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Getting to the Bottom Line: Conversations to help business owners maximize revenue, profit, and cash flow
Whether you're looking to boost your profits or simply gain a clearer understanding what drives business success, "Getting to the Bottom Line" is your ultimate guide to unlocking the strategies and secrets behind sustainable growth and the financial freedom you deserve. Tune in and discover how to turn your business goals into tangible results, one insightful conversation at a time.
Getting to the Bottom Line: Conversations to help business owners maximize revenue, profit, and cash flow
Know your Price or Pay the Price with The Price Whisperer
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Unlock the secrets of pricing strategies that can revolutionize your business's profitability with insights from Per, the Price Whisperer. Join me, Stephanie Smith, owner of New Light Financial Solutions, as we discuss the hidden power of minor pricing adjustments. You'll discover how a mere 1% increase in prices or reduction in discounting can yield an astounding 11.3% rise in profitability. This episode will guide you through the strategic nuances of pricing, revealing how even small changes can significantly enhance your revenue, profit, and cash flow, ensuring your business’s long-term success.
From large corporations to small consulting firms, strategic pricing is a game-changer. Learn how a holistic approach incorporating marketing, positioning, and customer targeting can unlock unprecedented profitability. Hear compelling real-world examples, like a SaaS startup that quadrupled its prices to attract premium clients. We also delve into the common pitfalls for startups, such as underpricing and arbitrary pricing decisions, and offer practical tips for conducting direct research with potential buyers. Don’t miss this episode filled with actionable insights designed to help you master your pricing strategy and boost your profitability.
To learn more about my guest, Per "The Price Whisperer" Sjofors, visit him online at https://sjofors.com
We want to hear from you! Send us a message.
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My name is Stephanie Smith, owner of New Light Financial Solutions, and we help business owners walk the one clear path to generating more cash in their business. To learn more, visit us online at https://newlightfs.com/
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Impact of Pricing on Profitability
Speaker 1Hey everyone, welcome to another episode of Getting to the Bottom Line, where my goal is to put into perspective the different things that impact your revenue, your profit and your cash flow. My name is Stephanie Smith. I'm your host. I am owner of New Light Financial Solutions, where we offer outsourced CFO services and we help our clients walk the one clear path to generate more cash in their business. I'm super excited to have Per on my show with me today because he is the price whisperer. Thank you so much for coming and talking with me today, vice.
Speaker 2Whisperer, thank you so much for coming and talking with me today. Well, stephanie, it's a pleasure to be on the show and I hope I can shed some insights onto that topic of yours, because it's very much a topic of mine too.
Speaker 1I imagine it is, and before we dive into anything, I just want to say so. For what we do with our clients, we consult with them on the drivers of revenue, profit and cash flow. So we talk about 16 different drivers and of the revenue drivers, pricing obviously fits into that bucket. So, depending on how you, price can really make an impact to your business, because if you maybe raise your prices a little bit, you can have the same number of clients and make more money, right, so it's potentially an easy way to increase your revenue. Now, obviously, there's a lot more that goes into your pricing strategy, which is why you are here, so that's why I'm excited to have this conversation, because it is such an essential piece of people's businesses. That said, will you tell everyone a little bit about yourself and your business and how you got to where you are right now?
Speaker 2Well, the, the I mean the first thing is my moniker there, the Price Whisperer, right and, and part of it, and part of why I I, why I adopted it, is that that I got this wacky name that nobody can either pronounce or spell to, you know, and that's because I'm natively from Sweden, so it makes perfect sense over there, but less so in the US. And the story is that I ran a couple of companies in Europe, one in Zurich in Switzerland and one out of London. Then, when I came here to the US in the mid-90s, I established and ran a division of a fairly large public company. After that I've had another four CEO jobs and in all of these instances we did experiments with pricing only because it was sort of an interest area of me and there was at least there was for me, and I know it is for a lot of people still a kind of mystique about pricing how do you get your price right, you know, and so forth.
