SPEAKER_00 0:16

Okay, last week we spoke about coming up with a brand promise to really it really resonates with your target audience. We used examples like Bunning's Lower Prices Are Just the Beginning or When It Absolutely Has to Be There Overnight, which was FedEx. So obviously, to try and cut through with a really strong brand promise is ideal. But this week we are going to talk about pricing. And really, price is probably the most powerful lever you have when it comes to driving profit, but probably one of the things that owners least think about. And if you think about it, there's only really three ways that you can drive profit. You can cut costs. Look, the scope to cut costs can be limited in many businesses, especially cutting costs without actually affecting the value that you're delivering a customer. And there's only so much you can cut, right? You can never get it down to zero. Of course, you can grow volume and so get greater scale and leverage that way off fixed costs if possible. And the third is changing price. And really, this is the best lever ultimately because if your cost base remains static and you raise prices, then really any increase in price drops straight to the bottom line in terms of additional profitability. So in a lower margin business, a 10% increase in price could be a doubling of profit, for instance. But as I said, most business owners really don't spend enough time thinking about it, analyzing it, and really coming up with a coherent pricing strategy that is coherent with the rest of the business in terms of their reach strategy and the engine and so forth. So today we're going to talk about two different kinds of businesses: price makers, you know, those that really have discretion on being able to deliver brand value and charge for it. And then price takers, and that the that cohort largely doesn't have a lot of ability to change pricing, but there's some other levers that they can pull to, you know, generate better profitability and better profit growth. So, Amina, let's start there. What distinguishes, you know, how how do you know whether you're a price taker or price maker? I'm gonna get a bit nerdy here and say you actually need to build a map.

SPEAKER_01 2:29

And obviously, with a map, you have two axes you have price on the vertical axis and perceived value on the horizontal axis. And what you'll do is you'll actually plot every competitor in that industry in the same industry that you're gonna market in, so you can identify where they lie in terms of where the consumer sees value and where they see their price. And then you'll draw a line basically across these various dots and in the middle of them that is. And what we call that line is the value equivalence line. And that line is what the market is telling you what they think is the fair price for or the perceived value for the product or service that you're actually providing. And what the pattern of dots actually tells you is matters more than any single competitor's position. So if you're looking at a single competitor in terms of their isolated proposition, then it doesn't give you enough information around the industry or the market itself. If everyone's clustered together tightly on that map, then that means it's a commoditized market. Customers don't see much difference between what you're offering and what the price is actually is. So you're really not a price maker, you're a price taker. Whereas if the dots are spread wide, that's quite the opposite signal. The market actually supports, I was telling you, it supports certain niches or premium pricing is actually achievable for the right value that you can actually provide. And then there's the white space. So this is the gaps where the map in the map where nobody's playing. And usually that means an opportunity that you could really cease. So an opportunity where there's a market cohort that's either being underserviced or that the price to value ratio is not there where you can actually build a business case around it. So these maps really work as a diagnostic tool. If your dot sorry sits in a sort of in that middle of that cluster, it's a warning that you're not on neutral ground. You're really going to be a price maker, you're going to be in a highly competitive market where differentiation is actually the hardest and price pressure is actually the highest. So I'll probably use an example to illustrate this. Koala Living, so you know, an Australian brand, it's a good illustration of finding that white space. They were a mattress retailer historically, and that's pretty sort of dense market where you'll generally see. I can think of every every time I drive a mattress retailer, they've always got 70% off this weekend only, that those signs never get old, and it's always on every weekend. And it's always it's always a highly competitive market because people don't see value in paying a premium price for different types of mattresses or understanding the different types of quality of mattresses. Everyone sits there in a showroom for probably 90 seconds, test a few mattresses and pick one out. And they would largely base this on price and comfort for one. Whereas Koalet, what they did is they not only did mattresses, but they built a whole furniture store around it. Not only this, they actually provided you a test before you buy, a 120-night trial, well beyond what any other retailer was actually offering. And they had a great marketing campaign that really reached a lot of consumers in that if you remember that single viral video of a of a wine glass sitting on a mattress and someone sit getting on the other side of the mattress and the wine glass wouldn't spill. And it really resonated with the right people. So the people had the certainty around the quality of the product as well as the price, and they could trial it before they actually buy it for 129. It really resonated off with a lot of people, so they weren't naturally competing on price anymore. So effectively they created a USP, a unique selling proposition where they removed the risk from the consumer, they removed the uncertainty around the mattress and gave them a free trial, or not a free trial, a trial for 120 days before they can actually return the mattress. So what that essentially did is shift the risk onto them. So the consumer was willing to pay a premium for their mattress, knowing that they could always return it if they weren't actually happy with it. So, Stuart, say someone actually does this exercise, they map out their competitors and they realize that in that price taker sort of environment, what should they actually do about it?

