The Art and Science of Pricing

Kathy (host):
Well, hello there, and welcome back to another episode of “Help! My Business Is Growing,” a podcast where we explore how to grow and build a business that is healthy and sustainable. I’m your host, Kathy Svetina, a fractional CFO and founder of NewCastle Finance, a company where we believe that everything that you do in your business is eventually going to end up in your finances. And to get to healthy finances is to have a healthy business. Well, easy to say, hard to do, because the question is, how in the world do you get there? Well, this is where this podcast comes in to help, and today is actually an episode that we’re going to be talking about one of my favorite topics, and that is pricing. Because pricing is not just a math problem of, you know, how much do you want in revenue and how much of your product or services you have to sell to get to that particular revenue and figuring out a derivative of, well, here’s my revenue, here’s the quantity, well, this is where the price is going to be. There is so much more to pricing. Pricing is actually more about psychology than it is about math, and I like to say that pricing really is an art – it is an art form. The reason for that is because a big part of it is understanding the psychology behind your customers’ buying decisions. And if your pricing doesn’t match the perceived value of your products or services, it can truly affect how people see your business, and it can hurt your bottom line. So thinking strategically about pricing can help you avoid these problems. Setting your prices is just the beginning. Of course, you need a plan, and you need to adjust as things change, and use smart pricing tools and techniques to help your business to get to that right pricing that you want to get to. So how do you set the right prices to achieve your goals? Are there any common pricing mistakes that you should be avoiding, and how do you make sure that your pricing strategy will help you stay ahead of the pack and succeed in the long run? These are all the questions we’re going to be talking about in this episode. And as a reminder, all of the episodes on this podcast have blogs and detailed timestamps, and we link to all of those in our episode show notes. So if you’re interested in that, please go ahead and look at it. Use it. It is a resource for you. My guest today is Adam Wallace, who has spent years unlocking pricing power for products and services, and after more than a decade as a corporate fixer, joining Fortune 100 leadership teams to capture additional value on multi-billion dollar ventures, he now serves as an interim executive and board member for private companies. He’s also the author of “Revalue: Raise Your Prices and Build Your Legacy.” It is a great book, and I highly recommend it. Please join us.

Kathy (host):
Adam, welcome to the show.

Adam (guest):
Oh, thank you so much for having me.

Kathy (host):
Well, thanks so much for being here, because we’re going to be talking about pricing, and this is going to be an interesting conversation, and it’s one that’s near and dear to my heart, because I love talking about pricing, because it’s not just about the numbers, it’s also so much about psychology. And usually when we think about pricing, it’s in this simplistic supply-demand curve. You know, the more expensive something is, the less there’s demand for it, and as the price goes down, the demand goes up. And you know, that’s Economics 101, but when businesses set prices, they will follow this example of thinking that, you know, the lower the prices, it’s going to increase their demand. But that doesn’t usually work as planned. So let’s first talk about it. Why doesn’t that work in real life?

Adam (guest):
Well, I think you pointed to it because it’s human nature, and so a lot of things are not as predictable or formulaic when actually implemented, because when it’s implemented, it’s implemented contextually to the individuals doing the buying decision. And so if we start at the extreme end of it, we just have to recognize your buyer at any time they buy, whether it’s a commodity or not, it is an emotional decision. All decisions are conducted by our limbic system. So there’s a lot of sort of the rules of the game from a perspective of an individual doing the buy that is completely different than when you aggregate all of the individuals up together and you identify certain averages. So, you know, in business, I love my supply and demand curves. It’s necessary. I did a whole lot of oil and gas work for the integrated oil and gas companies, and trust me, you needed to know supply and demand. And even in that market, there was always being able to sell to a particular oil refinery your particular crude oil from a certain location at a slight premium above the traditional market, if you could offer the right additional guarantees or understand the desires that the person who’s actually making that purchasing decision really cares about. And so if we go back to sort of what some of those curves look like, I’ve got a great example. Behavioral economic Professor Uri Gneezy has a published study on wine where he went to a local winery, and they did double blind, as much double blind as you can, but people would taste the wine, and then they would have an order form, and then they would choose. And so all of them was the normal stuff he sold. And then there was one that every day they would change the variable on. And so it started to turn out that at $20 a bottle, same exact wine they sold, let’s just say one, one on an average of one, right? And then as they raised the price, they raised it up to $40 a bottle, he sold two. And then as they raised it up to $60 a bottle, they sold one. So you get these pregnant supply and demand curves, not just the traditional ones. Same thing happened with Peloton. When Peloton first hit the market, they were pricing competitive with their industry, and it was $1,200 and then they weren’t selling them very well. And then they increased the price, no other changes to their marketing or advertisements. And then they started selling like hotcakes at $2,000 because part of what a buyer is making a decision on is called the price-quality heuristic in those cases. But what they’re really using is price as a signal for your buyer in addition to the other things that they are weighing and judging. So a Peloton at $1,200 looked cheap. It looked like it was value-engineered. At $2,000 it started to look elegant. It started to look high-end, even though it was technically the same look of the bicycle. Just simply by changing the price, you were able to have it register for people differently.

