My guest on this episode is Mark Stiving. Mark is a pricing expert and consults with companies on developing stronger pricing and product positioning strategies. Our discussion today on pricing is wide-ranging from the purposes of pricing, value-based pricing, segmentation, and who’s responsibility pricing is in an organization. What I loved about this episode is getting a distilled view on pricing based on hundreds of case studies over decades of work, giving tons of great lessons for the CEO listener.
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(00:03:07) Mark’s early career in pricing
(00:11:09) The fundamental purposes of pricing
(00:16:06) How to evaluate your product pricing, the CEOs role, and incentivizing Sales
(00:26:12) Tools for Salespeople
(00:28:14) Teaching Behavior in Sales
(00:30:25) Practices for communicating with customers
(00:36:44) The scientific process for determining the price of something
(00:40:57) When to segment customers
(00:48:30) Positioning plans for pricing within websites and calls
(00:51:59) Companies that have stellar segmentation and pricing pages
(00:53:56) Luxury Pricing
(00:56:12) How to raise prices
(00:59:33) SaaS Contracts
(01:03:49) AI in Pricing
(01:06:18) What strongly held belief have you changed your mind on?
(01:07:39) What’s the best business you’ve ever seen?
Alex Bridgeman: I’m excited that we get to chat over an episode. It was fun to meet you in San Diego and chat about all things pricing. We talked a little bit about your background, but I’d love to hear more about some of the roles you’ve had. You’re a founder of Destiny Networks, sold to Home Director, you’ve been a contributor in various magazines and publications, been on lots of podcasts, and done as much pricing work as I think maybe anyone on Earth has done. So, I’d love to hear your version of your background and the story and theme throughout so far.
Mark Stiving: The earliest memory I have pricing is going to the grocery store with my mother and seeing prices that ended in nine, like 99 or 69. And I always wondered, why do companies do that? Do they think we’re stupid? We know 99 is a dollar, so it’s not a big deal. About 20 years later, I was at UC Berkeley in a doctoral program in marketing, and I had a chance to play with scanner panel data. And this is the data the grocery stores collect when you use your loyalty cards. And this gave me a chance to statistically test whether or not nine cents actually works. And it turns out it does. And then I put together a bunch of different models to try to figure out, well, why does it work? And the reason it works is we’re lazy subtractors. When we go to compare two prices, we just look at the left hand digits and we say, oh, that one starts with a nine, that one starts with a six, that’s about a 30 cent difference. And so that works. By the way, we don’t make bad decisions because we do that. But if we’re all going to do that, then why wouldn’t a company end all of its prices in nine and make that extra nine cents? Think about a gas station, and gas stations always price at 4.29.9. Now, have you ever used that point nine to help you make a decision? Absolutely not. You just ignore it completely. And that’s pretty much what’s going on with the nine cent thing at the end of a price. I became absolutely addicted with understanding how people use prices to make decisions. I don’t know if it’s because I didn’t grow up poor, but I grew up poor enough that money really mattered to me. And so, I’m trying to understand all of the nuances of how do companies do this, and how do they take advantage of consumers, and how can I fight back as a consumer. And, of course, now I’m on the other side; I help companies figure out how to take advantage of consumers. Now that’s not the right way to say it. But I help companies figure out how to price their products so that they can capture more of the value they deliver to their customers. So that’s where I’ll start and that’s what I think. I’ve done a lot of things in my career. After I got my PhD, I taught for four years, including creating a pricing course for Ohio State. So, we created a whole price course for the MBAs. I ended up leaving academics to start that company Destiny Networks with a good friend of mine. And when we were running the company, my friend Brent and I, when we were running the company, of course, pricing was always an important part. But I learned so much about business, much more than just pricing, it’s really business. And then, okay, I’ll tell a story I don’t tell very often. And this is the truth. We sold Destiny Networks to Home Director. Home Director’s business was selling home automation products to the new production home marketplace. I was the president of Home Director. And in 2008, the new production home marketplace just disappeared. It went away. And what that meant was there was no more business. Our company was going down fast. I ended up leaving. Here I am, a failed CEO. I have a million dollar mortgage. I am depressed. Every single morning, I wake up, I walk down the stairs, my hands are literally shaking in fear for how I’m going to get out of this situation I’ve gotten myself into. And like who’s going to hire a failed CEO? I remembered I have a PhD in pricing. And I said, well, let me see if I can find a pricing job. So, I did; I found a pricing job. And this was at National Semiconductor. Once I landed that job, and I got comfortable there, I said to myself, this will never happen to me again. And that’s when I started blogging. I wrote my first book on pricing. I became- I created a course on pricing that I sold outside of that company. I truly made an effort to become known as an expert in pricing. And I got to tell you, I love the fact that I did that, and I would recommend that to anybody. Pick a topic, go become an expert, go publish in it, and truly be the person that people need to hire.
Alex Bridgeman: So how did you get out of that situation? How did your hands go from shaking to calm?
Mark Stiving: Oh, it was when I landed the job, the calm. But let me tell you how I got out of it, which was fascinating, nothing to do with pricing. I was listening to a podcast called Manager Tools, and Manager Tools was teaching people how to manage people. It was pretty interesting. They had a series on how to interview for a job. And one of the things that they recommended was go through your past and find five accomplishments that you’ve done, and write a story for each one of these accomplishments. And the story sounds something like this: We had this problem. I considered these alternatives. We chose this one and implemented it. And these were the results. And he said practice that every single day. Tell the story to yourself every single day. And believe it or not, it’s like a self affirmation. It helps you start to realize, yeah, you really did do some really good things, some smart things, and you’re not as horrible as your depression lets you believe you are at the moment. So, I’d say that’s how I got out of it. But that was the worst time of my life.
Alex Bridgeman: It strikes me that consulting and helping companies with their pricing would have a lot of similarities to academics and teaching in front of a classroom. What were some differences and similarities you see between those two roles?
