be materials to produce their own products and services for their customers. So, it is a very important function.

That's right, I think from a pricing perspective or a selling perspective you come into contact with procurement professionals in a B2B environment when you're selling to a business, obviously, private citizens make their own purchase decisions. But procurement in a company will have, at least a company of a certain size, they will have a dedicated professional trained in this area of expertise with the objective of getting better products and services at better prices.

A little bit of history about procurement, it started off as people say in World War I. When countries had to buy military goods and services,and they needed to ship and get things to where they needed to go.

That makes a lot of sense when you look at it from that perspective. If you're running a company the management they can't know everything about what they're purchasing, and so you do need expertise in the same way you need expertise in what you're selling, you need expertise in what you're buying, and it's to know the product and to know the service to compare offers and to compare the different values of these products and services deliver. I'll just give a footnote, we'll give them the positive side of procurement here, but there's also the negative side, from a selling perspective, but that makes perfect sense. Over those years since World War I and World War II when you're buying huge amounts of armaments, etc, and making the wrong decision could threaten your company's survival. If that profession has become more and more professionalised, an expert.

I suppose nowadays there are several steps into the procurement process and cycle but just to summarise, I suppose their expertise would need analysis for their own business determining what the business needs at a certain point in time. Then, identifying the right suppliers to get those goods and services for the business, and then monitoring. Do these goods that we've just bought make a difference? Can we cut costs? or Do we get the value that the supplier said we would? From then, the cycle continues and they would renegotiate the terms with suppliers, and this is where the tricky thing comes in terms of pricing. Difficult discussions around price occur from this point when procurement gets more educated on the goods that they're buying.

I'll be honest I have previously worked in a role where I was helping selling teams in a B2B environment sell to procurement professionals. One thing I'd say is, it's almost a mirror image of each other. You're both trying to maximise the value provided to the customer, I think the procurement team and the seller team are trying to do that. The polar opposite is the seller is trying to increase the price and the purchaser is trying to decrease the price for that increased value.

This is often a perception that procurement has about the sellers that they're in a way inflating the price. And this is often why they come into negotiations with a very cost focused mindset, and they talk about unit pricing, but it's not necessarily the case that the sellers are always trying to inflate their prices, often they're underselling the value and I think procurement realises this.

I think they do often as well and I think in that profession there can be quite a bit of frustration that they want to deliver more value to their own company, to their employer, and to add value that's what most good employees want to do. But I think from a pricing perspective and in our own profession we can learn a lot from the procurement profession, what they do well, recognising what offer they bring to their company which can be increased in value by understanding the value of an offer. And there's also another aspect that we need to focus on in future episodes which is the negotiation expertise, the reducing prices, and the framing of conversations. They're two separate skill sets, but both are vital of interest to our listeners.

I disagree with Aidan and I don't think that either sellers or procurements are very good at understanding value. I think sellers are very volume focused and I think procurement can be very cost-focused. Their main objectives for their company are to lower costs. That in itself eliminates a lot of value discussion. There should be an opportunity for both sellers and procurement to think very closely about what value means.

Joanna, I take your point, and I am always open to criticism. I take your point openly. I think in any profession, selling, pricing and procurement there are good and bad practices. I suppose I was maybe referring to a perfect world environment where what people do want to deliver additional value to the company that employs them, and any other stakeholders in the business. I suppose the last point I'd like to make on this podcast is as a profession you know if you're in a B2B environment and you're going in to sell to a major customer, who are you sending in to sell to them? Are you sending in somebody able, trained, competent, and confident with the skill set required to go up against a skilled professional procurement person? I don't know.

I’d like you to think about this as well as like, what is value? Is it just in terms of cost reductions? Sure that is an important element in procurement discussions, but also think about increasing revenue. How does that product that you're about to buy increase revenue for your business? How does that product that you're about to buy decrease the cost for your business? I'm sure you're completely over. How does that product that you're about to buy decrease the risk of the purchase of that transaction over a longer period? And do you want to establish a long term partnership that is going to generate a sustainable and safe option for you, your ecosystem, your business and your end consumer? So it's just broadening that discussion and thinking beyond costs and cost reductions.

I think so. I think most sellers, sorry when they go into that negotiation, they're focusing on understanding the contract. Are they focused on and often a big criticism of sellers, is that they're focused on talking about themselves. Are they trying to align what they're selling with what will increase value to the customer? The other thing is, are they competent, trained and knowledgeable in that area? Most big companies know that the procurement people do a lot of courses, they're members of Institute's, and they're dedicated professionals. In a large company, if you want to recruit someone from procurement, you get a procurement specialist. That's not always the case in the pricing environment.

I think education is required on both sides. I mentioned before, I think the value discussion value-based pricing and what that means is something that both sides of the equation could be better at, and we can then move the discussion away from line item pricing into real value total Economic Value discussions, and we'll go on to describe what that means.

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In today's episode - Aidan and Joanna discuss what is the concept of anchoring in pricing - and how you can use it to your advantage.

We discuss how people generally can only interpret pricing versus other prices.

We discuss how anchoring can be used in practise and how it can benefit you from negotiations to simply selling your car!

In today’s episode, we want to talk about one of those more dark art style aspects of pricing that isn’t purely cost-plus pricing strategy but the topic of anchoring.

