Pricing College Podcast

In this episode of Pricing College - we discuss why it is so vital to really plan out a pricing role before starting the hiring process.

Being honest - so many pricing hires fail to deliver on their promise - and this can usually be prevented by scoping and planning in advance.

In today's episode, we want to cover a topic that sometimes people don't consider before making their first pricing hire. That often is when a company employs the first person in a pricing department or kick off the pricing project, oftentimes, they can be disappointed in the first year with the results. They can think they might have achieved more or they hope to achieve more. But in many cases at Taylor Wells, we think that is down to at the beginning before you start the employment of the higher of the person. You haven't scoped out the role, and you haven't timelined what you hope to achieve in those first 12 months.

We do see a number of assignments. A lot of vague job descriptions are being handed over and an expectation to get that pricing superstar that can do everything. Even though, just because on that job description got literally every skill and task known to man or vice versa is just too vague. And it just indicates that there's absolutely no scope has gone into it. And it's just like… "oh, we want that person to make the role their own". Yes, that's a nice thought but it's either you want the person to take the role, their own, and it's so vague that they can do everything and then they sort of like anchor us. Or, the job description is so tight and restricted and full of like requirements that they have absolutely no room to breathe, create and drive strategy. So we're finding either end of the spectrum is occurring and both indicate there's a real lack of scoping out the role. Scoping out the role, not in terms of what the strategy is. The problems have got to be solved, the cultural issues that are occurring in the business, the change management requirement, the project management requirement and the EBIT expectation. How much profit do you want the team to make? Then the ability to say… "okay we've got the best pricing people on board we're going to allow them to do what they can do best". I think there's a reluctance to let good pricing people do it. Because often, maybe the business don't know what they can do and that's indicated by the scope and the lack of diagnostics prior to the hire.

I think there are two fundamental problems here. The first one to me is when you're employing a pricing person let's say you realise there's a problem. But just because you know the problem, it doesn't mean you know the solution. Oftentimes when you recognise a problem such as we have no pricing strategy that insinuates that you do not know the solution. When you draft a job description, and we'll see these oftentimes when companies are so committed to annual reviews, metrics and this idea that if you can't measure the accounts, you can't track it. What can happen is people are tied to ludicrous metrics that have nothing to do whatsoever with the job. So, the metrics can be set and the job description can be written by people who fundamentally recognise they don't know what they're doing. What that will do is lead people, lead the first person to come on board or the pricing person leads them down the wrong path. They'll know what they have to do but their actual contract may state the complete opposite. So that's a fundamental flaw. The only thing that's strange about that is you can come on and start a company and be presented with your metrics and your KPIs and the person looking at them can think this is ridiculous, that's the first law. The second one I would say is in a timeline when you started pricing role in any company. Specifically, if it's the first time it's happened in a company there can be pushed back. We've covered another podcast, whereby, everyone knows a little bit about pricing where everyone has a view on it. So if you start in the pricing company. You will get pushback, you will get people issues with sales, marketing and operations, with the people who control the P&L. And that pushback will happen and unless you have easy wins. Timeline produces and shows those easy wins to the company that push back will get more and more. And sales or people like that who want to protect their turf, there's nothing they welcome more than the opportunity to say… " Oh, this new department is useless or this new department is not cutting the mustard".

Often people say to me, how can we integrate this new pricing team within the business without disrupting our operations or our other teams? I suppose it's the same answer, you've got to understand and scope out the team structure, the role and understand the problem. As Aidan says, some people do understand the problem. But I mean understand the problem in detail like a pricing expert. I mean, even get the pricing person to do another diagnostic to show you how a pricing person views your business problem. Not just from a strategic high-level strategy from a pricing perspective because then, you'll see it in a whole new light. I mean I speak to a lot of CEOs and they often say to me, that we didn't realise we had a pricing problem until three or four years down the line. It cropped up in other ways. We only started realising it could be an issue when we saw the amount of discounting that was happening. And our sales team saying we don't trust the price list other than that, it was just like the way it was. I didn't even know there was someone who called a pricing manager to fix a lot of these issues. People just relied on legacy priceless, it was just what happened and nobody questioned that. Everyone just assumed, "oh we know we can solve the problem may be by just consolidating or buying our competitor that will solve the issue". Temporarily it does but then a new one crops up. What do you do to compete? You've got to review what the value of the business is in terms of, how customers buy and consume your products? Is the price therefore right? That's called the pricing discipline. This is where it's evolved. And pricing people are good at that, that's where the depth and breadth of expertise lies. Their job in a way is to show you that different view. We don't expect CEOs and CFOs to be pricing experts, that's why you get a pricing team. You want that fresh perspective. Because that fresh perspective will help you with a whole heap of problems and stop margin erosion from occurring because of pricing.

That's certainly true. I suppose my final point I'll say about pricing is, no matter who you hire, no matter if you employ the greatest pricing expert the world has ever seen and put them in a company. And you put them in an office then they're not getting any support, the CEO, the chief executives and the big senior executives in the business don't listen to them. If nobody listens to them, if nobody supports them. If there's no forum for discussion of ideas, if those structures aren't in place, if there's no support given when needed and if the other stakeholders in the business believe they do not have to listen. Or, even communicate with this new department it's almost guaranteed to deliver no value whatsoever. If you add on to that metrics that are valueless or metrics that do not help or even go against what is the department's trying to do. You're almost locking in failure. And so it's like building a house if you want a house to last you have to build a great foundation. But you plan and build the foundation before you start in the building that's how I'd set it out. With any pricing department, it's a great opportunity before you hire the first person. You'll save money down the line by spending a little bit of time and effort. Scope it out now. Get some expert advice whether internal or external, or you're just doing your reading. But think and dig into, what you want your team to do? What do you hope them achieve? What you and your senior leaders will do to back them up to ensure it happens?

In many ways, if you have experienced a series of bad hires in pricing and a series of failed price implementations. This isn't because of the individual pricing manager or because the sales or marketing team didn't work together. This is indicating problems at a systemic level. The structure is not working, the organisational design is not working, the price system is broken down. Individuals don't matter how brilliant they are can't fix a broken system. Putting just yet another person into a broken system won't work and won't fix your pricing problem. We have to rethink all of this. We have to go back and think, what am I doing? Have that pricing diagnostic re-scope the role, and rethink your business operations. Businesses at the moment are going through complete pricing and business transformation. Because the markets moving forward very rapidly. Digitisation is taking hold. It's not good enough not to have an online solution. It's not good enough even in B2B to not think about your only channel direct to market solution. Because a lot of B2B are going direct to market now, they have no choice. With all of this, think about the future of it. Think about where you are now, the problems that you face. And start building your pricing team according to these realistic problems because there's a lot of things, a lot of problems at the moment that they need to tackle. But not thinking about getting that expertise in because you think you can fix it with what you've got is not going to work.

I don't think for a minute that this is purely a pricing function issue. I'm a big believer that in 2020 and over many years, the business has become almost dictated to you by human resources. Even the hiring manager, the person in the department they want to hire somebody and they want someone to do the job. But often the gatekeepers at the human resources department fundamentally do not understand in many cases. I'll caveat that in many cases do not understand, even what the department does, let alone what they want this new function to do. This applies to any expert function that's not run at the mill. If you're trying to employ an expert engineer or computer software designer, a great marketer, even a great lawyer to get you off from an accusation or anything like that we need expertise, that's niche expertise. There's an issue, how do you know what you're buying when what you're seeking to buy is knowledge? If you're seeking to buy knowledge, it's very difficult and we're not a labour-oriented service. If you're seeking to buy expert knowledge, expert assistance, you need to know a little bit about what you're buying in advance, otherwise, you make mistakes.

I completely agree. The pricing disciplines moving on. You need somebody who's got the knowledge, can do something with the knowledge. Build new structures. Build a new architecture and extract value for the business, and value for the customers. And only then, will you get the results from your pricing team and manager that you expected from them when you first start setting up the team. Up until then, if they haven't got all of that, then you are not going to get the results. They need to be set up for success.

That's it for me, I think there's nothing more satisfying than seeing the money flowing. Seeing profits increase, the business improves and seeing a project happen and work. Fundamentally, you got to plan if you want that success, you've got to start planning today.

What does that mean in financial terms, it can be 3% to 7%, additional margin every single year when you get your pricing team set up and cranking according to the market, the business strategy. And everyone knows and is fully aligned with the business and know what they're doing.

In this episode of Pricing College - we discuss the potential problems when you only have one person in a pricing team.

One person may be able to do it all for a short space of time - or in a small business but overtime problems will arise.

Number crunching and strategy are different skills - and people can get burned out doing too many tasks.

In today's episode, we want to play a thought experiment. You've just made the decision as a company to employ your first pricing professional. You're probably thinking of this as a great step, and untold riches and profits will inevitably flow from that. But we need to point out that there is a one almost inevitable problem that will happen to you. And you will see it, whether sooner or later it will occur.

