Mastering the Science of Pricing

Per Sjöfors: Well, the, you know, I got a wacky name. I’m Swedish from start, although I lived here in Los Angeles now for 30 years. And on the way, I lived in the UK for a while and I lived in Switzerland for several years. I virtually been living in Israel for a couple of years and in Japan and Korea as well. So, where I set up companies. So, and the pricing is, I ran a couple of companies in Europe and several companies here in the US before I got into pricing. And we did experiments with pricing only because I was interested in the topic, right? And some of those experiments worked beautifully like, next quarter revenues are up 25 percent. And others were complete duds. And what I had learned about pricing in business school was so academic and theoretical that it didn’t help us to understand why some of those experiments worked and others didn’t. So when it was time for me to set out on my own, I decided to take that interest that I had and develop a process to make every pricing experiment a success. And that process we are still using. Obviously, over the years, we’ve improved it as one can expect. And also, we developed a piece of AI software to support the process. But why then is pricing important? Well, every CEO knows this, that pricing has the highest leverage on profitability. And in fact, if you calculate, I have something that I call the 1% challenge. And… every company has a resulting profits that is only, comes from three variables, right? It is the total cost of the operation. It is the total sales volume of whatever the company sells, and it is the price of what you sell, right? And if you calculate for an average company, which of these three valuables provides the highest leverage on profitability. Again, for the average company, and of course no company is average, but for the average company, if you can increase sales volume with 1%, profit goes up 3.5%, because cost also goes up, right? If you can reduce your cost with 1%, profitability goes up 5.5%. But if you can increase your price or decrease your discounting, which of course is the same thing with 1%, profit goes up with 11.3%.

Rohit Agarwal: That’s a huge number to even digest in compared to an increase on the quantity side. So more sales versus the decrease on the expenses side. Wow, 11%. Very interesting. We’ll certainly unpack that a lot. But before going there, I want to understand how long have you been practicing this art of pricing?

Per Sjöfors: Well, first of all, it’s not art. It’s really science. And we’ve been doing this, I think. I think we started like 16 years ago, something like that 15 or 16 years ago.

Rohit Agarwal: Now, that’s a significant amount of time.

Per Sjöfors: Yes it is.

The 1% challenge: why pricing has the highest leverage#

Rohit Agarwal: And your practice spreads across industries. It is not necessarily focused on one particular industry.

Per Sjöfors: No, there are some limitations. We don’t really work with retailers and we don’t really work with companies who sells purely to government because government are, you know, they’re required to buy whatever is the cheapest, right? And apart from that, we work with almost anything. So, product or services, B2B, B2C, it’s all the same.

Rohit Agarwal: Why not retailers? What’s specific about retailers?

Per Sjöfors: No, they have so many products, right? And the products are low cost. I mean, we do charge for our services, right? And if a retailer have, you know, like here in the US, I think the typical grocery store here in the US have 40,000 products, right? They don’t sell a lot of any of them, right? We can work for the manufacturer of that product, but not for the retailer, right? So that’s how it works.

Rohit Agarwal: Got it. You have lived in so many different countries. What do you take from the pricing mentality of those cultures and bake into your practice around pricing? Are there significant differences culturally or how people perceive price?

Per Sjöfors: Well, to be honest, I’ve been here in the US so long that I don’t really remember that point of living in other places. But what I do know is that pricing or buyers and buyers could be consumers or it could be, you know, corporate buyers, they perceive pricing very differently and willingness and ability to pay is hugely different in different countries. And one of the common mistakes that companies often do is that they decide they want to expand internationally. And they do so in the same way as they’ve been successful in their home market. But that is not a guarantee that they will be successful from overseas somewhere from their perspective because everything is different. You know, if you go to another market, everything is different. And everything matters when it comes to price. The competitive environment is different. The kind of messages that are effective to drive sales volume are different. Willingness to pay is different. Ability to pay is different. And it just blows my mind, to be honest, that companies say that let’s just replicate what we do in our home market. And I see this when we work for our clients, but I also see it when somebody from outside the US is trying to come into the US market. I remember just recently I saw an ad on Facebook for, I can’t remember what it was, but it came from a company in Lithuania, I think. And they said, hh, this is only 399 euros. Americans don’t know euros. I mean, of course some do, but the vast majority don’t. And another example is a company that we actually worked with that do fishing lures. you know, where you fish, use when you fish. And they had come up with an innovative way of painting those lures. And this was very successful in their home market. And when we did the study, again, study how everything affects what you’re willing to pay or what a buyer is willing to pay, we found that only 5% of the market cared about the color of the lure. And those 5% had the lowest willingness to pay. And the highest willingness to pay were those which represented roughly maybe 45-50% of the market, were those who bought because of the brand and the quality of the actual hooks. And I don’t fish, so I now know more about fishing lures than I ever thought I would know. But, you know, they were barking up the complete wrong tree.

Rohit Agarwal: Makes sense. Quite intriguing. Again, you’re solving for a very different problem or you would have solved for a very different problem not knowing what you have just told. Pretty interesting. Per, what led you to write the book, The Price Whisperer? People who wanna get into a particular field have a professional practice. There are multiple ways to do it. You decided to write a book, which is, I would think, one of the hardest thing to do just in general, help us understand the motivation behind it.

