110: Discover Your Pricing Mistakes with Per Sjofors

28
Apr

Per Sjofors is a six-time CEO, pricing expert, and author of The Price Whisperer: a Holistic Approach to Pricing Power. We talk about price anchoring, the mistakes businesses make with pricing, and how low prices can potentially scare away customers. 

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Listen to the podcast here

 

Discover Your Pricing Mistakes with Per Sjofors 

I welcome Per Sjofors to our show, who is a six-time CEO, pricing expert, and author of The Price Whisperer, A Holistic Approach to Pricing Power. Welcome to the show, Per. 

Thank you very much, Steve. And I’m happy to be here. And I hope we’re going to have a good conversation that’s of interest and entertaining for the audience.

Well, that’s the goal. That’s definitely the goal. So let’s see if we can have that. I’m sure we will. So let’s dive in. And I’m very curious about your journey because it doesn’t sound like it was an obvious one to become what you call a price whisperer. You have been a serial CEO of different companies and you got to the point where I guess you must have discovered that pricing is important because now you talk about that. So please tell us a little bit about your journey, how did you arrive at becoming a pricing expert?

First of all, let me tell you this, that the price whisper is not something that I invented. I was called the price whisper so many times that I eventually decided to adopt the moniker, but it’s not something I invented. But my journey is I’m natively Swedish and I got my first CEO job to establish and run a company in Switzerland, in Zurich. That was really a challenge because suddenly I was tasked with starting a company that I’ve never done before, tasked to be the CEO that I’ve never done before, tasked to develop the company to sort of a powerhouse in B2B businesses over Europe that I’ve never done before.

And it was in, you know, in Zurich. So it was in German and I don’t speak German. So it was really challenging, but as challenging as it was, it was also so exciting, you know. So that’s the first step on my journey. Next step was that I was really bought over by our main competitor, which was a Japanese company. So I ended up being CEO of the European subsidiary of that company out of London and over about a three-year period I managed to quadruple sales. And then it was time to sort of jump over the pond here and initially I established and ran a division of a fairly large public company.

And while I was very the company around me died, so it didn’t help us very much. But, and then I had another four, I think, CEO jobs, maybe five, before I do what I do. And in all of those instances, we did some experiments with pricing. And some of those experiments were very successful, like next quarter revenues are up 25%, others were complete duds. And what I had learned in business school and could read about pricing was so theoretical and academic that it was useless information. It didn’t help us to understand why some experiments worked and others didn’t. So 15 years ago, I decided I was too old and too opinionated to be a hard gun, so I set up my own practice and develop the process that would make every pricing experiment a success.

So what is it about pricing experiments which makes them difficult to codify and to kind of systemize so that anyone can do it? Or maybe it is codifiable. So why was it not tangible, the success early on? Was it a hit and miss process and how, how do you discover how to make it an intentional .

This is this is how most companies if if they do pricing experiments, and many of them don’t, if they do pricing experiments they theythey sort of adjust the The process I developed is much more scientific, if you like, because everything you do in your company is eventually expressed into your customer’s willingness to pay, right? And if you have, for example, if you have marketing messages that are not effective, your customers are not going to have a very high willingness to pay, and therefore we wouldn’t support high prices. It could be that your sales methodology doesn’t support higher prices.

It could be that if you develop the product, you have in the company a misunderstanding of what product features and benefits that will support higher prices and so forth. And all of this means that everything depends. And should you actually do testing, which you may want to do, let’s say you want to try a dozen different price points. You want to try to see how a dozen different feature functions benefit affects what people are willing to pay.

You may want to try the efficacy of three different marketing channels, each with six different marketing messages or benefit statements. Try three different sales channels or methodologies, and in the end, also try different, maybe half a dozen stratifications of your pricing strategy. Since all of these attributes, all of these influence all the others, you’ll end up with 15,000 accommodations.

So I’d like to dig into this a little bit deeper. But before we go there, I want to take a step back and ask you a really stupid question. Why is pricing so critical for businesses? 

Ok, that’s a very interesting question, actually, because any company lives of profits, right? Sometimes you can have friendly investors that support the company for quite some time but eventually you have to show a profit, right? And pricing is, profit in any company only comes from three variables. It is cost of whatever you’re selling and the cost of the entire operation. It is the sales volume of whatever the company is selling, and it’s the price of that whatever you’re selling in the company. And if you really think about it, reducing cost works on a relatively small number.