Mark Stiving: Well, it’s interesting that you see a lot of similarities because I don’t. The big difference I see is- I love teaching. I teach today mostly to business professionals. And the huge difference is business professionals actually want to learn what you’re teaching. And students in college want a grade, a really good grade so they can graduate and get a job. And so, they don’t really care what you’re teaching. They don’t have the background experience to be able to put it into perspective. So, teaching at the undergrad or even MBA level is much more challenging because it feels like they don’t care. But when I’m working with businesses, I’ve never worked with a business that didn’t care. Every company cares about their pricing. And even if you didn’t care about pricing, per se, you care about your career, and the things that we help people with are going to help you do your job better and improve your career.
Alex Bridgeman: Talking about, starting to talk about pricing and some of your philosophies and thoughts around pricing, one thing you touched on when we met was that pricing serves a number of purposes or reflects a number of different things. It reflects value of the product or service. Positioning. I’d love to hear just your thoughts on what are the fundamental purposes and goals of pricing as a high level?
Mark Stiving: Yeah, it’s a really interesting question. One of the things that I struggle with in my career and my business is that, I’ll tell you I’m a pricing expert. And most people say, oh, that means you put a number on a product, because that’s what pricing is, you put a number on a product. And it turns out, although that’s true, that’s like 0.1% of what matters that we talk about that we do. When we start thinking about pricing, everybody, every pricing expert is going to tell you the best pricing to use is value-based pricing. And value-based pricing simply means let’s charge what a customer is willing to pay. Or in other words, how much value is a customer getting from our product? And so, as pricing people, we actually think hard about how do people perceive the value of our products? Well, once you start to dig into that, then you start to say to yourself, well, how are we communicating about our products to our customers? Are we talking about the things they really value? Or are we talking about the things that we think are cool? And then we start to talk about what’s the right pricing model? And how are we delivering that value to the customer? How are they receiving value? Because then we can price based on different models for the different ways they receive the value of the products. I tend to think of pricing not only as yeah, we got to figure out the price, we have to figure out the pricing model. We have to figure out what does- what market segment are we going after? Because different market segments value our products differently. I start to think about what product portfolios are we going to build because we can build different products in different market segments to do essentially the same thing, but just focused at that market segment. We can build good, better, best products inside a market segment. And we start to understand then how do we get different customers with different willingness to pay to pay us different amounts. There’s so much that goes on in the world of pricing. And so yeah, that’s a struggle that I have – how do I tell someone pricing is way bigger than you think it is?
Alex Bridgeman: What do you feel like is most misunderstood when you’re starting to talk about what pricing does and what goes into pricing with a company or client or whoever you’re working with?
Mark Stiving: I’m not sure the word misunderstood is right. Or maybe it is right. Possibly the single biggest issue I see with companies is they don’t understand the value they deliver to customers. And that’s really fascinating because you would think they would. You would think that when you sit down to define a new product, or build a new product, or build a marketing campaign, you’re talking about what your customers care about. But it turns out, I do these exercises with value tables with customers all the time, and they struggle with it so much because they have this thing, we’ll call it the curse of knowledge. I first read about the curse of knowledge when Dan and Chip Heath wrote the book ‘Made to Stick.’ And the curse of knowledge essentially says we know something so well, we no longer remember what it’s like to not know it. And there are some fantastic examples of that. Imagine, oh, here’s a great one. Have you ever tried to help your parents or grandparents with their technology over the phone? And you’re saying click on the X in the corner, and they’re like what X? I don’t see an X in the corner. And so what we’re dealing with is we have the curse of knowledge. And we don’t know what it’s like to be them, to not know where the X is in the corner. And this happens in companies all the time because we know our products so well and we have this understanding that oh yeah, of course, this does this, and this does this, and that’s going to help you do that. But companies forget that their customers don’t understand that. And if you want proof of this, look at any company’s website, and 90% of them are going to talk about their products and their features. And what’s fascinating about that is most people don’t know what your products and your features do for them. I like to say that experts buy features, non-experts buy benefits. Well, in truth, everybody buys benefits. We buy a product because of what it’s going to do for us. The difference is experts can look at your features and translate those into their benefits. Non experts can’t do that. And so, when we talk about our features and our products, we’re missing all the people we’re probably trying to reach, which are the people who’ve never bought from us before, the non-experts.
Alex Bridgeman: You talk about companies most often not knowing the value that they give to customers. For the companies that you have seen that do really truly understand the value that their product or service provides to customers, what are they doing that’s different from the average?
Mark Stiving: Let me start the answer with I don’t think I’ve ever seen that company without me helping them first. And I don’t mean that to be arrogant or anything. It’s just it’s really, really hard. But what do they do once they understand that, then it starts to change the way they think as a company. Why would you build a product feature that your customers didn’t value? And once you understand what value really means, now you understand what you should be building and how you might package those features into packages and what you really want to talk about to your customers. And so, it changes a lot of business decisions that companies make.
Alex Bridgeman: When a company is evaluating their pricing either for the first time or reevaluating it and deciding what is the right path for how we set up our products and pricing and positioning and all that, who’s driving that? Whose job is that to drive the process of evaluating their pricing? And then who else is involved in that decision? And what’s kind of the right mix of that team to work on pricing within a company?