Per Sjöfors: Well, I’ve written a lot of articles and white papers and so forth. And I thought to myself, why don’t I just gather those in one book and write a little glue in between the various articles and to make it a readable book. That didn’t work. So I had to rewrite the whole thing. And why I did it? Only because, and this sort of goes back to that 1% challenge we discussed. A few years back, we did a research project to American CEOs. And we actually asked them the question, which of these three variables, the sales volume, the cost and the price is most effective in driving profitability. And 88% said sales volume. And I think it was only 4% that said pricing. So there is a tremendous amount of education that needs to happen. And I speak to CEOs every day, right? I speak to those 4% that really understands that pricing makes a difference. But it’s also, so I wrote a book because I wanted to educate people. It’s not the only pricing book out there, but I’ve read many of them, not all of them, but many of them. And they, many of them just focuses on this stuff that they teach you in business school. They’re written by academics without actual business experience. And I mean, we’ve all, let me just tell you a little story here again. We’re all familiar with these traditional demand curves, right? Where you have a demand or sales volume on the x-axis and price on the y-axis, and it’s a straight line. And people express price elasticity as a number, you know, between x and y. That has no relationship with reality. It’s a complete academic construct. And a couple of years back, I was asked to provide some comments on a pricing article that was written by some professor in marketing at Harvard University. And that of course included those straight line demand curves. And I told the guy that, I mean, this is false. You are teaching your students something that is not real. Why do you do that? And at that point, the conversation with this guy ended, you know, because he was so, he was sure that he wanted to continue to drive that falsification to his students. No good.

Rohit Agarwal: Got it. Why? I mean, the statistics that you provided, 96 versus 4%, that’s just huge in terms of majority, large majority, almost all of business folks not understanding the impact of pricing. Why do you think it is so hard to get pricing right? What is it that people don’t get it about?

Per Sjöfors: Well, first of all, there’s two things when, well, a couple of things when it comes to why that is. First of all, I think many companies don’t know there is a better way. They’re just not aware of it. And instead, if you look at many traditional sort of manufacturing industries and so forth, they are very good in calculating the cost of a product. And then different industries have different sort of rule of thumb for margin uplift, right? I myself, I worked in industries with the margin uplift was 15% on top of cost. Nothing, right? I’ve also worked in other industries where where it was, you took cost times five to get to the price. Right? And none of those have anything to do with what people are willing to pay, what buyers are willing to pay. Right? And there’s a cost pluses, and it’s easy. I mean, the benefit of something like Cost Plus or some margin goals or just guesswork is that it’s very easy. It doesn’t take any resource, but it’s also a 100% guaranteed way of pricing it wrong. Yeah, I think, I mean, the big difference is that people don’t think that you can accurately measure willingness to pay in a market and you can accurately predict sales volume and revenue at different price points.

Why companies get pricing wrong#

Rohit Agarwal: So it’s basically lack of effort in terms of going out there in the market, having that open communication with potential and existing customers and really figuring out what it should be. That is enabled that kind of deterred people to say, hey, let’s take the easy route and we are going to mark it up X percentage on the cost or a certain multiple on the cost and have the pricing set that way.

Per Sjöfors: Yeah, exactly. And the cost plus pricing has one issue here. I mean, imagine that you have a product, say, that cost the company 50 bucks to manufacture. And then in their particular industry, they doubled the manufacturing costs, so the price is going to be 100 bucks. Then imagine further that the company for some, with some effort managed to decrease the manufacturing cost to 40 bucks. Okay, then the price goes down to 80. And what they’ve just done is to shoot themselves in the foot because their margin also went down from 50 bucks to 40 bucks, right? And yeah, and this is some of these things that, you know, it’s so common sense, but every company do, you know, don’t see it that way, you know.

Rohit Agarwal: So tell us what are some of the common mistakes that companies make around pricing?

Per Sjöfors: Well, we talked about the, you know, cost plus is a mistake, that’s for sure. It doesn’t mean that cost is irrelevant, cost is very relevant, but it should not be used for setting price, right? And you wanna make sure that your cost obviously is below your price. And let me tell you another story on this. We recently did a project for a new company coming out with one of these baby seats you have in the back of your car for safety reasons. And this particular product is a very high-end product, really, really premium. It’s more safe than other car seats and so forth. And the company wanted to go to market with price between $1,000 and $1,200 for this. And the typical price for one of these seats are 350 bucks. So very much premium. Now the market were willing to pay up to $500 for the premium features, but not 1000 and not 1200, then the bad news was that manufacturing cost of this device was 550. So, I mean, yes, of course they will sell a few at a thousand dollars, but they won’t sell very many. And that’s where sort of cost plus comes in, right? They wanna make sure that they did the right margin, which is fine. The problem is that landed the price. So there actually sales volume will be a pittance. So cost plus is obviously a mistake. Another mistake is to use sort of margin goals that is often set by the board of a company. We need to have this blended margin, right? Which is another way of talking about, it’s really cost plus again, right? Then if the company have a multitude of products, they say things like, we need to have the same margin on all products, right? No, you don’t. Because each product, will have a buyer with a certain willingness to pay, and another product will have a buyer with another willingness to pay, and the cost of those products and the margin on those products should be different to match that willingness to pay. Another very common mistake is to see a market as homogeneous. And no market is homogeneous. There are always segments of a market that has a higher willingness to buy and a higher willingness to pay. And you need to, you know, a company needs to understand how they should target their, you know, target their go-to-market strategy, really, messaging and so forth towards that market segment that would support higher sales volume at higher, more profitable prices. If we go back to the baby seat, for example, this particular company said, we are gonna focus on those with older cars because they are not as safe. Makes sense, but it’s those with newer cars that are willing to pay higher prices for this device, right? They also said, and we are going to focus on those who have premium cars. They call it the Mercedes crowd, right? No, it is the folks driving Toyotas that are willing to pay higher prices for this baby seat. So they got it all wrong because it was all based on gut feel. No, there was no science here, you know. Or maybe there.