Speaker 2And out of those experiments that we did, some worked really very well, like next quarter revenues are up 25% or so. Others were complete duds. And you know, you spend three years in business school and pricing takes two hours on a Tuesday, that's it. And so what I had learned in business school about pricing was the little I've learned was so academic and so theoretical that it didn't help us to understand why some of those experiments worked and others didn't. And now, of course, I know. But when it was time for me to set out on my own, I decided to develop a process to make every pricing experiment a success, and that's what we do in my company. And it's interesting that you talked about the pursuit of revenue and profits. Right, because and this is a thought experiment I would encourage every company owner, or every divisional head, or every product manager or, or sometimes, marketing manager or CFO whoever sets the price of a product or a service is to do something that I call the 1% challenge.
Speaker 2The 1% challenge the 1% challenge right, and this come I mean. First of all, we need to look at that. Every company has a resulting profitability that comes from only three variables, right? It is the total cost of the operations, it is the total sales of whatever you sell and it's the price of what you sell. Now, if you do this thought experiment and your company is an average company I know no company is average, but let's say that there is an average company, right, let's say that there is an average company, right. If you do a thought experience and change any of these three variables with 1%, what you will find is that if you can increase your sales volume with 1%, profitability goes up with 3.5%. If you can decrease your cost with 1%, profitability goes up with 5.5%. But if you can increase your price or decrease your discounting because that's the same thing, right. With 1%, profitability goes up with 11.3%.
Speaker 1Wow Well obviously that's the winner of the three right.
Speaker 2That is the winner of the three. Now the challenge have you ever failed to change something one single percent?
Speaker 1Everything.
Speaker 2You know. So that is the power of pricing, and I'm suggesting that these small changes, you know, 1%, 3%, maybe up to 5%, typically have no effect on sales volume, right, or very little effect on sales volume. And because of that it can substantially increase profitability. Right, that makes sense. Why is profit important?
Speaker 1Good question. Are you asking me.
Speaker 2No, it's a rhetorical question, right, because if you don't have profit, eventually there is no company.
Speaker 1True.
Speaker 2You know, yeah. Eventually investors and if you're an entrepreneur, you're one of the investors, or maybe the only investor is going to get tired of funding that company that is not profitable, right, and at that point you try to sell it or you close it down or it goes into bankruptcy. It ceased to exist. So that's one reason for profits. The other reason for profits is that we are all in business because we deliver something of value to our clients. If we don't have value to our clients, again we don't have a business. That's very true.
Speaker 2Again, we don't have a business that's very true and with higher profits. We can spend more money on market development. We can spend more money on product development or service definitions. We can spend more money on even hiring better, more expensive people, right? So in the end, we can deliver more value to more people, right.
Speaker 1Yes, absolutely.
Speaker 2And at the same time shareholder value goes up and so forth.
Speaker 1So it is in that context, we need to see how profits are so important. Right, I love it and it's so. You're right, it's so important. Obviously, if you don't have any money, then you don't have a business and you don't want to funnel your own money into your business, but getting that pricing to strategy, right, right, that makes a big difference. So so how? How do you know what to set your pricing at? How do you help people to figure that out?
Speaker 2well, first off, I mentioned in this one percent challenge. I said that increasing prices with a few percent rarely make a difference. Now, there is a an exception to that, and that is there's something out there called price walls. Price walls are psychological price points. Where should you cross them? There is a significant change in volume, and let me give you an example. Just before the pandemic here, I spent some time with one of the VPs at HP, the computer company, with one of the VPs at HP, the computer company, and HP in general has a very simplistic pricing strategy. It's just cost plus right, and what he told me, though, is that they had done some experiments with pricing. They took this one computer model. They started to inch up the price a dollar at a time, and he told me that they could go up $17 with no change in volume. Right, if they went up $18, sales just fell through the floor, right?
Speaker 1That's crazy.
Speaker 2They had found one of these price holes.
Speaker 1Yes.
Speaker 2Right, one of these price holes. Yes, the second thing that came out of this little experiment is that they had they had been leaving $17 on the table.
Speaker 1That's true.
Speaker 2Yeah, and. And you're selling a low margin product. So $17 make a difference and you're selling 10,000 of them a day.
The Impact of Pricing Strategies
Speaker 1Right, yeah, big difference.