Mark Stiving: Yeah, so the infamous question who owns pricing is the hardest question in the world to answer. And the reason is everybody and nobody owns pricing, believe it or not. Everybody cares about pricing. Anybody who has P&L responsibility, the people who are developing products, the marketing people, the salespeople, the executives, everybody, finance, they all care about pricing. But who actually owns it? Because everybody cares so much, I think nobody actually owns it, and everybody touches it. And it comes back to that issue we started with where I said pricing is much bigger than putting a number on a product. But when you say who owns pricing, which part of pricing are we talking about? Is it the pricing model? Is it the pricing level? Is the discount authorities we’re going to allow? Is it the commission structure we’re going to use? Which is part of pricing when we think about it that way. And so, there’s so many different pieces here. But I do want to answer your question more directly. For small and mid sized companies, I believe the CEO has to own pricing. There’s nobody else there that’s going to own it. You’re essentially coordinating all the pieces, you’re making sure people are thinking about the value of the products, and how we’re delivering value and capturing value. As a company gets bigger and bigger, they start to bring in pricing people. And so pricing people tend to own pricing. But I say that very cautiously. Because pricing people in bigger companies don’t actually understand the value of our products. What we understand is what pricing means, how to think about pricing, how to think about how customers think about pricing. And it’s still going to fall back on a product manager or a product marketer, somebody who understands the value of the product to the marketplace to actually do the pricing work with the handholding of pricing. And the best pricing teams are represented, have representatives from lots of different departments, including sales, even though we like to make fun of sales a lot.
Alex Bridgeman: Making fun of sales, what do you mean?
Mark Stiving: When I was teaching in front of rooms all the time, I would start a pricing course out and I would ask the question, who in the room have salespeople who discount too much? How many hands do you think go up? Every single one. And so, we sit back and we say oh, it’s the salesperson’s fault. But in truth, I’ll tell you, it’s probably not the salesperson’s fault. It’s because we haven’t given them the tools and the knowledge and the incentive to go sell the prices- to go sell the products at the prices we think they can close that.
Alex Bridgeman: So what do you think that’s- If you have a sales team or a couple of salespeople who are discounting a lot, it sounds like you think that’s a symptom of something else?
Mark Stiving: Absolutely. It is absolutely a symptom of something else. Now, it’s possible that there are salespeople who just can’t sell. But I don’t think that’s the problem. In most cases, the problem is a salesperson, they’re going to use every tool they have, every tool they know, when they’re out trying to sell a product. What tools do they have? Well, they can talk about the product, they can talk about the features. In fact, I’ll make fun of myself for a second because I was a salesperson really, really early in my career. And I was horrible. Oh my gosh, I was bad. Especially looking back, I can tell you, I was just horrendous. And my sales technique went something like this: I’m going to look you in the eye as I go through all the features of my product. And I’m looking to see if there’s a little glint of interest in one of my features, so that I could talk more about that feature. And that, I call that showing up and throwing up. It’s just like let me spew what we do and hope that you might care. And so that’s me talking about my features. Remember earlier we talked about what really matters is how is it that customers are going to get benefit, what’s the value to the customer. So, my third book called Selling Value was me taking everything I had learned about pricing and trying to apply it to the sales world. And what that really is all about isn’t- it is no longer saying, hey, let me tell you about my features. It’s really what problems are you trying to solve? If we could solve that problem, what kind of result might you get? If we can achieve this result, what do you think that turns out to be in profit to your company? And it’s truly, it’s almost a consultative sale. But recall, I started this out and said companies have a really hard time understanding the value of their products. Salespeople are the exact same thing. They have a really hard time understanding the value of their products. And when we work through this value table where we say you built a feature, why did you build it? You built it because it solved a problem. Well, can we articulate that problem? Can we articulate it in a way that matters to our customers? And then if a typical customer solves that problem, what kind of quantitative result might they expect? Are they going to get 2% less turnover? Or are they going to get 5% higher click rates? What are they going to get when they solve this problem? And then if they get that, can we use business acumen to say here’s how many dollars in profit dollars that turns into for our customer? And when we can start to think that way and walk our customers through that, and it’s not a tricky, let me take advantage of you thing. It’s what if we started a sales conversation like this? And I got to tell you my product’s a little bit expensive. But let’s find out if it’s actually worth it to you to consider this. What problem are you trying to solve? And then we go through that exercise. And it’s me trying to help a client understand, do you care? Is this useful to you? Are you going to make money if we do this? By the way, I don’t think I ever talked about features in that whole conversation.
Alex Bridgeman: Yeah, there was a really good episode with Henry Schuck, the founder of ZoomInfo on Invest like the Best. And that’s the thing he talked about as well, where their sales team talks mostly about the outcomes that you could have with using ZoomInfo in their sales conversations and as a way to show like here’s what you are actually missing out on in terms of value and benefits by not using ZoomInfo, and less focused on just the raw features of it. There’s like the emotional side of sales. And there’s a really good book that I’m reading through now, ‘Never Split the Difference’ by Chris Voss. Have you read that one?
Mark Stiving: Yes, I have, fabulous book.
Alex Bridgeman: Yeah, I’m halfway through, and it’s fantastic so far. But he also mentioned that, and so that and the ZoomInfo conversations kind of overlapped by a day or two. So hearing you also talk about that, talk about the benefits versus the features, rings true to me as well.
Mark Stiving: Yeah. The other thing I’ll add to the question you originally asked, which was salespeople don’t have the right tools or why aren’t they selling? What they also don’t have is the right incentive. And earlier, I said that commission structures were part of pricing. Now it turns out, it’s not. Commission structures are built by salespeople. But do you know that your commission structure has a direct impact on how hard your salespeople negotiate price at the end of the deal? And if you have a commission structure that simply pays a percentage of revenue, then you’re not incentivizing your salespeople to negotiate hard, to try to hold the line on price. And salespeople’s job is to get the deal closed. They’re going to use every tool at their disposal to go close that deal. Price happens to be one of those tools. And so, if you don’t disincentivize that, they’re going to use the tool, they’re going to discount price so they can close the deal. And what’s sad is every dollar they discount is profit that came directly out of our pocket.
Alex Bridgeman: When you talk about tools for salespeople, as companies make this shift from focusing on features and they start to understand the value they provide to customers and start talking about the benefits, what tools do you see salespeople switch their usage of most?
