Episode #0121 - Margin Management: Why Revenue Growth Isn't Enough

TIME-STAMPED NOTES: [00:00] Intro: Why Margin Management Is Harder Than Revenue Growth [02:22] Why Pricing Strategy Fails Without a Margin Management System [06:16] When Pricing Strategy Breaks Down: Rebates, Costs, and Margin Protection Risks [11:44] Margin Management in Action: Building a Strong Pricing and Margin System [14:39] Conclusion: Margin Protection Requires Discipline, Not Just Growth   Running a business is not easy. Growing revenue, making money is really, really difficult. Winning new customers takes a lot of time, often lots of stakeholders involved. Sales cycles are getting longer, competition is heating up. So when companies grow revenue, I know that's a real achievement, but there's another challenge that often gets much less attention and that's margin. Because if revenue is hard to make, margin is even harder to protect.  Hello and welcome. I'm Joanna Wells, founder of Taylor Wells Advisory, and we focus on improving margin through better pricing strategy.  Now in this podcast, I just want to share some of my experiences and some practical insights on pricing margin and commercial strategy for CEOs, executive teams, and pricing teams. And today I want to talk about something very simple, but very important, how revenue is difficult to make, but margin much harder to protect. In Australia, businesses are dealing with ongoing change and disruption. Almost daily wars are affecting energy and commodity markets. Supply chains have been unstable, not just for a year or so, but for several years, and input costs remain unpredictable. At the same time, many Australian businesses are buying products in the US dollar or Euros. FX changes are, are becoming a real headache for businesses, and that just creates another layer of pressure and complexity. When the Australian dollar weakens those same products suddenly cost much, much more, even if nothing has changed with the supplier. Costs can still move quickly and often without much warning. And at the same time, what else do we have? Interest rates have just risen the other day. Customers are under pressure. Small businesses, large businesses, you name it, families, consumers, all under pressure and demand in some sectors is becoming less uncertain by the day.   Why Pricing Strategy Fails Without a Margin Management System   [02:22] So while revenue remains important. Margin here has become far more exposed than ever before, and this is where the pricing and margin system becomes critical. Actually, coming to think of it, there's something really quite interesting and strange about margin. Most leaders and teams believe they are managing it, but in reality, when you really look at your business. Are you really managing margin or are you actually only managing parts of it? Sales manage discounts, finance, manage costs, operation managers, fic efficiencies, marketing, focus on growth. Very few businesses actually step back and manage the entire end-to-end pricing and margin system together. And that system is what I call the pricing and margin system. Now, every business has one. Even if you don't think you have, you have one. And even if it wasn't designed deliberately, it's the set of decisions that determine how much profit your business is going to keep. For example, how prices are set, how discounts are managed, how rebates are used, how costs increase are handled during costs, pass through processes, and which customers the business focuses on and why. A few years ago I met a business owner. He owned a B2B manufacturing business. Anyway, we were talking and we got onto the subject of pricing, and he strongly believed that his business's pricing was really strong, that they defined, you know, value, they understood their customer's perceptions of value, that they knew that they thought their list prices were highly competitive. Et cetera, et cetera. And anyway, that he was going on to tell me that, um, they regularly introduced price increases and if we could come in and just have a, a look at the, the detail to ensure things were, you know, running as smoothly as, as he thought that would be great. So we did, we took on that invitation, um, and we analyzed their invoices. And what we found was that the customer's prices were actually much, much lower than the belief in the business. That, that, that actually, that he had, um, what we had to reveal to him and somewhat awkward discussions was that his sales force. We're fundamentally creating hundreds, if not thousands, of different pricing arrangements through small negotiations, what we call in the pricing world as price exceptions. And that essentially discounts we're building up over time outside of the official. Discount matrix in in the the ERP and that ultimately different customers were on different arrangements. They weren't on a neat listless arrangement that he thought they were on. And what we have here then is on paper, in in systems, a great pricing and margin system. Versus what's in reality is an actual, the main, pricing margin system in the business that the sales team are actually running.   When Pricing Strategy Breaks Down: Rebates, Costs, and Margin Protection Risks Rebates are another part and often a forgotten part of the pricing and margin system. Only are they forgotten or maybe they're forgotten because of this, but they're often very poorly understood. In theory, they're meant to drive behaviour, growth, loyalty, product mix, and all those great things, but in many businesses, they don't. Now, as I speak of rebates, I'm thinking of a commodities distributor I used to work with, similar to what you see in the fuel, steel and buildings, material industries. And they had introduced a number of rebates over time. They had a good intention for using rebates. They wanted to smooth out price cycles. They wanted to reduce customer hoarding behaviours and, hoarding behaviors, especially before price increase. And they wanted fundamentally to create more stable demand. But when we analyse what actually was happening. We saw something different. Each new rebate. Was introduced, but there was very little tracking of the impact. And instead of smoothing demand, customers actually just adjusted their buying behaviour. Some shifted, uh, product mix change, buying patterns while others worked around. The pricing system. So rather than stabilising the business in this particular instance, what we found was that rebates increased complexity and really did reduce margin. Now I can see why this happens. In highly volatile markets, there is a pressure to act quickly. There is a fear that if you don't offer rebates, don't offer discounts that customers are gonna look at elsewhere. As I was saying before, I know making money is hard, keeping customers is hard, growing the business, not easy. Often though, there's almost like a protection aspect of this. We need to protect volume. We need to stabilise demand, and it's all based on this fundamental feeling of risk and risk mitigation. People being cautious and thinking they're doing the right thing, but without structure and follow-through. Pricing decisions take on a whole life of their own. I want to move on to costs now because they are another part of the pricing and margin system now, not because costs determine price. It's a factor. But it's not a leading factor. No. But because they create margin, risk and exposure, and I'm seeing this play out right now in nearly all industries with when I see all of this fuel increases and talk about surcharges and what to do with rising commodity costs. And I want to talk to you about this using an example I have of a client right now who are in the waste management industry. Now, this client is operating in a high CapEx business, large fleet, high field dependency, and very tight margins. With the current instability in the Middle East, fuel prices as we know are moving quickly, going up and up in some cases day by day. And if those costs are not passed through immediately, this client starts absorbing them. And at the moment we are looking at about a 3% impact if conditions stay as they are today. But no one knows. We don't have our crystal ball. If fuel moves sharply, upwards, let's say five or six times, what we see today and within a short time period, the conversation shifts from margin to profit, downgrade to survival. But here is the real problem, not just for this client, for most businesses. Most B2B businesses still adjust pricing annually or maybe twice a year while their costs are moving monthly. Just giving you that example, maybe even weekly and in some cases daily. So there's a gap here. Costs are moving quickly, prices are moving slowly, and when that gap exists or exists and is ignored. What happens to margin, they disappear. And this is where the business needs a pricing and margin system. Costs like fuel need to be built into pricing. Now this could be as a surcharge, as a visible line item with clear rules. And here, when I say clear, I'm thinking clear communication to customers. Because if your costs move daily, your pricing, your rules, and your communication can't move quarterly.   Margin Management in Action: Building a Strong Pricing and Margin System So if I was talking to you, person to person in a room today, and I asked you, do you really understand your business's pricing, a margin system? Which decisions are actually determining how much profit you keep? Is it pricing, discounting, rebates, cost exposure, customer mix? And are those decisions being managed deliberately? Do you have an owner who are they, is a reset process? Are those rules in the system? Are people following the rules, et cetera, et cetera, et cetera? Because in many organizations, they are not. Different teams are managing different parts of their pricing and margin system. Sales, negotiate discounts, finance manage costs, operation looks at operation or operational efficiency. But is anyone managing the whole system? Because margin, it doesn't just fall down all at once. Or maybe it does. When you, beyond the business announces a profit downgrade. What tends to happen is that it is gradually eroding over time, slowly through small decisions across the business. The companies that I see doing well, performing well with a good balance sheet are doing something quite different from the rest. They've built a deliberate value culture, a culture where people understand how pricing decisions affect profitability and where pricing and  margin are managed deliberately with skill clear ownership across the organisation. So what should leaders do? Just start simple. First, map your pricing and margin system. Understand how pricing, discounting, rebates, and costs are actually working today. Then identify where margin is leaking. Is it discounts, rebates, cost exposure, your pass-through process? Is it the makeup of your customer, your customer mix? Then thirdly, put clear rules in place. How are pricing decisions made? What costs are passed through and why can you fully recover margin on all costs? How quickly can you make these changes in the system? Have you got the people to do it? And on that point, are your teams aligned? Because pricing and margin is not a sales issue. It's not a finance issue, it's a whole of business operation. It's a discipline.   Conclusion: Margin Protection Management Requires Discipline, Not Just Growth Margin improves when everyone is working to the same system, so revenue growth matters a lot. It's extremely important, and profit comes from the system behind the numbers. I mean here it's the pricing rules, the commercial discipline and the choices that you make about the people you choose to do business with and the products you bring on and your product portfolio. And in other words, I suppose it's down to the fact that yes, revenue. It's very difficult to make, but don't forget that margin is even harder to protect and to keep it, to protect it properly requires a deliberate discipline.  Anyway. Thank you for listening. I'm Joanna Wells, founder of Taylor Wells Advisory, and we help businesses improve margin through better pricing strategy. Now if you think this episode was useful, feel free to share it with your teams, and I'll see you in the next episode. Goodbye.

