Pricing College Podcast

In this episode of Pricing College - we discuss the segmentation strategy known as good, better, best.

It is a simplified strategy that helps companies begin a sensible customer segmentation strategy.

We discuss products and services such as whiskey and SAAS providers.

Today we're going to talk about a price segmentation concept called good, better, best. The reason we're going to talk about that today is that often people use fixed pricing, one fixed price for their customers, and because of that they have to discount and sometimes you don't have to discount to drive volume or revenue. So today we're going to talk about pricing segmentation in terms of good, better, best and what it is.

In a previous episode, we had covered an introduction to price segmentation but one of the questions we had back was, where do you start if it's your first introduction to segmentation of your customer base? where's an easy way to start? I suppose in Good-Better-Best (GBB) you can always argue the simplistic method of segmentation really with three categories. It's something that we're nearly all used to seeing whether online through software as a service system or in many other systems like a car or, gold, silver or bronze categories.

Just think about it in terms of when you get your car washed, they're using Good-Better-Best (GBB). There is car washing plus that'd be the good version, the better version would be plus wax, and the best version would be all of those three plus a polish and maybe a clean inside the car as well.

The segmentation strategy certainly in the software as a service, it's often tailored by restricting numbers or usage or some measurement component, whether it's the number of times you're on the website, the number of users who can log in and the number of pages you can see etc. That method is restricting people to tailor through a segmentation strategy to the size of your business to your exact requirements. That's something you should look at, and that is a simplistic watered-down version of more complex segmentation, but something that can be very applicable and quite easy for you to understand when you're starting.

So, why do companies use it? Well, it's a good way to spread out the price points across different products and basically what you're offering is the same sort of service or product, but with add on benefits and add on value. What you're trying to do is rather than a discount from your higher value, the best version, you're showing your customers that there are other things that they can choose if they're not prepared to buy the best version, then maybe they should go to the better version and that way you don't have to discount.

There's a couple of things I'd like to cover on this topic, it can often give people an introduction to a product or service that can select the good, or in other words, the worst version, and they can go with that, get a tester and then potentially upgrade to business or gold or whatever the higher category is, that's the first thing. The other thing I'd say about this is, and you will very often see this online. It can be an anchoring component with this approach whereby as people go through the buying cycle, you are being presented with three options, and with those three options whether you like it or not there will be an anchoring concept.

Just thinking about whiskey and tequila brands that have done this. Initially, they launched many of their products with the highest value brands, that's the best. What they found is that people didn't automatically understand completely before drinking, maybe they're new to whiskey and they were probably waiting for promotions and discounts to buy. So what they do is they bring out the lower-grade versions that were still high quality but not as good as their best version. And what they found is overall it increased the value brand perception of the brands as more people got into tequila again, they started to consider these brands as more of an artisan by simply adding three or four more types of variations of the product.

I think a famous example of that is probably the scotch whisky brand Johnnie Walker, which I think is one of the major mass-selling brands in the world, and they operate at a colour-coding scheme. I think I pretend not to know too much about whisky. It might say too much about me, but I think red is the standard or what do you call the introductory version, then you have the blue label and Black Label. I can't remember which is more expensive there. But it's almost the red is the mass market one with which you'll get people knowledgeable about the product, and in theory, you're moving up the value chain if you can progress people into the black or the blue labels. The interesting thing about whiskey in this kind of context, fundamentally you're selling. A procurement professional might even tell you it's the same product you're selling, a volume of a liquid that looks very similar from external and the actual differences in it to the naked eye is quite small but the differential can be higher as age, that log was capped, was its single malt, all these sorts of things. So when you're looking at segmentation it's about, what is your product? Why are people buying it? and how can you use a simple segmentation strategy to implement that?

Looking at the advantages of using Good-Better-Best (GBB) as opposed to fixed pricing. You can drive more revenue by offering more choices. You can also take a more defensive approach when your competitors have launched a similar product to yours at a reduced price but when you look at their product it's a lower grade version of what you're offering. So you can demonstrate that by offering more range but in a very structured way, you can say yes Mr customer if you want that product you can have it, but it doesn't have these extra benefits or features. So there you don't have to discount, and you defend your value. And then finally, the advantage is that from a consumer psychology point of view, you're offering your product in a very structured way. Often in B2B, customers bundle a lot of value into their offers, and as a result, they undersell their offer, and the customers don't know what they're buying and all the extra benefits and features and value drivers that they're receiving. You don't get paid what you should be getting paid.

I think in a future episode, we're going to cover menu pricing and I often see that the Good-Better-Best (GBB) strategy can often be presented in a menu format. One of the things with that is you can often be driven psychologically subliminally to the middle offer, that can be something that the company who's selling can use techniques to proactively move you into the middle offer or it could even be the highest offer which is a decoy pricing method that we'll cover in a future episode. But what I'd suggest to anyone listening is when you're looking or buying any new product or service just look at the Good-Better-Best (GBB), the three-tiered pricing approach that is offered to you and think why are they doing that? What is the methodology? And are they using psychological nudges etc to move into a position that potentially you don't need to be in? Another classic example of this that we will probably mention in a future episode is a mobile phone plan where people are through a sense of fear or shortage that they'll go over the limit, tend to buy packages with much higher data amount than they ever require.

So overall, Good-Better-Best (GBB) is largely applied in B2C but there's no reason that it can't be applied to B2B, there's often a reluctance to do that as fixed pricing is the only way forward. But just remember if you do that fixed pricing, then it doesn't give you much room to do anything else and then you're forced to almost discount and promote segmentation in terms of price and your customer groups are essential here, and there's no reason why B2B companies can't do it.

And this approach can be tailored, it can make you invest more in the value of your product offers. The classic example was the Johnnie Walker whisky were slight changes, things that might seem slight but to aficionados that can be huge, those changes by evaluating products you can help solidify this segmentation strategy. And the other thing you can do is simply tailor it by taking things off the table for where more of service where it's more like, that the software as a service approach, it could be taking things away rather than other things in and so you can work with data for both ways, and it's something you probably need to spend time working on and developing.

In this episode of Pricing College - Joanna asks whether making a loss is a viable pricing strategy for any business - and of course startups.

Many famous startups from Uber to Amazon have made losses for many years in a row.

We look at the Australian business Canva - and ask if the pricing strategy makes sense. Is loss making an extreme form of penetration pricing or is something else at play?

So many of the world's most valuable startups have never been profitable. So today, we're going to talk about the freemium model that many startups use as a good approach to take.

I think we read in the paper very recently that Australia has a new tech unicorn and that is the online marketing system Canva. Canva is a system that I personally use, I think it's great. It lets you do lots of different things such as design graphics, posters and anything from a visual perspective that is super beneficial for any company. The thing about canva which is interesting is it's valued at billion American dollars, I believe, but the vast majority of users never pay a cent. And I use it nearly every week, and I very rarely pay any money to Canva.

This is quite a common model for a lot of startups, their product or service is free. So where are they going to get revenue? In regards to Canva, there are a few templates that they charge for but there's a huge host of templates that are free and good to use.