Mark Stiving: The tool I believe they need the most is what I call a value table. A value table is pretty simple to understand. It’s pretty hard to do. So, the four columns to a value table are the solution, the problem, the result, and the value. If we could get product managers, product marketers, salespeople to create a table that looks like this, then what ends up happening is when a salesperson goes in and says the words, so what problem are you trying to solve, I actually have a document or history that says, oh, we know customers who are trying to solve this problem. And when they try to solve this problem, this is the type of result they’re looking for. And so, when I go on to say, well, if we solve that problem for you, what kind of result might you expect? They say, I don’t really know. We go, well, clients like you get 2% less turnover. Does that seem reasonable? Yeah, that seems reasonable. And so, once we understand, or we have a really good list of what are those problems’ results, then that helps us as a sales team, as a salesperson, know what we’re looking for and how to handle it when we go talk to our customers. By the way, one of my favorite lines is nobody cares about your product. Now that goes back to that expert versus non-expert conversation we had. Nobody actually cares about your product, they care about what your product can do for them. And so, if you think about your marketing, if you think about your salespeople, they need to be in that what’s the problem, what are the results, those two columns of a value table. And yet we usually spend our time in the first column, the solution, which is our products and our features. And what we want to do is be able to shift all of our thinking into those second two columns, the problem and the result.
Alex Bridgeman: So how do folks do that? How do companies make that shift? What goes into that?
Mark Stiving: Teaching salespeople new behaviors is extremely hard. So, I think step one, without a doubt, is to create some value tables. Try to figure out what is the real value of your product? What’s the value of the features you have that your competitors don’t have? How would your customers think about it? And then what will happen is, as you talk to your sales team about this, you’re going to find one or two salespeople that this is really attractive to, that they get the concept, they want to use it, they want to learn it. And as they go to implement it, we start to hold them out and say, look at how successful they were, look at how they were able to talk about the value of the product, and they didn’t have to discount as much to win the deal, the deal probably closed faster. And so, we can start to use these people as the shiny beacons to say let’s go follow them or imitate them for the rest of the sales team. But in general, it’s like any type of sales situation, you train them, and then you hold their hand and hope that some of them adopt it and use the coaching techniques to try to get more and more people to adopt it over time. It’s hard to get any salesperson to change the way they do work. It’s hard to get anybody to change the way they do work.
Alex Bridgeman: Yeah, that’s certainly true. You’ve kind of been touching on it, but a lot of this foundation for pricing comes from knowing your customers really well, your existing customers, knowing numbers around the value that you provide. You mentioned an example as reducing turnover by 2%. Eventually, somebody in your customer base had to tell you that or you asked a lot of customers that and they all said kind of different numbers and 2% turned out to be the average. But you’re gathering information from existing customers frequently and building relationships with them. I’m sure that’s really helpful when it comes to new terms or new pricing in the future, if you’re going to raise pricing. What are some helpful practices and cadences for communicating with existing customers that you found helpful?
Mark Stiving: I want to answer that in two different ways. Before, what I want to do is before I answer the existing customer question, I want to talk about new customers. I never ever recommend that we walk into a client and say we think you’re going to have 2% less turnover. What I do say is ask the client, what problem do you have. They give us a problem. We say if we solve that, what do you think that would- What do you think would happen? And they say probably less turnover. Great. How much do you think? So, I’m always asking them. I am never telling them. Because if I tell them, they don’t believe me. And if I ask them, whatever number they give me, they believe it. So, it doesn’t matter to me if I know the average or if I know the industry average or if I know anything. What matters to me is that I know to ask the question to the prospect. So, then the question comes to talking to existing clients. My recommendation is let’s help our clients be as successful as possible. You probably have, if you have a SaaS company, and you’re dealing with customers over and over and over again, you probably have a customer success department. Your customer success department can be talking to them and saying, hey, what were the before numbers, what’s our after numbers look like? Maybe you’ve got the data in the cloud already that you can go measure and see what kind of results we’re getting. But the better we’re able to communicate or allow our customers to realize the results that they’re getting, the more likely they are to not churn, the easier it is to raise prices or to upsell more things for them. So, I think customer success is a hugely important department in SaaS companies for that reason, more so than keeping them from churning, really to make sure we know when we can get more revenue from them, when we can deliver more value and capture more value from them.
Alex Bridgeman: What would a well run customer success team look like? And from an external perspective, what activities are they focusing on and doing?
Mark Stiving: That’s such a hard question because it really depends on the product, the customer type. If you’re selling a b2c SaaS product, you’re probably not calling customers at all ever. Although, it’d probably be good practice to occasionally call customers just to hear their voice, hear what they say, hear the emotions they have with the comments, and not just rely on surveys, which we all want to rely on surveys because it’s so easy to do. But to actually talk to them I think is a really good idea. And then we move to the b2b type SaaS products where it’s relatively expensive. I would say depending on the revenue we’re getting for the customer, once a quarter is not too much. If we’re getting a big amount of revenue from a customer, we should be touching them frequently.
Alex Bridgeman: And in those conversations, those touch points you have with customers, are there certain questions around value and pricing that you’re trying to continuously answer and have points of data across time with each customer?
Mark Stiving: Sure. By the way, I almost never ask a customer about pricing. It is always about value. And the question becomes, what kind of results did we get? And not only can we quantify those results, can we quantify the value of those results? So how much money do you think that made the company? Now imagine that you’re in one of my client companies, not mine, but you’re in a client company that’s using SaaS product. And the salesperson in the customer success department is having a conversation with you about what kind of results did you achieve. What you’re realizing is that you delivered profit to the company. And so, you want to share this information. You want to work with this person to say how much money did we deliver to the company, because this makes you feel good and makes you look good. Especially if when we report back to the company, hey, look, you realize that you saved $3 million this quarter by using our product, you give credit to the people you talk to in the company, they love you.