TIME-STAMPED NOTES: [00:00] Introduction [01:12] The Challenge of Rising Costs [02:39] The Problem of Ownership [03:53] Case Study: Finance and Product Portfolios [05:47] Case Study: Sales and Customer Relationships [09:03] Case Study: Pricing Teams and Internal Views of Value [11:59] Operational Systems and Data Challenges [14:05] Conclusion: Improving Pricing Capability   Most executives I speak to think that taking a price rise should be fairly straightforward. Costs go up, prices go up, simple, right?. But inside most organisations, things don't work as smoothly when it comes to price rises. So, here's a simple question: When your organisation takes a price rise, who actually manages it, and what's the process?. Is it Finance, Sales, Marketing, or does it depend on a particular person or a certain situation?. In many organisations, that question really doesn't have a clear answer. Hello, I'm Joanna Wells, I'm the founder of Taylor Wells Advisory, and we focus specifically on improving margins through pricing strategy. In this podcast, I'd like to share some of my experiences of working with companies on pricing strategy. What tends to work with a price rise, and what often makes them far more difficult than they need to be. The Challenge of Rising Costs Now, over the past few years, we've all seen a lot of cost pressure and disruption. There've been supply chain issues, commodity price increases, fluctuations, lots and lots of inflation, global instability, wars, and political tensions, you name it. For many companies, that's meant you've got to move quickly with costs to cover your margin. And that's usually when organisations realise how difficult pricing actually can be. From the outside looking in, pricing looks simple. I've actually had someone say to me, "How difficult can it be? You just add, you know, 5 to 10% on costs". Right, give that a go!. But inside the organisation, when you're actually doing it, and you want to do it well, you realise calculating prices, planning a price rise, changing prices in a system, it really does affect almost everything in an organisation and almost every team, from Finance, Sales, Marketing, Operations, and IT. And if these teams aren't aligned, things really start to become complicated. The Problem of Ownership And often, from my experience, the problem really starts with something quite simple, really basic, and it's about ownership. Inside most companies, no one really owns pricing. Yes, people might put their hand up and say, "I'll do a bit of pricing, I'll help you out, I'll change those prices in the system," but no one really is accountable for pricing. I've even seen pricing teams that say, "I'm not accountable for pricing". So, if you've got that dynamic happening and you've got a lot of opinions around pricing, that's for sure, but no one will actually go, "Yeah, hand up, I did that. This is my decision, I own that decision". So, when a price rise is necessary, when it's needed, when you've got your executives that said, "We really need to take a price rise, we need to cover our costs." People have to come together and coordinate and start making decisions quickly, and that requires ownership and accountability, and her, that's where the weakness in the process, even if there is a process, starts to show. Case Study: Finance and Product Portfolios Let me think of an example for you here. In Finance, the Finance manager might calculate the cost increase at price rise time. But allocating those costs and increases across a large portfolio, I'm thinking here of a large, complex B2B business from manufacturing and distribution right through to the end consumer and retail, often means dealing with a very large product portfolio. So, allocating those cost increases really isn't easy. I've worked with many of these types of businesses. I'm thinking of one in particular, a B2B complex manufacturing business where the Finance manager had to apply cost increases across a huge range, it was about 350,000 SKUs. But when we reviewed and looked at the data and the COGS (Cost of Goods Sold) movements, we saw that some products had increases three to four times the underlying COGS movement, while others had barely changed at all. Now, no one in particular, he wasn't wrong, he didn't do anything wrong when he did that, it was simply a very, very difficult task to allocate costs, even if you don't have that many SKUs. But if you could just imagine, correctly and accurately allocating costs across thousands, hundreds of thousands of products. It's almost impossible. And this is what we see time and time again, and a lot of Finance people are wasting a lot of time trying to do that. It's a great effort, but it's not getting the outcome that many businesses need when they're taking a price rise. Case Study: Sales and Customer Relationships Okay, so if it's not Finance, then who should it be?. Well, often when there are some issues in the price rise process, and people are not sure who does what and who's accountable, what we tend to see is Sales, the National Sales Manager or the Sales Director, bravely steps in. Of course, it makes complete sense in some ways because Sales are close to the customer, they know the market very well, they understand the relationships, and they often have a close relationship with key accounts. And someone needs to start having those difficult pricing discussions, so in one way, that profile looks good. The Salesperson should step in and do it. I actually remember one company I worked for, a B2B engineering parts business. They were taking a price rise, and leadership had approved the price percentage. Everything was going well, Finance had calculated the prices, Marketing had prepared some beautiful letters, and everything looked really good; everyone was like, "Yeah, we're ready to go". But once the increase went to market, what we found, actually, is that Sales teams had started adjusting the price increase from the original plan. And they'd done it customer by customer, and sometimes at the line-item SKU by SKU level. Some increases were reduced, some were delayed, and some conversations were completely avoided. Some Sales teams just dread having to discuss price with customers, especially an increase, oh no!. So, what we found, it wasn't that they were trying to resist; they were actually very compliant with the strategy, and they knew that it needed to happen. We needed to take a price rise, but they were simply, almost trying to protect themselves in some way and protect the relationship. It's so difficult, I realise, to keep those relationships and make new business; business growth is incredibly difficult, and then you've got to have that difficult conversation with a customer saying, "We're going to increase your prices". They sort of think, "Oh, I hope that's not going to jeopardise the relationship, please no, what are you going to say?" In this particular instance, within a few months, the increase that was discussed around the board table, with executives and senior managers, looked extremely different in the market than it did in the plan. And really, at the end of the day, it did not achieve the margin outcomes that the board and the executive team were expecting, and there was a lot of disappointment. And more than just disappointment, there was severe financial pressure on the business. Case Study: Pricing Teams and Internal Views of Value I've also seen pricing teams make personal adjustments or judgments on price increases. When the executives said, "This is what we'd like the price increase to be," I've seen the pricing team go in and question that and say, "We'll start, we agree on this portion of the portfolio, but not this portion," and they start spreading those adjustments across the portfolio based on what they believe the product should be positioned at. I'm thinking of a B2B industrial business pricing team that I've worked with, and they would say stuff like, "We think these products are premium, we think these products are highly competitive and should have a very large discount, we believe these are entry but not new, but entry in between evolved, so we're going to put this percentage on it". And it got quite complex. It was a criterion, for sure, it's better than nothing, but the increases would be redistributed across the range based on their internal view, and they'd all agree as a team that they were correct, and on paper, it really did make a lot of sense. But those decisions that were being made were not validated by the market response, the elasticities that we were getting. It was validated by their own internal views and emotions about value. And it actually, there was a big conflict, really, between the view of the pricing team and of the executive team, who did believe that the increases they wanted to occur in the market were being questioned. And look, there's nothing wrong with challenging opinions on value; it's actually a very healthy way to be, but it should always be backed with evidence. And in this case, in this instance, we saw that the viewpoints of the pricing team were not reflected in the market. Customers did see value in a different way. And sometimes, these two views are quite different, and I highly recommend that you get that cross-reference of different data sources just to cross-check your viewpoints. There are processes, customer value discovery processes, research that you can do just to cross-check your data, your opinions, your internal belief systems, because that's the best way to get the outcome that you need. Sometimes it's good to be challenged. Operational Systems and Data Challenges There's also more of an operational systems data side to increasing prices that I think we should consider as well. Updating price lists across systems within an ERP can be incredibly difficult. Often, when I'm looking at systems as part of the diagnostic, I can look at an ERP and think, "Good lord, all of these fields are taken," and often they're taken and used in completely the wrong way, not used in the way that the software vendors of that particular system would be happy with. It's often a land grab to take fields and use them across different teams. There're often master data issues, and in terms of pricing, there can be many different price lists in that ERP, some sitting dormant, often hundreds, I've seen hundreds if not thousands of legacy custom-built price lists for specific deals as well as your more traditional list prices that are used across different markets, and just being left, not maintained. So you can imagine, you've got all of that happening in the background, and then you've got to prepare Sales teams on communicating and aligning that communication with the actual data communication, the actual price list, and making sure the data and the messaging are aligned and matching. If you say you're going to do a 4% price increase and then your system churns out something like an 8% increase or doesn't churn out anything, then you're going to have a very difficult conversation. I suppose this is exactly why Sales teams get nervous at price rises; they're just thinking, "Gosh, I hope everything has gone okay in the back end as well". So, things, you say systems, you go, "Well, everything's embedded in the system, it should just run, it's automated," but it's often not that straightforward at all. Conclusion: Improving Pricing Capability So, the real issue when I think about all of these examples and what I'm trying to say, it really isn't the price rise itself. The real issue here comes down to pricing capability. Simple things, like: Do you have the data? Do you have the process? If I asked you what the process is, could you explain it to me? Could you write it out simply? Is it a good process? Who runs it? Do you have a team that you can trust to set and manage prices? And the ownership needed to manage pricing decisions properly across the organisation? So, here's a question to consider: If your company needed to take a price rise tomorrow, would you be confident that the team and your systems would be able to implement it well?. Because in many companies, that's where the real challenge begins. Thank you very much for listening. I'm Joanna Wells, I'm the founder of Taylor Wells Advisory, and we focus specifically on improving margins through pricing strategy. I look forward to seeing you in the next episode. Goodbye.