I suppose this is an extreme version of a freemium system, I think we're all used to getting a tester or a sample for a new product. Sometimes this can be very sensible, we covered penetration pricing in a previous episode, and obviously, a freemium system is an extreme version of that. I suppose the only more extreme version will be if they paid you to even use the software but when something so new that you haven't used before, you're not aware of it sometimes, a freemium or a free test, is an old fashioned way of getting you used to it, get you aware of it, and becoming accepting. Hopefully, the idea will be that as you become accepting, you use it, then you start paying, you become accepting of the value that you get from that product, and you will pay for it.

Yeah and this is quite different from the usual strategy for a novel or new product where if we look back in the textbooks, they say if you've got a new product, what you really should be using is a skimming strategy price high, and then work out what the willingness to pay is, and go from there. When it comes to startups, however, they've done the reverse, they've given it away for free and then determined the willingness to pay after that.

I can see a lot of people famously talk about the dropbox system whereby it led to a viral marketing method. In this sort of industry in startups, you need marketing of one format or another, and word of mouth for someone like canva is great. There's a huge universe of users, and they talk about and recommend it to other users, and then a certain percentage of those users will pay to use it. The dropbox example was if you referred a friend, they would give you extra storage or free storage and that would have the word of mouth viral nature of it. With Canva, one of the things I'll say about it is the vast majority of people can get everything they want from it without ever paying. How are they going to move people? Obviously, over time, they will justify the valuation that the potential user base will cap out somewhere, but they will need to get a certain percentage of people paying, either paying a subset of the subscription model or paying bit by bit. And the question is once you're used to using it for free. Will you move towards a payment model?

The same would apply to Google, they're offering pretty much everything they've got for free and then there's almost like this side business model to Google, where they're getting their money from ads, the pay for clicks. The strange thing about the way they sell the ad pay per click model is very much old school sales: they get people on the phone, calling you up to drive or to make you buy more of their ad space. And that's quite ironic I think, they give away stuff for free but then they use an older sort of sales and business model to fund their tech startup platform.

In the world of pricing, there's a couple of things people say when you don't pay for something you tend not to value it. There's a very famous analytical case study done where if you change the price of anything from zero to even 1 cent or 10 cents the actual demand for that will drop hugely. Way more than the actual value of 10 cents just even paying anything whatsoever will hugely diminish users. I'd asked that question about someone like Canva, if you just even charge a very minimal fee like $1 a month. What would be the percentage decrease in users? Would people move to other services? I can think of one that is not the same but things Stencil and other products like that. If you have to pay $1 a month, what percentage of the customer base, the user base on Canva would move elsewhere?

I think the pricing is connected to the philosophy of the startup, and the tech startup is all based on the idea that we give more value to more people and from that belief, it's made it very difficult for them to monetise and capitalise on the value that they're giving because that's the thing that's supposed to give away for free.

It is. These companies are clearly burning money and that money is coming in through investors' startup rounds of venture capital. We look at people like Amazon and Uber, who've gone through 10 years and I think in both cases of massive losses before they start to hit profitability. That's based on the market being sustainable, they'll have significant market share, and they'll be big enough to dominate that market. In the instance of Amazon, we see that now they're hugely profitable. When the company gets to that stage, will building that market is it a plausible scenario? I suppose there are overlaps in the world of pricing and also the world of business models. What we're talking about is offering a freemium service to grow market share to try and get market awareness. Is that a pricing strategy? or is it just giving away a great value for virtually nothing? Of course, if you give away a great value for nothing, people are going to use it. I don't know if that qualifies as a pricing strategy because it's unsustainable, it's not optimising profitability and it's almost as if profitability is not being considered. So, it is usable as a short term strategy to get towards your goals which may be growing market awareness, growing that viral aspect of it, but there has to be a drop-dead zone somewhere down the line when we start charging somewhere, or in some way.

The stock markets are very sympathetic to these pricing models even though they don't drive profitability. So there must be some doubt in the markets that these startups are going to capitalise on their huge user base of millions at some point in their life cycle. And it just seems I suppose from looking at it objectively from an outside position that often pricing isn't considered right at the beginning of this tech startup business model, it's sort of considered, further down the line, how can we use pricing now we've got these people on board, we've got these massive user base, and make money from them. And that seems to be things that all tech companies do maybe three to five years down the line as opposed to in the first year, maybe that's a strategy in itself.

Yeah, I think I just wrap up my comments here I'll say one of the big dangers is we tend to look at the winners, we look at the survivors in the tech industry or any industry I remember reading an article the airline industry after the Wright brothers invented the first plane and there were 1000s of airline companies, we only think of the two or three that even survived. That's the same in the tech industry, we think of canva because they're valued at a billion dollars but there are hundreds of smaller startups out there trying to pursue this freemium model, trying to pursue giving away this great value for nothing, and hoping that over time it will grow quick enough, they'll be able to charge charging before their funding runs out. In a company like Uber, yes they have a massive runway and the funding seems to be available but for many small startups, it didn't hit a crunch, and what can happen is that the runway can shorten much quicker than you expect. So you have to have at least a private strategy in your mind, have a time frame when are you going to start at least when will that start charging and when will that get you to a breakeven position?

Now I think that's a great place to leave it because I think we're going to talk about what startups could do in terms of pricing revenue models to ensure they can make a bit more money upfront, rather than leaving it too late, down the game in another episode. But for now, thanks a lot for listening.

In this episode of Pricing College - Aidan and Joanna discuss common ways to incentivise a sales team and why this can create issues if not not in a strategic way.

Is your sales team incentivised to sell volume - or with pricing targets or metrics. Does your sales team understand and articulate value?

What can go wrong with a shoddy incentivisation plan?

Today we're going to talk about sales, incentives, and plans. I suppose the reason why we're going to talk about that is there's a bit of a debate about whether sales are incentivised correctly, mostly this debate happens outside of sales. The sales tend to think that they are incentivised correctly and doing a great job and often they are. Other people in the business, however, believe that the way they're incentivised is driving profitability down, and it's not producing the best results for the business over time.

I worked in companies where the sales team were incentivised not by profit, not even by the price that we're selling out, but purely by volume. We spoke about cubic metres of product which was what the whole driver was and somebody would go out there and sell a lot of volumes, and the price that we're selling out was not analyzed, it wasn't looked at, and it's almost as if nobody cared. There's an old saying that anybody can sell $1 for 90 cents and to some extent, that is true. The real skill in selling is selling a lot of products at a good price, at a profitable price, but doing that is harder than selling at a low price. The thing I always say is, Is your sales team incentivised to hold the ground on price? Are they incentivised to not drop the price just when asked? Because if they're not, why wouldn't they? Why wouldn't they just reduce the price to get across the line, be friendly with the customer, and move on to the next site?

So, just to ask that question and I suppose, let's look at some of the incentives and plans that most salespeople are on and let's think about, do they drive profitable revenue growth? or do they just drive revenue? There's a difference between the two. Okay, so the first, incentives are things like sales quotas, it's when a salesperson is being given a target set by their manager and they're just got to hit that. And after that, they get things called accelerators which kick in after they've reached their targets and it's the percentage free on top of that, on-target earnings again another percentage rate free add on to their salary, and they may even have things like contests in a month to drive revenue in that month. Now, these are different from sales plans, you can have salary base plans, salary only, commission only plans, salary plus commission and as Aidan was explaining that volume-based plan, which means you sell as much as you can and they're incentivised on doing that. And the final one, which is a new type of plan which is a gross margin commission plan. That's when they are not just selling as much as they can, but it's based on the margin on-sell and the profit they get from each of the sales that they make.

