Pricing College Podcast

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

Notes on the time-stamped show:

[00:00] Introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

TIME-STAMPED SHOW NOTES:

[00:00] Introduction

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

[03:27] Global Supply Chain

[06:13] Customer patriotism

[09:17] D globalization era

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

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

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

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

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

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

Thanks a lot. Bye.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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