Today's episode is a bit like Part B or a follow-up from our last episode a couple of weeks ago, where we introduced our new project, which we're calling Value Culture.   TIME-STAMPED NOTES: [00:00] Introduction [03:05] Why do not all companies have specialised pricing experts or teams? [4:35] What can Value Culture do? [10:19] What can clients benefit from Value Culture? [11:17] The Ultimate Objective And The Essence Of Value Culture   What is Value Culture?   Aidan: Hello, and welcome to another edition of Pricing College with your hosts, Aidan Campbell. And    Joanna: Joanna Wells.    Aidan: Today's episode is a bit like Part B or a follow-up from our last episode a couple of weeks ago, where we introduced our new project, which we're calling Value Culture. But I suppose in this episode, I wanted to ask Joanna, really, why is this sort of project happening? What did we see?   Why did we think companies needed this sort of product? Like, what is the need or what is the problem that a lot of businesses, smaller businesses and, you know, medium-sized businesses, are facing?    Joanna: Yeah, that's right. I mean, primarily, what we are doing is creating and implementing an essentially commercial platform called Value Culture, which is really aimed, as you said, at small and medium-sized businesses and enterprise businesses too.   And the reason that we have done this, and we're calling it a platform; it is a tech platform and not traditional consulting, is because we saw the mass need, the scale of the need of smaller, medium-sized businesses. Considering that about 98% of all businesses in Australia are small to medium-sized businesses.   In terms of the problem, we've seen consistently when we're speaking to startups, SMEs, medium-sized businesses, privately owned businesses, and then your ASX listed and Fortune 500s' very common problems with pricing that we want to solve.   And ultimately, as you know, the problem was quite simple.   People feel that price can be something that is added at the end of a list of commercial tasks. For instance, when you're launching a new product, often the assumption is that it's okay. We can just set any price and then adjust that price later without really understanding the data inputs required to set pricing, the different pricing methodologies out there, and the metrics that they need to prepare and track along the way. And as you know, customer price response has a significant impact on your ability to change prices. Essentially, once you have your prices out there in the market, it's very difficult to change prices.   And often when people do that, companies small to large, when they just do that guesswork pricing or cost plus, they regret it because they end up essentially either overcharging their customers or losing revenue and volume.   You know, even selling below cost when they've got such great businesses essentially means they're undervaluing their proposition.   Aidan: I suppose, you know, here at Taylor Wells, one of the things I'd be very aware of, you know, on this podcast we've spoken many times about how getting a pricing person in really will give benefits to a company. But I think, you know, we're realists as well, and we're completely aware that if your business is doing a million Australian dollars in revenue, you know, you probably cannot afford, like, let's be honest, to go out and pay someone a hundred grand who's a high performer in pricing.   So I think, you know, there's a real gap in the market there. The vast majority of companies are small. As you said, Joanna, and I agree with that, there's a real gap whereby, in smaller companies, people tend to be doing multiple tasks. People tend to not be specialists, and the people often put their hand up and suffer the most stress and go, "Oh, I need some guidance on pricing. Can somebody help me today?" They fall into a trap, a gap, I guess, whereby they're not big enough revenue-wise to finance. A specialist, and to be honest, they're also, you know, there's not much point in getting consultancy for them either because there's nobody internally who could be dedicated.   Joanna: Oh yeah. Look, that's a great point, and that's a big part of the problem too. Pricing then just becomes this quite onerous task that puts real pressure on people who are really out of their depth and don't know where to start, what to do, or how to move forwards with pricing.   And really, what Value Culture does is give them that start, that ability to forge ahead when things are very unclear, the starting point, and then moving forwards, learning things step by step, getting the simple things mastered first before tackling the bigger, bigger things.   And then, step by step, feeding the right information in the right direction, whether that's in terms of getting the right inputs, data inputs, and information inputs together for price analysis and cost analysis or what, or whether it's more, okay, we need to learn different types of pricing methodology to set pricing, whatever the key area of the problem is.   Value Culture can give that first start and then move people along their journey.   So all of the pricing plans are customised to a roadmap that makes sense for that business. Those roadmaps are very closely aligned with business strategy. And then, if there are requirements to pressure test business strategy, Value Culture can go back to basics with strategic plans too, just to make sure that they're actually resonating in terms of the market and are indeed right for the business.   And then again, once that's solid and done correctly, we can start the process with pricing, get the roadmaps in order, get the individual team plans, get the individual plans, and then before you know it, it's different people in the business, say if it's a medium-sized business, or knowing how they're feeding into pricing, whether that's a price rise implementation or a new price for a product or even a tenderer, or even if it's thinking about how to simplify a very complex legacy system to make more revenue and to ensure pricing above costs.    Aidan: Just listening to you there, Joanna, it sort of reminds me of the Pareto principle, which I think I'd heard of once, and don't quote me on what that actually means, but I believe it's like the 80/20 rule or the 90/10 rule.   You know what I really do think? There's a real gap in the market whereby people will get a huge amount of benefit; they'll get 80% of the benefit, by doing the simple things first.   Like there's a whole echelon of companies out there who are doing no pricing, right? like zero. And I don't think we're proposing that these companies will be jumping on day one to perfect pricing and apple style, you know, maximising profitability.   But I think you will get 80% of the benefits with small amounts of work, but where I really see the value, you know, in the way you're describing it, there is, it's just a format, it's a structure. It's like when people go to the gym and have no idea what they're doing. Oftentimes, they can just waste their time, for years.   If somebody sensible gives you a very simple programme, it's better to take simple steps that are concrete and get you in the right direction, and you're making real progress. And I think, you know, if this project can do that, I think there's a real, you know, benefit.    Joanna: Yeah, I think you're right. I mean, when you were speaking there, it just reminded me of numerous case studies where people go, and what we need, is to fix pricing. Get me that right price.    And they just focus on that because they actually don't want to get into the bigger problem, which could be not enough volume, not enough leads coming through the website, which could be a mess.   There aren't the right online quote tools to really inform and educate customers on the pricing. There's no value proposition. It's an ill-conceived value proposition. So rather than think about that, there's no understanding of pricing and its impact on the P&L. Costs could be everywhere. There's no sort of understanding of different cost centres. So often they go, "Okay, but that's too much of a difficult problem to solve." What we need is just the right price. Because if you increase pricing, we'll make a significant profit improvement.   And that would be enough to save this quarter and keep the business afloat. But not necessarily, because you've got to think of the pricing and its impact on the customers. You can't just overcharge customers because you haven't got enough of them to lose the very customers that you've already got.   Does your offer really warrant that price increase? Or are you underpricing? So Aidan, when you say that, yes, you've really got, when you start with pricing, what we find is the big epiphany, um, with both small and medium and large businesses, is that pricing is bigger than the price point that you set, right?   You can't just make it up. You've really got to think about your whole business. From costs to marketing online. You've got to think about your positioning and approach. You've got to think about your business strategy. And you've got to get all your ducks in order. You've got to know how many leads you're getting. You've got to know your quote-to-book ratios and things like that. And these are highly valuable inputs to a price model, so it's not wasting time going through each of those things in detail or as much as you can as you get that information through. Because remember, you can't do it all at once.   It is a journey, but each of those steps is valuable, and in the end, you will get a price model that is absolutely customised for your business. And you probably think, wow, at the beginning of this journey, I've had so many people say that at the beginning of this journey, I never thought I'd be covering so much ground.   I just didn't realise it. And look at this. Now we've got a price model that I understand and can clearly articulate to the directors and the board. It's making money for the business. There's ongoing recurring cash flow. I mean, this is a good news story, and it doesn't happen over and over. But each of those individual tasks and successes helps and gets you that one step closer to that peace of mind, feeling less pressure, and feeling good about what you've done and what you've done for the business because you actually generated value for the business and even more so value for your customers.   Aidan: Yeah, look, I think just the way you're describing it, what I'm looking forward to seeing is just keeping it simple. Giving people who are coming in, who are time poor, who are, you know, often, maybe they're owner-managers, maybe they're people who are running their own business, maybe they're feeling the pressure and it's on their to-do list that they got this year.   Take a look at the pricing and take this system. Hopefully, you can help them do that. So yeah, I'm looking forward to that. Do you have anything else to add, Joanna?    Joanna: Yeah. I mean, again, keeping it simple is so important because yeah, people are very busy and especially from a small business and you're tasked with pricing, and you really are out for your debts, but you want to pursue that.   You need to keep it simple. And with Value Culture, this is what we've done.   As I mentioned at the beginning, it's an online platform. There's a highly sophisticated project management system that we can use for businesses to make decisions and plan. Simple. So everybody knows what they're doing at what time, and if they don't know what they're doing, there are templates.   There are guidelines and dashboards, and for each different stakeholder, there are dashboards, tracking dashboards and results, price, and performance dashboards. So every step of the journey. Full visibility, absolute simplicity. And then, at the end of the quarter, you can see the results.   Aidan: Super. When is this available? I want it right now. He says...    Joanna: Oh yeah. Look, it's been a process of hard work getting this together, but yes, look, it's available. It's been created, and we're implementing it with our clients. So look, if you want any more information about Value Culture for small and medium-sized businesses or if you're interested at an enterprise level, we can certainly give you a demo, run you through it, and talk about it in more detail. But, yeah, look, we're super excited about Value Culture. We highly believe that's serving a great need in a core market. And we just look forward to sharing that all with you. Thank you for listening.    Aidan: Thank you and have a great weekend. Bye for me.    Joanna: Goodbye.  