Speaker 2I mean, obviously we're talking about a giant company here, but the same applies to every business. Even if your business is a part-time consulting business or a coaching business or something like that, the same always applies. There are going to be price walls, right? And if you do a small increase in price and suddenly your you know your sales drop a lot, you have found one, right. And then you have to revert, right. Yeah.
Speaker 2But there is also a trade. There is also a that consideration here we all have. We all have or we at least all want to have returning customers. And let's say that you have customers that buy from you every four months just to pick a number right, then if you increase your price, it may not be until people start buying again that you see a drop that makes sense yeah, people start buying again, that you see a drop.
Speaker 2That makes sense, yeah, you know, and so that's something to consider, right, but how do you overcome this right Now? Price testing that we did in the companies that I ran, price testing, or small price increases that I just mentioned, have a very significant flaw, and that is that it looks at price as would it live in a vacuum, as it would live in isolation.
Speaker 1Right, there's got to be other things that impact whether or not consumers want to purchase from you.
Speaker 2Yeah Well, consumers or B2B, decision making is all the same. So the right way to look at pricing is to take that holistic view on pricing, because everything you do in a company affects how you can price your marketing. You may you, whatever marketing messages or positioning statements you have leads to a certain ability to set certain prices right. It may well be that different marketing and different positioning allows you to price differently, price higher and lead to higher sales volume as well. All right, and let me give you an example of that from a fairly recent client. This company has these dispensers for filtered waters you find outside grocery stores and places like that, and they came to us and they said we tried to increase our prices seven years ago and it backfired badly, so we had to revert. That's not good.
Speaker 2It's not good, no, so now we need to Right and we do a particular kind of market research called pricing research or value price research, whatever you want to call it. And what we found was that if this company would change how it positioned themselves, there were plenty of room to increase prices. So over about a week, they changed their positioning and in this case, you know, this is essentially the signage on these dispensers, right. So they changed that and they changed the price, and during that week they went from a $200 million to a $240 million company.
Speaker 1Wow.
Speaker 2Yeah.
Speaker 1One week In one week.
Speaker 2In one week. You know Something different In one week. In one week, you know, position themselves differently and in such a way that there was room to increase prices, which they did. And it's that understanding that very, very few companies have, although it makes perfect sense for you and me. But sometimes executives get so entangled in the operations or whatever they don't really step back and say that how can we do something a little differently?
Speaker 1and maybe for that reason, price for additional profits, for all the benefits we just discussed, or profits, yeah, well, I feel like too, as a business owner, you're busy in your day-to-day life and they don't have the time necessarily to go do this price research that you're talking about. Right, I assume you go and you're looking at what other people are doing and similar. No, how do you do your price research? No, yeah, I don't know.
Speaker 2Yeah, price research is. I said it's a subcategory of market research and it's market research done very differently than what you would get from a market research company company. And from that it's possible to accurately measure what people are willing to pay for a product or a service and those could be buyers in B2B or B2C and then with further analysis it is possible to understand where those price walls are. It's possible to understand what our marketing affects the prices that could be set. It is possible to assess which customer targeting affects how prices could be set. It affects how different sales methodologies and channels affects how prices could be set. Even product or service features and benefits obviously also affects how prices can be set. So it becomes rather complicated, but it has a huge impact on the company, right? That?
Speaker 1sounds like it.
Speaker 2Let me give you another example. This is a small company, startup. I think there were maybe about a million or so so a small company. They're a SaaS company and what we found was that they were so underpriced. They did this mistake that so many companies do, and I'll talk a little bit about mistakes that entrepreneurs do, but first let me tell you about this company. We could measure that they were very underpriced and could actually quadruple their prices wow, yeah, well that's.
Speaker 2That's a big difference that is a big difference. So they didn't do that overnight. They sort of inched up the prices over about a nine month period. But as I followed up with the CEO, he said to me that two things happened. First, our sales volume went up with 25%. Wow.
Speaker 2Well, because price is a message of quality and benefit and if you're too underpriced, people won't buy Anyway. So sales volume went up with 25%. But then he also said and we got rid of the bottom feeders, right, and we now have a more professional number, we have professional level of clients, so our customer support costs have gone down with 80%.