Kathy (host):
And I remember those early days of Peloton because I actually got on the bandwagon of Peloton as well. And one of the things that I’ve noticed is because every time I make a purchase, I always think about, why am I making this purchase? And what is that actually telling me about how I’m thinking about pricing, and if, in a world where everything is basically equal, and you’re trying to figure out what you’re going to buy – for me, higher price would signal higher quality. I will say that I am always aware that that might not be the case. But generally, I will always go for a higher price because my perception is that there will be a higher quality there.

Adam (guest):
That’s right, and that’s very much shared with most buyers. Now, the word of caution to be aware of is it totally works as to people will pay that premium for it. The caution is, any backlash for failing to meet the expectations of quality will be a level of magnitude harsher, right? So it’s one thing if you’re selling a bottle of wine for $20 versus $40, but if you all of a sudden raise that up to a $120 bottle of wine, well, most people who are buying $120 bottle of wine know what the $100 market tastes like, and if they taste your bottle, that’s judging between 20 and 40, and you’re now pricing it in that tier, the level of backlash and disgust can, you know, obviously, take down your product or ruin your product. So it is an interesting game, because I’ve done that several times in my portfolio, but everybody kind of has to know, from a quality service perspective, this can work, but here’s what we have to also bring along with it, because we’re not just necessarily – and I like what you said – when you’re making the decision, it’s not just the transaction. In the moment, you’re actually making that decision based on what are you buying and what does it enable? And so I have to ensure that if what is supposed to enable is impressing a date, or having a special occasion with a family, or whatever the case is, I’m actually delivering that intended value, not just the product.

Kathy (host):
Yeah, and you know, going back to the Peloton example, this idea of higher quality got ruined when they had a recall on their treadmill, because a treadmill had a safety feature issue that actually resulted in one child dying because they got pulled under the treadmill. And that was basically the beginning of the end for Peloton. It was just a horrific story, but that’s when Peloton really started to feel these issues. And it completely changed the perspective of the brand, and now they’re really struggling because of that. And before they had this almost like a cult following, now they’re starting to lower the prices, and now they even have a cheaper version of the bike. And it’s just been an interesting story from a perspective of business, but also how pricing was affecting their perception in the market. And as you said, because the quality wasn’t there, that had quality issues, it really tanked their perception in the market. And it was just an interesting story to follow.

Adam (guest):
Yeah, yeah. And that’s a good point too, because when you deal with quality, and any quality expert would tell you, you’re dealing with life cycle of quality across the entire thing. So your timetable is a little bit different on that, and that’s a great example with it – it has to last and has to perform the way you’re expecting it over a certain amount of time.

Kathy (host):
So let me ask you this, when you’re thinking about in terms of pricing, and when you’re looking at the competitor marketing, how your competitors are setting their prices – should we even be looking at that, and if we should be, how should we be looking at competitors and their prices and bringing that into your own business?