Why Pricing Requires CEO and Csuite Backing   Aidan: In today's episode, we want to dig a bit deeper into a topic we've covered a couple of times in previous episodes. And that it's vital, it's so important that a pricing transformation or a major pricing project has CEO, C-suite backing.   And I suppose today we're going to dig into that. We're gonna do a bit of a question-and-answer format. Cause it works quite well. So we'll be asking our resident pricing expert, Joanna, these questions. I suppose then she's smiling at that suggestion. So the first one is, I suppose an open-ended question.   Why is it important to have CEO and Csuite backing?   Joanna: Well, let's start with the simple truths and facts about pricing. The importance of CEO and C-Suite backing comes down to the returns that you can get from pricing. They're more than substantial and very impressive when you compare a change in price to changes in cost volume, a mix for instance.   So you can say if you were going for a 2% increase in prices, versus not increasing prices, can lead to an impressive and direct flow to the bottom line of 20 to 30%. Obviously, here I'm thinking, volume is the same and constant and we've got our supply chain and costs in control.   But I think you can hear the message here if you just make very small improvements and changes to pricing. You can get a lot of money for it. So that's why number one, it's very important that the the C-suite understand how much monetary leverage they have with pricing.   And equally, if they do pricing incorrectly, how much margin they could potentially lose?    Aidan: Okay, so I think we understand, that's clear that it's important for the business, but does the CEO have to be involved in this project? Does the Csuite have to be involved? Can they not just delegate it down to a finance manager or someone like that?   Joanna: I like how you mentioned delegating down. It's always about, I hear this a lot and look, I agree with delegating to the right people, but if that in itself can be a problem. I think initially it's very important for the executive team. A) to understand the importance of it as I've already stressed, and B) to get behind it and to be shown as a consistent voice on the topic of pricing.   Even if their areas of expertise are in supply chain sales, and product pricing. They still need to get behind the pricing project because pricing often touches all of those areas inadvertently. And what we also find, if the executive team, you know, they're role models for change.   What we commonly see within our clients, if they're not really behind it, they don't understand it, they're not committed, and they're just more focused on their area, almost this siloed culture. And they're sort of paying lip service to the role of pricing.   Yes, it's important we get that. But that really isn't what I call sponsorship, that's just lip service to sponsorship. You've really gotta take an active role because if the executives don't do that, then it sends a clear message to anyone, that they're gonna delegate the responsibility of pricing to that. It's really not that serious, and they can just tack it on at the end of the normal day job and nothing really gets done. Or if it gets done, it gets done poorly.    Aidan: You know, that makes sense to me. I think we've covered also some other podcasts, and how pricing often slips between the gaps. Which function does it fit into? Is it finance? Is it marketing? Or is it sales? Or is it the commercial function, which some companies, let's be honest, don't really have?   So, I completely understand that it needs to be for a real pricing project to really work, it needs to work across multiple functions. So I completely understand that. The other thing I think is if, just on this point, if people do what they're incentivised to do, and I think that concept you mentioned of leadership, role modelling. People know what if the higher-ups care about something. I think there's an old anecdote about it.   Some executive, what do you care about today? I care about what my boss cares about, and that's how you get promoted. So I think it is really important that it makes a lot of sense to me.   Joanna: I think, when you mentioned, Where it should be delegated to, should it be the finance manager? And often if there isn't an established pricing team, it does go to some kind of finance manager often, or a commercial manager. And I think, when it gets down to it, the real reason why you need executive sponsorship, especially if you're gonna move to strategic pricing or a value-based pricing system, you really do need sponsorship there because what you're actually saying is, I'm going to change how we think about our customer.   How we think about how we do business, how we think about making money. We're no longer going to anchor ourselves to our costs. We are no longer just going to look at maximising margin by putting pressure on our suppliers and thinking smart about procurement. We're actually gonna believe in ourselves and the value of our products, and we are going to articulate that to the market and we are gonna invest in our sales team's capability. We are going to install a new pricing manager, and we are no longer just going to delegate pricing, a tactical pricing based on cost plus methodology and tools to a finance manager who just rolls out that same, tried and tested legacy pricing method based on cost plus.   Now, that is the crux of why you need sponsorship. It's a mindset change, it's a complete culture shift.   And you know what, Aidan, sometimes the CEO needs to be reminded of that because often obviously they're not, they're not a value-based pricing expert. They've been grounded in that cost-plus modelling and viewpoint of doing business.   Like 99% of businesses have been for the last hundreds of years, but it doesn't work anymore. So sometimes a good CEO will ask for that additional support and education on why they must go to a new system. Often, they know deep down it's right, but just like they need to be reminded, their teams need to be reminded because it's a new habit, it's a new way of thinking.   And once you've got that mindset change in place. You can then build capability and then you can keep reminding of the importance of pricing by getting your executive teams there, sponsoring, educating, nudging the teams, encouraging them, and recognising all the good work they're doing in new areas rather than reacting and going back to cost plus when things get a bit hairy.   Aidan: I think that makes a lot of sense. Look, I'm assuming we're not proposing that CEOs go to every meeting and sit in on pricing projects. But, at the same time, clearly, if pricing is successful or if this project, even if it's a fiasco, the C-suite has to be aware that what's happening in the business.   They have to be aware of the drivers. What are driving volume change, profitability change, and all that sort of stuff? So, I think the question I'll ask is, what would you propose would be a sensible level of CEO or C-suite engagement? Would it be a weekly meeting?   Is there reporting style that they need to be looking at? Are they in kickoff meetings? Are they just championing stuff? Where would they be?   Joanna: These are good questions. And actually, I have met a number of CEOs that inadvertently have been the pricing manager for their businesses pretty much because they didn't have the governance, the setup in the business, the right structures, the right approvals process in the business and everything, therefore was escalated to them by the sales manager or the finance manager.   So inadvertently they had to do all the pricing, like all the tender pricing, the negotiations with customers, and they were the most knowledgeable. However, that's unsustainable. That's not the role of the CEO. And a CEO would know that. So, what I would suggest. This is a balance between knowing the principles of pricing.   So everybody needs to have an understanding of the basic principles of value-based pricing (for CEO and Csuite backing).   And you also need to have your organisation set up appropriately and have the right approvals processes in place. So then, where there are serious matters like market changing matters or serious money at risk from a large customer who is threatening to switch and it's going to impact the P&L. Those sorts of things would and should be escalated. But with a rationale and evidence for supporting the "Why" behind it. So a CEO could comprehensively read through the detail without having to get right into it. And then in my view here, and what I've seen work well is that the CEO is almost like a chairman of a meeting.   It's not the ultimate decision-maker. It's the people around him or her that need to make that decision. And that overall with the evidence provided that they together make the right call. Does that sort of answer your question? But you see, before I even get there, we've got a road of what level of education does a CEO need to know? I think the basic principles, the fundamentals of economics 101 and the reason for the change. Good case studies, understanding the business model changes and trying to align their pricing according to that.   Now, here I'm hearing as well, we also need to get everybody else on board so they trust their go-to people, their sales executive, their commercial executive. So when they feed the information to them, they go, "Okay, that makes sense. Okay. I think we've actually got more of a decision here than we actually thought."   And then together they can make a call. But that does require capability build. And often I think sometimes executive teams shy away from pricing cause they don't want to invest in themselves and build that capability even in the executive team.    Aidan: You know what? Look, I think any senior leader, whether you're like a general manager, whether you're an executive or whether you're the big dog, realistically you're short in time.   I think everyone's short in time. That's the modern corporate world. You know, meetings, emails, appointments, travel, all this sort of stuff. So, like clearly, any executive's got a very limited time for a new project, right? So, is there a sort of format or a best practice for dashboard reporting?    Clearly these people, or it's very unlikely, but clearly they're not gonna all be on the C-suite. They're not gonna all be by any means pricing experts or even commercial experts. So clearly there's gotta be a level of detail that they should have, but that isn't always granular. I'm assuming there's some sort of, what would you suggest there? what metrics or what sort of stuff should they be looking at?   And does that change? Through the process? Through the project? Clearly, you know what you're looking at in week one. To manage something, you need to know the detail. What is the detail they need to know?    Joanna: Okay. Right. When I hear about this, I think, that's why I started with the rationale, with the impact of pricing on the P&L being quite significant.   That if we can all agree at the C-suite that this is worth the effort, is pricing worth it? Yes, it is. But you've got to have an agreement on that. But what I often see is that, yes, executives may agree on that, but deep down they're not prioritising correctly. So they go, "Yes well this is a priority", but actually it's put on the back burner. And then it's, as you say, it's delegated to a finance manager. And even though there are major in price increases at the moment, strategic pricing isn't given the attention and investment that it requires, and then therefore people think it doesn't work.   So, I think one of the problems here is that you have to have clear priorities as an executive team (CEO and Csuite backing).   And when you say pricing is a priority, you've gotta back it up. I think that clarifies a lot. Now, once you've decided that actually pricing is a priority, then you've got to put in place those commercial systems that I think you're alluding to aid and that helps fast track and give executives what they want.   So, they are not crawling through the detail of every price rise, every price tender, every account. They just simply don't have the time for that. But here, you know, to build that structure is a project. And throughout industries, we're hearing those. To be referred to as pricing transformations.   Now, to really make sure that you wanna fast track that pricing transformation, just gets the fundamentals right, cause I think you just want an answer here. What I would do if I was the CEO of an executive team, I would make the first call here and say, should decision-making in pricing be centralised?   That will cut out huge amounts of work for you. Huge amounts of work because currently, as we all know, in most businesses, there's discretionary pricing and hundreds of salespeople, and product managers, all having to change setting pricing price overrides. The whole lot's happening. So it's very difficult to escalate any sensible recommendation to the executive based on discussionary pricing.   