Anchoring, it’s a concept that sits within the area of behavioural economics which fundamentally, largely has to do with psychology and behavioural psychology. The founding father of behavioural economics is a guy called Daniel Kahneman, he was the first person to question the economic theory of people buying logically rationally and suggested that people buy emotionally irrationally and this is where that concept of anchoring drives.

I think our listeners and nearly everyone will be aware of being influenced to some extent you know when the road shopping. A classic example is you go into a clothes retailer to buy some new clothes and you see 30% sale discount signs and somewhere in your mind, you think this must be a great deal because I'm getting a lower than a potentially even an artificially high anchored price. So, what’s happened here? You’ve been anchored to that higher price and with that, you think you’re getting a great price note.

Pricing is a good way to anchor people and to help them understand what value is. Because people find it very difficult to think about value. It's an abstract term, so they need it to be sort of framed for them and need to be anchored and positioned correctly for them to understand what's good, what's not so good.

Yeah and I think this topic has been covered in a couple of very good and easy reading books, covered by the child Eeinie influence I think was one where he covered it. And also, the book Priceless by William Poundstone, both of which give a number of examples of this topic. One thing that struck me was when you ask people how tall a mountain is or a hill is often they can't give it, they're often not aware unless they see it in reference to something else. And in many regards pricing is similar, It's the price compared to another price.

I suppose in terms of simple cost-plus pricing we were thinking about that earlier, and how people set prices on cost. If you look at that in terms of anchoring, you can see by setting prices on costs, you're lowering your potential to get a higher price because it's gravitating and anchoring everyone to cost, and you're not thinking about willingness to pay, how customers perceive value, and not testing that price ceiling.

I think that you can even argue yourself in a negative way, and you can even knock your own sales team. If you can't go on about the cost, there is a tendency for people to push it down to that cost. They will see it as the cost, the number that will be anchored in their mind as well. Another classic example in some of these things can be a little bit hard to believe unless you saw the statistical evidence. The classic example of buying or selling a used car. All the evidence suggests that if you want to sell it at a high price, you should ask the seller, you should just quote, get in there first and quote a high price, then you will anchor the purchaser to a higher price for the later negotiation.

There’s another reason why people don't like estate agents, for instance, they were quite reluctant in the past to use auctions because it has a tendency to pull things down but in a boom, however, they found that an auction can increase the price point because people are anchoring themselves by a dream of the best house in a lovely suburb. So, in a downturn, it's probably not good to do an auction, but in a boom time, it's probably a good option to use the auction as a way to sell houses.

Yeah, very often it's the way the question is presented to people, not just necessarily pricing but you can use this anchoring concept in many regards. You will see it in things such as referendums and countries the way questions are asked in political questions, the government's are often very concerned about framing the question in a certain manner. Because that is statistically proven to influence the outcome, even though the question is largely the same, the answer you get can be very different.

In Deniz Berkeley, there's an interesting study about how the concept of anchoring not just applies to prices and numbers but also applies to ideas. In this study, they wanted to see if the presentation of an exam influenced people's results, in particular women's results. And they found that having a different format, a more positive gender format increased marks for women by 10 to 20%. So literally how they framed the study, the exam did make people perform better, women perform better in exams.

I think we're going to wrap it up quite shortly. I think what we covered today really indicates that pricing and the pricing profession is much more than just numbers on a spreadsheet, there's a science but there's also an art to it and where that line is drawn, who really knows. But there is certainly room for people with very very talents in this profession, and hopefully, different people find this podcast interesting.

When you think about it, what does customer focus pricing mean? You are moving into more psychology behavioural economics, you are looking at finance and maths, but you're looking at things in its entirety. The market isn't easy to understand, people are easier to understand, but you have to try and find those different measures to gauge and improve your price setting.

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In this episode of Pricing College - Aidan and Joanna discuss a very pertinent question in the era of Covid-19.

What is price gouging and is it always wrong?

We provide a definition of what price gouging is?

Why should a business owner not pursue price gouging?

Do customers sometimes accept higher prices - and not regard that as price gouging.

In today’s episode we want to cover the question, what is price gouging? And when we find out what it is, Is it always wrong?

Going through the covid crisis we heard a lot about price gouging in various businesses like masks, medical equipment and some grocery goods. Is it right? Are they gouging? or Is it just a price increase? But first of all, what is price gouging? Price Gouging is basically when you are exploiting customers by increasing prices to drive a large amount of profitability all at one go.

I think in certain situations, we can all imagine where people would pay any amount of money for very non-descript items in other scenarios, such as if you’re extremely thirsty you pay infinite money for a glass of water. In Australia, during the covid crisis, people would have done anything for toilet roll but that’s a topic for another episode. But yeah, it’s exploiting the person who is in there of need and will do anything for that product or service at that point in time and then taking advantage of that scenario.

I think sometimes people mistake price gouging just like a basic price increase, they use those terms kind of interchangeably but they are different. It’s okay for businesses to make money. Why shouldn't they? They’re in the business to make money but sometimes when there is a demand for things like toilet paper, and mask because of certain crises businesses have to increase the price because they’ve got to make more of the products and they got to cover the production cost.

I think in many industries and sectors people completely accept that prices increase and sometimes increase massively. We’d give the example of the Cannes film festival in the South of France, somewhere I’ve never been but my understanding is for that one or two weeks when the film festival runs trying to book a hotel room would cost you maybe ten times on what it might cost at a lower peak part of the year. Another example will be in the United States, the Super Bowl weekend if it’s in a certain city I think you’d be foolish not to expect hotel rooms to be more much expensive, restaurant bookings all those sorts of things. That’s something people accept, they accept that for this reason, they will pay much more for that product or service.