Alex Bridgeman: Yeah, I like the focus on value. Are there any other topics around pricing or anything else in those conversations that you might avoid or try to steer clear of?
Mark Stiving: The question that everybody wants to ask their customers but they never should, and that is how much would you pay for-? And usually we’re talking about, hey, here’s this new feature, this new capability, how much would you pay for this? And I strongly recommend that you never ever, ever ask that question. If we’re trying to do a pricing research study, there’s techniques that we can use to try to figure out what the customer is willing to pay. I prefer trying to figure out how much value do we think this feature is going to deliver to our customer. But if you really, really want to ask that question, I’m going to give you a slightly different question that you can use. And that question is, what do you think people like you would pay for this? And what’s so neat about that question is it gives it like one degree of misdirection. And people stop thinking, oh, you’re trying to negotiate with me, or I need to gain the answer to this. And instead, they’re just thinking, well, what do I think people would pay for this? And so now they’re talking about the value of the product.
Alex Bridgeman: I like that switch in framing. I think this is a good point to give an outline for the process of creating a new price or deciding on a new price. You’ve mentioned before that folks are, companies are often surprised that there’s actually a scientific way to go about deciding a price, and it’s not just this squishy trial and error process, that there is some process and scientific exploration you can have to decide on a new price. Would you perhaps start with an outline for what that process might look like? And then we can dive into specific stages or steps.
Mark Stiving: Yeah, so let me not pretend that there is one scientific way to go to this. It is very different depending on a lot of different factors and situations. The very first thing that we always have to understand when we’re going to set a new price is what’s the decision a customer’s making. And I love this concept because it is so powerful for us as we’re setting prices and this concept is called Will I Versus Which One. Customers almost always make both of these decisions when we buy something. Am I going to buy something in your product category? Yes. Okay. Now which one am I going to go buy? Am I going to buy from you or your competitor? And the reason this is so important is because if people are buying that way, then what we have to do is we have to look at how much is our competitor charging and how are we different from our competition? What’s the differentiation? And now what we’re trying to do is we’re trying to put a value on the differentiation. So, are we going to charge more than our competitors? Hopefully the answer is yes. And what do we do better? And what’s that worth to our customer? So that’s how we think about pricing in a Which One world. But the reason I love this concept so much is because sometimes people only make a Will I decision. So, they don’t consider a competitive alternative. And in cases like this, we’re not looking at the value of differentiation because there’s nothing to compare us to, or they’re not comparing us to anything. So instead, what we’re doing is we’re looking at the value of solving the problem. And so, what’s the problem that we actually solve? How much profit are we going to make them when we solve this problem? And we should be able to get some percent of that. In the world of Will I, I tend to think for a first purchase, it should be in the ballpark of 10%. So, if we’re going to make a client a million dollars, they believe they’re going to make a million dollars by buying our product, we should be able to charge them $100,000 for that product. And that’s because there’s no competition. And by the way, they’re taking a risk to go do something new and try something new. So that’s why they’re getting the lion’s share of the profit. Now, everything we talked about, you and I’ve talked about so far, Alex, has been value, and how do we think about value, and how do we put a dollar value on value. But there are techniques out there that are simply pricing exercises or pricing techniques. The simplest one that I like to use if I’m going to do a pricing exercise is Van Westendorp’s Price Sensitivity Meter. And in Van Westendorp’s Price Sensitivity Meter, you go out and you describe your product, you tell someone what it looks like, or what it’s going to do for them. And after you’ve done- it’s almost like you’re selling the product. And then after you’ve done that, then you ask them four questions. And the four questions go something like: At what price do you think this is so expensive you wouldn’t even consider it? At what price do you think it’s so inexpensive you think the quality just can’t be very good? At what price do you think it’s starting to get expensive but you still might consider it? And at what price is it a bargain, a good deal for the for the money? And so, you ask those four questions and people start to give you pretty interesting answers. You’re going to find a bunch of segmentation, a bunch of different people giving you different answers. And you could start to say which types of customers give us which types of answers and start to figure out some of your segmentation. But I’m not as much a fan of that as I am of let’s understand our value and what’s that value worth to our customers.
Alex Bridgeman: You just mentioned segmentation, which you’ve mentioned a few times. How do you know when you should segment customers?
Mark Stiving: What a hard question. Instead of when to segment customers, let me tell you that there are two different ways to think about market segmentation. And so, the first way, every company has made this decision. Some companies make it intelligently and thoughtfully, and some companies just make it by default. And that’s what we’ll call market segmentation. Market segmentation is we often think of market segmentation as what industry are you in? Or what geography are you in or region of the world? And those are okay sometimes. But I prefer the definition, a market segment is a group of companies or individuals with a common set of problems. And so, we look at what are the problems these people are trying to solve, and now I can build products and marketing messages for that specific set of problems. My favorite example when I think about all this is LinkedIn. LinkedIn could say to themselves, hey, we’ve got different geographies, so we’re going to have a separate market segment for Asia and for US and for Europe. Or they could say, we deal with different industries, so we’re going to have a segment for medical and a segment for industrial and a segment for consumer. But they don’t do those. Instead, what they’ve defined as their market segments are salespeople, recruiters, job seekers, and professionals. That’s everybody else. You and I fall in that professionals category. And so, think about this for a second. LinkedIn is just resume storage and search with a few added features on top of it. And they take some added features and say, hey, how can we make this for recruiters that’s really, really powerful? And so, recruiters have different capabilities than you and I have inside the LinkedIn world. And by the way, if you have a paid account, you pay about 10% of the price a recruiter pays because recruiters get so much value out of LinkedIn. Salespeople get a lot of value. Us professionals, we get some value. So, it’s a phenomenal way for them to do market segmentation. Notice that they’ve built products for specific market segments. They price differently for market segments because of the amount of value those segments are getting from it. And then their marketing, the messages they send to recruiters is going to be very different than the marketing messages they send to salespeople or professionals. So, marketing and sales is very different for them. So that’s the first type of segmentation I would think about is market segments. Really important and really powerful. And I’ll take a quick step back. As you’re listening to this right now, can you think of a market segment that values your product more than everybody else? A type of customer? And then could you create a version of your product that focuses on that specific market segment and charge a much higher price. And they would likely buy that product instead of the one that you have that’s generic for everybody. So that’s an easy way to add a market segment if you can think of a market segment like that. The second type of segmentation I use a lot is called price segmentation. Price segmentation simply says, hey, different people are willing to pay different amounts. How do we get them to pay us different amounts? There’s lots of different techniques for those. We just have to realize when is it that people have a higher willingness to pay? And when is it that people have a lower willingness to pay? It could be characteristics of our customers, it could be things we learn at the time of the transaction. But there are lots of different techniques we can use. Probably my favorite technique or the most powerful technique as we start to build out product portfolios is building good, better, best products. And I like to build those inside my market segments. And so, if you go back to the LinkedIn example, for their recruiters, they have good, better, best products. For their salespeople, they have good, better, best products. And what I love about this is it may be complicated for people inside LinkedIn to think about all this. But if you’re a recruiter, you say, hey, I’m a recruiter, these are my three options, let me go buy one. And it’s really simple for our customers to make those decisions.
