The Roles and Functions Needed to Set the Right Price
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Introduction – Tim Smith and Wiglaf Pricing
Gabe Smith (00:39):
Hi everyone. And welcome to Pricing Matters. On today’s episode, we have Tim Smith, the CEO and founder of Wiglaf Pricing and author of Pricing Done Right. And several other books. Thanks so much for joining us, Tim.
Tim Smith (00:52):
Ah, thanks for having me, Gabe, always fun to talk with Pricefx
Gabe Smith (00:55):
For folks that don’t know about Wiglaf Pricing, or know you, even though you have a pretty large audience of followers on, on LinkedIn and such. I’m sure some of our listeners may not know who you are. You wanna introduce yourself and talk a little bit about what you do?
Tim Smith (01:08):
I run a company called Wiglaf Pricing and we’re consultants. We help people define prices, price, structures, pricing, organizations, pricing analytics. How do you actually get pricing into the organization leading to better decision making? That’s what we’re focused on.
The Need for a Practical Pricing Strategy Textbook
Gabe Smith (01:29):
Yeah. And you’ve written a few books on the topic and you do a lot of you know, post a lot of content online as well. And your latest book is pricing done. Right? And you mentioned before when we were talking about it, that you had written more of the, the pricing strategy textbook approach, and now you wanted to move to a different approach in kind of the next book took a different, different tact. Do you wanna talk a little bit about what, what you’re trying to accomplish there and why you decided to write it?
Tim Smith (01:56):
So in the textbook, my goal was to help students learn how to do pricing so that if you start as a price manager or an analyst, and you’re new to the field, you know what you’re supposed to be doing? What are the questions? What is the field of pricing defined as, and unfortunately the extra books at the time were not very useful in teaching. So I needed a teaching textbook. Well, that’s great. I can, you know, I’ve used it as being used around the world. People are learning how to do their job, right. But the decision makers are the CEOs and their direct reports. The question they’re facing isn’t how do I do conjoint analysis or make a histogram? Their question they’re asking is how do I improve my profits? What going on? You say, you’re in pricing. You’re gonna help me make more money. Are you gonna help me hit my objectives and revenue or whatever my objectives are? What do I need? What do I need to hire? And so the pricing done right, was really written about the organizational requirements for driving pricing within a company. Very different approach.
Gabe Smith (03:07):
Indeed. So very practical though, right. And, and almost like a, a planning kind of guide or, or a very pragmatic guide for folks to, to implement this in an organization, as opposed to the, a theory and some, something about the practice, right?
Tim Smith (03:21):
Yeah. It was more practical trying to define more the pricing department, how do they work with the other areas? What are the decision areas they should own? And in there we develop the value based pricing framework where it discusses pricing decision, starting from corporate strategy. How does my company fit into the competition and how do we win customers?
Gabe Smith (03:47):
Tim Smith (03:47):
How does pricing fit into that? And you can imagine the difference you would have on the corporate strategy of say L’Oreal versus Estee Lauder in terms of their competition strategy or Tesla versus GM. Moving on into price, strategy itself, pricing strategy, many people just say it’s skim neutral penetrate. That’s part of it, not disagreeing with that, but I’m, I’m also thinking that pricing strategy includes the structure like our, are you doing a two part tariff, tying arrangement, subscriptions, bundling, versioning revenue management. How do these things fit together? How is your business defining the way at which customers can self segment and choose to interact with you? The price a third area in terms of is you have your list of competition. How do you actually react to your competitor’s price moves? When do you react? When do you not? How, how does it affect when you’re looking at the other areas?
Mistakes in Pricing Execution and How to Overcome Them
Tim Smith (04:55):
And then the fourth area loan pricing strategy includes the people process and tools. This it’s nice to say, I want to have go to the moon. It’s another thing to build a rocket ship. You actually have to get in there and people need to be trained after that. It goes into market pricing. You know, how do I set the price on a pair of glasses like this, or price variance analysis who gets, what discount or rebate win? How do we actually control that? And finally we get to price execution. Okay. I have a plan. How do I make sure I actually do what I said I wanted to do? People do make mistakes still. I think you’ve seen that at Pricefx, very costless mistakes.
Gabe Smith (05:37):
I’ve seen a few, I’ve seen a few. Yeah, I was just I was just on this someone else’s a blog or, or a podcast and blog about actually on MITs. It was called in machines. We trust and I was talking about an example that I had seen in some research I had done where they had a wasn’t it wasn’t a very costly mistake, but it was a pretty amusing one because it was two pricing algorithms that were acting autonomously, but keying off each other. And they had increased the price of this textbook on like fly genetics up to like $1.2 million just because it was just operating unchecked. Right. So you could imagine if that was happening at scale, across a portfolio of products, the kind of habit that could happen.