It’s like the markets have been educated in a certain context like Airlines and Cruises to pay more when there’s a higher demand. In another context, especially for B2B, it’s almost seen as criminal to increase your prices to make even a small margin and literally, that’s come down or it could be just tradition convention and people are very reluctant to say we’re increasing prices because we were underselling our offer but rather they sort of hiding behind, we’re increasing prices to cover our costs and that B2B market which is an interesting comparison between B2C and B2B

Sometimes the way I look at price gouging I think of it is the question, Is it gouging or not? I would say it is gouging if it leaves such a bad taste in the customer's mouths. If they’re so annoyed by it that literally, they’ll never do business with that company or person ever again. The fact they’ve got exploited once and that’s it, they never go back. In theory, the shopkeeper of the business, what they’re doing is they’re making a lifetime profit on that one transaction and then they’d be burning the future.

In B2B, sometimes procurement teams react in the same way. They’re almost appalled if you increase your prices even by a small tiny percentage simply because it goes against convention even though it could be underselling your products and you’re just claiming back the value really that you deserved.

I think price gouging becomes an issue when the person or customer has to buy it and there’s no other venue to get the same product or equivalent product elsewhere, the examples of an emergency hurricane and those sort of things where there’s another plausible scenario. I think if a company can go and get their supply from somebody else then it’s just a normal business I don’t think in any way it is price gouging. The other thing I say is the example we give of the Super Bowl and that sort of stuff, those are leisure activities and I think nobody has the right to go on Super Bowl every year. We get into much greyer areas much more questionable areas with units of medications and certainly new medications, Yeah, this is something for another topic but certainly a much more valid question.

I think that’s really what the debate was it’s like when the boxes of the masks, the medical masks are being priced hundred of dollars people did object and rightly so just because of a peak in demand, there may have been supplied side issues as well at the same time that is gouging.

If you’ve bought a product and service I’d say just ask yourself this question, throughout the crisis if you bought something and you thought you were exploited to the position that you wouldn’t go back to that shop ever again I would say that qualifies probably as a price gouging.

No, it’s a lesson.

In Layman’s term obviously, but yeah I think every one of them that’s a good way to look at it.

I think it’d be a good topic and we’ll discuss this later. How you can justify a price increase? Yes, you’re going to have some customers who will reject or even feel emotional about any type of price increase. But this goes into understanding your business model, understanding the value that you offer and being confident in having that higher price and then being willing to forego some customers that don’t agree with you.

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In today's episode of Pricing College Aidan and Joanna discuss 5 obvious problems with cost plus pricing.

If you come to a podcast on pricing - you may not be surprised that cost plus pricing is not a perfect system.

We discuss issues such as:

• should you lower selling prices if you find a new way of manufacturing

• why cost plus can destroy value creation

• why choosing a margin often makes little sense

• why using cost plus can give procurement teams to push you down on price.

In today’s podcast, we are going to cover five reasons why cost-plus pricing may not be that good.

Before we touched upon the cost-plus pricing, looking at some of the benefits that we said it seems to be rigorous fair and logical. So yeah, today we’re gonna look at some reasons why maybe you shouldn't use cost-plus pricing

I think we picked a nice odd number like 5 which means that Joanna drew the short straw, so she has to do three reasons and I only do two.

Let’s start off with one, cost-plus pricing can be an overly complex cost allocation formula. It looks at both fixed and variable costs to set a cost position which basically means that it tries to allocate all these different costs across the product portfolio. If you’ve got a hundred different products, that’s going to be very complex.

Okay, so that’s number 1. Number 2 for me is that it tends to lead to a complete lack of innovation or financial benefit to innovating. If you think about the product, let’s say you’re manufacturing a telephone, it’s a new smartphone and you charge a 20% markup on that as your profit through cost-plus pricing. In that scenario, we’ll say you find a new technology and a new method of making a telephone that means it’s half as expensive to manufacture. Does that mean that you should cut your selling price by 50%? In that scenario, innovation will actually destroy your business.

From the point I made, it’s a very complex cost allocation formula but yet the mark up on that cost formula is simplistic, the percentage markup on cost. It takes a lot of that hard work why would you do very complex cost accounting and then sort of just make up a margin on top, it doesn’t really make much sense.

Actually, I just cover a lot on that one with Joanna’s point number 3 and I think yeah, financial people love cost-plus pricing because it seems to be rigorous and factual and then just make up a margin.

Yeah, that margin fundamentally means you either overcharge your customers or undercharge your customers.

I think that is point number 5, I’m gonna go with point number 4 . So my point number 4 is that when you practice cost-plus pricing and your customers know about it especially if there’s an aggressive procurement style customers know how to drive down the price. If they know that you practice cost-plus pricing they’re gonna want to know, and it’s the worst thing to any salesperson when they start asking about an open book or seeing your cost structure, the warning bell should be ringing. I remember I worked in the sales business and when the customer said we only make a 4% margin why should you be making 15% we want you to make 4% as well and it’s when they know what your cost structure is. It’s real trouble for you.