Speaker 1That's awesome, but that, yeah, that makes perfect sense. That you don't want to be the cheapest in town either, right, because there's a certain group of people always looking for a discount and that might not be your ideal client if you're looking to make more money.
Speaker 2Yeah, what happened is, if you're very underpriced, you will appeal to those price-sensitive customers. Now, the problem with price-sensitive customers are because they just want it, because the price is low right, right.
Speaker 2And that means that you, as the seller, ends up having to spend a lot of resource on educating those customers. On educating those customers, it may be with you know, in person, in different ways, but where you have to create lots of training videos or training materials and, you know, spend a lot of resource on this right. And then, when you spent all that resource on educating your customer on the product or service that you sell, there's going to be somebody who's a little cheaper and your customer on the product or service that you sell there's going to be somebody who is a little cheaper and your customer is gone.
Speaker 2It's true, yeah, so all your efforts are for nothing, right? Whereas if you can sell at higher prices to like, in this case, what he said, more professional customers you have a better customer loyalty. But I mentioned this about startups and so forth is, especially when they have a disruptive new product or new service of some kind is that they go to market with a low price because they believe they're going to quickly penetrate the market. Now, when you sell something to something disruptive, right, you are first only going to appeal to those that are called innovators, right?
Speaker 1Right.
Speaker 2And those represent about two and a half percent of a market. That's small. That is small. Yeah, now they care a lot about what you deliver to them but, they don't care about price. Yeah.
Pricing Strategy Development for Startups
Speaker 2You know they buy for all different reasons, but low price is not one of them. So here you have these companies that comes up with something innovative and they sell very little because there's only a few of those innovators. Eventually they may start to sell to early adopters and that's a larger portion of the market, but initially it will be to those innovators and, let's say, a year gone by, they look at what they promised investors, they look at their bank balance and they panic. And what do they do? They lower their already low price and, based on what we just learned, at best they will have the same low sales volume. More likely, sales volume will go down. Yeah.
Speaker 2And then you have this struggle. It's not impossible, but it's a struggle to increase prices.
Speaker 1Right.
Speaker 2And obviously they need to increase prices far above what they initially had set prices to right, and if they can't do that, they're history, they're gone right, which is one reason why you know 80, 90% of all startups fails.
Speaker 1Wow, they just need to hire someone like you to do all of the research to have the right price out of the gate.
Speaker 2Well, look at it as an insurance policy.
Speaker 1Right, right. Well, it makes sense that you would want the right price from the start because of the things that I feel like not everyone would consider.
Speaker 2You're getting started yeah, and and, and you know people, um tell you another story. We, uh, we never. We never worked with this company, but we should have um the, the another s company. They have a contractor management platform of some kind, and I had this conversation with the CEO probably about 10 years ago, long time ago anyway, and he told me that I've decided that we should price our platform at $165 per user per month. And then he continued but I don't know, maybe it should have been 99, maybe it should have been 250, but 165 just felt right. About a month ago I checked the company's website again and it's the exact same website as it was 10 years ago. I think that's an indication that they may not be growing as quickly as he thought they would you know?
Speaker 2because they're leaving loads. Exactly, yeah, yeah, so anyway.
Speaker 1Were they charging the same amount?
Speaker 2They don't have prices on. They don't have prices on their website.
Speaker 1So Okay, yeah, so that would have been interesting. Yeah so not pricing right out of the gate is obviously a mistake, or pricing too low. Do you? Have other other mistakes that you usually see.
Speaker 2Well, I think the biggest mistake over and over is not to realize that pricing matters and just doing that. This CEO I just mentioned that said I'll just pull. It doesn't work, you know. And the other big mistake is either using cost plus pricing, because your cost of your product or service is important but should not be the basis for how you price it, because your costs have no relevance to the buyer right.
Speaker 2To the value that the buyer right To the value that the buyer perceived. Another very common mistake is to look at competition right Sometimes. I mean if what you sell have competition with prices on their website.
Speaker 2It's sort of doable, right. But first off, you don't know if that competitor has the website geo-tagged, so if you come in from another geo you will see a different price. You don't know, if you come back to the website there will be a new set of prices. You don't know if they change their prices eight times a day, right, and you still don't know what kind of deals or specials and rebates and kickbacks or whatever they do, right.