Tim Smith (06:20):
Reek, that actually happened to me, not to 1.2 million, but I have a $50 textbook on, on basic math in marketing. Okay. Statistics, applied to marketing, or you can call it machine learning and, and artificial intelligence for marketing decision making. I think that’s what the title was. It got bit up on Amazon, October 4, 3, 3, and a half thousand dollars. And this is a book I can sell to anybody for 50 bucks. All they have to do is ask me, but yeah, yeah. I’ve seen this happen in real life. It’s like these bots. No, they’re not necessarily the black box is decision making. Isn’t always a good way to go forward.
Why A Clear-Box Approach to Pricing Optimization Software is Important
Gabe Smith (06:59):
Here. Yeah. I mean, that’s one of the reasons why we, we advocate more of a clear box approach and it’s more of a machine guided human led rather than machine led human audited. Right. And yeah.
Tim Smith (07:11):
Gabe Smith (07:12):
Because it’s, it’s dangerous and especially, and those, those kind of the more deep learning and neural network you know, algorithms really only work where there’s really good transparency and very high volume and low risk of making a mistake. Right. So yeah, someone goes to look at the three and a half thousand dollars textbook. They just sign out to buy it. Okay. That would’ve been $50 outta your pocket, you know, but if you’re doing that across your whole portfolio and, and the deals are, you know, three and a half million dollars and you either weigh in it or lose it, then that’s a different story, right? Yeah. so that’s more of our customers fall into that. Where, and it’s interesting though, because I think because of what people see with Uber and Amazon and Lyft and, you know, airline pricing, they have this sense that AI for pricing is always that it’s always, you know, some just black box, you know, neural network that should be just spitting out a price.
Gabe Smith (08:00):
And we get a lot of these questions on, oh, how does it learn and how to do this? And I’m like, we’re not trying to replace you as a pricing team. We’re trying to augment what you do and make you more effective and more efficient at what you do by automating a lot of the processes and then, and providing you guidance into those, into those things. But, you know, the machine only knows whatever data you feed. It doesn’t know that, oh, there’s a supply chain disruption that just happened yesterday. It’s looking at, you know, two years worth of data to try to figure out certain trends, but it, it’s not gonna sense that spike or I’ve got a new competitor. That’s doing this to me as of last week, right. It’s gonna, you’re gonna be able to react much more quickly and, and flex your strategy and tactics.
Gabe Smith (08:38):
And I, I think, you know, part of what we’re seeing right now with regards to all the change that’s happening is the understanding by a lot of companies that pricing can be used as a strategic lever, not only to drive more profit and more revenue, but also as, as one of the key strategic elements of how you wanna, you know, operate your business, right? Like you were talking about some of those things when you’re talking about your book, like, okay, subscription pricing, when you, when you come up, when you move to a subscription, you have a, the opportunity to completely reexamine your relationship with your customer. And the pricing is just one of those aspects, but the, the pricing really, it gives you the opportunity to look at, okay, how much, what value are they actually getting? And, and how do I want to be monetized during my relationship? And hopefully for a long time, by coming up with something that’s fair and how much of that value should I be taking right. As, as in price, right? That’s always a kind of interesting question to ask and, and to have answered. And a lot of it depends on how, you know, how competitive that market is, how much transparency there is, how the switching costs and, you know, elasticity and all these other things kind of combined. So it’s a pretty fascinating topic pricing, I think you and I would both agree.
Tim Smith (09:50):
I fell in love with it when I learned about it. So there I am.
Gabe Smith (09:54):
You’re also a professor, right.
Tim Smith (09:56):
I am. I started teaching in Paul back in 2003 and I’m still teaching there just much, much less than I used to cuz I’m spending most of my time consulting, not teaching, but I still teach.
Gabe Smith (10:09):
Yeah. I remember that Chicagoland event that we did over at DePaul that you had hosted a while back and you’re doing those now over at is the union club, is that right? Union
Tim Smith (10:17):
League club of Chicago. Yeah.