SPEAKER_00 6:21

Well, it's not the end of the world, Mina. It just means you need to take a slightly different approach. I mean, I'd much rather be in a price maker segment, you know, like the mattress provider, thinking about how you can make a better product. Seth Godin says that all the time the best marketing you can do is make a better product. And that's absolutely true whether you're a price taker or price maker. So if you are a price taker, there's only really two levers you can pull. The first one is deliver more actual or perceived value. So it goes back to that Seth Godin advice by making a better product. Because ultimately, if you can't compete on price, if price is sort of homogenous across the whole industry or product category, then the only thing you can really compete on is value. And if you're able to deliver more value for the same price than your competitors, of course, you're going to be inundated. The second thing is build a stronger engine. So that is really deliver the product at a lower price, a lower cost, I should say, than your competitors. And that way you can squeeze a little bit more margin out. I've got a couple of examples, both are in banking that to sort of demonstrate this. The first one is about Judobank. So Judobank was the first bank to list on the ASX for about 30 years. They listed it back in 2021. It's not a good listing story, you know, because I listed it about $2.25, $26, whatever. And now they're trading at about a dollar. So you'd say, well, that's not a great story. But actually, profit and cash flow has increased. That's more to do with what the, you know, how the market looks at them, I think. But the reality was that judo was started by two former NAB executives, understanding that there's a lot of price competition in the business banking market. And so prices are relatively homogenous. Like there's not a huge differential unless you get special industry specialization. So some banks do specialize in some industries. And in that situation, compared to a bank that's not specializing, sometimes you do get a pricing differential. But anyway, their idea was, you know, make the credit easier to deal with, have better credit policies, and then also bring back relationship managers. And so you know they're worth over a billion dollars in terms of market cap. They were two billion dollars. So they built a substantial enterprise really off the back of delivering more value or a better product. Similarly, mortgage broking is very similar to this as well. So the mortgage broking industry started about 20 years ago. And as you can imagine, a home loan's a home loan is a home loan. Like there's not much differential, particularly these days. There was probably more product differences 20 years ago compared to these days. And pricing for home loans really doesn't vary that much. It's even tighter in business banking. So, really, the only thing a broker can do, a mortgage broker can do, because let's assume that you get a good mortgage broker, and most of them are going to negotiate on interest rate, and most of them are going to have the software to, you know, compare products and credit policy and these sorts of things. So, what else can a mortgage broker do? Well, the only thing they can do is really add more value than the next mortgage broker. So, you know, one of the best things, particularly for a broker that's specialized in investment loans or helping their clients build wealth, is really focusing on helping that client structure loan correctly, work with their tax advisor to make sure they're maximizing the tax benefits, make sure they buy a good property, there's ultimately going to build wealth, do these sorts of things. That's where they can add value because they're a price taker. Of course, on the other side, they can make their systems and processes as smooth as possible. So if I can settle, set up and settle alone, you know, with only spending a couple hours of my time, that gives me greater leverage as well. So they're really the two levers that we can pull if we're in the price taker category, really add more value or deliver the product or service at a lower cost to me. But mean a price is more than just what's going to fall out of a profit and loss statement. I know that you're not going to like me saying that, but it does tell a story beyond profit and loss, doesn't it?