Adam (guest):
So what I do personally is I always do sort of a four-dimensional price map anytime I’m thinking about pricing. And so the first three dimensions are exactly the traditional ones. So one is competitors, what are they doing? The other ones I’m going to look at is, what’s my bottom-up cost, right? Cost-plus model, very simply. And then what is the value that I unlock for my customers? So those would be the sort of traditional three ways of doing it – cost-plus, competitive, and value. And then the fourth way that I always add into it is time. And we can talk about that a little bit later, but I do a time map with the customer journey, and that’s usually where I find insights. But relative to the competitors, you want that as a data point, and it’s a very useful data point, but you also have to kind of recognize it’s a single data point that doesn’t necessarily tell you the strategy. And I can’t tell you how many times, especially if you’re a small or growing company, and you’re looking at an incumbent, you might not know – you might misassume where that incumbent is actually capturing value. So one of the things I’ve seen recently, over the past 20 years is, sometimes you can actually get a more return of value through your increase of capital valuation than anything your customers can or will ever buy from you with direct revenue. And so if you’re in one of those situations, you might actually see your competitors pricing themselves well. Casper is a famous one where investors were paying $200 per unit lost for them to be able to sell and market because they had like a 70% marketing budget per unit sold. Like 70% of the sale went directly into acquiring the customers as they were growing. So now they got a unicorn status, right? They got a valuation of a billion, and then later it had to be marked down because the substance wasn’t behind it. But you could imagine, if you don’t realize the game that they are playing from a strategy point of view, and you just take it on face value, product to product – you know, it’s very easy to lose your shirt because what’s driving their value capture is a value plan, and it can be at multiple different levels. From the whole company to even just, you know, in the 1940s Black & Decker famously built a drill, electric drill, at half the price, and nobody could figure it out. Because, you know, they know how to build drills. We can do it and stuff like that. But it was an original strategy where they were selling at cost, but for the hardware store to get the drill, they had to guarantee them the end cap. Now that’s old business. Now everybody sells the end cap at a premium price, and that’s normal way of operating a retail store. But back then, it was very novel, and nobody could figure it out. But that’s because they could capture more sales when people came in for the low price and then decided, “Well, you know, a reverse gear is a useful feature. I’ll go ahead and buy that one.”

Kathy (host):
And I think that can be a slippery slope if you’re looking at those models and trying to emulate that especially in a small business space, because usually that happens in companies that are backed by investors that have deep pockets and they are able to finance this. If you’re trying to build this in your own business and don’t have deep pockets as much as they do, you can get into some real trouble, because if you’re looking at the unit cost, you could be losing a lot of money based on that.

Adam (guest):
Yeah, yeah, no, that’s right. That’s right. I have a whole chapter in my book about – I call it “don’t slip on the monetization curve,” because I do find there is this natural thing to look toward these admirable companies and look at their strategies and emulate them when you’re much smaller. But what you do is – and I worked 10 years as a corporate fixer, so I worked in some of the largest companies in the world, you know, on these $45 billion joint ventures among multiple ones of them – but what you lose out on is your competitive advantage. Most people don’t realize how constrained a large company is, and they have very, very tight limits. So they also have great opportunities, and they’re able to use certain strategies to capture those opportunities at scale. But so often, and part of what I show in the curve is the margins and the pricing power are so much better the smaller you are. And so often I do see that same thing when I’m working with small companies, and I take stakes in them and I just manage my own portfolio, but they pursue a strategy that they admire, not recognizing they’re actually giving up on their competitive advantage of actually being small versus maximizing that one.

Kathy (host):
So let’s talk about the competitive advantage of being small. What exactly would those be?

Adam (guest):
One of the first ones that come up is obviously niching. You can create products and services for niche ends of the market. Classic innovator’s dilemma – look, there are certain innovations that will come by being able to focus on the long tail and actually develop something new and novel on the long tails that the large companies just can’t invest in. Their overhead for even R&D is insane compared to most small companies. So small companies are always able to look, even if they’re looking at growing and becoming a big company, at finding a sustainable market on the long tail of the customer distributions, and really honing in. One of the things I’m seeing over the past 10 years, because obviously of the internet, is you can really fragment the tail ends of customers – you’re no longer regionally, physically constrained the same way we used to be. And so you can really find some niche markets. Like, one business I grew a department from 3 million to 20 million by recognizing those 75 people in the world who will buy this product at this price, and that’s it. But now it didn’t mean that some people who reported to them didn’t buy them, and some people that’s above them didn’t buy them. And it was a B2B service, but it was getting so focused on like, “No, no. These are the people.” A lot of people love the service, but they wouldn’t buy – this is the group that would actually buy it at this price, in this way. And so growing it wasn’t – I mean, think about it. You have a market of 75 and the good news is, the company knew 25 of the 75 so, like, you don’t have to spend a lot on marketing and sales. You just have to make sure your sales team is very much focused on finding out who the other 50 are and having lunch with them, right? Because once they hear what you have, it’s like, “Of course, that product is for people like me in my situation.” And I think that’s some of the returns that we’re seeing in a lot of situations. People are getting more and more used to and expecting that your product or service is for people like them with their exact problem. And so especially in service firms, but as professionals, we tend to see the thread in a lot of different ways, and we can sometimes not appreciate or index on the idiosyncrasies of our best customers. And that leads to one of the other things that we can do, especially if you’re growing as a company, is prioritize optimizing your customer base, right? The 80/20 rule on it – really looking if you’re going to think about pricing yourself based on value, you don’t create equal value to all your customers, even if you’re delivering the same products and service to them. So if you begin looking at who you’re unlocking the most value for, and reverse engineer the characteristics of that and then that’s where you’re doubling down on your efforts to develop new business or new customers based on those characteristics. And even sometimes it’s been as simple as firing the customers that don’t match that profile is a way of not only increasing margin, but actually increasing revenue, because people have more time to service the clients that give that disproportionate return, because they’re willing to pay more, and you’re able to increase your pricing power.