From my experience, an awful lot of sales incentive plans, to be honest, are almost sales disincentives plans. We've seen examples where people are capped certain at amounts, capped at certain commission levels per month, it leaves the items just sandbagging when you're moving sales around month by month. Sometimes there's even jealousy in the accompany by management if a salesperson is making more money than them, that's seen as a bad thing. What I would always say is, I think Joanna touched them the last one she mentioned there was the margin was taken into account. When you're putting together your sales incentive plan for your team, what are you trying to achieve? what do you want those salespeople to do? what price do you want it to sell out? Are they working in line with the pricing strategy that the company has? and if they are those the incentive program, does it align? does it make logical sense? or is there so much congruence that will lead you to a situation where at the end of the month or the end of the quarter, you're hitting numbers in one area, you're hitting the volume metrics, but you're not hitting the profitability metrics.

There's a lot of finance managers, and even pricing managers would argue for the last plan for salespeople that margin, that gross margin plan because they think it discourages discounting. They think that discounting just thinking about revenue-driving, revenue incentivises sales to discount to hit their sales quota. However, there is some complexity with the gross margin plan which salespeople don't like and for good reason, it's very hard to measure. The product base is shifting, distribution costs change, rebates are changing, territory changes and customer value drivers change and it's very hard to measure margin based on that. So often salespeople say, well actually, we're driving more revenue and margin but you're just not accounting for it. I mean this is a fair enough call, and also it's a very complicated way of measuring so I always believe you need to be got to keep things simple. I don't think that looking at the top-line revenue is a bad thing for sales to do. However, what I do believe is that the pricing manager or maybe the finance manager needs to get better tactics around discounting, and around margin management. In the first place, that's not the job of a salesperson that's the job of finance and pricing.

I think, you can never say the exact system of incentivisation indeed that will be determined by the company, what you sell, the selling structure, teams and how that works. But one thing I'll say from my experience is sales teams are very logical people, the right logical people often have a very much target oriented mentality, and at least the good ones do. And with that, they're pretty good at thinking through scenarios and what would benefit them. Logically in a company, if they're incentivised to do something that is what they will do, so are they incentivized to discuss value? are they incentivised to say no and push back on discount requests? Because if not, they will do the logical thing which is just getting the number to wrap up the sale, reduce the price, make great friends and contact with that customer that will lead to repeat business. But there's no point in having repeat business if it's at a margin or a pricing point that is damaging your other sales teams or damaging your other products and your profitability. So you have to look at, what you want to commit to achieving and this way the pricing manager or the pricing team really should be involved in setting the incentivisation programs, at least at a discussion level with the sales department. What are you trying to achieve? what metrics? what incentivisation program? whether it's commission, whether it's at the end of the quarter rebate or something to the sales team, think through how it works and then put it in place.

That's right, it's the role of the pricing manager to show what the real situation of maybe the discounting behaviour is what's the result of certain sales behaviours. Why just looking purely at the top line is detrimental to setting profitable revenue growth? or why the volume-based approach is not good long term? Often salespeople don't know that, they don't have that information at hand, so they think they're doing a great job and they are. Some people innately do know to sell on value and think about margin when they're selling, other people don't do that naturally, but again it's the role of the pricing team to inform the sales team and provide those tools.

Yeah, I think that's it for me today. We just reached the end of the quarter, the June quarter a lot of salespeople would be rushed to meet targets, and hitting up their lead base those sort of things. And when you want salespeople, you want them out there, you want them hungry and you want them to be desperate to get that sale in, the incentivisation structure is a key component for that and that's where pricing becomes motivational. It helps you lead the company and helps you set the mentality of what to have, it's not just about taking with numbers on a spreadsheet, but there's that human element also that's you know, as important.

In this episode of Pricing College - Joanna and Aidan discuss the concept of Total Cost Of Ownership.

We all know that Duracell batteries claim to last longer than other batteries - if it lasts longer - could it be cheaper in the long term versus buying cheaper options more frequently?

We look at this concept in the world of procurement, value based selling and sectors such as cars etc.

Have you ever been in a sales call with procurement and thought, Gosh, I want to get out of this price unit price discussion, but I just don't know-how. Or perhaps you are in a discussion with procurement and you've given them the lowest price, and you're thinking, why don't they go with me? And then they call you up and say look, we've decided to go with another supplier. So, today what we're going to do, we're going to talk about another important procurement technique and measurement that we believe suppliers should know about and this is called the total cost of ownership measure. Now, this is an important concept for suppliers because often this is something they will judge you on. So, yeah, we're going to talk about what it is and why it's important.

I think anyone who's ever had an addiction to shopping, or buying clothes etc you can often justify buying more expensive items. So say you go to buy a new coat, you can buy a fast fashion coat that may cost you $5 or $10. It sounds cheap on the initial price tag, but you might only wear it once. After the first wash, it might look terrible. The alternative is a much more expensive coat, something that looks great, but you could keep it for 20 years. You could wear it to important meetings and you might even get a better job from going to an interview in it. When you look at the cost of owning that coat over the 20 year period that you have it in, maybe you have to buy 20 times the cheaper coat, and the actual more expensive one, on a price tag basis might work out cheaper. The other classic example I'll give is batteries for your remote control of any electronic device, famously Duracell batteries are supposed to last x times longer than a cheaper alternative, so you may buy a cheaper battery, but how many batteries do you have to buy over the lifetime of the supposedly more expensive Duracell? Realistically it might be cheaper and save you the hassle.

I suppose to summarise the total cost of ownership looks at the complete costs of owning something once it's bought, like from purchase to disposal. When procurement listens to your sales calls, they're not just looking at the unit price. A lot of salespeople think procurement just wants the lowest price not necessarily, some are looking at the recurring costs involved when they buy your offer.

I think we're all used to saying you go to buy a car, and now with a lot of cars, specifically some of the newer entrants to the market. I'm thinking of people like Kia, which has built a very big presence here in Australia. 15 years ago I didn't even know they exist, but they're certainly unheard of.  They have offered things such as seven-year warranties, whereas a decreasing fixed price servicing. Math is the decrease in the total cost of ownership for that car over the lifetime of the car. The initial upfront price tag that you pay is only part of the actual cost. You have to look for a car, and you have to look at ancillary costs as well things such as insurance and fuel consumption. Does one car cost a lot more to run than another one? In some countries, there are even access fees you have to pay for environmental performance. The real cost of owning that car is related obviously to the component of the price tag of the initial purchase, but there are so many other factors to factor into it that you’ll only become aware of what we have to make the cash payment for years down the line.

Another example could be, I'll take one from my own experience when I was buying a water filter. I was looking at a couple of different suppliers for this water filter. The cost of one was like $485, the cost of the other is more expensive at $695. The cheaper one could do the job but when I look closely in terms of doing a job, it could remove heavy metals, etc., filter the water tasted okay but when I looked closer, between the two of them the cartridge of the cheaper one was much smaller, so that would mean, I'd have to replace the cartridge, more frequently. Also, both of them had to be installed by a plumber. The first one didn't have a free assessment to see how it fits into the house, the second one did the more expensive one did. So overall, even though the upfront cost of that filter was more expensive at $695 overall, it had a bigger cartridge. I didn't have to change the cartridge as much over time, had free installation from the plumber and a free assessment. I thought you know what, that's great because I also get advice from the plumber, is this the right one for me?