The last one would be that cost-plus pricing doesn’t take into account the market. It doesn’t look at the relationship between price and volume on cost and just focuses on that pure accountancy view in the spreadsheet. Misses out and lost the market dynamics and unfortunately, because of that, you can have this great innovation, a product innovation but really if using cost-plus pricing you can often undersell the innovation because you’re not looking at the value of the offer and adding that additional price premium that you deserved, underselling yourself.

I think we’ll leave there. I suppose as a final point for me if you believed in your product and want to give value to your customer really improved their lives and cost-plus is not a great way to do it.

There’s a lot of different methods now we’ve moved on from that basic, the cost-plus markup and we’re gonna discuss those different methods in future episodes

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In this episode of Pricing College - Aidan and Joanna look at the polar opposite of a value based pricing strategy - i.e. a commoditisation approach.

Under commoditisation - we really assume that a product or service has no real value adds - and is identical to other competitors in the market.

This approach generally leads to lower prices, less profits and a lack of investment in enhancing value.

In today’s episode, we want to take an almost counterintuitive approach and we’ve talked about what is value-based pricing in the past. In this instance, we’re going to ask what is the polar opposite of that, What is the commoditisation of a product or service?

We sort of touched on that with the commodity mindset but, it’d be an interesting conversation just to unpack what that means in terms of how different business leaders think.

From my personal experience, I’ve worked in companies where the marketing people could talk about the value all day long but sooner or later someone in the finance department would argue and say “no, no we only sell at a low price, the customer only buy at a low price”. I supposed they’re the polar opposite of the same polar opposites of the spectrum when we look at value pricing and what we’re trying to sell. If you are competing at a purely low price, you’re making an assumption that the product or service you’re selling is literally identical to that of your competitors, new entrants or anybody else in the market. This could be true in the instance of buying a share in the stock market where the share you’re buying would be a share in Qantas or any company you want to think of. The stockbrokers may give you different services or experiences but you’re buying on the market and the price you pay will be the market-clearing price at that point in time. You could also think of what are the very commoditise products, we think of raw materials things like coal, timber and oil those sort of things. As long as they’re coming from the same area, the material is chemically the same as another one it’s pretty close to being commoditised.

People think in that commoditised way of thinking about it as if they are trading in the stock exchange. They’re thinking about things as a sum of its parts, there’s a very component-based, unit-based sort of pricing thinking and logic. Equally, I would say we can’t dismiss that because there are some customers that buy in the very same way and we call those price-sensitive customers. But on the other hand, there are customers that don’t see an item based on what it’s made of. They think about the value it can give them and the problem it solves at a particular point in time. I think they’re both perspectives can be seen on the buyer side and the seller side.

I think another area that nearly everyone in the pricing profession, at least in the B2B environment has looked at is doing tenders where you’re dealing with procurement professionals who almost are trying to shout at you that your product and service is commoditised and it’s purely a red card exercise and they want the lowest price and that they’re not considering the additional value. That’s something many of us have gone up against and it’s trying to explain, we’ll give you the example if you’re buying two apples, people also had apples and apples. You’re comparing two apples, but if your two apples were on the table you want to ask: How fresh are both apples? Were they’ve grown organically? Were they grown with modern chemicals? Will that apple will be delivered to me? Or will I have to go and collect that Apple? Can I pay that Apple with cash? Do I have to pay for it with credit terms? There’s an infinite number of things that could be slightly different about that apple. That’s something that is seemingly commoditised by the time you eat it, consume it and then enjoy it. It’s a completely different experience.

It’s quite strange if you’ve talked about all those things that can be involved in just buying an apple but often they’re sold based on what they look like, the features and benefits and all of those other risk drivers is what I’d called. What you are really saying is deliberate time, and failure to supply or things like that I really never discussed but potentially that’s why the procurement do is gravitate unit pricing discussions.

It does not mean in the gone on now about apples but I find it quite interesting. I believed in Japan, there is a very common gift that people give. It is a very aesthetically pleasing fruit, but the fruits are not designed to be eaten but it’s designed to look at. It will come in a nice box and presentation gift set which is a completely different value driver than somebody eating the apple. So yeah it’s, what is the product really for? Are the product and service are commoditised items? or is it the paraphernalia that goes with it?

I supposed that to summarise it’s the value in use and the value at risk principles and you need to appeal aesthetics show of value at use. Some people buy purely on that, but other people buy the value at risk and they want to ensure that a certain product is going to come to them without any delay. There’s not going to be any product failure and they want you to describe to them how you’re going to do that and that is the discussion that does drive additional price premiums, especially with procurement.

I think there’s often a huge amount of risk in the purchase decisions and what you want to do as a smart buyer is reduce any potential risk. You go to buy like a Rolex watch, you can either go to a reputable jewellery store buy the watch you see the exact type of it, you’ll get a guarantee or a warranty that if it breaks you can bring it back to get repaired. It will also likely come in a beautiful gift box, all wrapped up and it’d be presented to whoever is going to. The alternative is you buy it from a dodgy guy on the street corner. He has assured you it’s fine and you probably get it at a much-reduced price but, are you really buying the same item? There’s a very high chance it is the same item as a basic watch but the paraphernalia around that you’re purchasing reduces your risk that’s makes you happy, they’re trouble chase.