That problem is hiring that superstar overpricing manager and expecting them to do everything. Strategy, stakeholder engagement, dive into the analytics, build the structure, build the price architecture, redesign the product hierarchy. Do it all. Do it all up to high capacity, full of energy for the entire employment. And not to expect them to be tired out or anything that's what the job is. That's what the role of the pricing manager is for and that's what they're going to do. But unfortunately, that's sort of Fantasyland, it doesn't work that way. Thinking of that person, that superstar even if you could find them, and yes there are those rare people that can do everything. Would they want to do everything like that all the time? The answer is, absolutely not, and they often won't do it at a salary most companies are offering, which is too low.

Obviously as a company or any company and you're making the argument to implement a pricing strategy and a pricing manager. The first thing would be let's keep costs down, let's employ one person, and then let's step it out from there with easy wins, and that makes perfect sense. The problem is, and we all know this, at least in the pricing profession. Pricing is a very varied and multifaceted skill set and area. It covers stakeholder engagement strategising, building systems using computer programs, working with sales teams, getting buy-in from ops. It's involved in every function of the business. I haven't even touched on marketing and the commercial aspects and working with finance. So, you want somebody who is competent and capable to drive that, to implement it, and be an expert and champion for change. But at the same time, you want them to do the number-crunching also. And with that, there will be an inevitable tension.

We're not arguing that the tension is wrong, it's great to have that tension. It creates energy, creativity and thought. The pricing manager role is varied, and we're not saying it's not and it does range somewhat. But it's the expectation that they do this role on their own for a long period of time, it's unsustainable. They'll get burnt out. It's a margin risk because if you've got huge amounts of revenue. You've got like 500 million to look after, you want to make sure that you've got the right support and resources to ensure and protect margins. And also, you've got your eye on the market to find new revenue and margin potential. Even the best of us won't be able to do everything all at once and this is why ultimately you need a team and a team that complements each other. So yes, a pricing manager should oversee a lot of areas. They should have competency in all of the areas so they can identify quickly any of the mistakes and correct them but they shouldn't be doing everything. This is why they need to hire correctly. Get the right analysts, support and look at the analytics and maybe a different type of business partner to do some of the stakeholder engagement. Because there's a lot of across the business vertical stakeholder engagement, especially for the large price change and price improvement projects. Then the pricing manager can run all of this and oversee it. Then consider all the options and make those options and present them to the executive team and the board.

I think it's vitally important when you're implementing a pricing project, and we've been through this process many times. Companies are aware, they've got sign off from their internal process that they want a pricing professional, but they haven't under scoped out what this role will do. There's a number of issues with that. Firstly, the people scoping out the role do not work in pricing so they don't know what this person really will do. Because if they did, they would have done it already. And they don't know the issues and taxes that would be involved. Secondly, when they're not scoping it out at the person they're describing probably doesn't exist. Somebody who has the capability to do many things such as be an Executive leader, come up with a strategy, go through the numbers implement stuff, all those things. People may have that a billion skill set, but just because you can do something, it doesn't mean you're willing to do it. When people want to be executive leaders, often they won't want to do the hard work. The analytical work would often say in a bank or financial institution will be given to more junior people. Try to find one person to do all, that it's almost impossible. So when you set out a job and start the project plan for this, the new strategy and the new function you need to have a timeline. You can ask someone to do that for a certain period of time, but that person needs to buy into the project too. They need to see opportunities to go up, to progress in the company, to get acceptance from stakeholders. And they also need to see a timeline when they will be getting assistance when will they have that support and when that support will come on board.

That's a large part of their job, they develop that roadmap to show you what they're going to do. Where are the price improvements going to come from and so you know you're going to get the ROI. How can they do all of that? How can they build a roadmap? If they're varied deep in analytics detail all the time, they can't possibly oscillate between the two. So they need support to be able to give you the full ROI on pricing that you would expect from them. And they know that they can deliver, only if they have support. Now a good pricing manager, like a good pricing executive likes detail, all good pricing people do. But as I said, that doesn't mean they necessarily stay in the detail all the time. They oversight the team, and they can spot and identify opportunities and this is their skill, they don't necessarily day in day out crunch the numbers that's analyst work. We've got to be very clear about the role demarcation just to ensure we've got everybody doing the right things. Working in unison not working against each other and slowing the mission down that's not what we want to achieve. So having that real good team structure role definition in place prior to hiring is essential to make sure that you get the right person. And that the person that comes into the role is going to stay in the role. Because you may have a huge range of expectations of what you think a pricing manager or executive will do. But they have a completely different set of ideas and if they clash and they find that there is a clash within the role, and pretty soon you'll find that they'll leave. And there are lots of options for great people. And what will happen is that you'll be left with a big gap in your pricing team, and no one willing to fill it.

The analogy I use is like building a bridge, fundamentally, every company wants to spend as little money as possible, and hope things will work out well. With pricing, it's almost like building a bridge, if you want to build a bridge across a big river you need to make sure spend enough money to make sure that bridge last for 100 years. It's functional, it's sturdy and it will withhold everything. If you don't spend enough money building the bridge and cut corners, fundamentally, you won't get the longevity and the support out of that bridge that you want. If you do it quickly and cheaply, potentially will only be a short term emergency fix. When you set out to build the price department, you want your company to grow over time throughout the life of the business. It's not something you can implement immediately. With any pricing project and any business improvement project, it's continuous. Business doesn't stay the same, the market doesn't stay the same so you're constantly needing to reevaluate, reset, develop and move onwards. It's not as if something that's been done, let's move on and then the project is finished, the project will never end. You need to keep people motivated, you need to keep people fresh, you need to have the thoughts happening, the analytical rigour, digging into that detail to find value and implemented. With that, you do need to support them, you need to stand behind them, give them the analysis, and analytical support they need. And also one other comment I make in a company, people are very good at being aware of where people stand in the pecking order of the hierarchy. If a GM or an operational manager, and they're talking to a pricing manager. If that pricing manager has to go back and then do all their number-crunching, to some extent, it will undermine them a little bit. So there's a status aspect in all aspects of human relations and it's specifically in business. Ask yourself the question, Where is your present department? where's your position? how do we see them? where are they seen in the echelons of the company?

With all of this, we're trying to say like, do you want to set your new pricing team or your existing pricing team up for success? or have you actually in fact set them up for failure? Think about those scenarios, think about where they are. Are they delivering the results that you want them to deliver? If they're not, just ask yourself is this because of the role, the accountabilities, the structure, there's something wrong with that, we're keeping holding them back in some way. Is there something that we could do to improve that? Because often there's a lot of clues in just that area, ask your pricing manager. Are they feeling overworked? What is it that's on their plate that's not making them or stopping them from delivering the results that even they want to achieve? Because all good pricing managers want to add value. They do not want to be a cost centre, and sometimes the very issues that are holding the business back. So it's having that open frank conversation asking the question, and being prepared to listen to them, change and adjust the team structure. Because often that will create huge benefits in the short term.

I'll finish up with the old saying that "failing to plan is planning to fail". We always talk about return on investment, if you do not resource your team and your people enough, the return on investment will inevitably be zero. You will not get a return, you will not get results. Getting results from price transformation is not a guarantee. It's only a guarantee and highly likely if you do it correctly and resources it correctly. It's like a football team if you don't train, you're not gonna win games, and that's fundamentally for me.

It makes complete sense like why people are risk-averse, it's an area that a lot of leaders and executives have got functional expertise in different areas. Pricing might be a new area, especially customer focus pricing. That's where the markets moving, pricing is evolving very quickly so a lot of people get a little bit risk-averse when it comes to building the team and hiring somebody. If you don't know, ask the questions. Be willing to admit that possibly not sure about how much should allocate to the pricing team. There are resources out there available to you. And the best start is to diagnose the issues and work around your commercial requirements just to ensure that everybody's working to the same tune.

In this episode of Pricing College - we ask how many pricing analysts your business really needs.

When launching a pricing transformation or improvement project - obviously, many businesses seek to keep costs low at the beginning - but if you under resource a team - that can have real issues also.

Today we're going to be talking about what is the ideal size for a pricing team. We get asked this question a lot, especially when companies are building their new pricing function. It's a new team, and they're trying to align the new team to strategy. How many people do we need to get the job done?

This depends very much on the type of business you are in, what sort of products you sell, etc. Because that drives the margins, the potential for uplift. And also, how much work there is to be done? As a very broad rule of thumb in the industry, we said one pricing analyst per $100 million of addressable revenue.

Obviously, if it's quite a strategic mission problem that you're trying to solve. Maybe it's not just one pricing analyst that you need, even if they're only managing 100 million. It could be, in fact, that you need a more strategic pricing manager. So even we'd say, if you've got a business, for instance, which is managing with revenue of 500 million. You could say one strategic pricing manager and then one pricing analyst to support them.

Fundamentally, some companies will just be too small to warrant a pricing team or pricing manager. If you're a business doing $1 million, $2 million and $3 million in revenue, it's highly unlikely that a pricing professional will pay dividends for you. The uplift potential from the revenue increase, won't cover their salary to get a good quality person. So, there is a lower threshold of what sort of company can employ a full-time pricing expert, full-time pricing analyst. And you are getting into larger companies where the uplift, where you're adding 1% or 2% to profitability. That's a huge amount of money and it will easily cover the costs of the project. And give a lot more of your value to the business.