I think if we wrapped it all up where are we trying to go with this, I think the point of it is when procurement teams are buying any product or service, they're tasked with a couple of things. The first one is to get a great price, and a great price is a low price. They want to pay less. But the second thing is they want a better quality product, better quality service and reliability and a low-risk supplier for their company. In the negotiation, they're probably trying to push you down on price, but what you need to be doing is a skilled sales team, a skilled pricing manager, you need to be aware of the concept of a total cost of ownership, the awareness that what you're delivering might be cheaper, and you need to go to the purchaser, you need to go the procurement team in the direction that I suppose benefits you takes awareness of the pluses of your offer. If you have a much longer-lasting product that has been tested, some of these, say a tire that will last $1,000 versus one this test for $500 you need to get that across. You need to be discussing the total cost of ownership and the benefits of your product, not just the upfront price tag on which you could be pushed down on the apples to apple comparison situation. 

It does help both the supplier and procurement to understand, upfront and longer-term costs direct and indirect costs, and hidden obvious costs. The limitation of this concept is that yeah, it's very cost focused. It doesn't go into all those risks involved in buying a particular product, delivering on time, supply chain issues, does the product work better than another product and product innovation is the downside. But this is something that good salespeople person will go at, I can add to this total cost of ownership concept by discussing risk, by going back into the procurement officers problem, escalating that conversation to real needs and not just gravitating to cost, thinking about how the product boost their revenue not just cut their costs, thinking about how working with you ensure that they have a safe and protected relationship over time that you'll help them if they need help, the support is there, it's not just about the product that you're selling.

On this podcast, we talk an awful lot about value, but realistically you can only really dig deep in value when you put yourself in the purchaser or the user's shoes or seat. Why is somebody buying your product? What do they want from your product? How do they value it? When you look at it from that perspective, that's when you can start mapping out the actual total cost of ownership, the benefits, the negatives, and the cost savings that a product or service delivers. When you can do that, then you can discuss it with them, and you can discuss those plus’ that make your product better versus others. I think we'd cover this much more in all aspects of this will be covered in future podcasts, but I think that's all I've got to say on this one today.

Just remember that you can use concepts from procurement to get out of those difficult sorts of price unit price discussions, you don't have to be framed by them if you can control that conversation and turn it around to an advantage to benefit you and the person who's buying from you. 

In this episode of Pricing College - Joanna asks a question that every CFO wants to know - can you increase sales by increasing prices?

Aidan discusses the concept of a Giffen good in economics and whether anything similar occurs in the 21st century.

Ask yourself - have you ever assumed a product must be better just because it costs more? We look at the examples of toothpaste and a nice bottle of red wine!

Today, we'll be asking the question. Will people buy more of a product that costs a lot more?

I'll kick off with this one because I want to reminisce about my university days and when doing economics, there was a famous concept of a Giffen good or a Giffen product, which I believe stems from a couple of 100 years ago in France where people say they had staple goods, such as flour bread, potatoes, that sort of thing rice and the poor people could only afford and that was their staple food and the concept was if you increase the price of that food, there'll be even worse off, and so they'd have to get all the nutrients from that one product. So in theory, if you increase the price of bread in pre-revolutionary France, the theory was potentially people would buy more of the brand.

As we reminisce about university days maybe I'll reminisce about my psychology course and talk about price perception. It's quite a common theme in psychology like people perceive prices in different ways and research shows that when a price is lower, people perceive that products to be maybe inferior cheaper, and maybe not aligned to their needs. Equally, if a price point is higher people tend to perceive that as having more quality, more value, something they want, and even down to those status sorts of drivers were talking about in earlier episodes, they want to align themselves to that product. 

Yeah, I think there's a very old common saying that says, If it seems too good to be true, it probably is. A lot of people, there's a couple of things they don't have specific knowledge about the product they're buying, especially if it's a little bit more complex like a chemical product or even as simple as a toothpaste it was something like that they don't have that knowledge. But there's also the safety in crowd's mentality, there's an idea that if you go into a shop and see a price set at a certain price point and other people have already purchased at that point and so you feel they've already made the choice, and it makes you feel more content and comfortable in the choices you make.

And looking at that example of toothpaste, there are so many different types of brands and versions of toothpaste. But toothpaste is an interesting one because it's a high-risk factor when you buy toothpaste and there's a lot of chemicals that go in it, especially if you've got yourself, your children, your family, you want to know that the toothpaste is not going to kill you. It has good qualities, it got the right chemical components and the right balance. We're not pharmacists or chemists, we don't know what we're buying here, it’s a lot of trusts involved. When you buy that toothpaste you can be sort of split off into groups, and we're talking about that before, segmentation. What type of buyer are you? Are you going to go for that sort of lower-priced groups segmentation? or are you going to go for a more expensive toothpaste that you believe is more trustworthy, it's not going to kill you, it's got all the research the latest research around it, and the price point is high, and that therefore, you align yourself with a higher price point based on all those value drivers combined. 

I think you go into a supermarket say in Australia or most countries there are probably 10 or more options for toothpaste. I don't think any more than 1 in 100 people would read through the chemical components that make up that toothpaste. In reality, we've no idea what we're purchasing.  The price differential can be very large, you could go from like $1.50 for a tube of toothpaste to even up to 10 or 12 bucks. Fundamentally, it's a small difference in your weekly or monthly grocery bills so a lot of people think they risk it, think of the money they're going to see if down the line is better teeth and a brighter smile, etc. So they pay more and they choose the better one, and they think, it costs more, so it must be better.

Yeah, in terms of that toothpaste example we touched on the health, people buy because they're risk-averse because of the trust. We also buy as Aidan mentioned there because aesthetically they want brighter teeth. You can see some of the brandings on toothpaste boxes a Hollywood smile, and those types of products have a higher price premium on them, even more so than health and chemical production and everything being sort of scientifically examined. I think the ones with a cosmetic appeal on top of that whitening, it has a higher price premium you could even get up to $12 a packet for those type of products.  Even often with those, they have an additional sort of attachment like maybe a special toothbrush that works well with that toothpaste to get you that brighter smile. So that goes into a premium, higher price and price bundling to appeal to a certain segment that wants that Hollywood smile. Maybe they're thinking about a Hollywood actress, their favourite and they want to be like that, who knows. But that price premium is all based on those particular value drivers.

We go from teeth whitening to a product that can make your teeth darker, and that's an example I think of is purchasing red wine. So say you're going to visit a friend or family, you'd be invited over for dinner, and you think I have to bring something I have to bring a gift with me so I bought a nice bottle of wine is a classic example. I'll be honest, I put my hand up and said, I like wine, but I'm not an expert, I don't know the vineyards or I don't know enough about where the product comes from to know what a bottle of wine is worth. And if I'm going in to buy a bottle of wine to bring to as a gift, I'll be honest, I'll be picking very generic, I know Shiraz and all this sort of stuff, but I'll be very much guided by the price points in the shop. I don't want to embarrass myself or come across cheap and so I won't buy a very cheap bottle to bring to my friend's house, I'll have a price point in mind that I'm not ashamed of and that hopefully will reflect well on me. I'll pick one of the shop guides, for all I know that wine is not a great wine but the shop is selling it at that price and so I assume, or they sell at this price more knowledgeable people than me or you know crowds, the statistical validity of crowds purchasing this bottle of wine must be good.