Alex Bridgeman: Within those kind of, that last model of segmentation, the good, better, best, how do you view upgrades in specific features within each of the good, better, best versus forcing a customer, like if there’s one feature in the next plan up or next package up that somebody wants, how do you think about just charging them an additional fee for that feature versus forcing a full upgrade to the next plan?
Mark Stiving: I think when you find that happens to you a lot as a company, what it means is that you didn’t structure your products correctly. If it only happens occasionally, then just force the customer to go buy the next plan. If it happens all the time, then what we need to do is we need to say what is it that we’re really trying to get accomplished? And it may be that feature should have been in the good plan, instead of in the better plan. What I like to do is take a look at if you have all your usage data, and you know what customers use what features in your product, you can often use that data to say, oh, these are the products or these are the features that everybody uses. And so, we have to have these features in our good product category. And then the people who value us more, they use these features, or they use more of these features. And so, we put these into our best category. And then finally, there’s a few people who use these specific features, and they love our product a lot. And so, we put them in the best category, and we charge a really high price for it. But if we can use usage data, it gives us really good insight as to what feature goes into which package. The other thing I’ll say is that sometimes, if there’s a single feature that customers in the good package want, some customers in the good package want, and some don’t, and some customers in the better package want and some don’t, and that feature is valuable, then make it an option. Give it a price, pull it out of all of your packages, maybe you throw it into the best package and include it, but then you can make it an option. The thing about options is you want them to be capabilities that are attractive to people in all three categories, so the good, better, best. Someone in good would want to buy this. And you want it to be expensive because you don’t want to nickel and dime your customers and you don’t want to have to manage a million SKUs. So, you only want to put an option in if it’s expensive. A great example of an option is if you are doing TurboTax for your taxes and you live in the state of California, you are probably buying the California State option for TurboTax. Some people who buy the cheapest version of TurboTax still need the California State option.
Alex Bridgeman: One thing I’d love to get your thoughts on is within those good, better, best plans and that positioning on either a website or a pamphlet or in a call with a customer, what are some helpful ways to position each of those plans either just visually on the website? We started off the episode talking about prices ending in nine. Are there certain ways that are effective to position those good, better, best plans in a website or call?
Mark Stiving: Behavioral economics would tell us to do it differently than what everybody does today. What everybody does today is we put good, better, best from left to right in columns. And I would recommend you do exactly that. And the reason I recommend it is every one of your customers is looking at your page, and that’s what they expect. And so, if you do something different than that, you are at risk of confusing them and making them unhappy. Another one of my all time favorite lines is confused buyers don’t buy. And so, if we confuse our buyers, they may not, they may choose to go somewhere else and do something else. So, I recommend, if you’re going to do this on a web page, just do good, better, best left to right, the way everybody does it. It’s certainly okay to make the middle column a little bit bigger with a star that says best value or everybody chose this or chooses this or most popular, and in truth, that’s what most people are going to choose anyway, the one in the middle. So, it’s totally okay to do that. But behavioral economics actually says we should have done it the other way. So, it should have gone best, better, good, instead of good, better, best. Now, what can we do with that piece of information? If we’re going to have a sales call, or if we’re going to have a call with a client, my recommendation is start with the best. And now what happens is, the reason this works in behavioral economics is people hate losses. Think about how much you get ticked off when someone raises a price on you. Even if it was like a couple of bucks on your Netflix bill, you’re like, dammit, I can’t believe they did that. And so, we don’t like it when people raise our prices. We hate losses. And so, if I tell you, I’ve got this feature here and it costs a dollar, or you can have these two features, and it costs $1.50, here’s what you just said to yourself, I can gain an extra feature, but I lose 50 cents. And so, you translate that dollar as a loss – I’m about to lose 50 cents. And so, what we do because losses loom larger than gains, that loss looks bigger than the gain of the additional feature. But what if we went the other way? What if we started out with hey, you can have these two features for $1.50, or you can have this feature for a dollar. Now what happens is I gained 50 cents, but I lost a feature. And because the loss looms larger than the gain, we would look at that and say, oh, I’d rather buy the big one because I don’t want to lose out on that feature. And so, it’s really a matter of how we’ve preset somebody’s mind as we’re presenting this information.