Profit in any company only comes from three variables: the cost of what you're selling, the sales volume, and the price of what you're selling. Click To Tweet

So if you can reduce your cost for the average company with 1%, profitability goes up with 5.5% roughly, again, for an average company. Whereas if you can increase your sales volume with 1%, profitability goes up with an average 3.5%, and that’s obviously because both costs goes up because there’s cost of goods sold and sales volume goes up. But if you can increase your price with 1% or decrease your discounting with 1%, profitability goes up with 11.3% for the average company.

And I have something that I call the 1% challenge. And the 1% challenge is really very simple. It is, have you ever failed to change anything one single percent? And of course not, you know. So for entrepreneurs who are looking at their pricing and then discounting, it’s about increase price with 1, 2, 3% or decrease your discounting. I mean, tell your salespeople that no, they can’t discount 20% they are only allowed to discount up to 8% right? And suddenly you doubled your profits.

That’s very compelling. But how do we even know that our pricing was right to begin with?

Say again, I don’t understand.

So how do we even, it’s a good thing if we can increase it by 1%, the price revenue goes up 11%, great. percent, great, but how do we know that our pricing was correct to begin with? Maybe we are not just one percent off, maybe we are 20 percent off, maybe we are 50 percent off. 

Absolutely, and that is very, very common, and this is what comes out of this process that I developed and built a company around, you know. And the process consists of doing willingness-to-pay research. You can very accurately, in online polling of a marketplace, again, with a methodology that we have developed, very accurately predict sales volume and revenue at different prices. And when you then compare what a market is willing to pay with your existing prices, you very quickly know whether you should increase your price or decrease your price, whether you should focus on maximizing profitability or whether you want to focus on maximizing sales volume and so forth.

And then in the next step, those predictions of sales volume and revenue at different prices are then also segmented by different marketing messages, by different product features, by different benefit statements, by different sales methodologies, marketing channels, marketing, you know, so in the end, you get the result of all of that, quote unquote, testing that I was, the sort of 15,000 variables, you get the result of that in a few weeks.

Is there a risk to overcomplicating pricing?

At one point, yes, there is. At one point, I was the CEO of the US subsidiary of a German software company, a fairly small company, and we did specialized software. And the company pride itself of having a development team and so forth, that was all PhD guys, you know, so there was out of the maybe 50 people in the company in Germany, 35 or 40 of them were PhDs. And they had come up with a pricing strategy that was so complicated that nobody can understand it. I couldn’t understand it, our salespeople couldn’t understand it, certainly the customer couldn’t understand it.

And when I was complaining about this, the answer I got was, oh, we wanna try to hide what people are really, our prices so they don’t really understand how much they are going to pay. And that was obviously not a very good tactics. Because you want to know what you want to pay. And this price list lived in a spreadsheet with oodles of dependencies and all different things. And I said, just scrap this. And we did, you know, we just said this is the price based on a couple of different variables. I think it was number of user and the size of storage we used and that was it.

Now, I see the opposite as well, because in the past, it was always the salesperson communicated the pricing and it was part of the, I guess, not revealing the price and keeping it as a curiosity inducer with the prospect so that you could present the price the right way, anchor them at a higher price, whatever, create the psychological circumstance when they would be easier to close. But now I see the opposite, that these new startup companies, digital companies, they often display the pricing on their website and the different packages are all transparent. So what do you think of that? What are the pros and cons of being transparent versus, you know, all packed with your pricing? 

Well, it really depends on the business. And if you’re a company that sells a commodity or near commodity product of some kind, whether it’s a service or an actual product or a piece of software or whatever it is, then it’s a good thing to have prices on the website. Because in a commodity marketplace, the strongest purchase driver is a low price. And because of that, you will, buyers will do comparison shopping and will, in a commodity marketplace, buy whatever is cheapest. Now, the flip side is that if you’re not a commodity, you should never have your prices on the website. Because then, I mean, there’s just no point in having prices on the website because you want to be able to deliver that value, have that conversation, whether it’s in person or digital or in some way with a customer to deliver that value before you talk about what the price is. And in particularly, again, in a non-commodity market, you’re differentiators.