Kathy (host):
And let’s go back to the whole number of 75 customers for this particular business. How small is too small of a market? Because, I would argue, 75 customers – that is pretty small. However, if these are like billion-dollar companies, there might be some huge potential for growth there. So it really, I think it comes down to two things from what I’m looking at: how big are those companies? Are they like super small businesses, you know, up to like 50 million, or are we talking big corporations? And is there maybe a potential to have some adjacent services to open it up to different customers and grow that way? So let me pause here. How small is too small?

Adam (guest):
Well, it’s a great question, and it’s interesting the immediate nervousness we get when we think that small. But let’s go back to human nature for a second.

Kathy (host):
You know exactly as a CFO when you said 75, my heart was like, “Oh!”

Adam (guest):
Yeah, exactly. And what if their preferences change and stuff, but let’s go back to human nature. But think about human nature now from the outside in, from the inside out. So what happens with humans is we start a lot of times – we just by default assume we see everything in our world around us. It comes into our eyes, we perceive it, and then our brain prioritizes what we care about based on what we value, right? So you know, if we’re talking and you really care about relationships with people, you’re going to attend to different things than if you care about winning or getting the deal done, right. So we see personalities in the way we do it. Well, it turns out we’re kind of wrong on the mechanics of that. It turns out we actually, because of computational efficiency, we only perceive the objects in our environment based on what we value, right? And so based on what I’m lining the team up to care about and value will start to shape what they see as obstacles and opportunities in delivering that value to the clients. So there are some things where it would just be nonsensical to narrow your customer base. Like, okay, all of a sudden, I’m doing it to a certain criteria, and they have to be left-handed, and they have to be within a certain region, and then it’s like, wait a second, but are all those criteria tied to my ability to unlock disproportionate value to them? I think that’s kind of the question. And then if you’re able to really narrow that down and have a provable market, it’s not that you’re not going to sell to the person to the left of them or sell to the person to the right of them, or above or below. It’s that you’re starting to really hone in on what’s that value and how do you unlock it. So that’s kind of also part of what I often do is like, I do a prime buyer diagram, which is sort of a traditional curve, you know, distribution curve. And okay, I got the prime buyer right in the middle on that standard 33% distribution. Okay, I got the characteristics to the left of it, I got the characteristics to the right of it. Those people will buy. It’s just that I’m providing the focus to my sales team. I’m providing the focus to my whole supply chain. This is what we’re going after, and it’s that focus that tends to help unlock a different level of performance versus “Okay, did we sell to more than two more people than the 75?” Of course we do. But that 75 provided the necessary focus and clarity to be able to unlock that value creation at a different level, that as soon as I said, “No, we create value to this person, to this person, to this person” – oh, there’s no real thread anymore. Then what do people do? They just start focusing on what they produce. And they start hoping other people get value from it.

Kathy (host):
Yeah, and I like this from an efficiency standpoint, because if you’re very clear to the type of buyer that is ideal customer for your business, now you’re not bringing in people who are going to be basically, you know, you can’t service them in the best capacity that you can because of these other reasons. The problem with that is, when you bring in people who are not ideal, you’re going to have to increase your cost of servicing them because you need to hire more people, you probably have to get more technology, and it adds extra cost. The question you really have to ask yourself there is, is adding all these extra customers who are not ideal – how is that going to affect my bottom line, and is it really worth it to me as a business?