And the same would go for like you're inviting some friends. You want to take some friends out for dinner. The question is where do you take them? They might not be your best friends, we want to make a good impression. So you'll be thinking about what restaurant, what experience would suit us and would identify with and I'd want them to understand me within that context. You’re even then thinking about anchoring yourself, sort of like framing value in terms of the restaurant that you choose. So within all of this when we asked the questions, would people pay more for products? I think they would, but a lot of techniques are involved in this like framing, anchoring and segmentation. Do you agree with Aidan? It's not just a simple question.

No. I think this is segmentation why are people buying. I certainly do believe that by increasing prices in certain areas you will sell more of a product and its other products or just standalone, like the examples we give are two tangible ones I think there's a whole fleet of other examples. Even buying batteries, so you need batteries for your remote control for your television set which we covered in the previous ad or episode, this simple example you could buy a branded battery which will be Duracell which will be sort of be at a price premium to some of the cheaper brands. For all I know I don't run statistical tests I don't know if its battery last longer, or it's more reliable. It costs more and they claim on the label it does. I don’t know if it does or not. So yeah, generally, I will pay more for the Duracell branded battery and I do believe that the higher price point of Duracell is pushing people to buy more of it.

I suppose you probably wouldn't buy it if you then learned after you bought it, that it didn't meet its service. It was broke down, all the guarantees that were given weren't abided by and the company just didn't do anything those sorts of things, then you would think, I will switch to another brand and I think this is a problem that is occurring, I think a lot of brands say one thing, but they don't live by that, and customers are quite savvy and they will work out whether you know the value proposition is real or not, and if they find out that it's not, and then they'll try alternatives. 

Yeah, I think even just discussing this topic I sort of have the opinion that people will buy more of an item if it's more highly-priced in the area where there's a lack of expert knowledge. They're not experts in what they're purchasing, we cover procurement in a previous episode, and I think this is where procurement comes into its own. If you're choosing two types of toothpaste, and the procurement people were experts in toothpaste and chemical make-up, they could get a great bargain by choosing the cheaper one. It's almost like a premium you're paying to compensate for the lack of knowledge or the time that you would have to invest to know which is which. The same way the battery, in reality, we all expect batteries to give out sooner or later and so, as long as it's not immediately, a couple of weeks, a couple of months that battery gives out, we're not going to complain, and we're not going to notice it, it's not that important to us. So I think we pay that premium, we trade premium, we trade money for the time that we would need to invest to research the product.

This is common in pricing strategy, new novel, unusual products tend to be priced using this scheming approach and then, products that we kind of are aware of, they're already out in the market, companies usually use a penetration pricing strategy for those types of products which is quite a more competitive pricing strategy. But yeah, overall, I think people are willing to pay a higher price when the value is there when it's proven, and they'll continue to pay that price within reason. I mean obviously, there's going to shift in the economy and crisis but we're all aware of, and we're living through right now. But still, people will pay for value because it's meeting a need, it's serving a problem and it's addressing a problem that customers may have. There's nothing worse than having to go back into the shop, rethink this all the way through, fundamentally, we're all quite lazy we want things to work, and it's better just to pay a little bit of price premium for that convenience.

You know we are pack animals at the end of the day, and we move in crowds it's very rare for people to be real lone wolves to use another example. So I think if you have a high price tag, the price tag on a product or service is a price, it’s the number you pay but it's also some form of branding, there are also other psychological aspects with that. It's a confidence in the company selling it to put that high price on that product. It insinuates that this may not be for everyone, but this is a high-quality product. And I think that translates somewhere into our minds and we will buy more of these products, under certain circumstances.

In this episode of Pricing College - Joanna and Aidan talk about 5 things to consider when selling anything - and take the example of a TV set.

TV watching is still a common pass time - even if it is now more Netflix than broadcast channels. However, when selling any item - what are common value drivers that should be considered.

The TV set has technical criteria that customers want - but we explore other value drivers that may be less obvious.

Today we're going to talk about value, what 5  things should you consider about value when you're setting prices? Now,  value can be quite an ambiguous term, so we thought today we'd go through an example of pricing a TV set according to its value and when we say value, I think we're referring to customer value, how customers buy and perceived the value of this particular TV set.

Yes, we want to give an example of the COVID and lockdowns etc., certainly, people know about the TV set and the value it provides. But we're going to give an example of stuff you should be considering that isn't exactly the size, the technical specs or the TV set. Other stuff that customers will value but then you have to put yourself in that mindset to think of them and explore them.

Yes, I'm not saying that technical aspects and visuals are not something that people do consider they do when they buy, but that's only one tiny aspect. So we're just going to explore some of those other aspects that could be tradeable, it could be some of those value at risk principles that we touched on in earlier episodes.

That's exactly right. When you go to buy a new TV set or any electronic product really, there are certain things you look at. You probably want to know the colour of those sort of aspects that it will fit inside your house, that it has the latest technology and it does everything right. But there are other things you're also looking for, so we're going to do five things to consider and again, Joanna's drawn the short straw so she has to cover three, and we'll kick off with number one.

Okay, I'm going to do the simple one as we've sort of touched on it already, just looking at some of the specs. Look, I know these are not some of the things we want to emphasize, but I have noticed in Australia that people do like big TV sets.  So we can't ignore the fact that the size of the TV set in Australia is quite important. It's much more important in Australia than it is in the UK, TV sets there are small. So, compared to here, I don't know though, what 50 inches? 60 inches long? Some of them they’re huge. This is quite commonplace now, so that would be considered some of the sort of more tangible aspects of a value driver that people buy TV sets based on their size.

Yeah, true. Second, what I'm going to go with is the branding. So, I think a lot of people probably recognise that manufacturing has been outsourced in many industries so when it's a rebadging principle, you could buy fundamentally the same television set at very different prices with different logos or badges. But when people come to visit, when family and friends come to your house if they see a more prestigious brand, such as Sony, LG and those sort of things. They might think you're a better person, ridiculous as that seems they may do so and you may have to value that. So people may pay a premium for a nicer brand.

When I go into the shop to buy a TV set, which I've done fairly recently. I'm not a big expert on TV and I’m quite a risk-averse buyer, I want to know about the guarantees, are they extensive guarantees or one year warranty. I'm worried about whether it's going to break down, I've made the right decision, what if there's a problem and I can't fix it, or someone comes to help. So those types of aspects guarantees, warranties are really important to me when I buy a TV set.

I just follow up on that point, it certainly is and even in Australia the Harvey Norman store offers a lot of their computer programs and systems replacement warranties which is a very valuable thing. Okay, onwards to my next one, which I think is point number four and deliverability, is it actually in stock? If anybody has been shopping over the last few months, in 2020, you're probably aware that stock is highly volatile. Shops may have the systems you're looking for, or they may not. So when you're looking to buy a product like a TV set, are you prepared to wait a month? or do you want it right away to take away in your car? It's that sort of availability and deliverability options that can be very valuable.