In a commodity marketplace, the strongest purchase driver is a low price. In a non-commodity market, you should never have your prices on the website. Click To Tweet

You know, so that makes a lot of sense to think about it like this, because obviously, if you are not a commodity, but people expect you to be one and then they see your prices, and they just flip out and think that you’ve gone off the rails, pricing yourself like that, and they don’t even contact you.

Let me give you an example here. This is a company that it’s a, I think it’s a $10 or maybe $15 billion company in the tech space, and they provide a valuable service to their clients. And I had a call with them, this is a couple of years back, and I had a call with them and they said, we are not profitable, right? And our investors are running out of patience, so we have to become profitable. But they continued and said, but we can’t raise our prices because people are complaining about our high prices already and we can’t raise them anymore.

And they had their prices on their website and they had a very long pricing page and it started as you scroll down the pricing page to eventually come to the price. It was just message after message after message on how cheap they were, right? So it set an expectation of the buyer that the prices would be rock bottom low. And it didn’t matter what the prices was, the perception was that they were too high. So I told the company, just remove the pricing page from your website, which they did. And then I spoke to them a few months later and I said, how did it go? And the guy said, well, we doubled our prices. We took away the page, we doubled our prices and nobody complains anymore. You know?

That is fascinating. Per, let me ask you about this idea of anchoring. You know, I recently read in a book that it’s really important that you anchor the expectations at a high price and then you make your case and then your price is going to look like a bargain. And I’ve seen this, I’ve seen people who sat on the stage do that. What is your thinking about that? Is this a credible way to present price?And what are the pros and cons of this approach?

I don’t think there is any cons. This is something that we as humans cannot not compare to numbers when we’re exposed to them. And in fact, this was first discovered in the early 50s when this was in a university in Chicago, I can’t remember which one, but they asked students to add up the number in their social security number. So they got a number, right? You add up the numbers in the social security number, and the result is a number, right? And then they asked the same students, now when you’ve done this adding up of the social security, put down a random number. was a direct correlation between how high that social security number was and the random number they put in.

So that’s how anchoring really was discovered, you know, from a psychological pricing, psychological point of view. That’s why if you do have prices on the website, you should always start with the highest price because that sets an expectation. And in fact, even to the point that you may want to have something that is extraordinarily expensive that may or may not even have a direct relationship with what you’re selling. And as we are reading top to bottom, left to right, it should be up in the left corner.

In fact, I’ve told this to several restaurant owners that I happen to know, and I said, a menu is a priceless thing. So put something up in the left corner, and it could be a family meal for six people with all the accoutrements and all the wine and beer and all the sort of a bundle of things that are extraordinary. And it’s going to be from the most expensive thing on the menu. So it’s going to be very, very expensive. And nobody’s going to buy it, but it sits there only to be that anchor. And it has worked every time.

I love it. So some kind of a super bundle on the top left corner and then everything is going to look super cheap.

Yeah, it’s going to look more affordable.

Yeah, I hate to say that because cheap is a negative.

Exactly, yes. And the same applies for your website if you do have prices on the website. And I mean, just to give you another example, we, I advised a company who, they have some kind of trade show, I’m not going to say the name, but I told them flip the website because they had different packages of tickets and I said start with the highest one and they flipped the website, or the way I suggested and made another couple of hundred thousand in a week.

Yeah, that’s definitely a very interesting advice. So one of the things that we talked about in our pre-talk is defending pricing strategy. So you set the pricing strategy, you defend it. So the question is, what is it about defending that’s important? And do you have to defend it or it should be self-defensive in pricing? How does it work psychologically?

Yeah, well, you defend your pricing strategy by having a detailed knowledge of what product features and product benefits drives a higher willingness to pay. And that is something that is sorely missing in most companies. You know, you have, and some companies have this strategy that I don’t understand at all, where they send out their sales people, this is mostly B2B, but they send out their sales people with the instructions of take whatever price you can get, right? And maybe having a floor, you know, so not below a particular price. But this inevitably will lead to low prices, right? Because salespeople then will use low price as the main decision driver, whereas it really should be the particular benefits.

That’s also, for example, in sales training, folks are being said, you never just send a proposal to somebody. What you do is that you walk through the proposal with the client. If somebody just send you a proposal, and I actually did it myself, somebody sent me a proposal the other day. And I do what everybody does. I open the document, and I scroll down to the bottom, and I looked at the price, not having read anything of the proposal, and I said, this is too expensive. And I didn’t even bother to read the rest. It was just, it was too expensive for what I had in mind. And that’s why I had this company. Had this company sort of walked me through the proposal, maybe I maybe I would have said yes. Right. Because then they would have been had the chance to defend their prices. Now they just sent a proposal and, you know, so that’s their loss, maybe my loss too. 