Adam (guest):
That’s right, that’s right. And so part of that can just be a product strategy, very transactionally, like you just said, is it worth it to me? Because I’m gonna now have to do this so I can just do a basic business case to it. Where I think it really undermines people is in service companies. Because what happens is now I’m distracting my team from what the value really is delivering. So if you’re choosing to play a value pricing game, you do have to maintain that clarity and sort of the ruthlessness to say, “No, this is the value that we truly unlock” and be willing to get it wrong, be willing to listen to the market feedback, not based on what your prospects tell you. And this is part of the fun of playing the game – most people can’t tell you why they buy something. Like what you’re really looking for is their time and attention. Do they spend the time exploring it, trying to figure out how they would utilize it in their day-to-day life? If you kind of think about the things that you buy, that you spend a lot of money on, you know, it’s rarely an impulse buy. Like you’re kind of looking at it, you’re thinking about it like, “Okay, would I really do that? Would I feel good about this jacket? Would I kind of wear it? Maybe I’ll buy it and I’ll return it.” So there’s like a – and this is what I mean by starting to lay out your buyer’s journey in time. Because if you can optimize to what do people spend the time and money on, not what they tell me they want, because people – you know, the old literary thing of the unreliable narrator – we’re terrible at telling people what we want, and often when we talk about what we value, we’re more negotiating our identities than we are really expressing. But those can be good things. So I’m not discounting – like, if you have testimonials, use testimonials, you can build sort of a standard frame of a social norm for who your customers are, so people can recognize, “Oh, the customers are people like me.” So there’s really great things that people can say, but it doesn’t correlate well to actual pricing numbers.

Kathy (host):
This is interesting. How would you think about market research in terms of this optimization of your customers? Should you even do market research in this case then?

Adam (guest):
Yeah, no, I love market research. I’m actually in the process of investing in an experiential marketing firm right now, and part of the reason is they can find more interesting, nuanced aspects of why people act the way they do – what’s actually driving their behavior. The way I think about it, though, is I’m not asking them to tell me their interpretation of what’s driving their behavior. I’m really looking to discover one of four things at any point in time for me to perceive something in my environment, so for me to actually see a product and think maybe I should buy it, right? So it’s called relevance realization, technically speaking, but a very simple example of it – have you ever like thought about buying a certain car, or recently bought a car, and then all of a sudden realized how many people in your neighborhood drive that exact same car?

Kathy (host):
True, yeah.

Adam (guest):
And it’s like overnight, you know? And it’s like it wasn’t that they weren’t driving that car, it wasn’t that that car wasn’t driving past you 10 times a day. It just was never relevant for you, so you never actually saw it. So I say a lot of times it’s not that people actually don’t get exposed to your products or service. They don’t even see how your product or service is relevant to them. So a lot of that sort of market insight – we’re looking for one of four things, as I was saying. I am looking to be able to see, is this going to be an instrument in order to overcome a problem I have? Right, classic business example – what problem do you solve? Okay, great. Customer has a problem. I got a tool that helped me overcome that obstacle. Decent, decent pricing power. Now, one of the things about pricing power relative to that is the time limit. So if I’m on the five yard line of my motivating destination, and I have a problem on the five yard line, I will actually pay more to solve that problem. It’s more valuable for me to solve that problem, because when I get my touchdown, I get my goal. If I’m on the 50 yard line, I’m actually going to pay less, even though the problem is the same size and the cost and the challenge of solving it is the same lift from the customer. So there’s an interesting sort of dynamic, and that’s also what I’m talking about putting in time to understand – where is the motivating destination of your buyer, and where are you in that cycle to help unlock it based on the value you can unlock for them.

Kathy (host):
How do you think? And I like this coming from the problem standpoint. But what do you think about pricing a product or service that essentially solves a problem, that is a real problem, but the customer doesn’t perceive it as a problem?

Adam (guest):
Yet you’re selling prevention, and prevention is always discounted at a level of magnitude – as a level of magnitude less. And so insurance is another example. What people often weigh that against is the foreseeability of it. And so often good sales, good insurance salesmen, of all the things to kind of study and understand what they’re good at is they’re good at increasing the foreseeability of what that would actually look like. So a person will buy prevention when they either have experience of it happening, or they can see a mental picture of what the consequences are if that does happen. Now I’m not suggesting, like, doing the old FUD factor and trying to, like, gin it up. I’m just simply saying that numbers rarely persuade people. Statistical risk never persuades people when it comes to insurance and foreseeability, but even the best you can do in there is going to be a level of magnitude less than when you actually solve the problem. So for example, and I could be the one who criticizes this strategy more than than anybody, but for one person, I was helping them, because they were always trying to get out in front of and it was in the fraud space and and trying to prevent fraud from happening to begin with. And the reality was, and the sort of the breakthrough and being able to do it was to recognize that the person doing the buying would never pay for it, to prevent it. So the goal was to get the minimum viable implementation and just wait until they had the fraud problem. And if they were able to build in the minimum viable on day one, they could then respond to the fraud problem way, way, way faster than had they insisted on trying to buy something and then getting squeezed down and only implemented the bare minimum. They found like a happy medium equilibrium. The person would have the problem, and then they would go and they would sell the solution right there. And then, from that day, having experienced the problem first, then they were willing to pay more and fund more to maintain ongoing solutions from that date forward. And so it’s kind of one of these things where it’s like, Well, come on, empirically, they would have been better off. You should have sold them that solution first, yes, but they would have never valued it. They would have never paid for it. So which are you going to plot your business against? What people will actually do, or what a person should theoretically do? That’s never my customer standing in front of me.