Largely we buy because we want to avoid risk as well as the actual thing that we’re buying. A good pricer will think about what a product is when they’re setting prices but also the risk the customers are avoiding by buying that product from that business and that really is one of the secrets of really great pricing. Setting pricing on value, unpacking value in terms of value at used and some value at risk

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Aidan and Joanna discuss the topic of penetration pricing and how and when it can be used.

Is it a suitable approach for a new business - or to give people a taste of a service or product.

Is it difficult to increase prices once a service becomes associated with low cost in customers minds?

Does penetration pricing go against value?

In today’s episode we want to talk about, What is a penetration pricing strategy?

Basically, it’s when you have a new entrant in the market where the products are fairly similar to other products out there already but they want to break into the market. They’re gonna do so by taking somebody’s else’s market share, maybe one of the bigger players.

When we are talking about capturing market share in this instance, we’re generally thinking about pricing it at a rate so competitive or thinking probably a low price that will make these other competitors cheaper seeming to be a similar product that people can make an immediate switch for and save money.

That’s the assumption in this strategy that if we break into a market you do need to sort of drop prices to be competitive, to be seen, and to be noticed, a differentiator. Other people would have argued that this strategy possibly isn’t the best pricing strategy to take even if you are a new entrant that wants to break into the market.

Obviously, if the company launch a new product, a new service or even the company itself in many instances there’s a certain volume required for the company to be viable. Whether that’s producing enough products, using the factories or fixed assets that you have you need to hit a certain rate or amount of products being sold just to be break-even before your cash runs out as a company. Getting to that position quickly can be a key target for many companies.

But market differentiation isn’t always based on prices, you have to personally think about the product and the product’s innovation. You need to know that your product or be it similar to other people’s products, has to have an edge, or a difference to capture people’s attention. Then think about the pricing, because research has shown that by dropping pricing too low you don’t necessarily break even and get the numbers that you want because not everybody buys on the price they buy on value.

Yes. From my perspective, if you think about a marketing approach a lot of people may think that their product is great, it’s better than other ones in the market. If people get a test of it, they will continue with it in the future. Whether it’s a loss later is a different question, but a very competitively low priced offer for the introductory fears to get that mass-market testing experience they may think that will lead to longer-term referrals, longer-term sales and wider market who can review it etc.

True. At the same time, it’s very hard to increase prices once dropped to a certain level. So then, you could have a great product that you spent a lot of money on and it’s very different from your major competitor's product but you’re underselling yourself and you're forever then struggling to increase prices and justify the value.

One thing I think anyone who’s ever worked in a pricing role will understand is the difficulty in getting to a price rise whether it’s an annual price rise, a price adjustment or whenever you want to phrase it. Customers who are used to paying a dollar, tend not to want to pay a dollar fifty. If you start of your users, consumers and whoever purchased that product or service on a certain price then coming back to them after six months or a year saying that ‘You know what we’re actually going to jump that price.’, the response you get may not be what you hope for.

This could be a failing of the penetration strategy argument, the assumption is that you can easily just increase prices and the market won’t mind. It’s just not the case and many prices will tell you that. But there are some good examples of new entrants that have come into the market with similar products and have been able to justify more above-average prices. One of them is a competitor to Doritos and they’re called Harvest Snaps, I don’t know if you’ve had them, Aidan, those dried peas and lentils salty snacks they’re very popular, very similar and competitor to Doritos but command a higher price even though the weight and the package is smaller.

To be honest, I have had them and I have enjoyed them. I think what I’ll say is, do people purchase products based on purely low prices or is it the features, benefits and value or whatever it is with that product. In the instance of salty snacks, are people buying them for a cheap price, or enjoy buying them as an alternative. Is it even just because the product has been positioned in a convenient location on the shelves in their local supermarket? Are they also just bored of their incumbent? And ease the product you’re buying now isn't a direct competitor for what is there. In penetration pricing, you could also have that system whereby it’s a completely new product that nobody’s seen before and they don’t want to take a risk on it. But if you can give them a test at a low rate that doesn’t hurt that pocket then you may be successful, and you may grow that market share. People may think that I love this new type of salty snacks as we talked about and I might continue buying it even at a slightly higher price. The other thing to bear in mind is once you become used to purchasing something in the supermarket at a dollar and you or the kids want it after a while you probably don’t even look at the price.

It becomes a habit. I think with the Harvest Snap example, they came in a good time. Consumer sentiment now is much more in favour of healthy eating, people still however love salty snacks and we know that obesity is still on the increase. People are still consuming fatty goods at the same time people want healthier alternatives so that came in on that sort of site geist and they were able to get and claim that additional price premium and at the same time take market share which is the objective of the penetration pricing strategy.

I think in all things pricing in business you have to consider why you’re doing something and what is the strategy behind it. Then once you have the strategy, you look at the tactics to implement. Often there’s no right answer but you have to know why you’re doing it and what you want to achieve from it. Penetration pricing sometimes can go alongside market share objectives where a lot of companies still have it’s almost a chest-beating concept where they want to have the largest share in that market and that’s the point of pride, even if they’re losing money. You’ll see that in any industry from the automotive industry traditionally to pretty much anything. It’s what does your company want to achieve? Is this a suitable tactic? and Does it work?

That’s right. You can’t just apply a strategy verbatim as they say. You’ve got to customise it and look at the market and your customer base will tell you how you should customise any sort of theoretical strategy

I’ll finish off by saying if you’ve got a product or service that is a great service and people want, that will improve their lives and give them value. Selling it at a too low price can’t be the right idea unless you have to get acceptance or people have something holding them back from trying it and price is what’s holding them back. If that’s what your market intelligence tells you, potentially that’s the right option other ways, always ask some more questions.