Alex Bridgeman: You mentioned LinkedIn as an example of effective customer segmentation. Can you think of other companies that you study and admire for either segmentation or pricing? I imagine some of these web pages with the good, better, best have to be some of the most optimized websites or pages in the world. But I’d love to hear any companies that you’ve studied and admire in particular.
Mark Stiving: So some of them do a fantastic job. And what typically happens is I’ll look at someone’s web page and say, oh, they did this really well. It’s not common that they get everything right or they did everything really well. But I’ll give you one that I saw the other day. I was on Zoom’s pricing page the other day, and I really liked the fact that Zoom has articulated some market segments, and so if you think about Zoom, you and I could be using Zoom right now, although we’re not. We could be using Zoom right now to record a podcast. We could be using Zoom to have a meeting. We could be using Zoom to do webinars or conferences. So all of these are different applications that they could charge for. And in fact, they do charge a different price for webinar services or webinar capabilities versus meeting type capabilities. But the one that jumped out at me, and I said, wow, that was really smart, is they actually have a medical version. And so, think about HIPAA requirements and privacy issues. And so now, oh, here’s this other market segment that really matters. And they probably have a much higher willingness to pay. They’ve identified it, they created a set of features around it, and said now we can go charge customers different prices for this. And so, I thought that was brilliant when I saw it.
Alex Bridgeman: Yeah, my mom is a family physician and is a customer of that product and uses it with her telehealth clients, so that’s pretty neat. Perhaps that’s a dumb question, but is there such thing as luxury pricing in b2b products and services? There’s plenty of b2c luxury pricing that I can think of, but I’m having a hard time thinking about b2b. Do you think luxury pricing exists? Or is it still so tied to value that it’s hard to make your price be a reflection of kind of scarcity and luxury?
Mark Stiving: As you point out, I think it’s very rare. As I start to search for an example, I could imagine a luxury pricing being probably mostly in services. So, imagine that you wanted to hire a lawyer. You would be happy to pay $1,000 an hour for a lawyer because you’re getting the best, even though they may not be any better than a $250 an hour lawyer. And so, I can imagine that there are situations like that where people are paying for reputation. But I don’t think it’s as common as what you see in the consumer world. Let me add to that, if I may. Companies put processes in place to try to force employees to make rational decisions. Consumers, we make irrational decisions all the time. And when you go to the b2b world, these are still people and people are going to make irrational decisions. But the companies are trying to figure out how do we get them to make rational decisions. And so, these are things like approval levels – oh, you’ve got to take that up to your VP to get that approval, and they’re going to ask you these questions. Or it’s purchase committees, we’ve got all these people involved. And so it’s not your feeling that’s going to make a difference. It’s can you justify it. Or RFPs, companies put out requests for proposals or requests for quotes. And these are techniques that they use to try to take the emotion and irrationality out of the decision making. And so they do a decent job. But there’s still a lot of irrational decision making in b2b.
Alex Bridgeman: It wouldn’t be a pricing episode without discussing raising a price. So for companies that have gone through the value exercise, they understand the value they provide, they have a team, the pricing team brought together and are sharing every part of the process, customer segments have been identified if they want to do that or if they see a need for that. How do they go about adjusting or raising that price for their product or service? What are some early steps? And what does that process overall look like?
Mark Stiving: I’m sorry I’m laughing here, Alex. Step one, swallow hard and just commit to going to do it. The reason that companies don’t raise prices is they’re scared. And it just amazes me. I have one client who hasn’t raised prices on a really, really popular product for over 40 years. And you’re like, really, just do it. But the fear is incredible for companies that don’t want to raise prices. Now, I don’t think across the board price increases is a very smart idea. You really want to think through who do we want to raise prices on, what products do we want to raise prices on, how are we going to go do it. And so there are lots of different techniques or tricks that we want to start thinking about. But I would step back and say, odds are really good you deliver way more value than you ever understood before. If you’re selling a SaaS product, when you want to raise prices on current customers, think about this for a second. In order for you to get a customer to buy your product the first time, in the first place, you had to convince them of the value of your product. And so, this is what we call perceived value. And they may or may not have believed you, they probably discounted it in their minds. They said, yeah, maybe we’ll get that. Okay, now they use your product. And they’re actually getting all that value that you told them they were going to get. They realize they get all that value and more that they didn’t even know. So why couldn’t you raise their price? Because they’re getting so much more value than they were when they made the decision to buy your product in the first place. And so, get over the fear. If you’re a SaaS company, customers, it’s really hard for customers to switch. It’s painful. They don’t want to switch. They don’t want to learn something new. You have lots of room to raise prices on your customers.
Alex Bridgeman: If you’re committed to raising prices, is this something that should happen with some regularity so your customers are used to it or more periodically, or what would determine which path you go down?
Mark Stiving: If you can do it, I would tend to lean towards annual price increases. You don’t have to make a big deal out of it. But just customers get this expectation that says hey, we’re going to raise prices every year. And so, they don’t get as upset or shocked when it happens. I wouldn’t do it more often than annually.
Alex Bridgeman: Yes, that makes sense. One of the ongoing questions I’ve been thinking a lot more about too is SaaAS contracts and what- the kind of ideal set of terms, either length or annual price increase, what does that look like? I’ve heard of companies with multiyear contracts up to maybe three or five years, they have built in price increases every year that are negotiated upfront and scheduled. Others I’ve heard will do two year contracts with the same rate in both years, expecting that at the start of year three, they’re going to raise the price by maybe 20%, so something a bit larger. Are there any things that you found within designing a SaaS contract and the kind of the whole scope of terms that comes with it that you’ve found effective with companies you’ve worked with?