Kathy (host):
That’s a really good example. Do you have any other examples where changing the prices actually failed with their market? Because the problem just weren’t it? They just were not in the front, front of their customers as much as they should have been.

Adam (guest):
I don’t have as many failed stories like that, but I do have an example of one that I often see kind of in that vein, and it’s recognizing what’s motivating your customers to do the buying. So I said there’s kind of four things from an underpinning approach to it. So one is solving a problem. Well, one of the other ones is a new route to get to where I care about. So for example, a lot of people were buying cybersecurity audits, not because they cared about cybersecurity audits, but because they needed to get insurance, because they needed that insurance in order to become the vendor of choice for a large company. And so it’s one of these interesting things – if your SaaS sales team thinks they’re selling the cybersecurity audit to go in and fix the systems, then they’re missing the mark. And what’s worse is, and so this is where the failure came in, I saw a bunch starting to sell those audits as loss leaders, versus what I often recommend, as I call them, gatekeepers, some of the first especially in service firms, in order to as a structured way to prevent going forward with the wrong clients. I often say that first sale, it needs to be a small sale, it needs to be a short sale, but it needs to have your best margins, because it takes a lot more time and attention than most people will calculate to onboard a new customer, and they may decide that they’re not the right customer. So there’s always a bit of – you know, this is one of those big company, small company issues. Yes, HP can sell you a printer at cost and then make the money on their ink, especially now that they put the little chip in it that won’t run on ink that’s not bought directly from them as part of a traditional loss leader. But if you mimic that strategy, it’s like, no, no. It’s the opposite. Actually, make sure your first customer sees the value you can unlock for them and has embodied that in their first buy-in decision, versus going forward with somebody who now – you kind of – sometimes if you offer them a discount, especially like an actual written discount, I feel like a sucker if I don’t negotiate that discount on the next contract, because I now know it’s possible. And so the precedent you set on that first sale translates into the type of customer you have long term. So thinking about that first sale as like, okay, what is the value, and ensuring that the customer was willing to pay for it, and then being able to deliver it. So that’s one relative – we kind of took a long walk there, but the cybersecurity audit, because they really needed this other thing, so they were using it as a shortcut. And if I know that, I can optimize to it, and I can charge accordingly to that, and I can actually get them there quicker, and I can set the right expectations in the delivery of it. So we have the obstacle – they’ll pay for a solution to get over an obstacle, the problem they have. They will pay for a shortcut to get to where they really want to. And then one of my favorites, it’s kind of like the Four Seasons. It would be terrible to talk about the Four Seasons as solving a lodging problem. No, they offer the embodiment of the destination that I want, right? So a lot of luxury goods, or like, $400 bottle service at a nightclub. It’s just a fractional way to sort of rent a lifestyle that I dream of having that I can’t get yet. And so a lot of times when you’re really talking about high pricing power of luxury goods, that’s what you’re actually selling. You’re selling the embodiment of what they value. So they can have a little bit of that today, and at $900 for a nice pair of shoes that I’ve been dreaming about my entire adult life is a bargain at that level. And so you’re no longer selling the product. You’re selling that embodiment of the destination which is interesting.

Kathy (host):
You know, recently I learned that these are actually called Veblen goods, and they’re like, high quality, well made, exclusive, they’re a status symbol. And, you know, we talked about the supply and demand. But the interesting thing is that as the price goes up, actually the demand goes up for these goods.
One of the things that I always think of when I think about these Veblen goods is Patek Philippe watches. And these watches are, you know, from a normal person’s standpoint, they’re ridiculously expensive. They can go up to hundreds of thousands of dollars for one watch. But if you go to a watch store trying to buy them, first, they have to be an authorized dealer. That’s number one. And two, there is a wait list of years for people – you have to actually be on a waiting list to be able to buy this. And this is interesting. It was always – if you look at their marketing, and this is where the psychology comes in. The whole marketing premise is that you never own a Patek Philippe. You always take care of it for the next generation. It is essentially something that becomes an heirloom. And now the interesting thing too, is originally they were targeting mostly towards men, the affluent men. Now they’re starting to target it towards women, because women want to have that status symbol and they can buy their own Patek Philippes. I think that is such an interesting psychology in marketing and pricing just in this one particular company.