This is what prices do. Looking at optimal pricing, what is the best price? Yes, it could be low but, does it have to be the lowest? That’s the question and this is what you've got, you’ve got to test but don’t test with rock-bottom price first because you’ll find it incredibly difficult to get the price back up and then you’ll forever be thinking I’ve undersold myself.

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Aidan and Joanna discuss (or some say argue) about the difference between pricing and revenue management.

Is revenue management a sub segment of pricing generally - or is it a standalone area.

Is revenue management only related to capacity constrained industries - and does Aidan always talk about airlines and apples?

In today’s episode, we want to talk about, what is the difference between pricing and revenue management?

In broad terms, I would say price management concerns setting and managing prices to drive profitability for the business and your customers, whereas, revenue management concerns allocating inventory to optimise your revenue.

You probably notice if you’re applying for a job in the pricing sector is that revenue management being honest, seems to be more jobs. There seem to be more jobs that describe this revenue management particularly in fields that are very much affected by covid bizarrely; Airlines, hotels, rental cars, and cruise ships those sort of things.

This is because pricing is often misconstrued as revenue management and considered more of the tactical lever as opposed to a strategic lever. People use pricing and revenue management interchangeably because they want to drive volume or tactically discount in the market to push volume.

To my mind in Layman’s terms, I think of revenue management as a sub-sector of pricing. If the entire sector is called pricing revenue management to me it applies to a certain sector which is capacity-constrained areas, ideas such as hotels, and airlines where you have a certain number of seats, rooms or cars that you can rent out. If demand goes through the roof overnight, you can’t increase a supply hugely. You’re trying to maximise revenue while assuming that your supply is constrained by physical capacity. On an airline, if flights flying from New York to London tomorrow there are 500 seats on that flight no matter what you do, you can’t make more.

This is why revenue management is moving into more forecasting demand so they can use that information to increase supply and know ahead of time that they need to produce more. In the instance of airlines, more flights.

Fundamentally, you could put on a very busy route you could put a different flight on. The way I look at the famous example as always the flight about to leave in one minute and there’s one seat left. What would it be profitable to sell that seat at? A famous example is a dollar or even one-cent as long as you’re not consuming excess fuel in the flight any extra money you bring in is profitable to the company.

Yeah. Because you wouldn’t have sold it anyway. That’s right. Another example would be fuels and energy gas, they are traditionally known as businesses that use revenue management dynamic pricing but that was more on the supply side, they’re using it to manage their supply. How much they should produce and allocate to their distributors etc. But now they’re using it to think closely about forecasting, consumer demands, and what drives people to buy so they can utilise revenue management to be more of a strategic lever.

When you think of revenue management as almost if you could think of it today as maximising revenue from what you have today. We take an example again of an airline whereby people will accept the prices change based on criteria such as time of day, red-eye flights are cheaper they will accept that flying between two non-main airports might be cheaper and flying over a weekend may be discounted if you do a longer stay. They will use methods to price discriminate between the potential customer to make sure they get every potential dollar revenue out of those customers that they can. If there’s one seat for sale, if you sell it to tourists who may or may not want to go to a certain city versus the business person who has to get to that meeting on Monday at 9 am; the willingness to pay difference could be massive.

This comes down to customer value drivers, understanding why people are buying. How they’re buying? How they’re buying from? Are they coming through your website? Are they coming through your call centre? What’s the urgency they need to buy? Things like that.

Looking at revenue management in recent years, a huge amount of technology, computer programs, and analytical data have been applied to that. If you think as Joanna mentioned the number of potential value drivers for those customers it’s much too much for any person to keep in their head. But computer programs PROS as a famous example the number crunch thousand of potential even more.

Yeah, they do that. But, they first look at segmentation to break this down. They break into what they call micro-segments which are fundamentally like different groups, which you can allocate groups of customers, and different groups of competitors. It’s breaking down the market so you can make it more manageable and you can review the value drivers more systematic way. Then you’ll find out that there’s a cross over between groups and other groups that are not.

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Do you think things or great or do you sometimes think your pricing is all wrong? Is this a cold reading?

We ask what are the lead indicators as to whether your pricing is great or failing - and why asking the question early can save a lot of problems down the line.

Pricing can be the canary in the mine - and it is always best to know early.

In today’s episode, we want to ask the question, How do you know when your business has a pricing problem?

It sounds like an easy question but actually, it’s quite difficult to detect you’ve got a pricing problem. Often business leaders think about pricing right at the very end and they don’t think it’s the problem, but it’s the cause of driver of a lot of other issues. I just wanted to discuss some of the things you should look out for or double-check you’ve got a problem or not.

When we look at companies, a lot of companies assume they have a pricing problem but one of the best reasons to do this in advance is it’s a lead indicator of future business success. If your business is facing a pricing problem that will suggest that down the line there will be a financial impact, there will be a business success impacts and I think it’s almost a canary in the main concept where it gives you that lead indicator whether they’re at six months or a year in advance.

Maybe you should always look out for and measure as part of a general financial rigour and check if you’re on the right track. So one of the things you probably should look out for is on the P&L, a very basic, is if your revenue is increasing but margins are declining this is a good sign but potentially you may have some pricing issues.