We see from our consulting engagements that businesses get the most value from a pricing team when they have revenues of over 100 million. Or, they're a business that is growing quickly and they anticipate quite large revenue growth. And that they need someone to manage that, as well as other projects. We have to be very careful here, what is the role of pricing because they're not project managers. They're pricing managers with a very dedicated skill set and dedicated experience in a specific area. So you have to utilise and focus them in the right area to get the maximum value out of the team.

Obviously, in most smaller companies growing businesses many people are jack of all trades. They have to focus on a number of areas, and that just makes perfect sense. If you're a one-person operator, you have to do everything. Then as you grow the business you add in people who are experts and take control of more and more segmented areas of the business. Obviously, with pricing good pricer they're not cheap. To get a good pricing professional there's a certain lower threshold you would expect to pay to get somebody competent and capable to do the job. And to deliver the value to you. We have to be honest, there is a certain size of business that is just too small to afford these costs or to warrant them. That does not mean for any minute that you shouldn't focus on pricing. You should learn about pricing. But probably employ a specific and directly employed pricing professional, that's probably outside your budget at the moment. The biggest companies, obviously, and we'll cover this in a future episode. You need someone to drive pricing strategy and also to analyse and dig into the data. Once the revenue gets over certain sizes 100 million, 200 million, 300 million, clearly the workload increases. As a rule of thumb but it tends to stack up that 100 million is a good threshold a good step to move to an extra assistant or pricing analyst to help.

What we also recommend is that at the beginning when you're setting up a new team the size of the team is probably going to be a bit bigger than what it will be over the course of the next two to three years. And the reason being is that everything is new. The price architecture hasn't been established in terms of a formalised disciplined approach. There's probably unlikely to be much logic or in the pricing structure and that's the very reason that you're getting a pricing function. Ironically, however, we find that when people do decide to recruit pricing managers or pricing analysts. They tend to just do it in a very risk-averse way. They just go, oh, we'll get one analyst and we'll just see how it goes. But that isn't enough to solve the huge problem that you're facing. This is an education process in itself. But what can happen is that you don't solve the problem and you think that the pricing team isn't the right solution. But it's because you've under-resourced in the problem and the team. So we highly advise that you think closely about your commercial requirements. Get some expertise to diagnose the problem. Then from there, you can build the right team structure for you and it doesn't have to be big. We're not saying you have to have a big team, it has to be agile, it has to suit your strategy, it has to suit the culture of the business. The team needs to get buy-in from everybody else that can take a little bit more time than people anticipate. A bit more skill than you probably thought at the start. But the team will change and morph over time. Gradually, as you build a new system, new logic, the pricing frameworks and models get slicker. You won't need to recruit as many people.

I think my final point I'll make is it's like anything else in life there are economies of scale in nearly all aspects of the business. If you want to open a factory to manufacture any product, you need to build a factory at least one factory, to begin with. You can then scale up until that factory is at full capacity. It's the same to some extent in the pricing profession, you need to start somewhere, and the first investment you make would be one pricing professional as part of your team. There are economies of scale and as the business grows, clearly those become more and more visible. The people you will bring on will be more analysts to help your team leader, but just as the business grows. I suppose the first step is pricing focus integrating that into your company, integrating a value mentality. And that does not require a private professional to do that. It just requires senior executive leadership, and which is also a topic we'll cover in a future episode.

In this episode of Pricing College - we ask a big question. Can you business simply say no to tenders?

Do you have to take part in tenders - or can you simply say no?

Does your business really want to take part in tenders as the normal option - or is there another way?

We've been talking in the past few episodes about tenders. And generally speaking, I think you can get the picture here that tenders, can be quite a negative and painful process. So we did touch on the idea of, what can we do differently to make tenders better? And what we're going to debate today is whether companies should just say no to tenders. Is that the best solution?

Clearly, this would take a very brave company. It would take a company very confident in the value they provide. They'd have to be aware that they're either super-sharp pricing or a differentiated product or service and more reliability etc versus competitors. This could be for new business, or it could be for existing B2B style business also. Would you have the guts? And is your company set up to just say, we don't have a tenders department and we do not do tenders?

When you think about tender in your company that is agreeing to go through the tender process, and other persons tender to process. What you're agreeing to is you're becoming beta to the alpha, it's their process. They initially came to you because you have the solution to their problems, yet, you're the beta in this relationship. It's completely dysfunctional. If you truly are and do have that solution. You should be driving the whole process.

In any walk of life if you want to buy a product or service that you like, what you do is you go out and you do the legwork. You research it, you spend a bit of time, and you find the one that you want and the one that suits you. This could apply to anything from buying a car to buying a house to buying a puppy dog, a pet for your kids, whatever you're going through. You do the research, you find out the one that suits you and you make that specific choice. The person who bought it from or the supplier that you buy from will be confident. You want them to be confident about what they're offering. You don't want them to be desperate to super keen or super desperate to get the sales in. Because otherwise, you'd be suspicious in your mind. You'd be like, what's going on here? Are they selling me an inferior product? and you think, why would that not also apply in many regards to a B2B environment? We're not foolish we know in a lot of scenarios that are the way industries are run and that's how they operate. But if you even take a bit of what we're saying here on board, you can hopefully minimise that aspect.

I think it comes down to the idea of reframing, a dysfunctional and largely unhelpful process so that both the seller and the procurer get a better outcome. I think that is essential, this is what we're trying to say. And so, what can you do? Somebody comes to you with a tender, you read through that tender often it's nonsensical. You don't have an idea of what they're trying to buy, their business, their agenda, their strategy, and things like their financials. How can you truly help them? At that point, just disrupting that dysfunctional sort of process is advisable. Because by saying no, they'll come as a shock to them. They'll not have heard that before, because most people just jump to and just provide a generic response to a generic RFQ. But you're going to be doing something different, and the reason you're going to be doing that is that you care. You care about delivering good outcomes for your potential client or customer. And you also want to understand whether you actually can serve them well. Why would you agree to a job with a customer if you can't deliver? At that point, you would recommend and maybe come up with a solution, another partnership or whatever but what you're trying to do is understand that problem. By saying no to the tender process is a real sign that you care.

When we said say no to a tenders or by no means saying do not discuss, do not provide communication, do not talk about pricing, do not cover every topic under the sun. What we're saying is do it better, what you want to do is have chat with the potential customer. Talk through what you have, you do not give them cookie-cutter style information that to some extent is useless. Give them the information that they need. If it's an existing customer, in any negotiation, there has to be a pro and a con. If there's no cost to doing something people either won't permit or avoid doing something. So in a theory, if you've had a customer for 10 years in a B2B environment, and they are saying oh we're just going to go to tender. I think any supplier would be fine and that's perfectly fine. There's no actual penalty on that supplier or that customer in doing that instead of you saying, "well we don't do tender so we won't be taking part in that tender process". In the customer's mind, are they going to rip off that 10-years relationship just on a whim? Or, are they going to discuss with you and have that discussion like the adults about the situation? I would suspect they will be adults, at the end of the day.

For instance, if you then decide, I'm not going to take part in that process. Because we've got another way of doing it that will ensure that we both know where we're at with that situation. Then we're very clear that we can serve you at the level that you want and give you the prices that you want. Would you like to choose that as an alternative to this process because we know it works? If they say no. Aren't they destroying not only their value but sort of fighting themselves in the foot a little bit here? Also, you get an insight into what they would be like if you work with them over a longer time. They're gonna just say no, you've got to do it this way even though you've got a better way of doing it and you can show them that will get them better results. And then they say no to it, then I think you've got an insight there about whether you want to work with them. That's the point. Then you can go back to management and go maybe this isn't the type of customer that we can deal with and may have a higher cost to serve. May be quite difficult to give them what they want and at that point, you move on is called segmentation. You want to work with people that you can work with, at that point you're being able to give them. Especially if it's a sophisticated solution that does require more than just transactional buy, sell, you do need to have that relationship.

I worked in a B2B industrial business previously and one of the things that I noticed was they do tenders for anybody. They do tenders for a 50,000 deal, they do tenders for a $2 million deal, they do tenders for a $50 million deal. At what point in time are we segmenting the market? At what point in time are we thinking, this isn't the customer for us. Or, what this customer looking for is not something that we want to want to be in. It was almost like a one size fits all environment. Whereby we were putting the same effort into the tender, which was a lot of effort but not much thought to it. To a large extent, the company wasn't differentiating and it wasn't thinking what this customer wants. Because so much time and effort were involved in putting together documents. You're almost kidding yourself, staying busy but not being productive. What is more productive? Increasing value in your company, and marketing that value to the market so that they will come looking to you. Or by being reactive and answering questions when a tender is sent out to 10 potential suppliers. And you've no ability to differentiate yourself. Always being differentiated, it's always beneficial at least people will know who you are, you want to differentiate yourself in a positive light. But my personal view is in many regards if you can't say no to tenders I think you should consider it. At least for certain segments of your market. Of course, we are always aware, we're not foolish either there are certain markets where tendering is required. Such as government-mandated areas or where this legislation requires but if you can reduce tender whenever possible. I think you really should.