Rohit Agarwal: Or I think it’s interesting because maybe the Mercedes crowd has better cars with automatic stopping and kind of braking and all those kind of things where their perceived value from a super high-end car seat might not be as much. So I think that is kind of the layer two, layer three unpeeling if you will, that needs to be done rather than just saying, okay, somebody’s paying X, you know, higher price for something. So they’re gonna pay higher price for my product as well. Quite interesting. I’m curious though, as we have talked about this case study a couple of times, what ended up being your suggestion to them? Do they have to, because it’s kind of like an impasse, right? Where it seems like 500, 600 is the right premium pricing, but then that’s kind of pretty close to their cost of producing the product itself.

Per Sjöfors: Yeah, what they, I mean, this particular company has spent millions developing this product, right? And what they’re in the process of doing is finding ways of reducing cost. And instead of having a single premium product to have a good, better, best product strategy, so that they can sell something and make a reasonable product down at 500 bucks and then sort of upsell the more premium versions.

Rohit Agarwal: I’m curious there, in terms of the good, better, best. Does the good need to be then closer to 300, which is kind of the general market pricing, and then you ramp it up from there, or the good itself could be 500?

Per Sjöfors: No, the good itself is gonna be around 500. And what the difference in this particular case is that the design is gonna be the same. So it’s gonna have the same safety, but the materials are not gonna be as exclusive as in the more expensive versions.

Rohit Agarwal: Very interesting. What if we talk about any specific industries or type of products or services where pricing is more important than others, or you think it’s kind of the importance is ubiquitous across the industry, other than of course, retail and government that you’ve talked about. We’re talking about other industries that you typically work with. Do you see the importance across the board or is it there also there’s a big difference?

Per Sjöfors: No, I don’t. The pricing is important. Well, we talked about how pricing affects profitability, and this is also oddly enough unbeknownst by too many business leaders that it is profit that drives a company. Right? And why is profit so important? Well, first off, if you don’t have profits, eventually you will run out of cash, right? If you’re like a normal company, you can be unprofitable for a little while, you know? You can go and borrow money and so forth, or you can ask existing investors for more money. There’s some outliers. I mean, companies who’s been unprofitable for a very long time because there’s a pot of gold at the end of it. But that’s unusual. I’m thinking, for example, on Amazon. I think they were unprofitable for 18 years or something like that before they finally decided that, okay, now we’re going to become profitable and eke out a resulting profit of just under 1% of revenue. That’s not a very good margin, right? But the reason profits are important is because it provides the company the resource for more market development, gives the company more resource for product development, and so forth. And let me give you another example, a company we worked with like eight years ago or something like that. There’s a SaaS company in the oil and gas industry. And we found that when we measured willingness to pay to their customers, we found that there were room to increase prices substantially. So the first… First year we said the recommendation is to increase prices with an average 41%. The company had 17,000 customers at that point. And we helped them to defend the price increase. What kind of messages should you use and so forth? We trained the customer facing staff on how to meet any objections and so forth. And the result of this 41% increase was that they didn’t lose a single customer, because it was defended the right way. The company at the time, before we worked with them, were about $12 million. So a fairly small company. And then the following year, we did the same thing, and then we doubled their prices. And now they lost like a dozen or maybe two dozen customers. But the company is now eight years later, they’re about 180 million. And they, you know, because they got so much more resource for product development, for market development, they also had resource enough to buy one of their competitors. Right. So, you know.

Pricing power and the role of differentiation#

Rohit Agarwal: That’s amazing. That’s amazing. Just to think about the sheer size of impact that pricing change had. How often, you mentioned the first year they did 41%, the second year they doubled it, so 100%. How often and how sooner can you do price increases?

Per Sjöfors: Mm-hmm. Yeah. Well, first of all, you should do price increases every year, right, with a few percent. It is not going to make a huge difference the first year, but after five years that compounded two, three percent have made a difference, right? And small price changes like that is custom, the buyers to a company, if you have repeat buyers, are not going to, they’re not going to make any, they’re not going to notice, right? And if nothing else, it’s to keep pace with inflation, right? And how often you should do other price adjustments is really depending on how quickly a market develops, how new competitors comes in, how new technologies affects the product or services that a company may sell, how maybe different government regulations may change, but what buyers are willing to pay. I mean, for example, here in California, recently, there was a new rule here saying that the minimum wage for fast food workers has to increase to 20 bucks an hour. This happened two weeks ago, three weeks ago. And there’s one sort of iconic burger chain here, no names, that I know in the effort to keep their low prices, because they are low priced, keep their low prices, they’ve been reducing the amount of beef in their burgers to keep costs under control. So now should they be forced to decrease the burger patty even more to compensate for that higher minimum wage? It would eliminate beef altogether, right? So they had to increase prices, you know.

Rohit Agarwal: Yeah, shrink-flation of a different kind, I guess. Interesting.