Managing Inflation and Margin Erosion with Pricing
Gabe Smith (10:19):
So I hope to see that the next one there in it’s in January, right. Coming up. Yeah. So, well, we’re planning on, on attending that. So we’ll look forward to seeing you there. So why don’t you talk a little bit about some of the things we’re seeing? So I had mentioned, you know, pricing as a strategic lever and some of the current trends obvious, see one of the big ones is around inflation, right? That’s happening right now. I just wrote a little white paper on, you know, using dynamic pricing to, to help avoid margin compression that, that you know, both manufacturers and distributors are experiencing as a result of, of, you know, inflation. You know, it is cooling down a little bit, but I think it’s, it seems like it’s kind, or to stay when you pump as much money into the system, as there has been. And, and you know, you get all these shortages and, you know, prices are gonna go up and you really have to be able to respond to that. You, you had made some points in our conversation last week about, you know, food production, kind of that some of the conundrum that some of these CPG companies find themselves in with regards to pricing and how it’s difficult for them now to, to react because of their, you know, their strategies and tactics that they’ve established
Tim Smith (11:25):
Well, inflation in the states and in Western Europe may be at 5% or so this year, and over the past decades, they were closer to 2% or zero. The fact of dealing with inflation is never gonna go away cause Argentina well, for the past 10 years, roughly, they’ve been enjoying extremely high inflation in double digits, as well as Turkey more recently. And so if you’re working internationally, you realize you’re gonna have to deal with inflation on a regular basis. The question is, is how, and this is where I’m seeing some organizations just caught flat footed.
Tim Smith (12:10):
And one of the, one of the problems I dealing with inflation, if you’re just doing based upon historical practices is that’s how you’re gonna manage your prices. Well, your historical practice doesn’t make sense when there’s been a step change from inflation, going from zero to five suddenly now you have to raise prices, but so do your competitors. And so your elasticity issues saying, if I raise prices, my customers will all go to the competitors now flip into. Yeah, well, that’s not quite true. We all issues. Are your competitors raising price at the same time, or how is the industry managing this problem?
I was reading about Darden. It’s a restaurant group that thinks, you know, long, long lone star steakhouse or Longhorn Roadhouse, I don’t recall. They also have like a red lobster and a few other chain restaurants. The CEO was expressing great fear about raising prices on these FA you know, casual dining restaurants, et cetera. And I’m just thinking, well, your cost of labor just went up. Your cost of ingredients just went up. Now, maybe your property cost did not increase, but still that’s two outta three of basically running your organization. You can’t just absorb it and expect to have a productive and fruitful future. You have to pass it on to the customers at some level. And the questions is how much and when.
Gabe Smith (13:39):
Yep. Yep. I think we’ve yeah, we’ve become accustomed, you know, to eating out quite a lot in America. And you know, I was just watching a, a show the other day where they’re talking about this talk show and, and they were saying, you know, when I was growing up and, and this was the case for me too, we didn’t eat out very often at all. You know, know we, we would eat out maybe once a week. We’d go to Denny’s I think on Sundays, that was about like the only regular time that we would eat out. But, you know, Denny’s was what, $2 for a grand slam or whatever. It was almost cheaper than making it home. But I think that kind of model doesn’t seem very sustainable in today’s environment. Right? When you talk about the inflation, not only, and the labor, the recent labor costs and the labor shortages that are going on, because the that’s one thing that I think COVID, O’s really done is expose the, the challenges around finding labor in, in this environment where you’ve got people on the front lines that don’t want to be on the front lines, they’re getting, you know, harassed because they have to be the enforcer of some of these policies.
Gabe Smith (14:36):
And, and then they’re are getting these, you know, on the flip side, you know, pretty generous you know, packages when they’re not working at least, you know, so no wonder it’s hard for them to find people, right. Especially in the states where they’re not even paying minimum wage because of, you know, I think there’s a bunch of states that are still paying people $2 and 13 cents an hour or something like this for a minimum wage when they get tips. So it’s, yeah, it’s inevitable. I, I think that, and obviously the fear though, is in those companies that, that people will eat out less. And, and I think that’s inevitable too, actually. I mean, with regards to, you know, all the, where this is all gonna go, because, you know, you’ve gotta, people’s most people’s incomes are not going up at the rate of inflation. Most people didn’t get a 5% plus raise this year. Right. And that’s, that’s their in lies the challenge, right? In terms of you know, consumers will have less money to spend behaviors are gonna have to change. People are gonna start saving, you know, saving more eating at home more and not exercising as much discretionary spending is cuz they can’t afford to. Right.
Tim Smith (15:37):
Things are changing, but they’ll always be changing.
Gabe Smith (15:40):
True. I mean, at some point that’s gonna reverse course and things back, so yeah, exactly. I mean, that’s, that’s the key I think in, when we think about pricing as a strategic lever in my mind, you know, to you, you, you have to think about really it’s about business agility is like how, you know, because things are, you know, before, before COVID happened, it was all about the trade and tariff wars and, and then, you know, and then the recession and at the beginning of, of COVID and then we came back so quickly from it, it was like, obviously, you know, that, that combined with the quantitative easing is what’s driving a lot of the inflation. So but yeah, at some point that’s gonna change and then you’re gonna need to be able to be flexible in the other directions.