Yeah, I agree. So I think what I've learned from all of this is, saying no doesn't mean having an antagonistic relationship with your customers straight off. It means the reverse. It means that you do care, they want to learn more about the problems, you want to help them achieve their outcomes. And you want to make sure that you can deliver on what you're saying. You want to make sure that you can serve them as best you can. And from the customer is a good time if you say no, let's do it this way it's better. Listening to the feedback from your customers and hearing what they would say in response to that will give you insight into long term sort of relationships. And business deals that you're going to have posted at that point in time, especially if it's your new customer. And if it's an older existing customer I think they'll be quite happy to go through that process. Especially if you've done the hard work and you've delivered on your promises in the past. Why wouldn't they?

I think this is all predicated on you being a great company. Your company provides great service, great pricing to the customer. At the end of the day, if you are a trusted supplier, if you've been given great service they're more than likely to listen to you. People don't want to get rid of what they're used to that works well for them. If you're a shoddy below power supplier, this technique or this approach will destroy your business, you have no room to be using this. When you know your value when you are capable when you are competent. If you know your own value, the customer should also know it, how would have customer know your value if you underappreciate yourself also? As Joanna started the conversation, who's the better alpha in the relationship? If you doubt yourself and just think you're the lowest cost provider that is inevitably where you'll end up.

This requires a lot of backing from stakeholders and executives in the business. You can't do this as a solo player it just won't work. You'll be considered like a lone wolf and unpredictable and all those things which you're doing great account management. But it needs to be a strategy, it needs to be agreed upon. And, it can only work if you have data, you've got insights that you use to improve your account management and pricing capability. But you've got to learn and trust that as well. That is taking time in many businesses it's like, how do we use this data? A lot of CRM is still really not filled in, not very helpful. It's a working progress. I take that but if people are coming to you and consistently that the business delivers on what it promises. Then maybe it's a strategy that suits you.

In this episode of Pricing College - Aidan and Joanna discuss why you should seek to avoid tenders whenever possible.

Your key account team and sales team should focus on preventing existing clients on going to tender - and work with potential clients to discuss value in a more productive manner than tenders.

In the last episode, it's been pointed out to me that I sound very negative. So in this episode that regarding tenders and why I dislike them will say. And so in this episode is like, you dislike something, what are you going to do about it? And in this instance, I think our messages show how to avoid tenders whenever possible.

I think avoiding tenders is probably the conclusion to all of this. But I know what you're thinking, it sounds a little bit too difficult. What are you supposed to do when there's a process already set up and we were sort of made to do them? Well, again I think it comes down to understanding the value that you offer and segmentation. Sometimes you need to know who to sell to and who to walk away from.

In many companies, I think we have this concept that tenders are inevitable. They're part of the job, they want departments to do specifically in B2B companies. I know I previously worked in a company where we were looking after major national chains and tendering was a very large part of the job. To some extent, I would think we should almost view ourselves as if it goes to tender that is a failure. The senior management gets excited about tenders and doing tenders. My view will be, we should get excited about preventing tenders or not going to tender. We should almost describe ourselves as, which will have metrics. Which tenders are we avoiding this year? Which customers have we kept by not going to attend or by not going to market through ongoing value and delivery? This was a different way of looking at it, but it will over time in my view lead to keeping customers longer and higher profits.

I think you're right, Aidan. To a large extent, the tender process is a habit for businesses. It's a routine that teams go through and it's an expectation that management has. It's like we don't go through it, that's going to disrupt the relationships that we have with our customers that we've built up over the years. But therein lies the question, you built up a relationship but yet you still have to go to tender with that company? Surely at that point, you have to question the strength of that relationship. Would you call a relationship with a customer a partnership when they routinely ask you to go to tender, but you have been known to deliver on time? They keep coming back to you but yet demanding a cheaper price. I wouldn't call that partnership. And I think at that point, you've got to reevaluate that relationship and get real with where you're positioning yourself with your customers. Then start asking the question, Am I a vendor? Am I a supplier? Or a partner here? And if I want to be treated as a partner, would I be going through this tender process? The answer is no.

I think if you look at the time and effort invested. When I say invested I mean wasted on both sides on the company selling the product and service and on the company buying the product or service. The other thing I will say, if you've got a long term procurement deal with a supplier, it's almost a bit like a long term relationship or marriage. So you're working towards common goals, you're part of the supply chain. If you view it as what you've done, you've outsourced your supply chain as a company. Then the company who won the tender goes and supplies that service to you to help your company deliver what they do to your customers and the supply chain. If you think about it, every three years or every four years we're going to go to tender, that's our company policy. What that theory does is it means for six months or a year leading into the tender. The relationship will fragment, the amount of productivity delivered will decrease. And specifically, when the supplier knows that you're either talking to competitors and that your entire proposal is to downgrade to water down your offer. To hammer down your pricing. There's going to be damage in that scenario. So that the first six months leading into the tender, and even if you keep the supplier on. Six months after then there's a kind of reignited relationship again trying to get things back to normal. So what you're doing is you're undermining the relationship for a certain period of time.

Sometimes when the customer comes to you or a business with a tender, what they're probably saying is that the relationship has broken down. They're not telling you specifically, directly, verbally to your face but they're giving it to you in that document. That's the sign that something's wrong. Because they wouldn't have come to you in that way if you were a partner. So what as a business should you be thinking about a tender when that's handed to you when you think that your business customer is a partner. You should be thinking, what have I done wrong? Have we delivered on time? Is our supply chain that efficient? Are there any points in the last two years that we've been working with that customer that we've failed them in some ways, they've been some product failure? Has anything happened and do they like the trading terms? If you found out that's true, then you can address it. But I think there's a lot of instances where companies don't ask those questions and don't have the detail on it. So things just get sort of ignored and daily operations continue. Your customers put up with maybe services they didn't want in a way. And then they don't want to tell you either what the problem is, so then they politely give you a tender document at the end of the contract, just to show you that things aren't right. So sometimes that's another way of looking at it. The point of all of this is you've got to start looking at your business in terms of data, understanding where you deliver. Where you possibly are underperforming? And then address it. You raise the question with your customers. So you have that feedback regularly and that conversation with them so where you stand.

I think that is fundamental account management if you have a dedicated account manager on that contract. Their job is to deliver increasing value to keep the customer happy. To keep your business profitable, to keep prices up and revenue and profitability for your business up. But at the same time is to keep that relationship growing, hopefully, expanding customers making with you. And if there are bumps along the road, see them as far as possible and prevent them. It's proactive, not reactive like tendering is reactive. If you're already been working with a company for 5 to 10 years if a tender comes up. Why could you not have prevented that? What could you have done in advance? We'll be completely honest, of course in some companies there are procurement teams who just love a tender. There's nothing you can do about it. And you can try to explain and use your relationships in that other company, explaining the value, but sometimes it just happens. But there's a certain percentage, pick off the low hanging fruit, the more you can prevent the better. If you can prevent more, you know what your customer wants, you can embed yourself more in their organisation. They become dependent on you more and more, and hopefully, over time they'll see you as trusted. If the customer wants something else that they're not getting from a supplier. Be open and let them talk about it, discuss it. Theoretically, if they ask for lower prices and you say no. The last thing you should do then is a tender process given lower prices. Why did you not get them in advance if that was possible or that was on the table? So if it gets to Tender, what you've done is you've weakened your negotiation and bargaining position. And undermined the relationship so that over time they won't even see you as a strong partner. Yeah, it's a negative all around.

I suppose, and that's what position on this is like, why bother going to tender if you haven't done the work in advance? At that point, you're both going to lose out. You're going to commoditise your service. And they're going to get something suboptimal that they don't want and expecting possibly it's going to be something else. So have the conversations well in advance. I mean, always have the conversation so you don't even have to get to Tender. If you're at the point of a tender, then have meaningful conversations, not like just two weeks before the tenders are due. These conversations occur at least nine months before. But what we're trying to say is, if you keep having these real conversations about the value that you're offering and the problems that they have. Then you're very likely not to go to tender, it won't go there. There will be exceptions as Aidan pointed out, it might be just procedure. But very often, they won't want to go through the cost of the tendering process either because it's costly to them. They're not getting what they want on time. The total cost of a tender process is quite substantial, so it's a cost that they wanted to avoid. And they would avoid it if they knew that they were getting what they wanted from you.

I think that's all I gotta add on the topic. Let's put it like this, going to tender is a crisis. Let's avoid crises by preventing them, putting in place preventative measures, and things should not come to that. Things should come to discussion, communication, if there's problems or something's not going where people want to go, that's the way it should be. If your competitor supplier has come out with innovation or a new product and your customer has expressed interest in it. Go back to your own company and see what you can do or why your product or service is slightly better, or can you provide a similar service also. So be proactive, think about the bigger picture and fingers crossed if you do that you should avoid the cost. Always remember that running a tender from a supplier or a customer basis, costs time and effort. And time and effort is something that nearly any sensible company wants to avoid because it's unproductive.

Apart from just account management, I think, account management needs to work with the pricing team on this one. And the pricing team needs to have all the facts so they can give account management the right information and tactics to go back and inform the customer about various things. Especially in terms of trading agreements and things like that. But key inputs that all businesses should know, was like, what prices are other competitors charging? I know that can be difficult in a B2B environment. But roughly people do know, they do talk, and often account managers, circle around the same businesses as well. So there's an understanding of, what the average price is? What are the key value drivers that your customers keep mentioning? Put that in the CRM. So, if an account manager leaves, the new one will know key things about that account. And then can ask questions probe deeper into it, and key metrics. What are your customers trying to achieve financially? What cost reductions do they want? Is that possible? How do they want to buy from you? Do they want to buy from you using the maximum annual or two-year long term contract? Did they just want to try? Or, do they want a non-commitment sort of contract month by month? Is that possible? Why is that not possible? All these sorts of things lead to very meaningful discussions which you can track and monitor using data and then translate that data into conversations. Okay, Thanks a lot.