Per Sjöfors: Yeah, all the different kind. Yes. There’s a wasn’t it. I mean, and this goes on in the burger industry for a long time. There was a another iconic advertising for maybe in the 80s or thereabouts, where there are three, I think there are three elderly ladies looking at a burger from from, from a the ad and they said, where’s the beef? So different industries change differently and at different speeds. Obviously the high tech industry is what I think is, moves the fastest. So there you need to, be quick on your feet and make changes to prices fairly frequently. And then there are other industries that work very slowly. I’m doing a lot of stories here, I hope that’s okay. I spoke to the CEO of this company making mechanical micrometers, you know, to measure very fine mechanical tolerances. And he said, we can’t hold prices, we have to discount too much to get the business and so forth. And so I asked him what he thought the reason was. And he said, well, we still consider the new guys on the block. We haven’t fully established ourselves in the industry and so forth. So I asked him, okay, when was the company founded? And he said 1926. You know, that is a slow moving market.

Rohit Agarwal: Certainly. Wow. Quite funny. So there is, I guess, the inherent amongst the ability to increase the price is the pricing power. Right. How much can I increase? Can you tell us, can you define what that really is and how can a company really figure out what kind of pricing power they have in the market?

Per Sjöfors: Well, pricing power was actually, it’s a term that was coined by Warren Buffett. He was interviewed by, I think, the FCIC during the financial crisis 2008. And what he said then is that his main criterion for investing in a company is whether it has pricing power or not. And then he also defined what he meant with pricing power. And he said that pricing power is the ability to increase prices without losing sales volume, right? And so how do you gain pricing power? Well, pricing power always comes from differentiation. If what you’re selling is a commodity, low price, I mean, a commodity is sold on low price only, right? And the more commoditized a product or a service is, the more important a low price is. But if you can differentiate yourself in ways that are meaningful to the buyers, you get some level of pricing power, right? And let me give you another example of this. Couple of years ago, and this is personal example, I decided that I should get one of these blood pressure measurement devices, right? So I went on Amazon and I looked for these devices. And as I was looking, you know, I found a product that was obviously the same, actually it was the same product with two different brands. You know, the pictures were identical, everything about the product was identical, except two things. One of them was like 18 bucks and another was 29 or so, right? And the more expensive one had a much more elaborate description. It was written by a copywriter. It was not a translation from Chinese by Google Translate. And it looked the same, it had another, you know, a different brand. But because of the more elaborate description, it differentiated that product. Now, I was sort of lucky that I just happened to see that there was two of the same product, right? Because, and that doesn’t always happen, right? So, and how much the sales of these two are, I don’t know, right? But some people will obviously appreciate that more elaborate description and buy that product instead because it adds a layer of comfort to the buyer.

Rohit Agarwal: It might also make it feel like the other product, the lower price product, is actually just a replica or a copy of the original one. And may not be, it may be a fake. Who knows? Interesting.

Per Sjöfors: That’s true. Yeah. Well, it’s like all these folks that buy an authentic reel. They go to Bangkok and they buy a real Rolex for 100 bucks from a street vendor. You know, if they’re lucky, it works all the way until they get home.

Rohit Agarwal: Yeah, absolutely. You talked about commoditized product. Is it a good strategy to undercut the price? Can price be a differentiator in itself in a commoditized market?

Per Sjöfors: in a totally commoditized market, no, but there are other things that you can do in a commoditized market to differentiate yourself. You can, for example, have different warranties. You can have different, if we talk about products here, you can have different delivery methods or different delivery times than your competitors. You can obviously have simply better marketing than your competitor and that by itself leads to, and again, everything matters, right? We talked about the importance of that everything matters how you can price. And we talked about pricing mistakes and so forth and how you market definitely give you some level of pricing power if you do it right. It doesn’t necessarily mean that you can charge twice the price. But if it is a true commodity, the profit margins are going to be pretty low to start off with. And again, looking at something as commoditized as gas, right? I mean, that is the commodity of commodities, right? and you have these companies selling fuel. And they try to convince you that just their additive, that nobody knows actually makes any difference, that their additive is a little better than the other guy’s additive. And that they, for that reason, can charge, you know, 5% more, right?

Rohit Agarwal: Yeah, yeah, quite interesting. You mentioned about right price many times. Can you tell us how can a company get to the right price for their products? What is the broad brush process or what is the framework that they could think about to get to the right price?

Per Sjöfors: Well, what company, we’d also talked about mistakes and what companies often do is that they do price testing. But since everything matters when you price, price testing doesn’t work, right? Because imagine that you wanna test six different prices. Imagine that because everything matters, that together with that, you also want to try and see how three different marketing channels affects sales volume and profits. How six different marketing messages in these channels affects how you can charge. You want to maybe try three different sales channels with three different sales methodologies with, and you wanna maybe try to stratify your price in six different ways. And you end up with 15,000 combinations, right? And price testing only works when you look at price as would it live in a vacuum, but it doesn’t, right? And… And again, let me tell you and the audience another story here. This company that came to us and said, we tried to increase prices seven years ago and it backfired badly. Now we need to do it. So now we need to do it the right way. What we found in the study that we did for this company was that if they change their marketing message or how they position themselves in the market, they do sell a commodity, right? If they change that marketing message and positioning, there was room to increase prices. So they changed that. according, you know, following our advice and following our, our consequent pricing advice as well. And in one week, they went from a 200 million to a $240 million company. Because suddenly they could with a different positioning, there was room to increase price.

Finding the right price: pricing research#

Rohit Agarwal: That’s awesome. Super, super impactful. Wow. I mean, 40 million of top line increase in a week. Very nice. In your book, The Price Whisperer, you discussed leveraging consumer perception. Could you share an example of how a change in perception can significantly impact pricing? Can you maybe elaborate on this particular example that you gave where maybe it was positioning that led to a change in perception or another example, can you amplify that for us?