The final point that I often think about, especially nowadays with the advancements in technology.  Does this TV fit with other systems that I'm using, Netflix? Does it fit with my surround sound? Things like that. Is it easy to use? Product innovation is also useful and because I'm not very good at that sort of technology side of things I want to know, Is there any system support? Is there anyone I can call? Perhaps that can help me with some of these integrations between systems. So, those types of things I'm looking to as well.

I think in Australia there used to be the concept of a Holden family or a Ford family and people were aligned with those brands. I think you could almost argue now you're a Samsung or an Apple family or an Android versus Apple Mac family and fundamentally if you're trying to sell a TV set to somebody it's important to know what systems they use. Do they use Chrome? Do they use you know Google Home? etc., and if they do, they're almost certainly more likely to be Pro. An Android stroke, a Samsung style television set versus one that’s more aligned with Apple so those things should be considered and it's the ecosystem I think is the term used. Products we buy now are not stand alone, they fit into wider ecosystems, and knowing about that will help you sell.

I suppose this comes down to people buying TVs based on brand, but what does that brand power mean? It's because these companies made brands that were reliable that you could trust based on all these different value drivers that we've just looked at, and literally, they just ticked the box on that and over time, we've just got used to accepting that client value from certain brands. We should never ignore the fact that underneath those brands, there is still innovation in terms of product innovation but there's still, I think a lot of brands now need to rearticulate the value that they already deliver to their customers and just remind us sometimes of why we buy.

Yeah, I don't have very much left to add all I know is when I choose a TV set, I want the biggest one possible because it makes me feel more important.

And it's also great that you have a salesperson that can just hone in on all these sorts of key questions that the customer may have in the store because these things are on our minds and asking the customers the right questions can bring out these value drivers and help us, select the right TV set for us. But anyway, yeah, I think, I think hopefully this example has helped unpack customer value, and this logic and framework can be applied to all products.

In this episode of Pricing College - Joanna introduces and explores the concept of segmentation.

For the vast majority of businesses - whether selling to consumers or to businesses - you will likely want to tailor your offer, and charge varying types of customers different prices.

This could be due to some customers buying much more - or requiring additional services or value adds. Segmentation is vital as a step to understand your customers - and charge the "right" price.

Today we're going to talk about segmentation. What it is and why it's important? The reason we want to talk about that now is that a lot of companies and pricing departments are now investing in pricing technology and new systems and a lot of these new systems require segmentation. A lot of advances have been made in segmentation, but we're just going to talk about what it is, and some applications.

Just this week we had an inquiry of a startup business, and the inquiry was, we have different types of customers, we have large corporate customers, and we have smaller customers, mom and dad stores. How do we segment our offer to those businesses? How do we deliver different services? and fundamentally, how do we charge them differently to maximise the potential revenue to the business?

A lot of companies are struggling with segmentation at the moment because they're using fundamentally quite outdated segmentation principles and approaches that are largely derived from demographic segmentation. That's usually things like postcode or location, geography, and country. They split the country up in large chunks, but the problem with putting a lot of people in large groups, is that you don't get the subtlety in terms of pricing, in terms of understanding their needs, and why they buy?

I would even say a very large number of companies in Australia and globally don't segment at all, they fundamentally sell, you know we go back to the apples, you come in to buy one apple, you come in to buy 10 apples, you sell it at the same price and under the same circumstances, whether this is online or delivery or through bricks and mortar store. A lot of companies don't segment, either offer to their customers.

That leads to a lot of problems because they're not addressing the customer's needs and they're not giving their customers what they actually really want and they’re fundamentally just pricing using cost-plus. I think we talked about it before, they worked out their cost, they just added up the percentage margin on the top, and then just rolled it out. No segmentation at all. Other companies are a little bit more sophisticated and they have been using that geographic segmentation principle, but there are other things that people are doing now, especially with online businesses in fashion. They're looking at price segmentations in terms of their customer's behaviour. They track what customers are buying in real-time. They're trying to use more analytics to understand different customer behaviour so they can split people off into different groups, which is quite useful. Then there's another new type of segmentation that's called psychographic segmentation, and do you know what that means?

That’s a little bit more about value-based pricing, it's more aligned to that. It's when your customers have a specific value principle in mind. They buy because they like to be healthy, they believe in a cleaner ecology and things that are important to them, they're motivated by people in companies that have a similar value system to them. It can come down right to the food they eat. I'm thinking now like grilled burgers, we've all had a nice grilled burger. Why do people go there? They're trying to segment their customer base using that psychographic segmentation, where people go there for a healthier burger and Greenburger. They treated their animals right before slaughtering them and customers like that. They put a lot into that sort of ecology motive.

We've covered a lot of what segmentation and the factors to look at, a good question is, Why would you segment your customer base? What is the reason for it? This is the discussion we had this week with an internet startup. Fundamentally, the reason is if you treat everybody the same and we'll give an example of an airline. Let’s say you're flying to New York, some people want to go in coach, some people want to go in premium economy and some people want to go in business class, and if you charge or try to charge everybody with the same price for the exact same service what you'll fundamentally do is undercharge, or leave a lot of money on the table to certain customers, overcharge another segment of customer base and just through pure luck you will be hitting the thing they’re right to value spot with certain customers, but what you're doing is you're underpricing or overpricing, and completely misaligned with 80% or so what your actual market.

In doing so you missed out on a lot of revenue opportunities, a lot of margin opportunities because there are going to be some customers that buy your products that are willing to pay more. Then there's going to be other price-sensitive customers that are not willing to pay the price that you're charging at all and will go elsewhere. I suppose this is why segmentation is important because it's identifying those different customer groups, so you're aware of what they need, and you know what price they're willing to pay and what they value, and this is how you determine your pricing power.

But I think the actual, you know, Joanna went through a lot of what you look at but there's no easy answer, it's not one size fits all, the segmentation strategy really is a completely different business to business, product to product or service to service. When you're looking at a business, you have to think, what does that business provide? What is its value add? Who is the customer base? How can we break it down? How can we use, what was that complex word, psychographic analysis? all those sorts of things. When you're trying to sell a luxury car, an airline flight, or even just a fancy hamburger to somebody, you need to know what that person is buying. Is it a corporate account? Is it a private person? Is it for entertainment purposes? Dig into it, and when you dig into it deeply, you can get great indicators as to why they value something, and then that gets the next step. How do you segment that base? The Internet version, everyone’s used to seeing it. If you buy software as a service, SaaS stuff. You’ve probably seen thousand times the menu page, where you have a starter, Professional Enterprise, categorise segmented offers that standard but you probably won't even realise how many times you are being segmented.

I suppose this comes back down to my original point when I open this discussion about people, pricing departments and companies buying pricing technology. A lot of this technology comes with its own approach to segmentation. A lot of companies choose technology before thinking through their segmentation and their offer, and then they buy this software and it's not quite aligned to their business and go to market approach, or even their value profile. And often it can be very difficult for them to then unwind the segmentation that's already pre-programmed in that system. So, just to note here, be very careful about the technology that you choose, and always think about your pricing framework and your segmentation logic first, before actually buying technology because it does come with its pre-programmed segmentation. 

In this episode of Pricing College - Joanna covers the concept of framing - and how it can benefit you in a negotiation.