To cut a long story short, if you want clearer answers and fast, think about centralising your strategic decision-making.   But obviously, you are in a complex B2B or B2C business. You want to give your sales teams the flexibility they need to make a sale. So here, think about and consider decentralising execution and putting the two together.   In that instance, you'll go through a pricing transformation with a much clearer direction, and you'll be able to be given the information that you require along the way. And over time, things will just get easier, but, I'm not saying this is a journey. It's not just one or two decisions.   And here you've got your silver bullet recommendation. You just have to go through one or two pages and the decision is done. Things that work like that. We are realistic business people here. It doesn't work in any other area like that. So it doesn't work in pricing like that. So it's small steps, but making the right decisions, and being guided by logic, sense and the market.   Aidan: Okay. So I suppose, just maybe a final point, what metrics should they know? And this is, I probably am pushing this point a bit, should they know margins? Should they know the general company's margins? Should they be aware? I'm assuming they should be aware of the actual pricing strategy that we're pursuing.   I'm assuming we should. If we're doing value-based pricing, they should know that.   They should know about if we're bundling, and they should know about what our overarching pricing strategy is. I'm assuming they should know our margins going up or down. I'm assuming they should know, what we're doing to prevent margin decline. What we're doing versus this and versus that? Should they know about it? And again, this is a CEO. I'm almost painting in my mind, a perfect CEO. They should know the values of the company, the pluses and weaknesses are, you know, those value drivers. Should that be something they should be discussed at these meetings?    Joanna: I think this is, I mean, if they were discussing these sorts of things at meetings, it would be great. I rarely see it, however, but yes, I do think that would be absolutely a well-informed executive team meeting.   When I've gone into businesses, I've often found it's very difficult for executives to make any call because their teams haven't been able to provide them with even baselines on price metrics, on margin.   And often you think, "Gosh, it's astounding." But even th[e baseline level, like where we at now with costs? It's incredibly difficult to get that level of detail, especially as we know there's been major commodity changes and fluctuations and things like that. But in terms of pricing, yes, getting the baselines, understanding price elasticity, understanding the opportunity in long tail pricing.   I think we were talking about that, which connects with elasticity, understanding which parts of your products are highly sensitive and which you, I suppose make a change to pricing and nothing will happen. Those inelastic products, understanding in specifically the value drivers of your customers, Why they're buying for you?", those sorts of things are really interesting to executives and once they get that information, they can start piecing it together.   Then they don't have to go into the details, the nuts and bolts of price management. Then you can trust your pricing team to do their job.   Bottomline: CEO and Csuite Backing   Aidan: Okay, look, I think we'll leave it there today. I think all this is suggesting to me that wouldn't it be wonderful if there was some format or system that would make this easy for CEOs to do, wouldn't that be a valuable product or service?   Joanna: I suppose it would. And, we've been working with executives and CEOs in the past few years now on building commercial systems that provide these sorts of answers to and support systems to executives and their teams as they go through a pricing project. And overall what we have found accelerates the pricing transformation by three times shorter than just organically finding things out yourself and putting a hodgepodge of tools together, hoping that, that will fix the problem.   It never does. So yes, there are things out there fortunately for executives. And it's great to see that these new tools and systems are there.    Aidan: Well, that sounds really interesting, and I think that's something that I would like to dig into in a future episode. So maybe that's something we'll discuss next week. Okay. I think we'll leave it there today. Everyone has a great weekend.   Joanna: Yeah, thanks a lot.

In today's episode, we want to explore the world of startups and I supposed at Taylor Wells we got asked or approach by quite a few startup businesses and the early stages of development with questions about pricing advice and pricing strategy and how start-ups should price. And I suppose we just really want to explore some of those ideas today and maybe just discuss some ideas. TIME-STAMPED NOTES: [00:00] Introduction [03:00] What's our advice on issues regarding pricing for start-ups? [12:19] How can we advice start-ups in discovering value in pricing? [16:57] Would you advice implementing various pricing strategies for start-ups? [22:01] Pricing Advice For Start-ups: Don't lose data. Keep learning, testing, and trialling.   Pricing Advice for Start-ups to Kick-start Their Growth   Especially quite recently. We've had a number of questions and inquiries from startups. And we're talking about startups, people that are literally coming up with new business ideas. And often, it's the first time that they've done that and they're trying to launch either a new product.   Now, this could be ranging from, you know, an FMCG good product or you know even a Saas type product and you know, they come with legitimate concerns often they've heard the podcast and there's thought, you know what, I never really considered any other approach to pricing, other than thinking about costs and putting a markup on the cost to give me that margin that I need to cover my costs and get revenue in through the door.   And I never really thought about value-based pricing but it really did change my viewpoint, not just on the price point, but also it gave me a new perspective on what I'm trying to do in the market, my business model, how I'm going to generate revenue, what the sources of value are that are going to help me do that and cover my cost, how I'm going to work with suppliers who my target customers are.   All these new and very important ideas came almost flooding in people's heads after thinking about value-based pricing and, you know, we just going to explore today, you know, a little bit more about pricing for startups and a few techniques just to help people make those first few steps because it doesn't have to be a difficult journey or long drawn-out journey, you can start pricing immediately, even though sometimes you think "God I've got so much else to do. I'm just going to get money through the door", type of approach.   It's clearly, you know, we're not gonna go into cost-plus pricing on this podcast, but clearly for a start-up, it's even more exacerbated.   You know, if you make one item, you know they're your cost base is going to be higher than if you make a thousand. So, you know, as you grow in scale, do you intend to reduce prices? So, that makes no sense.   But clearly a start-up even number of issues that will make pricing more difficult: A) there is no right price for your product. At the beginning, you don't know what a value provides to your customers you might have an idea, you might have you know obviously you've got your pitch deck and you've got your ballpark figure and your idea, your elevator pitch let's say, you know and you thought about why you're getting into the business and where you fit in the niche. But realistically what's that old saying?   Everyone's got a plan until they're partially on the nose. I think Mike Tyson said and you know until you go out there and made customers and really get into the market you don't really know, you look at statistics, how many companies, how many start-ups pivot?   How many really hit a niche and really make money it's limited obviously we don't want to put people off from starting up but you know those things have to be borne in mind and when you're looking at pricing, that is the issue.   They are, you don't have enough information at the beginning, there's no saying that trying to get some customers, trying to get out there with some customers. Realistically, I don't think the price of the beginning, we'll get into this a bit later, but just winning customers is very important. Because then, you can explore value, it's a value discovery process.   Almost look at it as a subsidized value discovery process where a customer is almost paying you, it may be too much, or it maybe too little, but hopefully they're paying you and then you can explore and learn about your own business. So that's the first thing I'd say, clearly, It's very important to get customers on board. The second thing I say, unless you have funding and we'll talk about, you know, series A or a large amount of funding, it is highly unlikely to have a pricing manager.   Let's be honest. Most startups at the beginning have very limited revenue, and a good pricing manager's salary probably will be quite expensive. So, you're going to be doing an ad hoc, you'll be doing it in-house. Probably the startup. The founder would be doing the pricing and so, you know how much attention you can really give the pricing at the beginning is limited.   I totally disagree with the point that, you know, people often come into the business with a really good plan.   In my experience even consulting with major corporates, medium-sized businesses, even you know, blue chip companies, often the surprising point is they don't even have a plan when it comes to pricing or even their business strategy.   What they've actually got is a very flimsy outline of what they kind of want to do. Often the key question of, Why are we selling this product? How do our customers value this product? How do they perceive and value us? What are important in the eyes of our customers? How good are we at delivering what customers value? Are things that are hot, not addressed in, I would say, 98% of business strategies, even though that's the most important questions you should be asking.   So, I would say, most startups don't have a plan either to be fair. And really, there's a little bit of hope and a prayer that this product, this new business is going to solve a gap in the market without actually, as Aidan said, approaching customers and seeing, you know, giving it that, you know, testing our assumptions.   Pricing Advice For Start-ups: Testing out, let's call it a hypothesis about what we think we've got and how valuable that is, in the eyes of our customers.   Because essentially, if you're going to get investment from private equity, seed investors, they'll be asking that. I mean, because it's the central aspect of a business, a new business model and operation system or it should be.   And if you haven't got clear answers on that, you're not going to get the funding and that brings me back to what I was saying before. You know, a lot of startups have come to us and even with you talking about value-based pricing, it made us think about value.   And it made us think that there was that major Gap in our business thinking, and our strategy, which has, in turn, delayed other things, not just pricing, but even you know, how we go and approach, our customers, our pitch, what do we say to them? You know, what is that compelling message?   All of these things, you know, were sort of underbaked and then have been preventing people from launching. So like Aidan was saying, let's go back to basics.   Let's ask and turn these questions into hypotheses and start going back and thinking about who our target market is.   Can we think about the personas of these customers, that would want to buy the products we're trying to sell? How are we going to communicate that offer to them? How are we going to make it easy for them to buy from us? Now, these are the questions, like you're not going to have the answers and don't fear not having all of the answers.   When you approach your customers, the key here is to have some hypotheses in mind about what you're doing, and what the value of the offer is, right? When you go in to speak with a customer. But then ask the questions and then listen. Listen, very very carefully to what they're saying to you. What you will find, is that some customers that you're talking to are really not your target market.   Even though you thought they were whereas other people really are potentially changing your viewpoint on your initial business model and plan and then iterating from there. This is the fundamental aspect of value-based pricing and as Aidan mentioned we call it a value discovery process, but really it's essential. It's an activity that leads to profitable revenue growth and it's one that's often ignored and skipped but it's the central aspect of any pricing model and of any business strategy.   