Mark Stiving: Yeah. So, let’s decide what’s the objective first. So, I can give you the answer that I like for maximizing the lifetime value of the customer. And then there’s also a different objective, which could be making your investors happy. So, making your investors happy, they love multiyear contracts. Because now you’ve got a client locked in, you could say, hey, look, we’ve got this revenue that’s coming in for three years, and so it makes them feel confident and comfortable. I personally am not a fan of multiyear contracts. The reason I say that is if you’re a SaaS company, one of the big advantages of a subscription product is that people can try it for a month and say, hey, I love it, I want to keep using it. Or they can bail out and say no, this doesn’t do what I want it to do, I’m gone. And if we force a multiyear contract, and what we’re saying is we’re not confident enough in our product that you’re going to stay. So, you have to sign up for three years before we sell it to you. And so, I love the idea that says, look, I’m confident, you can go month to month, it doesn’t matter to me at all. We’re going to deliver so much value to you, you will never leave us. When it comes to price increases, I just learned this one not too long ago, and I love this tactic, this technique. And that is get rid of all of those annual price increases completely, just take it out of your contract. And the only thing that you want to put in your contract is we have the right to raise prices with 30 days’ notice. And you have the right to leave with 30 days’ notice. And so now we can do whatever we want for price increases. There are a lot of companies that had these 1%, 2% price increases, annual price increases. And they find themselves in this 9% inflation world saying how do I get my prices above 1%, or my price increase above 1%? And they locked it into a contract. My recommendation is don’t put it in the contract, just say hey, we have the right to raise prices with 30 days’ notice. And that’s it.
Alex Bridgeman: Would the answer or that thinking change for annual contract values above 5000 versus below or would you say it’s the same no matter the contract size that you’re not a fan of multiyear or haven’t seen as effective as some of these other options?
Mark Stiving: I don’t see how the price matters. Here’s what I could see. A really expensive monthly or annual price probably has a lot bigger implementation. And so, there’s more investment upfront to get the client, there’s more investment from the client to get the project implemented and started. And that also means that there’s much higher switching costs to get out of it. So, in that case, having an annual contract or an upfront implementation fee, something like that, to guarantee that we get to implementation isn’t a horrible idea if we think that there might be some people backing out during the implementation process. But once things are up and running, I no longer have that risk of hey, the implementation didn’t go well. And I don’t see any reason why we need to do anything other than, hey, we have the right to raise prices with 30 days’ notice.
Alex Bridgeman: What questions about pricing have I not asked you that we should talk about?
Mark Stiving: You know what we have to talk about is AI.
Alex Bridgeman: Yes, let’s do.
Mark Stiving: It’s the hot topic for everybody right now. And so, let’s talk about AI and pricing for a second. AI seems to be really powerful in the b2c world. And I say b2c because we have lots and lots of data. So, places where there’s lots of transactions, you can get that information and pump it in, correlate that with other data. So, for example, there are companies that are doing car rental pricing. And so, what are you going to match your car rental pricing with? Well, it’s going to be with holidays and what times of year in the past and what’s the weather forecast look like. And there’s all sorts of things that we can use as we start saying what are we going to use for car rental pricing for AI. And I think that makes sense. In the b2b, we tend not to see it very much because we don’t have as much data. We don’t get to see what’s going on. But let me caution everybody on b2b and b2c when it comes to using AI for pricing. And that is AI needs the result to know that they made the right decision or the wrong decision. And we never know if we got pricing right. If I price something at $10 and you buy it, I don’t know that you wouldn’t have paid $15 for it. All I know is that you did pay $10 for it. And so, we just want to be a little cautious as we start thinking through this AI process. So, for my pricing friends, I would say don’t worry too much, you’re not going to lose your job in the near future. But it probably doesn’t make sense to do a lot of work and understanding how to do data analytics.
Alex Bridgeman: Have you seen companies focused on pricing within pricing teams hire AI experts or at least put more and more resources and attention towards AI?
Mark Stiving: I personally haven’t seen that. It doesn’t mean it’s not happening. What I do see a lot is there are many, many pricing startups nowadays that are using AI to gather a whole bunch of different datasets and give pricing advice to companies.
Alex Bridgeman: That’d be pretty neat. What strongly held belief have you changed your mind on over the years?
Mark Stiving: Okay, this has very little to do with pricing, but I’m going to make it have something to do with pricing when we get to the end of it. I used to think the world revolved around me. Believe it or not. I mean, I think we all do that when we’re teenagers. Sadly, I did that way too late into life. I believed this. And it took a long time to, and some pretty hard life lessons, to learn that that was not true. The world doesn’t revolve around me. And in fact, the lesson I took from it, I probably swung the pendulum so far the other direction. But it’s made me a great pricing person. And the way the pendulum has swung is I now understand or at least believe 100% that every decision that you make, you make it because it’s in your best interest. And I believe this for everybody. And what that does for me as a pricing person is it forces me to put myself in everybody else’s mind and say how are they making this decision? What do they think is good for them? And so that’s something that was, I mean, it was a horrible lesson to learn, but it was fabulous once I learned it.
Alex Bridgeman: I love that. What’s the best business you’ve ever seen?
Mark Stiving: Can I say LinkedIn? For some reason, I just love this company. I use it a lot. I love the way they do their pricing. I love the fact that they’ve got network effects. There is so much I love about this the LinkedIn business that I’m going to stick with them.
Alex Bridgeman: It’s a great data company too, if you think of every one of us with a LinkedIn profile, as a contributor, we all have an incentive to keep our profile up to date and make sure that the data that’s on our profile is in fact accurate and that we’re not at some different job or whatnot. And it’s a pretty amazing data tool when you look at it from that perspective, too.
Mark Stiving: It is. It is such a powerful company in so many ways. So, I wish I had started LinkedIn.
Alex Bridgeman: Yeah, we’d have bigger planes, I think, for sure. Thank you, Mark, for sharing your time. I really appreciate you getting to chat with us all about pricing and looking forward to hopefully working with you a little bit more and continuing our discussions.
Mark Stiving: Excellent. Thanks, Alex. We’ll talk to you later.
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