In this episode of Pricing College Aidan and Joanna talk about tenders - and why they often destroy value, and any interest you may have in working with a company.

Tenders have lots of clear flaws - and whether they get the best price or the best supplier is far from certain.

What's the number one thing that you love about pricing, perhaps that you don't like so much about pricing? When I asked this question people generally tell me the negative, and B2B, guess what it is? Tender pricing. People hate going through the process of tendering with the customers. So today we're just going to talk about some of the frustrations and problems with pricing and tenders.

If you think what we're doing here is moaning and complaining, you will be exactly right. That is the entire intention of this podcast today. The thing that gets on my nerves about tenders is, in many instances, they're pointless. I'll give you an example if you think about a customer buying a product or service, say you're going out to buy anything. What you generally do is, you do the research, you find out the answer, you compare, you ask for reviews, you kick the tires, you do the legwork. You make an educated decision and then you make the right purchase. The tender process in general does the exact opposite of that. What it generally does is, it does no work or pretends to have done no work in advance. And sends out a list of questions that they want to be answered. Then basically the marketing department combined with the sales department and pricing department in a company, fill these things in. It's almost like the worst possible way to find out and to inform yourself about buying any product or service.

In a way it's really like a guessing game for everybody concerned. It shows who's an informed buyer, who's an uninformed buyer, who's an informed seller, and who's an uninformed seller. But unfortunately, it doesn't give either the buyer or the seller a chance to have a meaningful conversation about the number one thing, customer value. And how the sales team can help deliver on particular problems a customer may have. It also doesn't give them the real opportunity to discuss specific things that the customer needs. Often in this process, it's a very one-sided process, with not enough questions and not enough communication. So I think the communication breaks down completely.

What we can do is go through what we think are some of the more annoying or nonsensical aspects of the tender process. I'll start with number one, say you're going to buy an industrial product widget or let's just call it widgets. I have no idea what a widget is but let's say that. So what you do is you go to the industrial company who specialised in making widgets. You ask them to provide you with a colourful document with nice photographs describing the products and services. Are you honestly telling me that you are going to look and compare the quality of the brochure, and the type of photographs? To me, that's ludicrous. If someone can provide the service, a tradesman could do a service but that does not necessarily mean they can also fulfill and fill in complex data documents.

I think what you're touching on is a good point. I think often we're using sort of old school marketing techniques to promote our goods to customers. Sometimes the customers don't care either about how fancy your marketing brochure is. How colourful it is and how glossy and thick the paper is. They want their problems to be fixed. Often in the past, they would have gone with leading brands who could have perhaps given them all of the above. And that glossy brochure, however, that's debatable now. Very often, especially if it's in niche B2B products and services, you have to go to a smaller player who does specialise in specific products. They may not have all that glossy brochure. But they do have the insight. They have the knowledge of your problem and they have the solution. But the problem with the tender process never gets to that point where you can have a meaningful discussion about the problem or the solution and get that right mix and fit.

The second clear nonsensical aspect of tender processes to me, is that what you're doing is they're saying, I don't know research, this is the procurement team. I don't know what the product or services are. You tell me about it but only in this very strict regimented system that I want you to tell me about. If you don't know what you're buying, should you be dictating to the person who's telling you what they can tell back? Look, I'll give an example. Say you're up on a murder charge and you're looking for the very best lawyer out there. You're not going to go in and start dictating to the lawyer what they should tell you when trying to convince you to buy their services. There's an arrogance in it, and to some extent it's, it's just foolhardy.

I've seen quite a few tender documents now. And often a lot of them have been put together badly. They're often just cut and paste from older RFQs and put together. They don't go into detail about what the customer wants. They're just given out and sent out to lots of different selling organisations and businesses. The pricing team and a sales team have to work with that document. And put something together that's meaningful in terms of pricing, the business executive summary, and all the value you can offer. But really, the tender document itself was put together in literally five minutes. There are many mistakes in them, so it's very difficult. Again, how are you supposed to have a conversation and build value from here?

Another aspect I'll say is the ability to add value through a tender to differentiate yourself. Tenders often seem to be set up on a very much a price drilling down. I'll get onto the pricing card last because that's my real packet. But the one whereby your ability to add value to the process is just incredibly limited. You're trying to ask really strict questions, are they ever going to read or compare? I have no idea. I can't imagine they are. A lot of your ability to say, why are you different? Why should you not be in this category? If there's no room to excel, or to do, or to take part in it. So, it's a bit like the old saying about the rat race, "the only way you win the rat race is not taking part". So it's yeah, it's a tough one.

The last quite annoying thing about tenders would be that idea of, who are you competing with? Are you competing with anyone? You'll be told that your price is too high. It's an inevitable outcome from the whole tender process. They'll come back to you and say somebody is competing and giving me exactly your offer. But for less money and you're supposed to believe them. It's debatable, no two businesses are the same. Operational costs are different. How businesses run are different. The pricing, therefore, is different, the value offered to them is different based on supply. The quality of the products as well as the insurance of any risk happening. Tons of things that could be involved in that pricing and they come back to you and say, "your price is too low, you've got to lower it". I call this to some extent, procurement technique, it's a phantom bid. So why would you go through a whole six to nine-month process with a tender, and just be told, your price is too cheap. Then you've just got to lower those prices right at the end of the tender process makes no sense.

Fundamentally, the pricing card makes no sense on many levels. As Joanna said, it does make a lot of sense if you've completed the entire document. If the entire document shows your differences, your pluses or how you're stronger or better than other competitors. Why then is someone in procurement coming back to the end of the process, saying you're slightly higher in this area. What was the point of the differentiation in the entire 100-page document prior to that? The other thing I'll say about it is tender documents, they've already said upfront we do not understand your business. Tell us all about what you do, but then fulfil and complete this red card. We will dictate to you how you should fill in and how you should charge for your time. It's like telling again the example of the lawyer, the Johnnie Cochran character trying to get OJ off. It's like, are you going to dictate to anybody who's an expert in their field how they should charge for a service? and what they should do? It reminds me of the classic example. I think it was Nikola Tesla, the famous inventor who was in a factory. This is probably not a real story but I think it was Henry Ford who said, oh there's a rattle in the wall, and he goes how I sort of to charge you to fix the rattle. So, Tesla walked along and he touched the wall once. He got a hammer, and he put a hole in the wall and the noise disappeared. Henry Ford was hammered with that cost and went to find the hole 20 bucks and to know where to look for another 20 thousand bucks. When you're an expert in any field, you determine how you charge. You don't let someone who doesn't know the product or service dictate this to you. So that's all I could add on tenders. I'm going to calm down now because even the concept of tenders winds me up.

So from this what I've got is obviously, it's a dysfunctional process. Something has to change, sales, companies, businesses, obviously don't like it. They've got their sales team on one hand going through the pain. And yet that procurement team is probably giving other businesses equally annoying documents and processes to go through. Let's think about how we can improve it through business. And also, do procurement enjoy going through that process too? Is there some other way that they could think about making that whole process more meaningful? Having that better discussion. Asking better questions just to get cut through that process. Get to the point where you're fixing real business problems, making money, lowering costs, increasing revenue. Because that's really what all of this is about. The tender process doesn't fix any of that.

Just one more thing sprung to my mind there with tenders and again it's a nonsensical thing. How often do you look in newspapers and you see a major infrastructure project has blown out costs wise to huge degrees from a billion dollars to $3 billion. But the same person building it keeps going, and to some extent there you go well, how did that tender process work in the beginning? Did they just dictate what they wanted to be told? They didn't want to listen to other maybe factual truths from other suppliers, and they picked the lie that they liked the most. Basically, you're not lying to the procurer but to some extent, you can't tell them the full truth. Because they've already told you they're not gonna listen to it. So, yeah it's people who get what they deserve in many regards, and that's all I got to add.

It of courses seems to make sense - that you should check on what your competitors are charging - and base your pricing somehow on that metric.

However - can there be drawbacks in this approach and if so what may they be?

Just because someone is a competitor - does it mean you should charge the same. Should a convenient late night corner store - price match against an out of town hyper market?

Today, I want to talk about a different form of pricing. We talked about value pricing before and what it means and cost-plus pricing. But we haven't covered competitive pricing, I think that's an important one. Because what we've noticed especially in our consulting is looking at price points just generally in life, is that a lot of businesses are very very keen on wanting to know their competitive pricing. It's almost like this fixation with setting prices by knowing what someone else is pricing. We just wanted to look into that, and see whether that's a good approach. Look at the pros and the cons.