Yeah. I was just thinking as you were explaining this, that I reluctantly agreed to participate in an RFP weeks ago against my better judgment, and I said the proposal never heard from them, and I think that may have been exactly the reason.

Yeah, exactly. And I actually got an RFP here Friday from a large company, and in that case, they say that we are going to be invited to present the proposal. So we’re not going to just send it. Then it may make sense, but otherwise, I mean, every RFP already had decided for. 

That is true.

It’s not something that is worthwhile spending a lot of money, a lot of time on.

That’s true. Good lesson for me. So we are getting to the end of the time here, but I have one more question. I am really dying to ask you. So can a low price be self-defeating? So can a low price communicate lower expectations of deliverables and therefore off-putting?

Oh, it does. It absolutely does. Not only does there is something called expectation bias. The price of a product or a service sets an expectation of quality and benefit or lack thereof. And if your price is too low, people will equate it with inferior quality and benefits, so they won’t buy it. And we’ve all been there, you know. We hold something in our hands and we say, I kind of want to buy this, but this is so cheap, it can’t be any good. But then the other interesting thing is that the price also affects customer satisfaction. And there’s been many, many tests, but one of them is we know that a five-cent aspirin is not very good to curing your headache, but a 50 cent of aspirin is. Right. So customer satisfaction is also directly related to price. 

The price sets an expectation of quality and benefit. If your price is too low, people will equate it with inferior quality and benefits. Click To Tweet

And you might even get better customers because they will have a higher expectation of the service. Maybe it’s something so they are going to their attitude is going to be that we’re going to get more out of this. So they’re going to put more into it and they’re going to deliver the value to themselves.

Do we have time for one more story?

Yes. 

Okay. So this job for a company who has a phone system in the cloud, and they were desperately underpriced. So we told them that they could actually quadruple their prices. Now, they didn’t do it overnight. Took them about nine months to do so, but the two things happened, and I obviously followed up with the CEO, and he said, after quadrupling prices, sales volume went up with 25%, right? But then he said, we also got a completely different set of customers, a more professional level of customers. So our customer support costs have gone down with 80%.

Well, because at the very low price they were, they’re only attracting price-sensitive customers. Price-sensitive customers buy from you only because of low price. They obviously didn’t bother to learn the product or use it in a proper way. They just wanted the low price. And as soon as the low price disappeared, they went somewhere else, you know.

So that’s true. So sometimes it’s good to fire the low price customers and replace them with high price customers. And everyone’s going to win.

Yeah, low. You fire your price sensitive customer. And it’s the same thing when if you have products that are at the end of life what you want to do is that you want to jack up the price very significantly. You’re not going to sell many of them but each unit by itself is going to be usually profitable. 

Fire your price-sensitive customers and replace them with high-price customers. Everyone wins. Click To Tweet

Okay, well lots of lessons and I guess if you listeners if you want get more of these lessons or get deeper into them, then you can buy the Price Whisperer, a holistic approach to pricing power, it’s coming out tomorrow, right?

The Kindle version is coming out tomorrow. The hard copy is coming out on November 8th, I think it is. And my publisher actually for the Kindle version has a price promotion, so it’s only 1.99.

Is it a good idea? 

It’s a 300 page book. No, I don’t like it. But they said, this is what we need to do. 

Yes, to get to the number one spot.

Yeah, correct. 

You can raise the price later.

And for the audience here, the best way of finding me and the book, of course, is just to do a Google search on the Price Whisperer.

Yeah, the Price Whisperer is up there. By the time this show comes out it will already have been published. So definitely pick up a copy. And you know, Per, you also are on LinkedIn. 

Yes, obviously I’m on LinkedIn. I don’t really use other social media. Yeah, I do have Twitter and stuff like that, but I don’t really use it. It’s LinkedIn. That’s the business social media I live in.

Awesome. Well, thank you for coming and whispering to us about prices, lots of good strategies and lots of things to chew on for our listeners and for you listening to the show. Stay tuned. Next week, I’m going to bring another exciting expert, CEO, entrepreneur to the show to share their management blueprint. Thank you, Per, for coming. 

Thank you for having me. 

 

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