Speaker 1Right.
Speaker 2But the most important mistake with all of this is that if you start looking at your competitor's pricing and then you say, okay, I think I'm a little better, so I'm a little higher, you have this fluff factor. That is a pure guess, right, right? Or maybe you say I'm not really as good, so you have another fluff factor and a little lower, and the whole point of looking at a competitor is just goes out the window, right, because you're still guessing.
Speaker 1Very subjective yeah.
Speaker 2And then, if you start by looking at competitors' pricing, soon you start using the same or similar marketing messages and you have the same feature functions and you're in the commoditization death spiral right Right, from which it's almost impossible to recover. I mean, look at every US airline except Southwest have gone into bankruptcy in the last 10 years. Everyone right.
Speaker 1Crazy.
Speaker 2Commodity, no differentiation and so forth. The other big mistake is to I mean, if you, if you hire in a business where you don't see your competitors pricing is, you say we know what the market will bear, how do you know? You can't know, you don't. You don't know what, what, what, what buyers of your competing product or what they are paying Right, and if you're also joined customers, they won't tell you.
Speaker 1Right.
Speaker 2Yeah.
Speaker 1Okay, yeah. Okay so that said, if someone can't hire a company like you, where do they begin?
Speaker 2Well, there is a way you can do this right that doesn't cost any money and it's possible to do for an entrepreneur starting him or herself right. Okay.
Speaker 2And what you do is that you identify at least 25, 50 is better, but at least 25 potential buyers right. Those are not your current customers, they are not your prospects and they are certainly not your friends and family. Once you've identified those I mean, if you're selling something B2B, maybe you can use LinkedIn If you're selling- something B2B, maybe you can use LinkedIn right, right, yeah, if you're selling something B2C, you know you go to your local Starbucks and you say can I ask you a couple of questions, right?
Speaker 1Right, yeah.
Speaker 2Very practical right. Yeah. And the questions you ask. First you describe your product or your service and specifically the value right, mm-hmm, or your perception of the value, and then you ask this person two questions and the question is what is the price now, when you understand the product or service, that is so low that you think that we are going to over-promise and under-deliver and for that reason you won't buy.
Speaker 1That's a good question, right yeah?
Speaker 2And then you continue saying something like and now let's look at the flip side. You know the benefits of our product or service. What is a price where you think that we are going to under-promise and over-deliver, yet is so high you will not be able to buy it, right, yeah, and then you take the average of those two questions and obviously there's going to be outliers. Right, those are not part of the 25, so to speak. Just ignore those 25, so to speak, and just ignore those, and you take the average and suddenly you have the range of where your prices should be. Right, right yeah.
Speaker 2Not below that and not over that Right. And then, of course, you want to set your price close to the higher.
Speaker 1Right. You know, Definitely not close to the lower end.
Speaker 2Yeah, exactly yeah, and it's not perfect, but it's a lot better than guessing, right yeah?
Speaker 1Yeah, absolutely.
Speaker 2And then if you can continue this process. Well, first of all, if you can't find these 25, right, you have bigger problems than pricing Right. You have bigger problems than pricing Right.
Speaker 1But if you I mean this could be an ongoing process right, that would be my next question is how often do you do this right? Because obviously there's disruptors and things like COVID happens right and things change perceptions change.
Speaker 2Well again, if you're a small company, as you grow, you continue to do this.
Speaker 1Right.
Speaker 2And maybe, as you have, maybe 100 people, and if you know who these people are, I mean, ask them. If this is consumers you find at Starbucks, ask them a little bit. You can obviously see gender and age and stuff like that. You can obviously see gender and age and stuff like that, but there may be some other attributes that you also want to capture. Ask them about it. And when you have like 100 people that you've done this and this may take a year, it may take half a year, I don't know Then you can say are there differences in how these people in that range we talked about, right, is it one range that is higher than another range? And then you can start maybe using different descriptors. Right, when you start, you have your own idea of what is the benefit, which is probably reasonable.
Speaker 1Okay, but you may probably want to try a couple of different benefit statements and see if that shifts right yeah, well then I think if you find a group of people that your range is higher, maybe you need to be marketing to that group of people.