If you’re selling more and more but the pricing you haven’t reduced it at. This assumes that there’s no huge volume discounts or rebate strategies in play, but to sell more products you are having to discount and reduce your margins. Another aspect of this can be more of a people aspect talk to your sales team, see what they say.

They might be complaining that there’s a lot of pricing pressure out there, a lot of competition and they’ve got no choice but to discount a lot of the products even the high-value products more than they want to, it may be the case. It’s a simple sort of cost-plus pricing methodology that isn’t covering substantial price premiums that you could charge or it could be indeed something that you’re struggling to cover the cost of CapEx even though you see your sales teams selling lots of deals and lots of products but you’re just not getting returns there.

I think, especially for more capital-intensive industries whereby you need your business to be the return on investment has to certainly cover the cost of the capital otherwise you will eventually go broke. If you’re investing in a business that isn’t growing, doesn’t have pricing power sufficient to forecast or give you good confidence in ongoing profitable growth that will cover the investment; it’s a ticking time bomb.

It’s good to think about your pricing power, so you’ll know what price-setting methodology you should use. But it’d be quite dangerous to apply value-based pricing in a margin constrained industry with limited pricing power, you need to think very carefully about your P&L and your price setting methodology.

I think when we talk about looking at a business and seeing what doesn’t have a pricing problem, the flip side of that is the opposite of a pricing problem is having pricing power. Like Warren Buffet, probably the world’s famous investor he always talks about pricing power in businesses that he looks at. He looks at having protective moats and pricing power whereby that company can either maintain pricing or increase pricing over a short-medium term.

It’s funny that sometimes if you just look at the P&L to determine your pricing power you can think you don’t when you do. This is a sort of a mindset issue, we see a lot of companies that potentially have more pricing power than they think they do but they’re constraining the power of pricing because they’ve got a commodity mindset. There’s that sort of tricky line between looking too much at the P&L to determine pricing power and thinking psychologically about the culture of the business and trying to unlock both, the mindset and the P&L.

We’re seeing proactive institutional investors, people like private equity. Classically, what they do is the buyer company take on debt and then they try to improve the company through either cost-cutting or improving the commercial focus. And pricing is becoming much more common in that area whereby streamline did the business system but also improve the commercial and pricing approach and pricing outcomes.

Private Equity now staying in businesses much longer. They growing the business and they look at the pricing when they’re buying a company to see if there is indeed pricing pressure. Once they bought it, they want to grow their business and they’re introducing more sophisticated pricing techniques, value-based pricing, dynamic pricing, to ensure the return on investment.

We’ll wrap it here today but what I’d like to finish on is that having a pricing problem is not always a bad thing, spotting a problem is the first step of fixing it. Knowing you have a problem that just tells you, you can improve.

That’s right. When you think everything’s okay or you don’t have a check-in place to make sure things are on track. Ask those questions, look at the P&L, and look at the behaviour of your team to give you a sense of where you’re at with pricing and never underestimate your pricing power. Think about mindset, P&L and team behaviour.

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We know what you came for - it is a chat about value based pricing and what it really means.

Lots of people (from outside the pricing profession) have doubts about value based pricing - and whether it can be implemented in your business.

We give some simple examples that hopefully make it clear what it is all about.

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We want to cover something slightly more, maybe exciting or interesting. We want to cover, what is value-based pricing?

Value-based pricing, it’s a method that people are starting to use a bit more but there’s still quite an element of confusion about what it is.

To some extent, I almost say it’s a bit of a holy grail in the pricing community. A lot of people want to move towards it but they’re still certainly looking in the vast majority of companies there’s a reluctance or a misunderstanding or something holding people back.

Also, something that seems to be in the hands of consultants more than the business community but we’ll get on to that may be a later date.

So Joanna, what is value-based pricing?

I supposed in theory, it’s a processing method whereby you set your prices based on what your customers perceive as valuable about your products and other people say setting prices based on your customer’s willingness to pay.

You could think of it as a customer purchasing a product or service at a price that they’re happy with. A price that they think is a fair reflection on the “ value “; the value whatever that may be that they are receiving so they don’t feel like paying too much. They don’t care about paying too little but they’re paying too much for the value that they are receiving.

That’s the tricky part knowing where that best price, that sweet spot of pricing is for different customers because everybody knows we’re all different and we’re all willing to pay different amounts and I think this is where people may be businesses get a little bit sort of maybe confused or a bit reluctant to use it. Because it’s very difficult to know how many because there are thousands and millions of people out there prepared to pay different prices. So what’s the best way to control value-based pricing in a business?

In the last episode we touched on cost-plus pricing and we discussed one of the big pluses of that is it makes sense to many people certainly from a finance background it’s easy to understand.

Easy to use and apply.

Yes and I think this value-based approach it’s almost the polar opposite it sounds, I’ll be honest it sounds hard.

In many ways, it’s not easy but it’s applying rigour and discipline to the price-setting process. You need a set of rules, you can’t just dive into it. There’s a science, there’s mathematics, there’s economics, and psychology all involved in that which I think I’m making it sound even harder but I supposed you know to say it’s easy it’s not.

