WEBVTT - Tim Smith on the Pitfalls of Pricing (Audio)

0:00:00.840 --> 0:00:04.120
<v Speaker 1>This is taking Stock with Kathleen Hayes and Pim Fox

0:00:04.280 --> 0:00:09.200
<v Speaker 1>on Bloomberg Radio. Pricing it's crucial to business survival and success,

0:00:09.280 --> 0:00:12.680
<v Speaker 1>but it's arguably the most difficult business function to get right.

0:00:12.960 --> 0:00:15.560
<v Speaker 1>Occurring to our guest here in studio with us today,

0:00:15.800 --> 0:00:18.680
<v Speaker 1>Tim Smith. He's the founder and CEO of Wiglaf Pricing.

0:00:18.680 --> 0:00:21.360
<v Speaker 1>He's an adjunct professor at De Paul University, and importantly

0:00:21.640 --> 0:00:24.480
<v Speaker 1>he's the author of the new book Pricing Done Right,

0:00:24.880 --> 0:00:30.280
<v Speaker 1>the pricing framework proven successful by the world's most profitable companies. Congratulations, Tim,

0:00:30.280 --> 0:00:32.639
<v Speaker 1>and welcome to the show. Thank you for having me so.

0:00:32.800 --> 0:00:36.479
<v Speaker 1>First of all, tell us about your your pricing model.

0:00:36.560 --> 0:00:39.600
<v Speaker 1>What is that? What is it that you have analyzed

0:00:39.640 --> 0:00:44.480
<v Speaker 1>and distilled down that a lot of companies don't really grasp. Well,

0:00:44.479 --> 0:00:47.479
<v Speaker 1>I've been taking a look at pricing as an organizational challenge,

0:00:47.880 --> 0:00:52.000
<v Speaker 1>not as a algorithm or a methodology challenge that was

0:00:52.040 --> 0:00:55.200
<v Speaker 1>handled in my textbook Pricing Strategy. In this book. When

0:00:55.240 --> 0:00:58.760
<v Speaker 1>I'm looking at is great. We have all this technologies, methodologies.

0:00:59.040 --> 0:01:01.880
<v Speaker 1>How do you implement it? If you're like ge or

0:01:01.920 --> 0:01:07.200
<v Speaker 1>if you're Emerson or Abercrombie and Fitch, how do you

0:01:07.240 --> 0:01:11.679
<v Speaker 1>actually apply these questions. Well, let's talk a little bit

0:01:11.680 --> 0:01:15.800
<v Speaker 1>about the details of pricing on an industry by industry basis,

0:01:15.840 --> 0:01:18.800
<v Speaker 1>because just before you came on, you were talking about

0:01:18.840 --> 0:01:22.679
<v Speaker 1>how sometimes the pricing strategy for one industry at one

0:01:22.720 --> 0:01:27.200
<v Speaker 1>particular time in history doesn't apply to what's going on currently.

0:01:27.520 --> 0:01:30.800
<v Speaker 1>Give us the sort of current state of pricing, and

0:01:30.840 --> 0:01:35.000
<v Speaker 1>then what you see is a better way to do it. Look,

0:01:35.720 --> 0:01:39.520
<v Speaker 1>the the past state that I'm transitioning or the industry

0:01:39.600 --> 0:01:42.800
<v Speaker 1>is transitioning, was cost plus finance. I'll go out there

0:01:42.800 --> 0:01:44.319
<v Speaker 1>and say this is my margin I want you to do.

0:01:44.360 --> 0:01:46.840
<v Speaker 1>We'll get Marketing would say great, I'll make products that

0:01:46.840 --> 0:01:49.600
<v Speaker 1>should get that margin, and say also say yeah, nobody

0:01:49.600 --> 0:01:52.280
<v Speaker 1>go buy that, give me a discount and I'll sell it.