Pricing Advice For Start-ups: Let's be honest at the beginning.   For anyone who's ever started a business, every single interaction with a customer, feels like life and death. You know, you stressed about them.   You dig into too much, you know, all those are those interactions statistically valid, you know, is it over time when you scale up your business, you know, will that apply across a larger number of customers? Those questions have to be decided. I suppose at the beginning you have to have a ballpark figure.   As to what value you're providing, you know, are you aiming to be the cheapest in the market and undercut traditional operators because of your cost of operation, you know, is that your model? If that is the case, likely, then you probably will be cheaper if you're cutting costs; if you're value-added or you're cutting costs? If you're value-added that you're offering, we're more features and benefits, you know, then you probably can be charged more than other people. Big questions.   Should you be going into the SAAS situation?   So many startups, Online businesses try to get onto a subscription. There's a huge movement towards recurring revenue, showing recurring revenue. You have to really think. Does that suit your business? Is that really the type of business that you want to be operating? It gives investors confidence but you know, is it actually plausible into what you're doing?   So that also has to be considered. I suppose you're fundamentally, you have to really dig into what your business do. And what is the best way to charge for it? Just pick the best that you can think of at the beginning. Over time of course you can optimise, you can go into it once you get more professionalised, once one customer becomes ten, becomes one hundred and hopefully becomes thousands.   Then over time, you can start to optimise potentially bringing pricing expertise and pricing analyst over time and optimise that stuff. But you know you really got to think about what you know, I suppose companies will go through different strategies at different periods of their life cycle and development, you know, at the beginning.   Are you trying to grow your market share? Are you trying to get some sort of like give us good network effects?   I'm assuming that you'll be wanting to try and grow the business and potentially to try and grow. You might be offering freemiums, or you might be offering lower quality, you know, tester versions of that. So again, all have to be considered, but you have to be, I suppose you put on the old saying a cart before the horse.   You know, what are you actually trying to sell? That's the fundamental thing, pricing is not, it doesn't separate, it is your commercial strategy. And the point I'm trying to make is, what is your business trying to do?   In an ideal world, let's say, obviously you're not going to do everything perfectly but is trying to do something and then once it's doing that and a customer is, you know, bought into that and want that service or product or whatever it is, you know, how are you, what's the best way to charge that customer for that while some shaving, your objectives of growing, you know, over kidding solvent until your next funding round? You know, that is the question.   I mean, you make a good point that you know, is a value discovery for one or two customers statistically valid? Obviously not, it wouldn't be, but it gives you a starting point. And I think it's an important point to note here, that value discovery is ongoing, it never stops. You've constantly got to do it.   Pricing Advice For Start-ups: So it's important that you don't lose track of the data and the insights that you learn from different customers, as you approach them, in terms of understanding value.   So actually, in a way, it's a very scientific approach to understanding value and has to be set up as such for it to be meaningful in a statistical way.   And to give you insights that inform your strategy over time in regards to, when I was listening to Aidan there, you know, I agree, though there is certainly an evolution of pricing methodology that Startups and even big businesses, go through, starting with the rudimentary cost plus, knowing your cost and adding a simplistic markup going through that competitive benchmarking scenario.   When you line up all your competitors' prices and then you go, "I think I'm going to be somewhere around here", so you go, you pick lowest-highest and you go, "All right, I'm going to be here in this bit in this price bandwidth". That's what they call it. I'm not going to evaluate these methodologies will do that later on. And if you listen to other podcasts, you probably have heard us evaluate them.   I just talked about evolution and then I think Aidan was going on about SAAS businesses, using subscription models, now that's a revenue model.   But the pricing methodology that tends to be adopted within that revenue model is called attribute-based pricing where they do look at the features and benefits of the product or plan and then they set their different price tiers.   You know, good-better-best essentially or decoy pricing based on those features and benefits, you know, evolution from there, you know, obviously got Dynamic pricing looking at, you know, inventory and capacity utilisation and demand and forecasting, and things like that.   And then in terms of evolutions of the subscription model, they go into like consumption-based pricing, where basically, you charge customers for how much they use different plans, that's becoming particularly popular at the moment, and then from there, you know, a more sophisticated one is based on outcome-based pricing, but basically what a customer gets from using your service, your plan, your product.   Now, that's a newer one. And all of these as Aidan says, it's not like "Oh, that sounds good. I think we'll just use that .", even though 90% of SAAS businesses do that, they just go with trends.   Pricing Advice For Start-ups: You have to be very careful which one you choose because each have their limitations and it takes a hell of a lot of time and effort to integrate them successfully within the business model.   And if they're out of sync with the market and the business model, they're not going to generate profitable revenue growth, then, in turn, you're actually going to lose probably more money than you make and overtime. So you've got to be right.   And this is why Aidan was talking about pricing expertise. It's quite important to get that pricing expertise on board, but obviously, as a startup, you've got to be aware of the strengths and weaknesses of these different pricing methodologies. And what we're trying to say is, the best way of doing that is, understanding your business model, thinking very closely and how it connects with the market.   And then thinking about, how you're going to capitalise on the value that you're offering based on the perceptions of the market, your customers and how they perceive and use that value. What do they get from working with you, in a very simplistic way.   From buying your product and working with you, how did they perceive value?   And what value do they actually generate in terms of, you know, do you help them lower cost, do you help them generate more revenue, I'm using your plan, your products, whatever. Are you helping mitigate some risk in a way for them? And those sorts of questions really give you a head start, when it comes to evaluating the best pricing model for your business.   I think everyone when you're starting a business clearly you have to be a jack of all trades. You want to know a little bit about everything. But the thing about pricing is, I suppose people come and they go "Oh tell me, a pricing strategy" and we hear that a lot. The reality of it is, there's no right or wrong pricing strategy.   There are many potential strategies you could implement. Some may be better than others clearly, obviously, how you implement them. There's some science behind that, there are approaches, but you could have meant for many businesses.   Pricing Advice For Start-ups: You can Implement various strategies particularly when they were a very early stage.   When they haven't proven anything you could tweak certain things in the trajectory that business will go in that are very different. So you could pick different ones at the beginning. Clearly, because they're not tested by the market, they haven't got many users and you haven't got feedback. Clearly, some are more likely to be successful than others. And you have to visit.   There's an art to picking that one. You know, the actual pricing strategy that commercial strategy used. Clearly, a lot depends on so many moving parts, you know your funding, you know, do your funding, or do you have to actually make profits from day one and grow boost route. You know, you look at MailChimp.   I think they never took on funding and grew pretty much organically by being profitable and then adding additional features over time, but not, you know, jumping massively, just growing gradually, Canva, probably the most famous Australian unicorn, fundamentally they grew at the beginning, by giving free service to huge numbers of people.   I don't know what percentage of people who use that platform actually pay for it, I read, I think it's in the papers this week, that it seems implausible, but apparently is true.   Every month over 1% of the world's adult population uses canvas which does seem unbelievable. But apparently, those are statistics. So clearly they're not all paying for this service but a significant proportion are.   So you know you're thinking clearly they had funding and a lot of these startups are clearly lost making for many years. You're thinking, Amazon, you're thinking Uber, they're clearly lost making for a very long period of time.   Pricing Advice For Start-ups: Until you know, the investors are confident that market share, skill, efficiencies, economies of scale all that stuff will factor in later, you know.   So those questions have to be asked and if your business needs skill to operate, to be profitable in three years time, then clearly you need to grow that scale and potentially, it could be, you know, using pricing strategies such as you know, skimming or like being even a loss leader or, you know, going in cheap and then over time adding additional services.   And you know upselling, so really look, the answer is,it really depends, but it all stems back to the beginning to having a clear view as to what your business does, having a rough idea is to what potential value it has and the longer term business model, focus on the business model.   And once you have that and confidence and backing in your team behind that business model, then you start charging forward and working out, putting in place, a model that can: a) keep your business solvent long enough until that's achieved and, b) making as much profit as possible along the way. I think those are my comments today.   Bottomline: Pricing Advice For Start-ups   I like that. Don't be afraid to try new pricing methodologies and revenue models. You've started your business now with a great proposition, you went with it, you're already going in with an experimental sort of mindset, and you're keen to learn. So just do the same thing with your pricing. I actually say, even in big businesses, it's much better to learn quickly and fail quickly.   It's okay if you make mistakes, as long as you learn from them, same applies, with startups, just learn and do exactly what you do when you're passionate with your own product when it's very the same mindset apply, so keep doing that and I hope along the way, we've given you some overview of all the different types of approaches that you can take.   That value-based approach mixed in with more of the technical sort of methodology that potentially is out there for you to utilise as you experiment and learn. Key to all of this is if you've got a number of different products and plans often, that means there would be different types of pricing approaches and models.   You don't always use the same type of approach for everything, that's sort of like when markets are more stable. So, having that creativity and thinking, a very granular level, when you have time about different products because every product has a different type of price sensitivity, and different value profile.   Pricing Advice For Start-ups: So you'll find over time that different plans will require a different approach, but you'll learn this. If you just keep on learning and testing and trialling but do so, you don't lose that data.   You don't lose all that learning. You apply it, feed it back and you continually update and learn and test and tweak, that really is pricing like it is with product development. It's the same type of thing and same approach. I think overall I'll leave it there. But feel free to ask any more questions about some great feedback from you guys recently. So keen to hear more, well thank you for listening.