I think for people who haven’t listened to the podcast you don’t know much about value-based pricing I think we’d like to give two examples that make it clear to you, how it works in the real world. For example, the first one I’ll give is the concept of rebadging cars. In the auto industry, certain factories manufactured cars and they come out of the production line and there’s a different badge stuck on them at the end. What we see is fundamentally the exact same car except a badge can be sold in the same markets at different prices. And, we’re not trying to trick the customer but the customer is actually putting a value on very different things, not just the car itself but items such as brand prestige perhaps financing packages; lots of different things.

I suppose here it’s the job of the business to work out segmentation. Value-based pricing becomes much simpler when you understand your market and you break it up into manageable sort of groups. You group your customers it was from that example you got the same product, it’s pretty much the same it’s just how your customer perceived that product which adds that additional price premium but just because you can add a price premium doesn’t mean you overcharge the customers. I think, very often value-based pricing is seen as an overcharging method but I think that’s incorrect. Value-based pricing is adjusting prices to the market it’s actually creating fairer prices.

Another example I will give and I saw Joanna commented there she had a new handbag I don’t know about handbags but it appears to be an expensive one and I suppose in that context the cost of manufacturing the bag I don’t know does it even have anything to do with the price of selling.

Well, again we’re going into psychology here why do people, why do women buy handbags? I suppose it comes down to things like prestige, which could be status, these are things called value drivers. And it’s a job of a pricer to find out what the unique value drivers are and from here set prices based on those types of qualities they’re not always tangible qualities, they’re intangible, psychological value drivers, it can be emotional value drivers and things like that they’re not just financial.

We’ll finish up whereby we’ll say those items there’s more know on financial reasons that’s something that makes a lot of people certain in the finance profession you know a bit scared I think of value-based pricing but I’d also like to finish by saying I’m very glad that the value drivers driving expensive handbags luxury products don’t apply to me so I don’t purchase them.

Well, I think this also comes down to having a diverse team you do need different disciplines to get involved in the price-setting process so that you can ensure that you’re charging the right price for the product and using a range of different methodologies to ensure that the price is the correct one.

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In this episode of Pricing College - Aidan and Joanna discuss what cost plus pricing really is?

We do not focus on the weaknesses or potential negative impacts of cost plus pricing but introduce the topic.

Cost plus pricing can be as simple as adding a mark up or margin to your costs.

It can be as simple as buying an apple for a dollar and selling it for two dollars.

Cost plus pricing can be very appropriate for simple trading or arbitrage style businesses or for simple retail businesses.

Cost plus pricing tends to be popular with finance professionals as it is easily understood and gives the appearance of common sense and financial rigour.

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In today’s episode we want to cover that seemingly, very simple question but something fundamental in pricing; What is cost-plus pricing?

A lot of businesses used cost-plus pricing. It’s a very common price-setting method and technique. We won’t go into a lot of detail about the weaknesses of cost-plus pricing but we will discuss what it is.

I think certainly the obvious flaws or problems potentially with cost-plus pricing is something we’ll cover in not one future episode but I assume many. But what we’ll cover today is the pluses of it, how it’s done, and why this is seemingly very efficient and make sense to so many people.

I supposed in a very simple way it’s a mark-up on your cost; fixed and variable cost.

Some people say a mark-up, other people try to capture a certain margin but fundamentally it means if you buy an apple for $1 you sell it for $2. You make a profit on each item you sell and at the end of the day, that’s a very sensible business. As you get more complex in business you may not want to make the same profit on every apple but, if you’re selling a thousand apples on average you want to make a profit on each one you sell

Yes. If you’re pretty confident about your cost position then cost-plus makes sense. It’s just perhaps when markets change, it becomes a little bit more tricky but we won’t get into that right now.

Fundamentally, cost-plus pricing makes sense in a very simple business that could be a trading business; An arbitrage style business when you buy a commodity and sell it with very limited value add. In that context, if you’re a price taker from purchasing it can make perfect sense. Especially if you have limited ability to influence the price you are selling it out.

I supposed it’s not about a technique to use. It may be in a retail business as well. In a small retail business you've got relatively few products that you’re selling, you know your cost. It’s not about approaching your first step into setting prices.

I think also in this episode, we’d like to cover why is it so popular and why is it so accepted in the business community, and often if you talk to people who are not pricing professionals cost-plus pricing is what springs to mind. I’ll go first in this one because I am an accountant patriot previously and it does appeal to accountants and financial professionals who love looking at cost, P&L and balance sheets.

In many regards, I think it’s used because it was the first pricing method that ever existed. Makes 99% of the businesses use cost-plus pricing. That’s what people are used to and maybe it’s used because it’s a tradition; a management convention, and some people don’t know that there are other things out there too. I don’t know. Aidan, you’re the accountant, what do you think?

Thanks for reminding me and I supposed in accountancy people, there is a real dedication to numbers and the seeming solidity that numbers give. So if I see your grills, the CFO wants to know why decisions are being made and basing things on a cost-plus method gives a solidity that makes it seem sensible. Certainly to people who do not have a marketing sales approach or mindset and of course without trying to bash certain professions here. Certain professions are more focused on you know value marketing sales and others; and yeah I think that’s fundamentally it.

What appears to be quite a rigorous logical approach, is that what you’re saying?

It’s the appearance of a rigorous approach whether that makes sense or not I don’t think matters but, I think we’re straying into some negative territory which I think we leave for a future episode.

It’s good to find out where this convention started and why people are so dependent on it and I don’t think that’s a negative

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