0:01:52.280 --> 0:01:56.000
<v Speaker 1>It doesn't work. So we're throwing that paradigm away of

0:01:56.040 --> 0:02:00.640
<v Speaker 1>cost plus pricing and arguments and replacing it with value

0:02:00.640 --> 0:02:05.160
<v Speaker 1>based pricing, focusing on the customer and how that specific

0:02:05.240 --> 0:02:09.320
<v Speaker 1>customer set sees the offering be at product or service

0:02:09.400 --> 0:02:11.440
<v Speaker 1>and they're willing to pay for it. And a good

0:02:11.440 --> 0:02:14.120
<v Speaker 1>example of how something works one and the other one

0:02:14.480 --> 0:02:16.480
<v Speaker 1>doesn't work in the other. You take a look at

0:02:16.600 --> 0:02:20.280
<v Speaker 1>Um Johnson, who worked at Apple, worked out wonderfully. You

0:02:20.320 --> 0:02:24.000
<v Speaker 1>know this single price, everybody pay this basic price. Ron Johnson, right,

0:02:24.840 --> 0:02:28.079
<v Speaker 1>formerly the CEO of Apple, Yeah, Ron Johnson. And then

0:02:28.120 --> 0:02:31.480
<v Speaker 1>he transfers that same concept method diality to J. C.

0:02:31.680 --> 0:02:35.160
<v Speaker 1>Penny and complete disaster. He just destroys the company and

0:02:35.160 --> 0:02:36.840
<v Speaker 1>he has to go after a year and a quarter.

0:02:38.080 --> 0:02:41.360
<v Speaker 1>So tell us then a little bit more, because I

0:02:41.360 --> 0:02:42.880
<v Speaker 1>think for a lot of people it's still sort of

0:02:42.880 --> 0:02:47.920
<v Speaker 1>sounds like management speak. The culture around value based pricing,

0:02:48.240 --> 0:02:50.880
<v Speaker 1>how does that work? What is it? The cultural value

0:02:50.880 --> 0:02:54.480
<v Speaker 1>based pricing is focusing on the customer. And if I

0:02:54.480 --> 0:02:58.000
<v Speaker 1>had to put that in a simple paradigm, I'd say

0:02:58.000 --> 0:03:02.600
<v Speaker 1>from the customer's perspective, the customers asking when they approach

0:03:02.680 --> 0:03:07.200
<v Speaker 1>your company, what's my alternative? Are you offering me something

0:03:07.280 --> 0:03:11.119
<v Speaker 1>better or worse? And do I care about that differential?

0:03:11.760 --> 0:03:14.160
<v Speaker 1>And so the pricing comes down in prices against the

0:03:14.200 --> 0:03:18.440
<v Speaker 1>competitor adjusted for the value differential. That's the new culture,

0:03:18.520 --> 0:03:23.440
<v Speaker 1>the concept everything focusing on customer valuation, not something else.

0:03:24.080 --> 0:03:26.720
<v Speaker 1>Have you met chief executives who do not know the

0:03:26.800 --> 0:03:30.920
<v Speaker 1>price of their products or how the prices were arrived at? Oh,

0:03:31.000 --> 0:03:33.840
<v Speaker 1>I've met many chief executives who don't know the specific

0:03:33.919 --> 0:03:37.520
<v Speaker 1>means at which the price has arrived at. And let's

0:03:38.440 --> 0:03:42.080
<v Speaker 1>talking public news. Take a look at Granger. Granger went

0:03:42.120 --> 0:03:45.200
<v Speaker 1>from four thousand products to one point six million products.

0:03:45.440 --> 0:03:48.520
<v Speaker 1>Grangel went from about a four billion in revenue to

0:03:48.560 --> 0:03:52.680
<v Speaker 1>about nine to ten billion in revenue. Granger quadruple its

0:03:52.720 --> 0:03:55.760
<v Speaker 1>profitability over that same time period. There's no way you

0:03:55.760 --> 0:03:59.160
<v Speaker 1>can expect that CEO to know the price on one

0:03:59.280 --> 0:04:05.080
<v Speaker 1>point six billion products with millions of transactions every day.

0:04:05.120 --> 0:04:08.680
<v Speaker 1>Managing a customer like ge versus managing a small customer

0:04:09.120 --> 0:04:13.120
<v Speaker 1>who's running a mom and pop garage doorshop, there's no way.