We're seeing it even in job descriptions and in pricing departments, we're seeing more and more web scraping. IT software is being written to go out and look through all these different competitor websites and compare the prices and match to the market. All this stuff is almost as if it's the only way to do things. First of all, that's quite good technology. It's good to know these sorts of things and of course, there's a lot of shopping around the software now. If people are trying to buy on the internet, price comparison websites are prevalent in nearly all industries. Certainly from hotels to insurance markets. But let's dig into this a bit more and look at it from a probably a brick and mortar perspective a bit more.

What is it? I mean, you'll hear so many different terms bonded around competitive pricing, match to market, and market-based pricing. They'll have subtle differences but let's just go through very quickly what those are. In a nutshell, I suppose competitive based pricing is thinking about your pricing in relation to other people's prices. What people do like Aiden just mentioned, a lot of companies now web scrape if they can. Then just then line up all their competitors' pricing for a particular item, or product. Then they go, this person's five, that person is like seven, we're gonna then set this price for this product around here. It could be in the middle, it could be slightly above, whatever. But that's essentially competitive pricing and that's what all sorts of systems do.

This makes a lot of sense in the Internet era, or when you're reselling a product. When you're reselling a branded product whether that is a watch, a bottle of perfume. Those sorts of things that customers know that they're getting the item that is the same. And they can compare and contrast with different providers. Let's say, for example, supermarket chains if they're based in a large hypermarket store on the edge of town. And their competitor is also based in a large hypermarket location on the edge of town. It does make a lot of sense for them to be tracking what the competitor is selling it at. At the end of the day, you can't be a little bit up, or a little bit down but within a bandwidth. If you're selling it at two to three times the price, the educated customer is not going to come to your store or your website.

I think another example there would be petrol stations, you can get two on the same street one across the road from each other. So having one like pricing way up from the other one, people will notice. So, having that sort of competitive understanding when you're setting prices in petrol stations makes sense. That would be called a micro-segmentation strategy as well, which we touched on before. I suppose the other sort of different approach would be market-based pricing. And essentially, what people do there is looking at supply and demand dynamics. What it costs to make and the demand for that certain time. A petrol fuels industry would use that type of pricing, you can price high if you've got a new product. Then, over time, as you get to know the market, you can gradually bring the price down. That's a form of pricing strategy that people use there. And then you can gradually bring it up again based on demand and supply.

What I'm going to say here is a couple of concepts to keep in mind. The first one is the bandwidth, you can charge more or less within a certain bandwidth. How big is that bandwidth? It depends. It is important to bear in mind that no product or service is ever the same. Nothing is ever the same because of customer service, because of the exact location. And because of potential payment plans credit cards you can use in that store. The example of a petrol station, one petrol station cleaner than the other one when you go inside. You can collect point miles with them. I'll give you an example, nearly every petrol station there will be a price difference even just a little down the road. We're used to seeing that which is a mark to market environment or, competitive pricing environment doesn't make a huge amount of sense. The other one, I'd point out is, even if you're selling the same item, convenience is a massive thing. So, who are you comparing your pricing against? The example I'll give is, let's take a corner store convenient to your house. You have a late-night emergency or something like that. You need to go out and pick up a bottle of milk, or kids diapers, whatever it is. And you just want to pop out the door, run to the shop and buy that item. Is it a Corner Store, are they comparing themselves to a hypermarket half an hour away that sells the same item but half the price? It wouldn't be very sensible if they were. Because the bandwidth in that instance could be hugely different. What you're seeking to buy is convenience. The solution to your problem is that it's not worth you jumping in the car and driving for half an hour. Bandwidth is something known about but the size of the bandwidth. And who you're comparing against those are the important things.

Thinking about this, when you track your pricing against somebody else's. You're sort of making an assumption that your business model, your cost of operations, and your way of doing business is the same. No two businesses are the same even if you're selling the same stuff, you're doing it differently. Operations are different. Your cost base is different. Your customer base could be different, and they're willing to pay. So you're making a whole load of sweeping assumptions by literally bringing your price close to theirs when you do that. So I think it's important to know that when you're using competitive based pricing you are in a way capping your revenue potential. We said that before when we discuss cost plus you're anchoring people, even your organisation to cost when you're using cost-plus. Equally, when you're using competitive base pricing, you're anchoring your total economic value to your competitors and it could be greater. Therefore, you're reducing your pricing power. It becomes a very confusing market when everybody's following everybody else, who is the price leader? Why are they the leader? Should they be the leader? Is everybody second-guessing each other and everyone's just following you? Who knows? It just becomes quite a confusing game and this is why we need a pricing strategy. You need to know your value so you can with confidence go out in the market and rightfully, set your price positioning the market based on one value. I'm not dismissing your competitors' price point, competitive activity and tension are important to note down. But what I'm saying is costs and competition are just two of the inputs in setting a price. And the value of your business to the market and your customers will give you more pricing power.

I agree with that, I think, fundamentally, one of the roles of pricing departments should be to increase that bandwidth size, the bandwidth we have spoken about. Make it as big as possible, offer as much value as possible to the customers. Educate the customers as much about your specific value. Educate them about your reliability, your convenience, your trade agreement terms, your payment terms. The pleasantness and the friendliness of being in-store and any offer sales pushed that aspect. At the end of the day, there's a real value people know about these things to put that value on them. So, the better you do, the better your customer service even selling commoditised items. Let's say an example of a watch or any item like that, the better you sell, the more value you invest in your sales team, your marketing, your opening hours. And whatever it possibly could be that will serve to increase the bandwidth that you could sell up and down versus your competitors.

To sum up, competitive pricing is the next step in the evolution of the pricing journey. You move from cost plus, now you're looking outward to the market, to your competitors. But at the same point, it's still quite a tactical pricing game that you're playing if you just stop there. It indicates to others that there isn't a strategy and perhaps that you are disconnected from your customers. Therefore, relying on other benchmarks like competitive benchmarks, indexing and things like that. You're also reducing your pricing power by going out oh they're seven, the other ones are five. We're gonna be somewhere in the middle when potentially. You've got so much more to offer, what you're doing by that is underselling your offer.

My final point would be, say you're competing in a market against one competitor. What if your competitor is just making crazy decisions? What happens if they're driving their business into the ground? You should certainly not try to replicate that or try to compete with them, a race to the bottom will destroy you both. So, just because someone else is doing something. There is this concept of intelligence in which crowds of people make the right decisions. I'd also argue that crowds of people make the wrong decisions so you'd have to think through, why are you making that decision? At the end of the day, everything is down on your own, what you do.

I agree with that. When you start looking to others for everything, it becomes quite cheap. You don't have that 360 view on the market, you're just always faced with the immediate. And everything becomes a sort of firefighting. We've heard our competitors have just raised their price and everyone goes rushing to either raise them higher than that or lower than that. That's the small end of town, you've got to think bigger than that. Have a broader view and a game plan that is a little bit more than that just day to day sort of tactics and reactive pricing. And that in itself will give you so much more confidence when your competitors do raise prices or they launch new products you'll have a game plan in mind. And that will give the whole pricing department so much confidence which in turn will feed into the sales teams, and the tactics and guidance you give them as well.

We are always used to thinking that the more you pay the more you get of a product or service.

However - have you ever been in a supermarket and found that a 660 ml bottle of cola costs more than a 2 litre bottle - why could that be?

We discuss pack sizes and value based pricing - and what may be driving this seeming error.

Okay so we've talked before about how products are actually getting smaller and yet the price is roughly the same if not increasing for a smaller product, that's shrinkflation. And so today, we'd like to focus more on whether people would pay more for a smaller product just because it's smaller. And we're just going to go into that using various examples of different sorts of FMCG products, drinks, snacks, things like that.

Yeah, we're gonna workshop that idea. Sorry, that springs back bad memories from conferences. I think a classic example is let's take a very common soft drink. You take very common soft drinks like Pepsi Cola and Coca Cola. You go into the shop, the average supermarket and this applies to Australia, but I'm sure it applies to many other countries. At the front of the store, you get a can or a 660-millilitre bottle. And it might be in Australia around the $3.50 mark. It's refrigerated also so that is a value add. You walk away from there and you go down into the shelves with the fizzy drinks. You probably get a 1.25-litre bottle and it may be on promotion around $1.80 or $2.50. But quite often there you'll even get a 2-litre bottle that might be cheaper than the 1.25-litre bottle. But both of those bottles will be cheaper than the smallest unit sold.

So, what's going on there? I mean, it's sort of different variations on the theme of convenience. You've got the smaller drinks in the fridge that are being chilled because people like that, right at the counter, they're easy to take. It could be the people that walk in just want to drink and they just want to walk out there. Possibly, the assumption here is that they could be willing to pay more for that can. But then you've also got the slightly bigger bottles of drink in the fridge, slightly more, though not always they are more expensive than the small tin cans. Because those tin cans have got smaller and bottles are actually in some way bigger. And you often get that buy one, get an extra one free offer going on with those bottles of water and Coca Cola and things like that. From what Aiden was saying, you walk back one or two aisles to the major aisle, the food and drinks aisle. And you can just see how the price points are like everywhere. What is the distance between the price points of the refrigerated cans versus the refrigerated bottles of drinks versus the bigger non refrigerated just almost household good type drinks? I don't know if they are logical, or whether they've thought it through.