Per Sjöfors: Well, it’s much again is based on how you market yourself. And I mean, in this case I just mentioned, there was no change in the product, right? It was just that the company came up with a value perception that was, how should I say, that better resonated with what people were looking for, right? And what they used to have in this case was a fairly technical value description and a fairly technical description of their products, so to speak. And we changed that to something just very, very onto benefits instead, right? And some companies have managed to create sort of a lure of, that is, I mean, it is, I mean, look at Apple, right? The iPhone is, it’s not. it’s not even the, you know, compared to all the various Korean and Chinese phones out there. It’s technically inferior, right? And yet they manage to charge at least, you know, twice the prices, right? Because they have through years and years of marketing position themselves completely different in the marketplace. And that is what makes a difference in this case. So, and you mentioned the title of my book. The subtitle is actually more important. And the subtitle is “a holistic approach to pricing power.” And it’s that absolutely important understanding that, and I’ve said this several times already, that everything matters when it comes to pricing. Because everything affects how you can price. If you go to market with the wrong message, you’re not going to be able to price as profitably as those who have the right message. If there is not a good product to market fit, you have to lower the price to convince some portion of the market to buy anyway, right? And so forth. So…

Rohit Agarwal: In that case then, those 15,000 tests or permutations still exist, right? When you go in to work with that client who has those 15,000 permutations, what are you telling them? What is the magic that brings down those 15,000 to maybe five or even one? to say, hey, OK, all the other variables are taken care of. We got all the other things right. Now price is something that we want to maybe test. One singular variable.

Per Sjöfors: Well, we don’t ask our clients to test prices at all. I mentioned how I wanted to find a method based on my own experience to make every pricing experiment a success. And that process consists of doing something called pricing research. And pricing research is done online, right? It’s a, you have a questionnaire that goes out to a company’s potential and existing buyers. And in that questionnaire, you have product features, you have different marketing messages, you have different marketing channels. I mean, you ask these people what marketing channels do you prefer? What marketing channels is most important for you? What product features are more important for you than other product features? What sales methodologies and channels are more important for you than others? and so forth, right? And this could also include things like what kind of warranties are you expecting? What kind of delivery times are you expecting? How can all of this be eventually tied together into that holistic view. And then we can accurately predict sales volume and revenue for all these variables. So it’s then possible to say if a company focuses on this particular market segment, whatever that market segment is. And this is often, if it’s B2B, it may be a certain industry, it may be a certain title or whatever. I mean, for example, we worked with companies who had some success in B2B selling to, selling to, selling training services to HR departments, but the HR departments have very low budgets. Well, okay. So they wanted to find a way to sell to the C levels. And they could do that if they were using different messages, right? So, because the C level folks care about different things than the HR people do. So, we can define the customer target, the messages that those want to hear to support more profitable prices, the channels where they want to hear them to support higher prices and more profits, the sales methodologies and the sales channels that also support higher, I mean, we just did a… a little project for a company that sells something as commoditized as, when they do a survey, they put wooden sticks in the ground. This is where we’re gonna dig. And that comes from surveyors. And in this particular case, the company sells these wooden stakes through retailers. 58% of their buyers wanna buy it directly from the manufacturer. So that changes how this company is going to go to market.

Rohit Agarwal: Makes a ton of sense. You have another paradoxical but beautiful quote in your book which reads as “consumer behavior is irrational but predictable.” Does that predictability comes through the survey that you mentioned or did you mean something else?

Per Sjöfors: Absolutely. Well, no, absolutely. It’s it’s people make rational decisions. But they’re predictable because we when you talk to a lot of people, we have the benefit of getting the wisdom of the crowd. Right. And and this has been proven. again and again and again, you know, they’ve done things like you have a big jar, glass jar, filled with beans or something like that. And you ask people, how many beans is it in the jar? And when you talk to enough people. that aggregated result is gonna be, if not spot on, is gonna be very close, right? But there will of course be outliers who are completely out of whack. But, and that’s what make this… the predictability here, right? Because a lot of people have, when you ask enough people the same question, you are going to get an answer that is pretty close to reality.

Rohit Agarwal: I want to quote you again from your book. “Effective pricing strategies are actionable, not just theoretical.” What are some of the actionable steps businesses can take today to improve their pricing strategies?

Per Sjöfors: It’s all about getting knowledge, right? And realizing, we talked about mistakes, realizing that guesses and gut feel and cost plus, or maybe looking at a competitor, or trying to price as a competitor, are flawed strategies, right? And it’s that differentiation that leads to pricing power, meaning that the ability for a company to charge higher prices than competition and still have an acceptable sales volume. Again, let me, another example here. A couple of years ago, we worked with a company that they rent out these steel plates that you run over with your car when there is a trench in the street, right? And this particular company had positioned themselves as a thought leader in this market because they were doing safety training and different kinds of training. they had different training courses for those who were on the street actually working with these steel plates. So the result of that was that they could charge roughly 20-25 percent higher prices than competition and they had about a 65 percent market share. Because they had managed to differentiate themselves. And they were not selling on low price. They were selling, for example,I now know more about steel plates than I ever thought I would know. But in this case, they had, when they delivered these steel plates to a work site on some street somewhere, they had two people in the truck. The competitor had one person. And having two people in the truck meant that one guy could direct the driver to put the plates exactly where they should be. Right? Very simple, but that was a differentiation that those who buys or sort of rent those steel plates, it makes a difference for them.

