Pricing College Podcast

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.

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. 

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.

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.

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. 

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. 

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. 

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.

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,

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. 

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. 

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

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?

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. 

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. 

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. 

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.

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!

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.

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.