With framing - you can assume dominance or the moral high ground in a meeting or interaction and this can be used to great benefit. This can be a tactic often utilised by procurement professionals.

What can pricing managers learn in this regard?

In today’s episode we want to cover the concept of framing and framing in any sort of environment such as an interview, any negotiation, but in particular, discussions with procurement.

Alright, so what is framing? This is a very important concept. It is used as Aidan said a lot in negotiation, it's when one perspective and another perspective clash. Because frames in a sense our points of view, perspectives that everybody has when they interact with another person. So, wherever you go, there's always going to be framing occurring. So it's important to know how to utilise that to your advantage.

I think everyone has been in discussions or meetings with people where there's a clear power structure or pre-stated or unstated mechanism where one person is in the morally correct area versus the other. You can think of, even in a courtroom where a judge sits high up on the stage, or much higher up than the lawyers and the people in the court, that puts a much stronger moral position for that judge. You probably also have it when you're a school kid and you're calling to see the headmaster or masters. An all piled office with a nice big desk and frames the entire discussion in a way that may not benefit you

I suppose it goes back down to our evolution, our history of being people. Framing comes down to power status, where do we fit in the pecking order? Are we alpha or not? And in any discussion, that's kind of what's happening, especially in negotiations. So it's important to know where you're sitting the power control in any discussion. An interesting book on this that describes this well is a book by Oren Klaff, Pitch Anything highly recommend that you read that.

I think people are very aware of the way things are positioned and the way things are framed.  There's always the concept that if you're the buyer, some people think they're almost the boss of the seller, there's almost that mentality, and they can push prices down or be tough. Try that if you want to go in and buy a luxury product, like a Ferrari or a Lamborghini from a prestigious dealership. You may find the old framing slightly changes, but I think people are used to that. I’ve got a horror story that I want to bring up, but I think Joanna is going to cover a few more items regarding framing. Sometimes you can find yourself being framed and you have to wonder, how do I get out of this situation?

It's a really good story that Aidan's going to talk to you about and maybe just to give some context that it made me think through the story are some four very typical frames that people use during negotiation so maybe think about these different frames when he talks through his story. Now, these four frames are called time frames. That's the first one, do you know when people often look at their watch or cut a meeting short or say, I'm going to leave if you come too late? They're using what's known as a time frame. The second one is the power frame like big bosses or CEOs, they want to be powerful and come across and show their power. So, they will use that to their advantage in a conversation in a meeting, maybe they'll sit in the power position at the top of the table, maybe they'll talk more, those sorts of things. The moral authority frame is an interesting one. It's when you have the moral high ground in a conversation, and we all know those people that go, you may be right but the good thing to do here is X, Y, and Z. They've completely undermined what you've just said, by using a moral authority frame. And the final one is called the analyst frame. When they dismiss what you said, using things like facts, evidence, and maybe using logic as a way to undermine emotion when both coexist in this world, that's the final frame.

I've learned quite a bit listening there and I can even recognise some of them in this story. This is from a couple of years ago when I was a pricing professional and I was helping a sales team in a B2B environment. We were selling to a French multinational. We got an email on a Friday evening, demanding that we jump on a plane on Monday, and fly off to meet somebody who was jetting out from Paris. This was in Australia, we flew off to Brisbane on Monday morning, we did not know what the meeting was for? They refused to give us any information in advance, clearly keeping us in the dark. I can feel that there was pressure on us, we had to get up early, we had to get there. We arrived at the location of the office and we were kept waiting more than I think 45 minutes beyond what was required. In the meeting ahead of us, there was like a stream of different people going into a meeting and I could hear shouting coming out of the meeting. You felt like you're a small kid back at school getting shoved up. Eventually when our time for the meeting came up. We went in to meet somebody who introduced themselves as a very important person jutting out from a head office in Paris, and that we were framed as a very unimportant people. I think the initial thing was, How can you explain yourself? was almost the first question. And we were like, I don't even know how to answer that and so you know you start talking through the meeting. The meeting was incredibly awkward, the gentleman from Paris was badly dressed in unironed clothing, four days on the shift, looked like he hadn't slept, and to be honest, had virtually no idea as to what we were even selling. It was more than just accusations. I think one of Joanna's points there was about an accusation that you're not being moral and the accusation was you're ripping us off, you're ripping us off, repeated four or five times and demanding explanations for it. When we tried to give any explanations, and discuss things the answer was, I'm too important to know this detail. You can work on it later and send it across to my assistants. The meeting was ridiculous. I'd be honest, I still don't know what they hope to achieve from it. I think the highlight for me was when the gentleman shouted at me, you're looking at your watch, you're looking at your watch, you're so desperate to get out of this meeting, that's a sign of guilt. And then when I pointed out that I wasn't even wearing the watch, I think that was the final straw of the meeting. Yeah, I think it stands out to me as a comical example of probably somebody going through the motions using these framing techniques, and I think we can take all four of them off, just from what Joanna mentioned. Yeah, I don't know what was achieved in that meeting. I think as a sales team we have to learn from that and try to reframe it.

And the interesting point about that is when you meet somebody who's using all these framing techniques on you, it feels really bad, it feels uncomfortable and often if you're not aware of framing existing then you're not going to respond in the right way. What's just happened then is you've been framed, you’ve been controlled and you are then beta, you're not alpha, and they've won that particular discussion. However, the good thing about this power is, it's in flux, it changes and you can get that power status later. But only if you know how to use brain control. So I highly recommend that you learn these techniques, because it'll make you feel much more confident about yourself and where you sit in that situation in a conversation, and then you can start having really meaningful conversations with your peers, your managers, and your customers.

In this episode of Pricing College we discuss 5 practical things to consider when entering a negotiation or meeting with procurement professionals.

Procurement is becoming more and more common in B2B environments - so ensure your pricing and sales team are ready to negotiate effectively.

In today's episode, we want to talk about five common mistakes that salespeople in a B2B environment often make when going in to discuss projects or tenders with procurement.

Negotiations, everyone knows, can be quite nerve-racking. But we want to get to the bottom of what you can do to make things a bit better. But to do that you've got to understand some of the common mistakes that maybe you or salespeople make. So I'm just gonna cover some of those.

And Joanna drew the first or the short straw, so she has to cover three topics whereas I only get two.

The first point I'm going to talk about is often salespeople can go into a negotiation with their heads full of details about the products, they think about the features and the benefits of the product, they think often about the value in use, I think we've covered this before in a different podcast rather than maybe some of the problems that the customer may have and that's why they're asking for those particular products. I also think that a lot of salespeople go into negotiations trying to make friends with the other person. When this isn't the right time to do that, they often waste, maybe a quarter of their time, and you've got an hour to get to the point of wasting it on trying to be likable and being liked. It doesn't work in that context.

Number 2, and this is so much based on personal experience. In many B2B companies, people in the sales area often do not know the pricing shape, certainly, in a tender environment where there are many products and services. They can go into the meeting, they've come from maybe a lower level of sales where’s more personality-based, and they have a red card, and it has been provided to them by the finance department or some other department, they really don't understand it where they don't have any ability to move or negotiate on those prices, if there is pushback, they will have to leave the meeting and discuss it with somebody else and that leads us on to a very unsatisfactory meeting. It gives them no real room to negotiate. But one thing we often see is the finance department is very wary of many companies that go into these meetings they tend to be a little bit fearful of that confrontation.