Rohit Agarwal: It’s quite interesting, I guess. As a first thing, leaders can just unlock their minds and say, there is something that we can do to better our price. I think that acceptability is perhaps the first thing to really start that journey. Because I would imagine it’s not one and done, as you have mentioned in your examples as well. You should be able to do it multiple times over and over. At least should be doing it yearly to match the inflation, if nothing more. And so it’s a continuous evolution. It’s a journey that you need to get on. Very cool.

Per Sjöfors: Yeah, exactly. think there’s another aspect of this and that is that we are all in business. Anybody who runs a business are in business because we are delivering some value to our clients. If we don’t deliver value, there’s not gonna be any buyers and we don’t have a business. So by pricing, for more profit means that you can have maybe more product development, means that you can have more market development, means that you can serve your customers better, means you can deliver more value to your customers. Right? So, so, I mean there is, you know, there’s some, some people who say that profits are not good, or profits should not be as high as they are. And certainly here in the States, there’s an ongoing discussion about the drug prices and consequent profits, you know? And why can you sell the same drug in Canada for 40% of the price that is sold here in the US, right? But it’s that profits that is being used for more drug development. Right. So, it’s a double-edged sword. You want those profits, but you also need to make sure that you reinvest them in the company and not just keep them in the bank, so to speak, or just distributed as, you know, as shareholder distribution.

Rohit Agarwal: You mentioned price in and of itself sets an expectation of quality and benefit. Help us unpack that relationship between price and quality. In your recent example on pharma, certainly completely new development, very high price, people seek those drugs and affiliate a certain quality or reduction in pain that is going to have through the use of those drugs. There may be genetics available as well after a few years of their introduction, but people still go to those branded drugs than genetics per se. So help us understand that.

Per Sjöfors: Yes. Yeah, there is a lot of what we’re talking about here in terms of what drives people’s decision making is part of an academic field called behavioral economics. And there is three Nobel Prize winners who, we’re standing on the shoulders of those Nobel Prize winners and a few other people who really have understood the buying behavior, right? And that’s why everything matters when it comes to price, because we have a buying behavior that is not rational. So, a low price, a too low price sets of inferior quality. And I know we have all been there. We, you know, we hold something in our hands, either physically or metaphysically. And we say to ourselves, I kind of want to buy this, but at this price, it can’t be any good, right? So a too low price sets an expectation of inferior quality. But then also the result of that purchase once you’ve done it is also affected by the price. So, since you talked about drugs, there’s been some academic research done where they look at… or they offer to sell a painkiller for five cents. And people who bought that painkiller for five cents did not find it very effective. The same painkiller sold for 50 cents turned out to be much more effective, right? And it’s, so expectation bias also affects, you know, how happy you are with the purchase. And again, another story on this is that I’m a bit of an audiophile, so I follow a little bit of what happened in the audiophile community. And you have these people who, you know, you connect your computer with something, you know, a DAC using a USB cable, right? So anybody who knows a little bit about technology knows that what’s happening in that USB cable are bits of data going back and forth, right? But you can buy an audiophile grade USB cable, right? For 5,000 bucks, right? For a three feet cable. And those who buys that… God-awful expensive USB cable clearly hear a difference. There’s no way there can be a difference because either those bits goes back and forth or they don’t. There is no middle ground, right? But they can hear a difference. And in fact, a few years back, because you’re also within the audiophile community, you’re supposed to have this sort of heavy duty power cables because normal power cables doesn’t work, right? So I was involved in promoting a kind of product to trade shows, this was sort of a side gig I had, to high-end audio trade shows and people were complaining that we were using just normal, cheap audio sort of power cables, $5 power cables. That wasn’t good enough, because you can hear that it wasn’t good enough, right? So next year, what we did was that we took those cheap power cables and we… we put a plastic hose around them and bought some sort of industrial grade actual connectors, right? And nobody complained about the cheap power cables anymore. And they could not hear that the deficiencies that they heard last year because of that.

Price as a signal of quality#

Rohit Agarwal: Yeah, yeah, I totally get it. I think alcohol, wine, like that market is also similarly placed where you couldn’t really differentiate maybe, you know, a $10 wine versus $100 wine most of the time.

Per Sjöfors: Well, so here’s a story for you on that. Actually two stories. First off, they have put people in functional MRIs and they’ve given them cheap wine and said it’s expensive. And they can see how the pleasure centers in the brain lit up. And they’ve done the opposite. They give them expensive wine, they said it was cheap and the pleasure centers didn’t lit up. Right. And so that’s one thing. The other is that I had conversations a couple of years ago with a company who has developed a very, very precise chemical analysis tool for wine. Right. So they can… The idea behind this one was that if you like one wine with a certain profile based on the chemicals, you should like another wine with a similar profile. And what they found was that some of the larger wineries, they were selling the same wine in different bottles and different brands and different prices, right?

Rohit Agarwal: My god, oh my god, uh… Yeah, thank god someone figured it out. Hahahaha.

Per Sjöfors: So, but this goes back to differentiation, right? And expectations. And you buy something that you think you’re stretching your budgets for. And because you’re stretching your budget, you expect a better result and you get a better result. I mean, I talked about the, you know, the guys, because this is only guys, spending all that money on this audio file USB cable, they are happy customers, right? Because they got what they wanted, because they paid so much money for this particular account. So higher prices that sets an expectation of a better outcome leads to higher customer satisfaction. Right? Same with the iPhone. Right? Apple have higher customer satisfaction than the other phone makers. Buy a lot at higher prices. Is the product better? I don’t know. I’m an iPhone user, so I don’t know. But I don’t have personal experience with Android.