[00:00:00] Aidan: Hello and welcome to another edition of Pricing College with your host Aidan Campbell  [00:00:06] Joanna: and Joanna Wells  [00:00:07] Aidan: Often at Pricing College, we find new ways to show that we live in the past. And so today we are going to talk about cinemas, cinema pricing, and I predict somebody will say movies are not as good as they were in the old days. [00:00:21] So I'll let Joanna kick-off .  [00:00:24] Joanna: I think we we're talking about cinema pricing, partly as response to that Bruce Springsteen, dynamic pricing scenario that occurred a few weeks ago. I'm sure we discussed it in a podcast few weeks ago, but it's been throughout the press and, you know, it reminded us of, you know, back a few years ago, when cinemas were sort of, I mean, struggling with their business model, less people going, demand for cinema and movies going down, rising of Netflix, all that sort of stuff. But, so they were thinking about, you know, how can we make more money and more margin as a cinema? What new pricing methods could we use? [00:01:03] And they're really toying with the idea of dynamic pricing. So yeah, when I look at that now, that strategy and you think, Oh, well, it seems to be working in the ticket industry for other entertainments. Why is networking so well for cinemas? Well, partly, I mean, through the pandemic, you know, it's been very difficult for, you know, cinema to even test new pricing methods like dynamic pricing, because simply people weren't going out or allowed to go to the cinema for a long time. [00:01:37] And still, you know, there's that, that knock on effect, on demand levels, you can see they're dropping. Very few people still going. Before we go onto that, let's think about how cinemas really do make money? How are cinemas still open today, considering very few people go? [00:01:52] Well, the sales model really is based around the distributors really funding a lot of cinemas. Cinemas pretty much give way about 20. Well, let's say 80% of ticket sales in the first two weeks to distributors for movies. And after that point, they pretty much keep all their sales. So for them movies like Avatar are great because what they can do, they can bring out the old avatar movie, the first one. [00:02:22] Because they sort of own the rights to that one. Now they don't have to pay the distributors anymore. Well, they don't own the rights of it as well. They've got, they can keep all of the sales revenue from that in preparation and then move on to, you know, forward forecasting for Avatar two. [00:02:41] And that's a great way for the cinemas to make money, at which point they could potentially use dynamic pricing, you know, as they build demand for that movie, however, the customer experience and demand levels have to be optimised to be able to do that, and I really don't [00:03:00] think at this point cinemas will be able to test dynamic pricing. Hence, it's not really been tested.  [00:03:08] Aidan: Yeah, like I find there's a lot of interesting pricing things we can look at with cinemas. You know, I think there's been an arms race, at least in Australia with the quality of the cinemas themselves, like the actual rooms, the buildings, not so much the locations because they've probably moved away from of market, red carpet style, CBD areas to, you know, malls on the edge in suburban malls. [00:03:31] But one thing that, you know, we've seen in this Australia Gold class, I don't think there might even be a platinum class, almost like very leather beds. Fully flat seats. It's almost like the peripheral has really invested in that. And usually that's something we really push with or we promote here in Pricing College, talking about the value adds that they offer. [00:03:51] You know, you're gonna have drinks brought to your seat. Some cinemas will have buttons you can press and a waiter will come up and bring you stuff, which all sounds very luxurious. But, you know, [00:04:00] I think almost can we argue that, And I think I'll be the first one to say that, you know, maybe the core of what they're offering has decreased, you know, the quality of movies, I think a lot of people admit that it isn't as good as it used to be. [00:04:11] I think the only movies that are selling out now, there seem to be disney style movies or the never ending stream of Marvel, and DC comic sort of action hero movies. But I think cinema in general, you know, the normal cinema goers, I think that market has decreased. [00:04:26] And to some extent you have to argue that the core value of the cinema, which is the actual movies, you know, there is a real risk there, a real issue there with what's being produced. Obviously the cinema owners don't have an influence on that. So that's the first thing I'll add. Second thing, I just think, we often talk on this podcast about, you know, revenue management and capacity constrained, like, and to a large extent, cinemas are capacity constrained also, there are number of seats watching a screen, but like, I cannot remember ever being in a cinema in the last 5, 6, 7 years and seeing a cinema full or even having difficulty in buying a ticket. So there's [00:05:00] clearly that revenue management aspect isn't been optimised. You know, and we're not arguing that you should be selling those tickets at 1 cent or two 10 cents, but, you know, maybe that is a question people should be asking. [00:05:11] What is the revenue management model behind these screens? Look, I was at a movie maybe two weeks ago, midweek Thursday night, which used to be regarded as, you know, midweek shopping night. And I think we were the only people in the cinema, and it was potentially a 500 seat cinema. [00:05:25] So you're really questioning the model there. Another thing I will add is, I think we'll get into a later on this podcast, but some things I'd like to look at are loyalty programs that they have that they try to get you into, you know, the rationale behind that. I'd also like to look at the geographic variation in pricing, where they charge you different to go to different locations. [00:05:46] And I personally experienced that, which I find a little bit strange. You know, the actual differentiator is huge. And then the third one I think is, sometimes they try to sell you a subscription model whereby you can go infinite times for a flat fee, [00:06:00] which traditionally was in with students and maybe even later school students. [00:06:04] So those are models that I think are interesting that maybe have they been fully developed and of course the classic of do movies, just, it's more of a conspiracy theory that I personally like the popcorn. Do cinemas favor bad movies in the teenagers because they eat more popcorn than old people. It's an interesting one.  [00:06:21] Joanna: Well, if they look at their sales model, yeah, they really do. That's where they make their profit is. It's on the concessions on the food. It's literally pure profit for them. And I think a while ago there was some price tests being done on dynamic revenue management, on the concessions as opposed to the tickets. [00:06:38] People didn't like the dynamic pricing on the tickets so much, but they optimised by a few cents on the food, which is already profitable for them. Now I can see, you know, potentially their backtracked cinemas are backtracked from that and they're now utilising more, like bundles using tiered pricing to upsell to, [00:07:00] you know, the large popcorn, based on price, because there's very limited price difference. [00:07:04] So why not get the larger version and the theater makes more money? That's one that we all know. In terms of that, I just wanted to circle back to the customer experience that we were touching on before. I'm sure, consultants have come into major cinema businesses and said like, really the number one thing to think about before you look at optimising price or testing different pricing methodology is to really work on your customer experience. [00:07:31] Because that in term will enable you to utilise and test these different pricing models like subscription pricing. The problem is you're not driving enough traffic to the theater and that's feedback from the market has said because we don't enjoy the experience and Aidan touched a point a lot of the theaters got. [00:07:52] Quite run down and there wasn't enough money being invested into the cinema, the room itself. Some [00:08:00] cinemas got these nice, lovely leather seats recliners, reducing the number of seats in the cinema, thus reducing potential for that capacity constraint idea through dynamic pricing. [00:08:12] Other cinemas then thought, Well, let's not improve the cinema. Let's look at how we can implement dynamic pricing by potentially looking at when people buy their cinema tickets, if they buy it closer to the cinema. The movie date or time, then we'll charge more. People didn't like that. [00:08:31] And then really all of those things, if they didn't really help boost the experience, it took it away from the experience. So thinking about customer experience, often cinemas. That do well. And I'm thinking very much like the petrol stations, gas stations, they do well not just cause of, you know, the product or what they're selling in the store. It's actually the site where they are, where they're situated. Are there restaurants nearby? Are there like entertainment late at [00:09:00] night? Aidan made the point of most of the cinemas that are doing well at the moment, it's because they're showing, movies for kids, but potentially if they built a customer experience for adults. And by thinking about, you know, what's around that cinema? Would that actually bring more adults into the cinema because you think, Oh, you know, I'm not just gonna get, you know, I'm not, it's not just a, you know, gonna watch a film cause I can just watch a film at home. I'm gonna, you know, have something to eat. [00:09:30] I might, you know, have a nice like drink before I go in and not the drink in the cinema. Do you know the gold class membership in the cinema? Rarely see anybody really in there, you know, taking in a nice drink before they go in. People prefer to have a drink with the dinner outside, then come in. [00:09:48] So maybe I'm thinking here and boosting, you know. The customer experience by thinking a little bit outside of the walls of the cinema. And you know, partnering with [00:10:00] entertainment businesses, you know, partnerships, loyalty cards that look at how connecting, building a community outside of it, you know, that sort of stuff. [00:10:09] It just requires a bit more creative thinking. And then once that's done, once you're bringing the people that you want to attract into your cinema, then you can start testing pricing models.  [00:10:21] Aidan: I think that's a great point. I'm thinking some of the local cinemas, you know, in my area, and to be honest, they're deserts in the evening time. It's like you'd have to get in a car and drive at least 10 minutes to have a restaurant or somewhere. So the idea of having an evening out. It takes that away. It strips that away and when I think of the more successful ones I know of there's restaurants and some of the more recently renovated Westfield big shopping centers, they do have restaurant options, bar options near the cinema and reducing to be more of a buzz and it can create a date night atmosphere or stuff where people would go for an evening without having to plan a second location. So, you know, that is a big thing. Like the other thing I'd say is [00:11:00] cinemas, they've almost dumbed down. [00:11:02] Like obviously people's society is dumbed down hugely, but I think with cinema and entertainment, and it is a bit like music. If you all go to the middle and we covered a bit of this in Bruce Springsteen where if you want people to pay top dollar and really be a addicted to watching bands. [00:11:17] It's because it's not one size fits all. Some people love Bruce Springsteen. Some people love dance music. Some people love whatever rap music, et cetera. It's the same cinema. But in the mainstream cinemas, it's gone towards the popcorn selling, you know, rubbish in the middle spectrum. [00:11:34] And the more art house or that sort of aspect, there doesn't seem to be appetite forward, or is it just that it's not provided? So potentially that is decreasing the attendance as well. When you minimise the offer. You know, again, in the pricing stuff we talkabout you optimise the tail. I don't see the tale of what's been provided being optimised really. [00:11:54] And even the peripheral, not just you know, there's a cruise ship element to the cinema of course, too, whereby they've got you [00:12:00] captured once you come in the door, you know you're not supposed to bring in external food, et cetera. There's an opportunity to upsell you clearly. And I don't think the rate that really is developed much in the last, you know, 10, 15, 20 years, and to some extent it's even become more middle of the road. [00:12:15] It fundamentally is in the main cinemas, it's popcorn, it's a Diet Coke or a Coca-Cola and a large bucket style container, you know, an a limited selection of lollies or sweets. I think even the pick and mix, which kids used to love hasn't really seemed to come back post covid. [00:12:31] I haven't seen that really. And again, kids used to love that. And that was an element of stuff, but I just feel it's almost like in a shut or a slowdown of the cinema industry, you know, I think there's clearly opportunity for upselling on, you know, more, you've got them captured. So more ancillary services. Clearly you can be provided and creating more of an atmosphere. Building more of a community. Clearly it's like, cinema at least it used to be fans, it used to be, you know, people would [00:13:00] diehard of certain genres, they would go to the cinema on a regular, weekly basis. [00:13:04] You know, you'd have season tickets, you'd have reduction. I just don't really see that happening. I know Hoyts, one of the cinemas where I'd be most used to going to. They have a loyalty program like that, to be honest, doesn't make a huge amount of sense to me. It almost like, you know, they're giving you a lot of value back immediately just from signing a former pay. I think it's $15 you pay annually and then you see, you know, x percent of every ticket sale. But it doesn't really seem to make a lot of sense to me. It seems to be almost. You know, they just want that 15 bucks up front, and then they're giving you back the 15 bucks immediately. So it's a strange one. And again, I'd be open to people telling me that there is method behind this, but to me it doesn't often stack up.  [00:13:43] Joanna: I sometimes think, people go, Oh, you know, this generation's different. All they wanna do is stay home, watch the screens, and watch Netflix. They don't really wanna go out. It's a bit about the defeat attitude. Like, I'm thinking about this one restaurant. I know it's in the middle of nowhere. It's next to a [00:14:00] lovely beach, but it literallyhas nothing else around it, but they've made this restaurant a destination point in itself. And then after that, people can go to the beach, and it's a new business, right? But prior to them taking over the business, it wasn't at a destination. There was tons of different types of restaurants going in that really hadn't focused on how they could create this wonderful customer experience. So really what they did instead is like, it was an awful experience. People just went and they didn't even go to the beach, even though it's a gorgeous beach. [00:14:31] They just were like, I just wanna leave. But they did it. And people go and even, you know, millennials and the whole lot of young people, they get out of their bedrooms. They go to this place because it's giving them something in return, right. Cinemas can do the same thing. [00:14:49] And I do think it's a cop out for business to going, Oh, you know, things are changing. We can't keep up. Yes you can. You just got to think carefully and strategically about [00:15:00] what your customers want, how you can connect and partner with different businesses to correct, create an experience that is worth staying around for. [00:15:09] You don't just go to the cinema to sit in a lonely, dark, dusty, old room to watch a poor film. And that's where we've got cinemas and distributors in the whole industry have to think differently. Now, thinking about that on the other side, What's happened to cinemas, they've been captured within the Westfield Mall type experience, which, as Aidan was saying, shuts down, especially in Australia at like six o'clock. [00:15:38] It's a dead zone, partly because Westfield rent is ridiculously high and they can't attract niche and creative businesses in there for a long term before they shut down. So there's something with the whole ecosystem, with, you know, having cinemas in malls and reliant upon landlords who [00:16:00] charge too much, in which in turn negate the experience that bring customers in, because the rent's too high. [00:16:07] But then they argue, well we need the rent to maintain such a big complex, Well, maybe this is the end of the mall and we know that this is happening in America. . However, what's happening in America isn't great either because that's just breaking down community at the same time. So like, are we going back to the old school way of, you know, high streets, independent businesses just clustered around actual areas that people congregate, they congregate around beaches , in metro city, you know, where there's life, people go, So rather than think we all go where there's life. Let's get into the creative zone and create life and bring traffic to you, rather than the passive reactive. Oh, I'll only go when I know there's a business case to set up a business, and everyone goes to malls. They don't go to malls anymore. It's a dying [00:17:00] business model. I think that's, I don't wanna rent anymore, but I think you get my gist here. [00:17:05] I think we just gotta think completely different. Get our creative hats on, start to reach out and connect with businesses, not these major malls. That's not the answer anymore. It's the niche players, it's the startups and its partnerships. And from there you can build loyalty plans and pricing plans that are absolutely spot on. [00:17:28] Aidan: Look, I think we're talking about a creative industry In a previous one. We, we covered that. Like, I think Hollywood often goes through these cycles of, you know, the big corporates, and then you have, you know, the new wave, the French movies where you have even in the seventies where it was like the alternative movies came through. [00:17:43] And then you had in the nineties where you had like the Quentin Tarantinos and this new wave of directors. Like, I think that's Hollywood's crying out for at the minute. Like, clearly everything seems to be produced by committee and by what do you call it, focus groups, you know, whereby, so you, you get movies that are [00:18:00] basically cookie cutter and that appeals to the middle section. [00:18:02] But when you appeal to the middle section, you don't get high emotions or you don't get, you know, people going to watch the movie twice or unmissable. There aren't really movies that you cannot miss anymore. There aren't movies that people talk about much, and I suppose it all spreads down from there. You know, at the end of the day, if people aren't overly fostering going to the movie, you know, the paraphernalia around it and all that, it then is a habit that if people are out of that habit, you know, maybe they won't get back into it. So, like, I would argue, you know, there's fundamentally, and you need better movies to be watching is the first thing. [00:18:34] And secondly, there's clearly a pricing element about the peripheral around that, creating an evening out, creating an experience for people. And then it's trying to somehow charge them by optimising the pricing, which to me, you know, doesn't seem to really be happening. It just, you know, is it like, at the end of the day, if people don't want to see the movie, they're not going to pay less or more depending on the day. So fundamentally, you need the movie first, but then there's gotta be an optimisation process, that[00:19:00] is the ticket too high? Are people not going cause it's too expensive? Or, but at the end of the day, should a cinema be sitting empty, you know, during a peak time? [00:19:07] And if that's the case, there's a severe issue. And are we facing a blockbuster video scenario where no pricing change? When no pricing strategy change will rescue what is, you know, a defunct business model. I'm not saying that, but you know, I think there should certainly be warning signals that people should be looking at this immediately and asking is the existing model, like, does it work or not? [00:19:29] Joanna: Yeah, agreed. And I don't think it's a defunct model. I just think they need to do a complete mindset change. There's no point doing tactical price changes, and implementing new methodology. If you just don't have enough traffic to optimise a revenue based on demand, there is no demand. That's because as we were discussing, The whole proximity location is often wrong. There's no experience. There's no connection with other businesses. The movie itself is middle of the road and not drawing in enough traffic in and of [00:20:00] itself, and the experience around the cinema is dull. It's lifeless. The cinema itself is tatty tired. Leather seats will not compensate for that. [00:20:09] However, the model in itself, the whole industry could be better. We know there have been great movies before which have driven in traffic. We know that when you put a cinema near a great restaurant, people go, Oh, the restaurant's great. Let's catch a movie after that too. It works. It's not rocket science, but you've got to start thinking differently and maybe breaking outside of the Westfield Mall premise, because I think that's capping revenue potential. And people are simply just not going to those sort of things anymore. So yeah, look, fear, like repeating ourselves, I think that's kind of what, what I've gotta say on that. And yeah, really keen to hear what you guys, are thinking about this particular topic. Well, thank you very much for listen.  [00:20:55] Aidan: Yeah, just as a last point, like I wonder is there the opportunity for small, [00:21:00] regional, local, you know, niche cinemas, you know, to restart , it used to be that every major town had 10 or 15 cinemas showing with one screen, showing one movie or one genre, you know, is there room for that again, could you open a cinema in Sydney or Melbourne showing just horror movies, are showing just the latest, you know, international movies or French movies or Italian movies, is there an appetite for that? Would that model work? At the minute it's dominated by the big players, the Hoyts, the events, the major corporations, the Warner Villages. The small operators have left the market. Is there room for, you know, we've seen popup bars reappear to create life again in CBDs. Is there a popup cinema? And I'm not referring to council run open air cinemas showing 1980s movies, see if middle the ground for families. I'm not talking about slightly more challenging, slightly more things that people might, you know, make people think. Is there room for that? But obviously that's entrepreneurial. It takes risk building, it takes love of cinema and I don't know if love of cinema is there at the moment. So that's it for me [00:22:00] today. Have a great weekend. [00:22:01] Joanna: Thank you. Bye.