Adam (guest):
They play that game extraordinarily well. And I think that’s a lot of – if you’re looking at improving your pricing power, you have to think about how you’re organized as an entire company and have that coherent thread tightly in your organization. Because you could imagine if all of a sudden your inventory manager is trying to optimize and thinking discounts, that’s going to undermine your front end aspect of that. And you know, I’m thinking of the Patek Philippe that was the Tiffany green. Are you familiar with that one that there’s 100 in the world? But like, clearly, part of your sales strategy in doing that is you’re able to offer those to a certain clientele that’s going to be in the newspaper a lot, and then people are going to see that very distinctive – because, you know, out of any color in the world, that Tiffany green is a very distinctive color, and then that drives up the ones that you’re available. And like you said, you only get invited to purchase one of those watches at, I think that one was around a million dollars. But you get invited to purchase it at a million dollars. It’s not even available to most people.

Kathy (host):
Yeah, exactly. So let’s bring this back into the smaller business world. We’ve been talking about potentially – you’ve said, you know, something more realistic when you’re thinking about pricing for a smaller business, a business that is between, you know, five to $20 million. Do you have any examples from your work with them where they have been able to implement pricing that actually used the pricing to help them grow?

Adam (guest):
Oh, yeah, yeah. No, no. All of them. That is exactly what I do with each of my companies. That is the goal on it, because that is part of what you’re optimizing for your growth strategy. So there’s two parts of it. I would say one part of it is disproportionate returns. So what are you looking to grow? A lot of times I’m taking an owner or investor’s perspective, I’m looking at growing earnings. So if you have a healthy company with a 20% profit margin, okay, if you are able to increase your pricing power by 20% you just doubled your earnings without having to double your revenue, without having to double all of the complications of running your business. And so part of the goal there is to really hone in on what are people buying and how do I more efficiently deliver it? Because often what I see is as companies grow, they got to go through these sort of development stages, and what works in the previous stage that allows you to be – oh, I have 5 million. So prior to 5 million, all you have to have to have a company is you have to have something that people want to buy, and somebody who’s willing to sell it, and somebody who can make it. And then you surround those two people with a good team, and it’s all hands on deck. And you know, you can have a two and a half million dollar company a year, and it’s just right into that zone. You don’t have to worry about performance reviews or SOPs or anything like that. You can just have a nice company by having two sort of entrepreneurial roles, and sometimes it’s the same person wearing both hats and surrounded by a capable team. All of a sudden, once you start getting into that kind of $5 million level, well, you know what? You get some return on investments by getting the right SOPs. You’ve got to start kind of standardizing a little bit of, okay, what is my offering? Who am I doing it for? How do we now deliver it? So that’s where the part of optimizing your customer base can immediately come into effect, right? So by letting go of the wrong customers, I now have more bandwidth with the same resources to be able to pursue better customers at a higher margin in it. So it’s kind of interesting, because as you’re going through these leaps, and then the next leap, I don’t know exactly where it is, but in the range, you said, somewhere around 15 million, you kind of get to the level where I kind of say, you got to start ring fencing the founders. Because, you know, a lot of times, founders are very entrepreneurial, and they see opportunities and they see needs, and they jump around, and they’re able to do it. And it’s very admirable. Because, you know, some of the ones I’ve seen, you know, like you have a $5 million shortfall, they go out there and bang the streets, and they fill that $5 million shortfall. But at a certain level too, once you start becoming a more established company, you actually want – you know, like, if you have a professional sales team, you want the lead salesperson to have friction and annoying arguments with the product developer. Because what most people don’t realize is there’s a healthy tension, because we need to hone this in in order to scale. And we need to really, like, where do we put the line in this argument on it – we actually want these arguments between these different perspectives and these different values and these different best practices in each one not to dominate politically based on, oh, sales is more important, so we’re going to listen to them at the cost of product. But no, no, we need a tie breaker. We want to know clearly what is the value the customer is paying for, so that we can have the tie breaking vote – do we do it this way, or do we do it this way, situated to the actual decision we’re making? So I think relative to that phase of growing the company, that’s what you’re – that’s why I find pricing power so important, is it’s not just about raising your prices. It’s about getting so clear about the value you’re unlocking for your customer, you can actually make those tie breaking calls in a way that everybody feels good about, because it’s not my opinion versus your opinion. We’re putting the customer’s value at the apex to be able to how to most reliably deliver that. And I think that’s also a little bit of the culture shift that helps unlock that growth is because now you’re building a system and an enterprise that’s optimized to unlocking the value that people pay for. And that’s usually where I see – okay, that’s where the revenue growth comes from, because it’s no longer about my preferences or my department’s. It’s about unlocking the value for the only people that can pay my salary at the end of the day.