Rohit Agarwal: Makes sense. You mentioned price is not a function. It’s a holistic approach that encompasses the entire company. If this is the case, who should have the ownership around pricing products optimally? Because in general, if you think about companies, institutions, unless there’s a dedicated person responsible, usually consistent result doesn’t really get delivered.

Per Sjöfors: Yeah, no, there should be a pricing function in a company, you know, and that pricing function is responsible for doing more than just pricing because again, because everything matters. How you present your prices matters, right? How the messaging is done matters. How the, what product features and functions are being promoted matters. What product features and functions are being developed matters. So everything matters. So that pricing function needs to, needs to, first of all, it should be really ideally separate from other functions and it should be a function, you know, below the CEO. And it needs to be able to not only set prices by itself, but just making sure that marketing doing the right marketing things, that product development are doing the right product development choices based on the features and functions that would support more profits than other features and functions. And need to make sure that how a company, like I said, how prices are being presented makes a huge difference in how you comprise. And so that person or that group of persons need to be able to access a lot of what the company does. Doesn’t mean that they should do the marketing messages, they just need to make sure that the right themes are being used, right? Or the same with product, they shouldn’t do the product features, but they should say these are the product features we should do, you know, in a little high level maybe.

Rohit Agarwal: That sounds a lot like strategy function, right?

Per Sjöfors: Oh, absolutely. Absolutely. Yeah.

Building the pricing function#

Rohit Agarwal: Should those, should strategy function and try sync function be different or they can be the same function doing two jobs?

Per Sjöfors: That’s a very interesting, I haven’t really thought about that. That’s a very interesting conclusion. And traditionally, the pricing function when there is a pricing function in a company, does not do strategy. Right. But it makes total sense for strategy and pricing to be combined or at least joined by the hip, right? And the, most of current pricing functions, if you like, are there to accurately or as accurately as possible calculate the cost of a product or a service so that they can slap on that cost plus margin that the company have decided to use. Not all of them are like that, but many of them are like that.

Rohit Agarwal: Before the recording, we’ve talked about companies having multiple thousands of people in the pricing function, right? Few e-commerce retailers and so on, right? Where they’re literally pricing each skew. And so those are, I guess, the kind of people who are perhaps trying to figure out cost plus kind of a model or something around that. advise the company on standing up a pricing function ground up. When do you think should they hire their first in-house pricing expert?

Per Sjöfors: Well, really when it’s a full-time job, and so that then depends on how many products or services they have, how often they change those, how often the product or services, yeah, how often they change, how quickly they’re growing and so forth. But we talked about one thing that I think is really important that I mentioned the importance on how you present prices. And that goes into something called price anchoring. And as humans, we cannot not compare numbers. When we see two numbers, we always compare them. And if, what that means for pricing is that when you present a price to a potential buyer, they should, that potential buyer, should have been exposed to a number, preferably a price, before you present the price of what you wanna sell. And this is called price anchoring, because if you see a really high price first, whatever then you wanna buy or what the seller wanna sell at a lower price will appear more affordable.

Price anchoring and OKRs for pricing teams#

Rohit Agarwal: That’s such an interesting thought and perhaps so counterintuitive to everything we saw on all of the pricing pages, at least certainly across all software companies, where the pricing starts as whatever light or basic to pro to enterprise, and the price is actually going up.

Per Sjöfors: Yeah, they should be the other way around. Go and look at Mailchimp, for example, right? They have the first price you see when you go to Mailchimp’s pricing page is a price of, I think, $299, right? For some kind of enterprise something. The next option is 14.95, right? And the next option again is 9.99, right? So that 299 sits there just for anchoring purposes. Of course, there may be a few people that buys it, but not very many. We talked about Apple, the most brilliant use of price anchoring I’ve ever seen was when Apple came out with the, the watch. What was that? Five years ago, six years ago? So they had the regular Apple watch at 349. Then they had a identical electronics in a golden case for 17,000. And of course, every journalist who covered this launch of that product, and every potential buyers who followed those journalists were exposed to the 17,000 versus 349. And that 349 became more and more and more affordable. So this really works. So a friend of mine who runs a restaurant here in Los Angeles and they were on the pricey side. It’s a Thai restaurant and they’re normally quite low in prices. So, and he said, I want to increase prices. So I told him, on your menu, because the menu is a price list, right? On the menu, on the top left corner, put something god-awful expensive, right? And he said, well, we have this fish that is unique to us and, you know, we can use that as a sort of special for this restaurant put at the top left corner, right? And then he increased his prices with 20% or something like that, right? In this new menu. And as I followed up with him, he said sales volume are up. Right. And, you know, so this really works. It can also work in a different way. And again, talking about the how you present prices in general. I had a discussion with a fairly large public company whose name I should not say. But they came to me and said, we’ve never been profitable. And this is like a $12 billion company, right? We’ve never been profitable. And our investors now tells us that they are not willing to support us with any more money. So we have to become profitable. And every time we try to increase our prices, we get a backlash. Sales volume just drops. Can you help us? And I just looked at their pricing page on their website and it was one of these long pages where you scrolled and you scrolled and you scrolled and eventually you got to the price. And as I scrolled, what was repeated all the time was we are cheap, we are the lowest in the industry, we are dirt cheap, you can’t find a better price. And there was endorsement from people saying that, we use this company because the prices are so low, yada yada. So, when you finally got to the price, your expectation was that it would be very, very low. So no matter what the price was, it still was too high, right? So people didn’t buy. Right? So I told this guy, just remove all this stuff about your low prices and talk about the benefits instead, right? Which they consequently did. And I followed up with him a few months later and he said, well, we changed our website. We took away all the talk about how low our prices are. And we doubled our prices and we’re now profitable because we haven’t seen a drop in sales volume. Right. So how you present prices always makes a huge difference.