Speaker 2That's exactly my point.
Speaker 1Right yeah.
Speaker 2Or maybe you find that one statement of benefits drives the range a little higher than another range of benefits. Yeah, and then you continue this and suddenly your price does not live in a vacuum anymore.
Speaker 1Right, wow, that makes a lot of sense. This was such a great conversation. Excuse me, I feel like we could have so much more conversation about this and there's so many details. I'm sure that you work with your clients on, but this was a great start, so I want to ask someone getting started today? I know you just gave like the how do you get started, but what would be the one takeaway that you would want everyone to know based on this conversation about pricing?
Speaker 2Well pricing matters. I mean, there's a guy called Mark Andreessen. He was successful with the very first internet browser in the early 1990s and he grew up and became a famous venture capitalist. And he was asked in a conference a couple of years ago what is his most important advice to startups and he said raise your prices.
Speaker 1Raise your prices.
Speaker 2Yeah.
Speaker 1It's so simple, just do it.
Speaker 2I mean, you can always go back.
Speaker 1It's true, it's easier to go down than it is go up, but so you got to go up first, right?
Speaker 2Yeah, exactly, yeah, yeah. Yeah, and you know there's a lot more information. You know about the same stuff in my book. You know that the subtitle is actually much more important than the title, where the subtitle says a holistic approach to pricing power. Yeah. And that is to realize that everything you do in a company matters on how you price.
Speaker 1Yeah, I was going to say. My takeaway is pricing is not a vacuum where you shouldn't pull it out of your hat, but there's a lot of factors that go into what I learned from you today. Marketing makes a difference, right, and how you position yourself makes a difference, and that can really impact how you price your products and services. So that's awesome. If someone wanted to buy your book or learn more about you or I assume you have more information out on the Internet where can they find you?
Speaker 2The best is just Google the Price Whisperer. You should get about 10 million hits, and most of them are me, and it will lead to a lot of my well, it will lead to the book. It will also lead to. I have a YouTube channel and I just uploaded today A little talk about how your price selects your customers. You know, talk about how your price selects your customers. You know Interesting and it's. You also find my company and I have loads of articles out there, you know. Yeah, so that's easiest, just Google the Price Whisperer.
Speaker 1Go Google the Price Whisperer. I'm going to do that, I think.
Speaker 2I'm going to buy your book.
Speaker 1I want to read about this holistic approach it's very interesting how it all works together. Yeah. And everyone else should too.
Speaker 2Go buy the book. Well, you know, especially in your business, as you described it early in this call Right, this is right up your alley right.
Speaker 1It is Because there's many factors you mentioned earlier too about returning customers, but the revenue drivers have a lot to do with all of those things. How many people?
Speaker 1the number of people, how often they buy from you, how often they come back, all those things. And it's all related to that pricing. You want to make sure people can afford and want to pay for what you have. And it's not um awry, but even just as I, like you, brought up, just raising your price one percent can make a really big difference to your bottom line that's, that's a significant number yeah, certainly.
Speaker 2I mean we talked about that in the context of the average company and if I mean if, if, if you even even even if you're a software company where the actual you know selling another copy or getting another client to your SaaS platform is negligible, there's still costs for every customer, customer support and training and, like we said, maybe you need to do a lot of training, videos and stuff like that, so every customer still have. I mean, you look at, still the average software company still have a gross margin of like 25%, 20, 25%, right, yeah, although the incremental cost of one more copy is is nil, right?
Speaker 1right, yeah, so raising your price one percent can make a big difference. That's right um, awesome. Well, I really appreciate you coming and speaking with me today. Um, I did want to say if anyone wants to find out more about me, you can find me on my website, wwwnewlightfscom, but definitely go check out the Price Whisperer online. I'm sure there's a lot of great information out there. So thank you again for coming and speaking with me. I had such a great conversation.
Speaker 2Thank you, stephanie, and I hope I added some value to your audience.
Speaker 1Oh, I think you did, if no one else but for me. So thanks everyone for joining us. That's all we have for this episode of Getting to the Bottom Line. I hope you join me again on the next one. Have a great day, everyone.