0:04:13.520 --> 0:04:16.200
<v Speaker 1>So Tim, you know you point out, I mean, some

0:04:16.279 --> 0:04:20.880
<v Speaker 1>people have to rely on discounting, others hardly discount at all.

0:04:20.960 --> 0:04:22.600
<v Speaker 1>But if I'm running a company I've never done it,

0:04:22.600 --> 0:04:24.200
<v Speaker 1>hats off to everyone who does. But if I see

0:04:24.200 --> 0:04:26.560
<v Speaker 1>my competitor cutting their price, I would think my knee

0:04:26.640 --> 0:04:29.400
<v Speaker 1>jerk reaction is I better cut mine too. Well, that

0:04:29.560 --> 0:04:31.919
<v Speaker 1>is the knee jerk reaction. You can destroy your company

0:04:31.960 --> 0:04:35.160
<v Speaker 1>that way, or that's the right reaction. It's not one

0:04:35.400 --> 0:04:38.360
<v Speaker 1>or the It's not a one size fits all solution.

0:04:38.960 --> 0:04:42.640
<v Speaker 1>Think about two cars Porsche versus Volkswagen. Have you ever

0:04:42.880 --> 0:04:47.680
<v Speaker 1>seen a Porsche discounted? Probably not unless it's already used

0:04:47.680 --> 0:04:51.480
<v Speaker 1>it on Craigslister eBay. Right, you don't discount pors but

0:04:51.640 --> 0:04:54.760
<v Speaker 1>Volkswagens they compete heavily down at the bottom end of

0:04:54.760 --> 0:04:58.520
<v Speaker 1>the GMS, etcetera. It depends on who your target market

0:04:58.680 --> 0:05:02.120
<v Speaker 1>is and how that target market is price sensitive. Not

0:05:02.320 --> 0:05:06.000
<v Speaker 1>every customer is price sensitive. You speak about the and

0:05:06.080 --> 0:05:09.560
<v Speaker 1>just to correct myself, uh Ron Johnson, he was never

0:05:09.640 --> 0:05:12.479
<v Speaker 1>the chief executive of Apple. He was the senior VP

0:05:12.640 --> 0:05:15.839
<v Speaker 1>of retail operations and then went to J. C. Penny.

0:05:15.880 --> 0:05:19.080
<v Speaker 1>But talk about the different departments inside an organization and

0:05:19.200 --> 0:05:25.479
<v Speaker 1>their responsibility for getting pricing strategy at least on the

0:05:25.560 --> 0:05:29.240
<v Speaker 1>on the radar. So, as I studied in the past,

0:05:29.279 --> 0:05:32.800
<v Speaker 1>we had finance setting margins, marketing going out and developing products,

0:05:32.839 --> 0:05:36.560
<v Speaker 1>and sales going and discounting it away. What's changing to

0:05:36.600 --> 0:05:40.800
<v Speaker 1>get in pricing right is we're adding those three in

0:05:40.839 --> 0:05:44.120
<v Speaker 1>the initial all the way through to the end decisions

0:05:44.960 --> 0:05:50.680
<v Speaker 1>with a new function, a pricing professional, and it's Emerson's ge.

0:05:50.880 --> 0:05:53.840
<v Speaker 1>Lots of companies have added in this new function the

0:05:53.960 --> 0:05:58.200
<v Speaker 1>role of the pricing professional is to add analysis, so

0:05:58.320 --> 0:06:03.080
<v Speaker 1>accuracy of decisions and diplomacy to try to get the

0:06:03.080 --> 0:06:06.360
<v Speaker 1>two sides to talk together in a positive manner. Well,

0:06:06.360 --> 0:06:08.880
<v Speaker 1>thank you for talking with us. Tim Smith is the

0:06:08.920 --> 0:06:12.280
<v Speaker 1>founder and the chief executive of a Wiglaft Pricing, adjunct

0:06:12.279 --> 0:06:15.160
<v Speaker 1>professor at DePaul University, and the author of the new

0:06:15.200 --> 0:06:18.520
<v Speaker 1>book Pricing Done Right. This is Bloomberg