Rohit Agarwal: Awesome. Great, great anecdote, great story. What kind of OKRs, Per, should the pricing team have? Should they just carry a certain dollar amount or a certain percentage of growth? What should be their OKR? How should the CEO judge?

Per Sjöfors: Well, it really depends on the… how should I say the objectives of the company, the overall objectives, you know? You know, some companies are hell bent for market share, you know, and it’s interesting that you mention OKRs because I don’t know if you’ve, I got exposed to it as opposed to KPIs, right? I got exposed to it by being recommended to read John Doerr’s book called Measure What Matters, right? And one of the things that he says in the book is very interesting. He talked about YouTube. And they came up with the OKR for them was number of minutes watched as opposed to income. Right. And then they said, if we can reach, and I think their target was a billion minutes a day. And it’s quite a bit. And because then income takes care of itself. Right. So I think, for the pricing team, if there should be OKRs, it should be based on profitability. Because profitability is at the end of the day, what drives the company forward, right?

The future of pricing and career advice#

Rohit Agarwal: Very cool. Let’s talk about future of pricing. With technology evolving, you mentioned you have an AI product that you use in your work. How do you see AI, data analytics, other technologies kind of really shaping the future of pricing?

Per Sjöfors: So there is within the pricing community, if you like. There’s a lot of people who think that dynamic pricing is going to be the future of pricing. And what dynamic pricing means that the price are changing with product availability and demand, right? High demand, higher prices, low product availability, higher prices. And the opposite, you know? Low prices if there are lots of availability and low demand. Dynamic pricing was first introduced as yield management by American Airlines, I think 1986. And the story goes that American Airlines CEO did a presentation at a shareholder meeting in 1986. And he said, we are going to implement this yield management dynamic pricing. And it’s the most important invention for the airline industry since the jet engine. Right. So they did. Six months later, they filed for bankruptcy. Their revenue increased with one and a half billion. Their profit just completely disappeared. And that was because it didn’t take very long for two people sitting next to each other in these uncomfortable cramped seats to find that the guy who booked a ticket two weeks earlier, paid less than half the price, right? So next time somebody bought a ticket, they bought it two weeks earlier, right? And now of course, and dynamic pricing eventually led every single American airline to go bust except Southwest Airlines, right? Now this is more under control, so this doesn’t happen as much. But there is belief that dynamic pricing is always going to be the golden goose, if you like, and it’s not. There’s been recent talk for some of the fast food companies to have dynamic pricing, right? And one of them tried three or four years ago and it backfired badly because buyers want predictability. They don’t wanna go to a restaurant and see, today the burger is 349 and yesterday it was 298. Then they probably buy the burger but they won’t come back, right? So I don’t believe that dynamic pricing is gonna be anything that is going to be what some people think it’s going to be. Yeah, it’s fine for airlines and hotels and so forth. Another thing that I think is happening is that among cars, right? Now you can subscribe to features, right? And my, and that just, there’s a backlash here. I mean, I’m reading that people hate it, right? Why should I have to pay 15 bucks a month to the car vendor in order to have this feature on my infotainment system? And, and, but then again, I’ve been wrong before. So the, it’s not something that I personally would do. I mean, my, my brother has a fairly new, well, brand new, actually, was a few months old Mercedes. And he was supposed to again, pay 15 bucks a month to have a car play, you know, Apple car play functioning in his, in his, in his car. So he said, no way, you know, so I won’t buy it. Right. He still bought the car though, which is another story, which I may not have done had I been presented with that particular choice, because it just rubs me the wrong way around.

Rohit Agarwal: Makes sense. Pricing seems to be a very multifaceted function, if you will. There is no certain course or a stream or a qualification that you can go and get from an institute that makes you ready to emerge as a leader ultimately in your professional career in this space, right? For anyone who is interested in pricing, what kind of traits or skills would you recommend those individuals to develop so that they can continue to emerge as leaders in their field?

Per Sjöfors: Well, if you look at what is really necessary, and we talked about, you can look at pricing the way that many companies look at pricing, which is really just a function of making sure they’re not selling at a loss. Right? That is something that you have a business analyst or an Excel jock do. But pricing, when you look at pricing from the perspective of driving a company forward, I think it’s necessary to have actual business experience. You have to understand how a company works from a senior management perspective. And you have to understand how people work. Because buyers are people. And all purchase decisions are made emotional by the limbic system. And if that purchase decision is fed up to the prefrontal cortex and we put rationale around it, right? But the decision is already made. We just need that for ourselves because we’re supposed to be rational people, but we’re not, you know? And we make the wrong purchase decisions, you know? A purchase decision is good enough. It’s rarely optimal. We talked about that several times here, how a company… can influence how the buyer makes that decision, right? And this is not a bad thing, because you influence your buyer to make a decision leading to a happier customer. And so I think really having an understanding of business and what I said, behavioral economics is if you ever want to really understand how people make decisions and buying decisions obviously are important.