Not Getting Caught Unawares with Inflation
Tim Smith (16:19):
And I think that’s where some companies been caught off guard business agility requires investment in people process and tools. You can’t just suddenly flip on pricing in these organizations when I’m looking at large manufactured consumer product goods company with the pricing department, still being basically two people with an Excel spreadsheet, running elasticity analysis. And they’re doing, you know, 10, 15 billion a year of business with that model. And then suddenly you have this real problem. Come up. Inflation is no longer zero. We need to do something and they didn’t have the intellectual. They didn’t have the intellectual capital within their organization to drive better decisions. They didn’t have the people, they didn’t have the tools, they didn’t have the software, they were kept, you know, caught flat footed. And, and I’m looking at, you know, quick serve restaurants and, and some of your food manufacturers, you just wonder, how are, how did they get this big with such bad pricing policies?
Gabe Smith (17:29):
Yeah. To a large extent it’s been because they focus so heavily on promotions, right? So cuz that ocean line item at most CPG companies is something like 15 to 20% of their revenue. So for a 10 to 15 billion company, dollar company, that’s two or 3 billion that they’re spending. So they’re investing a whole lot of time and effort and people and process and systems in managing their trade promotion spend. Right. But there a lot of ’em just view, oh no, that’s, that’s just the price on the shelf that I don’t change. I only change that once a year. Right. So why do I need a bunch of people looking at that? They’re not flexing it by channels, but those days are gone because you know, first of all, the 2020 and very, very much was the year of, of direct to consumer, right? So that there’s never have been a higher investment, but in, in any of these companies around going directly to consumers, but even beyond that, they’re operating at all these different channels.
Gabe Smith (18:16):
So selling through Amazon, on their website, through traditional retailers you know, through all these different models that they may not have ever done before. So it really requires a much more holistic thinking around price and promotions were working together. Right. And I think that’s what we’re starting to see happen, but you’re right. Like most of the companies are not, they’re not organized in a way to really think and, and they don’t have the, the tools or the people that you know, or the, or the processes to think about pricing in that, in that more holistic sense.
Tim Smith (18:45):
I think that the hotels, airlines they’ve done I would, they’ve really gone far on the revenue management approach. Absolutely. Which is good for them. Yeah.
Tim Smith (18:55):
B2B, I actually think has taken further advances in driving forward pricing than I think B2C or CPG type companies. It’s hard for me to look at a billion dollar manufacturing company and not find at least some semblance of a pricing department. Mm-Hmm <affirmative> maybe with just three people in it, but it’s non zero. Even companies reaching 200 million are starting to look at building a small pricing department with the little pricing analytics and the, and the B2B sector. And it’s just, it remarks partly on the work that has been happening for the past 20 years or so B2B price, setting, price management. It also reflects the importance of finance over pure branding in the B2B sector. So we have a bit more power in thinking, what do I want revenue profit or market share? And profit comes up a bit higher on the priority list in the B2B sectors.
Gabe Smith (19:56):
Indeed. Indeed. Well, that depends on who you ask because a lot of times you ask, you know, finance, so they’re gonna say profit, you ask sales or they’re gonna say revenue, you ask the CEO, they’re gonna say both. And that’s actually something that, yeah,
Tim Smith (20:09):
Yeah. I think we both experienced that, but it’s not as bad. And, and this is like, think about the B2B B2C area. You have Amazon, which I don’t think made money for 15, 20 years of its first beginning.
Gabe Smith (20:25):
They still don’t make money on their retail. Actually. They did make all their money on the AWS really. So it’s a pretty interesting business model. They pivoted their strategy
Tim Smith (20:32):
They went after nothing but size and they got well rewarded for it.
Gabe Smith (20:36):
Tim Smith (20:37):
Yeah. And you know, Tesla didn’t make money for the first seven to 10 years either. And now it’s the most valuable brand and automotive. Yeah. You look at a bunch of startups run with good names behind ’em and they can grow for a long time just going after size, not actual money. Now you look at a bootstrap startup, which is, you know, wig laugh right here. No we’re after money every single day. I can’t just go for size. I’d love to be a huge, but realistically I gotta make money and I can’t give away the, the barn. I gotta make money on this. So it’s a different attitude of what is drives your financial metrics, meaning the CEO’s pocketbook is a profitability and you definitely see that with Carol tome of ups, she’s trying to increase the profitability of all of her assets or is it pure revenue and that would be Amazon just trying to be the biggest thing in the planet or is it market share, which I think would be how you would describe Kelloggs or post or any branded serial maker.
