Pricing College Podcast

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

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

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

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

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

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

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

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

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

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

and ability to pay.

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

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

TIME-STAMPED SHOW NOTES

[00:00] Introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This can have pros - and also lots of cons.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We run through the basics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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