I think there is a sense of segmentation going on here. And clearly, the sort of people I think consumption of large 2-litre or 3-litre bottles of fizzy drinks is decreasing and for a number of reasons. You've got decreasing family size or household units, more people living alone, more awareness of health. And not drinking bucket loads of fizzy drinks with sugar and high calories. So, I think those things are decreasing. People are probably segmenting into certain groups where you just want a little snack, an impulse purchase near the counter. You'll buy a small kind of drink because you don't feel bad about yourself but you may feel bad if you buy a bigger one. I can see the segmentation of the larger bottles. Potentially, even though it's the same product and the same material in those bottles are being offered to a very different market. At the end of the day, there's not much point in buying a 3-litre bottle of Coke. If you're only going to drink a litre of it or in that week, the rest will probably go flat or be leftover. So, you're segmenting by potentially family structures or household structures, and also, where the person is? Are they walking home shopping and they don't want to carry a big bottle? There's a lot of those factors that go into it, whether or not the shops thought about them all, that's a different question

Yeah, I suppose that's a question for the suppliers. FMCG as well inform the supermarkets about how the end consumer and shopper consumed these types of products. They're the ones that should be doing that sort of research and informing the supermarket. So they can, in turn, present a clearer strategy pricing to the end consumer. But from an end-consumer perspective, it can be confusing, these price points I mean. For instance usage, we know we would buy a bigger bottle of Coke or Pepsi if we were having a kid's party, then it makes sense to buy bulk. But a confusing promotion I saw recently was between Pepsi and Coca Cola bottles. It just seems the promotions oscillate between the two, if one's being promoted the other one's not. Coke was promoted, and then Pepsi was cheaper. It just seems to be that there's no sort of strategy other than it's all about trade spend. If one's pumping money into trade spend and the retailer will promote that one. And put the other one back on full price hoping that people will grab the promoted goods. I mean that in turn, it just destroys any sort of value base or consumer-led strategy. Because they're just going on an impulse buy based on price. Whether the price is recouping the money from that promotion, or looking at the data, stats and even people grabbing the items. I would say people still prefer to go for the one that they like. It could be in the taste, or it could be because they trust it. I don't know, what do you think?

9 out of 10 Cats prefer a Pepsi Cola, apparently our first taste that was a famous example. Not cats but human beings.

Because it was more sugary.

Something on the first sip. But, yeah, we'll cover that in our other podcast on fizzy drinks, we don't. So what I would like to point out is, I think there's a lot of value that can be added in pack sizes. Certainly, people on diets have portion control, I think it's the term used in the diet industry. Knowing the size of the portion. And the smaller account is a fizzy drink that treats size or fun size which it used to be called. It really makes people feel better about themselves. They're buying that smaller can, they're probably prepared to pay more. Because of the ancillary benefits to their self-esteem and their mental approach to life. So, I think I can understand and to some extent, smaller package sizes that will be chocolate bars, fizzy drinks and those sorts of things. As long as they give the calorie intake or the kilojoule intake, people will pay more for that.

What I'd like to clarify here is that I think that they would pay more than that, but that you need to have your promotional strategy clear as well. It can't confuse that strategy. If you're going through a pricing strategy based on usage, how do people consume? how people go through the supermarket and what do they grab? You need to get your promotional strategy in line with that strategy.

One point to add in and this is something I had thought about, one industry where it's bad for your health and it's got high sugar content, is the wine industry. If you go into any ball shop or off-license, you will see that it's pretty much the same bottle of wine size covering 95% throughout the shop, which is, I think it's like 750 millilitres is the global standard. You do get a larger bottle more I think magnums and special promotional things, and you can sometimes get smaller ones, but I would say 90% of the bottles sold are the standard bottle. You look at the size of coke cans, the size of those bottles, wine to my mind would be perfectly applicable to that if a person lives alone. They say I'll just have one bottle of wine or one glass of wine for dinner, then you don't have that temptation with the second one so it's in your calorie portion control. It takes a decision out of your hands, and this would even be more beneficial to people because obviously as we all know about wine, there's a slippery slope if you have one and then the second one becomes more appealing. So, yeah, that's out there to the wine merchant to the world to give me an answer.

I think the same goes with chocolate, there are some real chocoholics out there. I questioned whether reducing the size of the chocolate bar tends to only happen with value packs. When you look at chocolate bars, say at the counter, they're still the same size. So, in relation to the argument about reducing pack size purely for our health, I debate that because the ones that are in counters are still the same size, single purchase ones are the same size and it's generally the value packs. So the value packs, who are they aimed for? It could be sort of a younger segment of children. I wonder whether it would control people's consumption of chocolate or reduce the consumption of chocolate when you reduce the family value pack size. Kids like eating more from what I've seen, they do eat more and obesity levels are rising so I think the value pack is very similar to a selection box of chocolates. People are just eating more of them because they're smaller, it's almost the reverse psychology that because I know it's smaller, I'm going to eat three times as much because that equals one normal chocolate bar. So I think it's increasing the consumption of sugar.

One final point I'll make is that this is a very modern problem if you think back to what sweet shops, lolly shops, and your local grocery store were 50, 60 and 70 years ago, it was somebody with a white coat, pulling things and weighing them on a weighing scale and giving you the exact weight that you wanted. In theory, pack size is a modern issue created by modern supply chains and supermarkets. 50 years ago, you'd say I want X amount of these sweets or these lollies and it was you would get into the exact amount. It's funny how things go in circles and though we're probably moving back to some extent to that old deli-style approach.

And also, if we're noticing, even if it's on a latent subconscious level that things are getting smaller, what does that do to people? It breeds scarcity. It breeds a sense of loss. People then end up buying more, say the chocolate or whatever it is because they feel they're going to be missing out, they're going to be losing out if they don't. All the while the price point is the same for something that is shrinking, if not getting more expensive, and people are consuming more. So, they're consuming more, there's a higher volume of that consumption and the price points are going up. Overall, just based on that sense of loss not having it, that could also be triggering the rising obesity levels as well.

In today's episode we look at the practise by food product companies to reduce pack size - sometimes without the customer noticing - rather than increase the price.

Have you noticed that some items - like cereals etc or the number of bags of chips in a multipack is getting smaller or fewer?

What would you say if your pint of milk (or beer!) gets slightly smaller every year - but the price tag stays the same?

This is called shrinkflation

Have you ever thought about pack sizes getting smaller? Have you thought when you're eating your favourite cereal or drinking your favourite cans of Coke got these packs are getting smaller than they used to be? Maybe it's just me or is it happening, our packs getting smaller?

So obviously, inflation generally affects the entire economy in the basket of goods that we purchased. We are used as people to sing what $1 bought last year or $1 bought 10 years ago, it doesn't buy the same nowadays. In the post-COVID World, deflation is starting to impact a lot of countries, which has impacted Japan in recent years, but still, fundamentally we do expect prices to increase year on year or every couple of years. So, you might have bought a large box of cereal for the family might have cost $2 and then somewhere down the line you expect to slowly increase. Sometimes those companies rather than increasing the prices actually just make that box slightly smaller.

This is a concept called shrinkflation, it's a term that people use just to describe products pack sizes getting smaller. I suppose a good example of that would be cereal. Cereal boxes have got smaller and often when they've got smaller they've changed the bundle or the mix of products. For instance, kids products now offer a range of smaller pack sizes for one almost like portion control but seven of them in a packet. But all of them are much smaller than they used to be so there's a mixed thing happening here as well as shrinking product size.

I think different value drivers have smaller packages and I think we're going to cover that in a future episode. But really in this episode, we want to drill into is the right choice for a manufacturer of consumer goods, food and drink is what we're talking about. Is it the right thing to think that customers would prefer static prices? A dollar today is a dollar tomorrow, or would they just more happily pay the 10% increase? A lot of companies fear putting through price increases, the fear that there will be a drop off in demand and the price elasticity will mean that demand will fall. Is that true? Or, are they tricking the customers? or are they tricking themselves?

Well, I think the assumption here is that customers are very price sensitive and if they were to learn on a price increase that they wouldn't buy the product. Therefore, manufacturers are making pack sizes smaller to prevent that from happening. Is that true? Has it been tested? No, because what manufacturers tend to do is avoid that sort of awkward conversation with consumers and, in turn, they reduce the pack size. What does that reducing the pack size mean? They're trying to increase margins on the cost side by reducing their costs as opposed to thinking about pricing and demand for their product and having a frank conversation with consumers saying, if you want this product this is the price and we'll have to increase the price if you want more or less. These are the reasons why that sort of conversation hasn't happened so people are now focusing on maximising margins by reducing costs.

I personally think the companies are kidding themselves a bit with this. The example I always give is if people are used to buying things in certain amounts or sizes, like a pint of milk, or a pint of beer. If I give you the example of a man who went to a bar or a lady of course who went to a bar and bought a pint of beer and if year by year that pint of beer was getting smaller and smaller but the cost is staying the same, at a certain point in time they would think it's getting ridiculous. I think that applies to most situations. I also think that when pack sizes decrease in size customers aren't going to or if you decrease the packet of a box of cornflakes by 10%, you're not going to an average buy an extra box every 10 boxes, you are in theory you're just going to buy less of it. What the companies are doing to some extent is, they are just decreasing the volume and putting a cap on the sales and the monetary value of the sales also.