Gabe Smith (21:46):
Yeah. Yeah. I think it’s, it’s interesting. I mean, from my perspective as well, coming from, you know, a big company like Cisco systems where I started my career and we were, but we were very much in, you know, in that hyper growth mode, even though we were already a large company when I joined, but we were, you know, the category leader and we were defining that whole networking space at the time. And it was just all about growth, right? It wasn’t really so much about, I mean, we were starting to get into profit mode, but as I was there, we started to get into it. When I started that price effects. We were actually bootstrapped for the first six years of our existence. So we we’re about 10 years in now and we’ve raised something like 130 million. But but when, when I started, we had raised $0 except for friends and family, I, I actually personally invested in price effects to stake the expansion into the us.
Gabe Smith (22:33):
And so, and that ended up being a pretty good investment, but the that’s not the point, the point is that we were bootstrapped and we were very much like, you know, worried about cash flow and, and profitability. And we were actually profitable. I think three out of our first six years, we were profitable as a bootstrap startup, which is pretty irregular in the, in the software industry. But since then, obviously we’re, you know, we’ve raised capital and we’re running at a loss in order to gain share and, and to grow which, you know, seems to be working fairly well so far in software. There’s this rule of 40, right. So it’s like basically when you look at your, your your E margin, right. And your growth the two of those things together should be around 40%. So if you’re growing zero and you’re a 40% profitability you’re doing okay. Or if you’re, if you’re, you know, at zero margin, but you’re growing about 40%, then you’re okay. Or if you’re growing at 80% and you’re at negative 40%, then you’re okay. So that’s kind of an interesting metric that our, our CFO looks at and, and uses to help measure, you know, our business. And I, I won’t comment on where we are there, but cuz that’s, we’re a private company, so I shouldn’t get too much into our financials, but
Tim Smith (23:40):
<Laugh> yeah. But I, I work with a lot of startups in the software space too. And I see it very clearly where they say we wanna price structure and price guidance that tells us where we should expect the deals to land yet at the end of the day, if the deal looks good, I don’t care what we get, just close it.
Gabe Smith (24:02):
Tim Smith (24:03):
Gabe Smith (24:04):
Yeah. Be mean on our, you know, we have two, you know, two parts of our business, there’s the, the subscription side and then the implementation or services side, we care much more about profitability on the services side of the business because you know, that is, I mean, we kind of view that as a bit of a necessary evil in, in the way that sorry if I’m offending anyone in our services organization, but I think they, they realize we wanna keep that as small as possible. One of the things that mistakes that some software companies in our space have made is overinvested on the services side of the business and become really reliant on that revenue. And when you do that, you actually start becoming more of a consulting organization from a culture perspective and, and because have this big bench and they’re always concerned with, okay, how do I, you know, how do I get these resource
Tim Smith (24:50):
Avoid this resource? Yeah, exactly.
Gabe Smith (24:53):
And so we’ve been very cognizant to not do that. And, and we’ve always viewed that, that side of the business as, yes, it needs to run, you know, autonomously, we don’t wanna be pumping money into it, but at the same time we don’t care a ton about, you know, it making money. That’s traditionally how we viewed it. But now that we have more ambitions of, of like, you know, our future and what we’re gonna be doing there we are looking at as more of a, you know, the profitability on that side. But I mean, the beautiful thing about software is that the variable cost on the subscription side are pretty minimal, right. Outside of, you know, paying sales people and, you know, running the software, but, you know, that’s, that’s the nice thing about being able to scale, but the other part side of the business doesn’t scale.
Gabe Smith (25:33):
So, you know, we wanna scale through, through partners and that’s one of the reasons why we, we want our services organization to actually become a partner enablement organization. Right. And so come, whether it’s smaller partners like, like WLA or larger partners, we really want a lot of work. You know, both the, obviously the strategy. We never want to get into that. But even the, the implementation side and the integration side, we want partners to be doing that work going forward. And, and that’s how the most successful enterprise software companies have grown into what they are. Right. And that’s not lost on us.
You have been listening to price effects, pricing matters with Gabriel Smith, copyright price effects, 2021. If you have any questions or any points you’d like to share with the program, please send them in to email@example.com. You can follow the presenter Gabriel Smith on Twitter SW_evangelist. You can also follow us on social media using the hashtag pricing matters cast. If you like listening to pricing matters, please remember to follow us by subscribing on iTunes and leaving a rating, or by following us on Spotify and sharing the podcast.