Right, so maybe another point I'd like to make is that often salespeople can go into meetings with a light fuzzy idea about the customer's business and that's unacceptable. You should be completely across what your customers do. How do they operate? What their problems are? An excellent area to break the ice, to get to the nub of the problem, to see how your products and services can't meet that need?  And a lot of salespeople just don't know what those problems are, they don't know the objectives and so then, therefore you have very limited discussions that don't mean anything to either party and maybe we can move forward from there.

Point 4, my second point. I often think that the sales personnel in that meeting, they're feeling they're between a rock and a hard place. I think the concept of the complaining salesperson is very common, but in many regards it is correct. So if they go into that meeting, they are given a red card, or to discuss the tender, they're almost going into their bright-eyed bushy-tailed hoping that the customer, the procurement team will just agree to that red card. If there is pushback in any way to the salesperson company, there are other stakeholders, you know, operations, etc. They will likely be very negative and bash that salesperson. So, the salesperson feels that it's confrontational both ways. The procurement team, there's a confrontational aspect to it, and then their own company when they get back to head office they're in trouble there too.

That leads to knock-on effects like they go into the negotiation with pricing that's very similar to everybody else. Everybody's trying to get the lowest price, therefore commoditising the whole market, the industry and it makes the negotiation quite pointless and difficult.  From there you can seem kind of needy because you kind of know that's what everybody else is doing, so everybody's competing into the bottom result and race to the bottom. And then, in so doing, you don't know subconsciously, that looks quite needy in wanting the business the procurement team knows that and then you fall victim to all their techniques.

That's right. And I think techniques and framing is something we will discuss in our next episode. So, from today's procurement lesson let's leave it there.

And just remember where we were going over some of the mistakes. I've seen some excellent work and negotiations being held by sales teams as well and also cover that in another episode.

In this episode of Pricing College - it is not exactly about knowing the enemy - but you have to know the enemy.

In reality - when selling in a B2B environment - any pricing professional will meet with and build relationships with procurement teams.

We ask what is procurement and what should pricing managers know about the procurement approach.

In today's episode, we want to cover a topic that will probably strike fear into the hearts of many experienced pricers, and that is the dreaded word procurement. So Joanna, what is procurement?

To summarize, procurement is a fairly new function and the main purpose is to buy products and services for their own business to operate or function and these could be materials to produce their own products and services for their customers. So, it is a very important function.

That's right, I think from a pricing perspective or a selling perspective you come into contact with procurement professionals in a B2B environment when you're selling to a business, obviously, private citizens make their own purchase decisions. But procurement in a company will have, at least a company of a certain size, they will have a dedicated professional trained in this area of expertise with the objective of getting better products and services at better prices.

A little bit of history about procurement, it started off as people say in  World War I. When countries had to buy military goods and services,and they needed to ship and get things to where they needed to go.

That makes a lot of sense when you look at it from that perspective. If you're running a company the management they can't know everything about what they're purchasing, and so you do need expertise in the same way you need expertise in what you're selling, you need expertise in what you're buying, and it's to know the product and to know the service to compare offers and to compare the different values of these products and services deliver. I'll just give a footnote, we'll give them the positive side of procurement here, but there's also the negative side, from a selling perspective, but that makes perfect sense. Over those years since World War I and World War II when you're buying huge amounts of armaments, etc, and making the wrong decision could threaten your company's survival. If that profession has become more and more professionalised, an expert.

I suppose nowadays there are several steps into the procurement process and cycle but just to summarise, I suppose their expertise would need analysis for their own business determining what the business needs at a certain point in time. Then, identifying the right suppliers to get those goods and services for the business, and then monitoring. Do these goods that we've just bought make a difference? Can we cut costs? or Do we get the value that the supplier said we would? From then, the cycle continues and they would renegotiate the terms with suppliers, and this is where the tricky thing comes in terms of pricing. Difficult discussions around price occur from this point when procurement gets more educated on the goods that they're buying.

I'll be honest I have previously worked in a role where I was helping selling teams in a B2B environment sell to procurement professionals. One thing I'd say is, it's almost a mirror image of each other. You're both trying to maximise the value provided to the customer, I think the procurement team and the seller team are trying to do that. The polar opposite is the seller is trying to increase the price and the purchaser is trying to decrease the price for that increased value.

This is often a perception that procurement has about the sellers that they're in a way inflating the price. And this is often why they come into negotiations with a very cost focused mindset, and they talk about unit pricing, but it's not necessarily the case that the sellers are always trying to inflate their prices, often they're underselling the value and I think procurement realises this.

I think they do often as well and I think in that profession there can be quite a bit of frustration that they want to deliver more value to their own company, to their employer, and to add value that's what most good employees want to do. But I think from a pricing perspective and in our own profession we can learn a lot from the procurement profession, what they do well, recognising what offer they bring to their company which can be increased in value by understanding the value of an offer. And there's also another aspect that we need to focus on in future episodes which is the negotiation expertise, the reducing prices, and the framing of conversations. They're two separate skill sets, but both are vital of interest to our listeners.

I disagree with Aidan and I don't think that either sellers or procurements are very good at understanding value. I think sellers are very volume focused and I think procurement can be very cost-focused. Their main objectives for their company are to lower costs. That in itself eliminates a lot of value discussion. There should be an opportunity for both sellers and procurement to think very closely about what value means. 

Joanna, I take your point, and I am always open to criticism. I take your point openly. I think in any profession, selling, pricing and procurement there are good and bad practices. I suppose I was maybe referring to a perfect world environment where what people do want to deliver additional value to the company that employs them, and any other stakeholders in the business. I suppose the last point I'd like to make on this podcast is as a profession you know if you're in a B2B environment and you're going in to sell to a major customer, who are you sending in to sell to them? Are you sending in somebody able, trained, competent, and confident with the skill set required to go up against a skilled professional procurement person? I don't know.

I’d like you to think about this as well as like, what is value? Is it just in terms of cost reductions? Sure that is an important element in procurement discussions, but also think about increasing revenue. How does that product that you're about to buy increase revenue for your business? How does that product that you're about to buy decrease the cost for your business? I'm sure you're completely over. How does that product that you're about to buy decrease the risk of the purchase of that transaction over a longer period? And do you want to establish a long term partnership that is going to generate a sustainable and safe option for you, your ecosystem, your business and your end consumer? So it's just broadening that discussion and thinking beyond costs and cost reductions.

I think so. I think most sellers, sorry when they go into that negotiation, they're focusing on understanding the contract. Are they focused on and often a big criticism of sellers, is that they're focused on talking about themselves. Are they trying to align what they're selling with what will increase value to the customer? The other thing is, are they competent, trained and knowledgeable in that area? Most big companies know that the procurement people do a lot of courses, they're members of Institute's, and they're dedicated professionals. In a large company, if you want to recruit someone from procurement, you get a procurement specialist. That's not always the case in the pricing environment.

I think education is required on both sides.  I mentioned before, I think the value discussion value-based pricing and what that means is something that both sides of the equation could be better at, and we can then move the discussion away from line item pricing into real value total Economic Value discussions, and we'll go on to describe what that means.