I suppose another assumption here is that a lot of consumers maybe don't know that the pack sizes are getting smaller, it's not a massive concern of theirs, they sort of overlook it from day to day, and through that sort of psychological humans sort of just getting used to things day-on-day. You don't notice manufacturers could cut costs by reducing the pack size because nobody's making a complaint about it. However, I suppose like everything, there are different segments in the market and some customers do notice. The question is, would they be willing to pay more even for a smaller pack size versus a bigger pack size? And the answer is, manufacturers don't know, they haven't asked that question because they keep sidetracking.

This shrinkflation was the word Joanna use, my personal view is that this stems from a real dedication to the cost-plus mentality. Fundamentally, you're not thinking about what the customer wants, you're purely thinking about cost and margin and accounting and those sort of aspects. Why is the customer buying that pack size? Why is the customer buying that pint of beer or that box of cornflakes? The cost comes in but it's the value that they get from it. So, are you shrinking the box size based on the value to the customer? or are you simply shrinking it from a cost-plus accounting approach? I can understand with family sizes and household units, it might make more sense to have seven disposable units in your box of cornflakes that you open morning today if you're one person, but shrinking it by 10%, tricking the customer. Fundamentally, think that's you're only tricking yourself.

I think there's one company that recently came out Mandalas, about the reasons for shrinkflation and they associated the smaller pack size with the new trends for health, we're making this smaller because people need to learn how to manage their diet. They need to know what calorie counts are in each of these boxes, we need to get that chocolate bar under 100 calories for instance, like portion control. But other than that, I haven't heard of another manufacturer using that sort of customer value driver for health as a reason for shrinking the box sizes, that's a sort of a new announcement really in FMCG. It's probably something we're going to hear a lot more, it's for our benefit. It could be like a tokenistic phrase but, is that the reason? I think it's still about reducing costs to maximise margins as opposed to demand.

I think in that instance that the example given of the calorie counting etc. I almost think that's a value add, and I think a lot of people will pay more for that. It's almost like having a personal trainer, looking over your shoulder and saying no-no to that extra piece of rice or that extra chips. So to some extent, I would say you should have increased prices in that scenario, but I think that's a topic we intend to cover in a future episode.

I suppose this last example I'd like to give is that there are some packs that have been reduced in size and I'm thinking even household goods like washing powder, they're getting smaller in size too. Over years they get smaller and then after a while you get a value pack with 20% more introduced but actually, that value pack is the same size as the original size when that product was first launched. But the price hasn't changed, you're not getting 20% more, you're probably the price is sort of you're paying more than you would have done before. So, even though they're shrinking products when they reintroduce value packs it was sort of that the normal size pack that you would have had three years ago.

Yeah, so, let's all go to Costco and stock up. I've been doing that over the last few months in my bunker, but I don't recommend it to everyone because we don't want panic buying. So that's it for me today.

In this episode of Pricing College - we discuss how pricing software tools work for a business - and what they actually do.

They can be very useful tools with huge forecasting and calculation ability when they are correctly configured.

Obviously - the devil is in the detail as they say - and these tools generally are not the immediate answer to all pricing queries.

Today we're going to talk about pricing systems and what they do. The reason I suppose we're going to talk about that is that a lot of leading companies are buying pricing systems. Some of which I say would think about pricing systems as a silver bullet solution to that price setting and management of prices and revenues. Other businesses are thinking in terms of efficiency. And thinking about how you can integrate people intelligence from the pricing team and the sales team with an added juiced up pricing system. As I suppose today, we wanted to talk about essentially, what it does? Because a lot of people I suppose on the ground, wouldn't have as much insight into what it does. It's generally a top-down sort of decision to buy a pricings system, especially if it's expensive. And often there's sort of a disconnect that happens. And hopefully, we can fill that gap and just explain what it does in a little bit more detail. So, if you're in a company that uses it, you're going to know kind of what's around the corner.

So pricing software tools are becoming much more advanced. They become better at what they do. And they're becoming more accepted as obviously information technology is taking over the entire world. The amount of data that's being captured in every walk of life with the internet of things, etc. More and more items and machines are capturing data at every turn, from customer data to sales data to repeat purchases, all those sorts of things. And so these machines, I would describe them as very useful tools to help pricing teams or pricing managers make the right decisions to help optimise profitability. Fundamentally what these software tools do is crunch huge amounts of numbers and data based on the criteria that you select and that you plug into them. They crunch it in a way that's much more efficient than any human. Much more capable of analysing data, and coming up with suggestions. And recommendations based fundamentally on the criteria that they were programmed to do.

I would always think about a pricing system in terms of three main elements. So, typically, it has a forecasting element that will look at past data to predict the future demand. But as the machine sort of learns and collects data, they integrate real-time data on-demand with past data just to refine any assumptions that are made. So that's one element. The second element would be called the price optimisation module, that's the price-setting component. And here they'll use price elasticity modelling linear regressions to set prices. And then the third element would be, let's call it the company financials. The benchmarks and the revenue targets they have, the margin targets they have, and the costs that they need to consider. And that will help feed into the price floors and from there, the optimisation part of it will optimise the prices based on their sort of baselines.

That's right. So, even just hearing some of those terms I'm sure it makes a lot of people shiver with fear, pricing elasticities and regression analysis. These are things that you certainly can't run just with a quick back of an envelope calculation. And as things get more and more complex, a number of factors can be included in these algorithms. I don't know if it's limited, it's unlimited. But it's certainly huge. You look at it could be competitors pricing. It could be the day of the week, it could be capacity left in the warehouse, it could be the date of delivery, it could be any number of things. When you know your business and when you know what drives customer activity, and how it's working these tools can be used to do all the legwork. All that hard number-crunching work and optimising things, then this can feed into more dynamic pricing systems that can feed into pricing at times of day, stuff that any team will just be exhausted by doing so. It gives you that real capability of optimising pricing, doing the number crunching but you always have to remember that it can only really do what it is told to do. It doesn't know who your customers are, it's never met them, it doesn't know their real drivers, and fundamentally, it doesn't know whether your product is of higher quality than other products. So, it's what you teach that will crunch and will regurgitate to some extent but with a lot of detail, and expertise.

A lot of pricing teams have mentioned this to me that went well. When we got the system we didn't fully appreciate how much that system needed to be taught because without our input. And it was constant for the first two years the machine would just produce like literal garbage. It was just priced that could not be rolled out in the market, they would be instantly rejected, it'd be a laughingstock to do it. So the pricing team had to spend a lot of time teaching the system, changing the numbers, and altering the business rules. Because often with pricing and when you're setting up a new pricing system, a lot of the logic you have to learn as you go. A lot of the assumptions that were made in prior pricing models and frameworks no longer worked especially as market changes. This is why you do need human intelligence when you're working with AI or new pricing systems. Because the computer won't think about the market like a human. And will just keep plugging away no matter what you put into it and the rules you put into it. So, the pricing team's job is really to keep things on track. But also the pricing team isn't the only one that uses a pricing system because the sales team have to use it in its various forms. They'll use it in terms of a quoting tool so there are different sorts of dashboard interfaces on the front end that people will see from the pricing system. And all in all, you may even get a quoting tool that's made to look like Excel, but behind it is the juiced-up pricing system. All of these algorithms and assumptions are being made as the tool is producing their quote for you. But again, the pricing team and sales team are really important in this because their feedback about the system, good and bad, about the price points it produces and their knowledge of the market, all have to be fed into the system too. So good companies take that on board to improve the pricing system, they don't just let the pricing system run on its own without any guidance from pricing or sales.

I think when you know your business, when you know what you want to do, and when you have a strategy that works in marketing, sales, product development, implementation, all those sorts of areas. When you have your actual business model, this can be a great tool to help you implement, to calculate, to optimise. But I don't think it will come up with a strategy for you. If you think that's what it's going to do like a black box I think you will be let down by it. But it's fundamentally a tool that will help you get the job done, and it's gonna save you a lot of time, and it's gonna save you a lot of effort and potentially will reduce the need for analyst and number-crunching from a human perspective so, it could be cost-effective also.

I do see it transforming the pricing department, to some degree. Once it gets used to doing a lot of the simplistic, data entry or price reviews or that sort of thing. Or even the sort of more mundane, everyday sort of analysis there will be less need for people to do that sort of stuff. But there always be a need for people to think through complex problems, to adjust the system to the market, to readjust an informed strategy, and most of all segmentation will not be static. And I think we made this point before a lot of these systems come with their pre-programmed segmentation just to break up the market and to make all these analyses and algorithms make sense in terms of different groups. If they make the market smaller in terms of groups, then they can check the math is working outright and that's literally why they use segmentation like that. Sometimes, yes it works mathematically you can check your answers right but it doesn't work in the market and people don't buy like that. This is a problem that is still being worked out between pricing system software, and the market and segmentation, and I'm not sure it's completely figured out, but again, this is the job of a good pricing leader and a good pricing team to work with vendors and also sales and other factions of the business, to come up with a better solution.

I think finding the point I'd say it's the old mantra junk in and junk out, but if you remember that you have a pretty good guess as to how the system will work so I think we'll have good stuff in and hopefully good stuff out also. I think I'll leave it there from my side, and thanks and have a great day.