Kathy (host):
Yeah, that’s a really good point, and this is where finance can become such a great resource for the company as well. Because finance basically sits in the middle of everything and is able to pull these conversations and bring these leaders together and have a whole rounded conversation of where we are, where do we need to be, and have those conversations about what makes sense and actually be able to, for the lack of a better word, poke holes and act as a devil’s advocate to see, does this make sense down the line in the business, and bring a perspective of, hey, maybe this is not the best thing to do. Maybe we should go this way. What do you think about that? So having that perspective of finance can be truly game changing for a company that is in that stage.

Adam (guest):
I would just underwrite exactly that. Because one of the things that you often are able to offer is an objective, arm’s length view on – in the same way our customers buying is always an emotional decision, which strategy we go to as an internal decision in the company is always an emotional decision. So being able to kind of at arm’s length, say, Look, we don’t like these customers, but they’re 80% of our revenue, maybe we need to learn how to service them a little bit better. You know, I wrote just as a concrete example, my brother I was having years ago with his company, and I start, you know, it’s your brother. So you get to, like, say certain things to relatives that you wouldn’t say to a business model. And I’m like, Look, you’re being mad. You’re complaining about doing business for a certain profile of customer because they don’t pay you on time. You make so much more money off of them that you can now afford to drive to their office, sit out in front of their front door until the CEO walks up to the building and give him the invoice and have him cut you a check and drive home and still have three days extra compared to your other buyers. So there are all these kind of interesting things that also like – just taking a purely numbered, like being able to go back to zero and have an equal measure yardstick, which is what finance often allows us to do, can actually kind of be like, Oh, crap. I didn’t realize that. Oh, it’s that good. Oh, okay. Well, maybe I can figure out, oh, if that’s the case, here’s how we can solve that problem in a different way. So the perspective is so critical and so valuable to have at every step of those decisions.

Kathy (host):
Yeah, and finance also sees a lot of different departments that maybe, you know, the sales leader, your marketing leader, your ops leader – they don’t. Finance is basically in the middle of everything. Adam, we have been chatting away, and I could be talking to you for hours and hours, because, again, I love this topic, and I love talking to you, but please tell our listeners, if they are trying to implement better pricing in their business, especially in a particular small business, or between five to 20 million, what is the one actionable thing that they can do in the next week or so to get to that more optimal pricing?

Adam (guest):
Very simple. It’s the ABCs of raising your prices. First, A, socialize it. If you think about raising it, you probably have some customers that you have friendships with, or relationships with, or other things. Talk to them about it. I can’t tell you how many times, especially at that level of a company, do they bring it up and then the person’s response is, I’ve been waiting for this conversation for three years. You know. Like, I don’t like it, but frankly, like, no, you’re underpricing yourself. I see quotes all the day. Raise your prices, it’s no problem. You know. Keep in mind, I was your first customer. Treat me well. But of course, you know, it’s less of a deal. So one, if you think about raising your price, socialize it around. You’ll be surprised a lot of times at what your customers actually care about and are willing to do. The second one is, as you implement it, beta test it. Identify the 80/20 in your customer that you’re okay if they leave. And maybe you start with them, or maybe you start with just new customers on the new price list. And then you wait a quarter prior to starting unrolling it for renewals and stuff like that, so that you can actually test – you can de-risk it by not doing it all at once. And then the third one is the commercial rollout. Make sure everybody knows – everybody in your team knows the numbers like what you’re saying on the finances, that we’re actually okay losing 20% of our business if it’s these customers, as long as these customers are not changing. And so people really need to appreciate that. If you’re on a yearly cycle, it might take 12 months to go through that entire price ranging change. What are the trade-offs that you’re willing to do and being pre-aligned on it? So people know, because otherwise you’re putting your customer for life person, whose job every day is to have no customers leave, at odds with your business strategy. So make sure everybody’s prepared for the rollout, and you pre-talk through those trade-offs so everybody’s on the same page to do it well.

Kathy (host):
That’s a great tip. Thank you so much, Adam. Where can people find you?

Adam (guest):
You can go to adamwallace.com or if you want to read my book, you can just type in “Revalue” on Amazon, and it’ll be the first book that pops up.

Kathy (host):
And we’re going to put all of this in the episode show notes, so if you’re interested, please go take a look at it and let us know what you think. Thanks so much, Adam.

Adam (guest):
Thank you. It’s been a pleasure.