SPEAKER_01 10:15

Yeah, that's right, it's true. Because in the absence of any reliable signal, so you haven't used or bought the product before or service, price becomes really the signal. It's not irrational. People genuinely do that. And it cuts really both ways. If you price yourself too low, the market sort of automatically thinks that you're of lower quality and the underlying work will be shy of excellence. So think about I I like to always think when I'm scrolling on Amazon, for example, and there's multiple hundreds of products of the same type, and you're almost certain that it's almost all out of the same factory or supplier, but there's varying price points. And I I naturally think the highest price is the one that's going to be the best quality. Even though they all look the same, do the same thing, and so forth. It's a natural human thing. So you price yourself high without anything backing it up, you sort of get exposed. You're sort of overselling yourself and under delivering. Now, I'll probably use an example for this ASOP. You know, we all know ASOP, the sort of expensive skincare brand that we're all like. It was founded actually Melbourne in 1987, so another Australian brand. And it was known for its premium pricing on skincare. But they really had a disciplined approach in the reach and value strategy. They refused to do one thing, and that one thing was no traditional advertising and no discount sales ever. You could never buy a skincare product from them on sale. And that refusal became part of the message. It's a brand that never needed to put themselves on sale. It's a brand that basically never really had any sort of products that become discontinued or obsolete or go out of date because they've always got that demand. And that brand actually sold in 2023 to L'Oreal for two and a half billion US dollars. It's actually L'Oreal's single largest transaction in history. So that brand, what that brand did was tell a story around quality, price, and that pricing discipline actually took that business to that next stage. So what I'm trying to really get to here is that price isn't just what you charge for your work or product. It's the first piece of evidence the customer gets before they've actually seen the actual work. So when you start out a business, it's not uncommon for you to feel the need to actually discount your product or service just so you can get some runs on the board and volume through the door. But by doing so, you set an expectation. You really need to understand what target market you are trying to achieve and where you're going to price yourself in that market. Now, Stuart, I know this one's probably a bit close to home for you because professional services live or die on this exact dynamic. And we've seen this whole terminology around value pricing, but where does that go wrong?

SPEAKER_00 12:43

Well, I mean, there's this old parable, and maybe people have heard about it. It's been told a few times. I don't really know if it's a true story, but anyway, the story goes something along the lines of this. So a huge generator broke down in the Ford factory when Henry Ford was running the business, but none of the Ford engineers knew how to fix it. So they called this engineer called Steinmetz. And apparently he was a legendary electrical engineer. Anyway, he spent a day or two just listening, measuring, making notes, not doing a whole lot. And then he eventually climbs up with a piece of chalk and marks a small X and says to the engineers, remove 16 turns of wire from this coil or whatever it might be. Anyway, they did it and it worked again. Ford received an invoice then for $10,000. This is a long time ago. $10,000 was a lot of money. Anyway, Henry Ford's asked for a breakdown, and so the breakdown comes back with $1 for a chalk mark and $9,999 for knowing where to put the chalk mark. Anyway, and this parable's often used as a sort of introductory to pricing for value. But you know, the problem is when does pricing for value stop looking like pricing for value versus pricing for someone else's success? Like, yes, I've spent 20 years, 25 years, probably more than actually 30 years, honing my craft in my career as an accountant, financial advisor, mortgage broker, and so forth? Yes, I've done that. And it's the result of that experience and knowledge that I've accumulated that I'm able to impart today. But to what extent, like even if that experience allows me to say $50,000 for a client, does that mean if I charge them $20,000 for that three minutes of work, does that feel the right, is that charging for value or is that really pricing in the person, the client's success? And you know, there's that saying it's a bit crude, but you know, you can shear a sheep many times, but skin them only once. And I totally believe I think pricing has to be a fair exchange of value. And you might be able to make an argument in a spreadsheet to say, well, if I saved you $50,000, then without me, you might not have saved that $50,000. So surely you can afford to pay me $20,000. There's a logical argument with that in isolation, in isolation with that one transaction. But to what extent does that then deliver trust? What extent does that build brand value? And how likely will that client come back to you in the future or customer come back to you in the future? And how have you positioned yourself as a business person, as a brand, as a as a business in a in of itself? You know, I would argue that it you can it takes many years to build trust and it only takes minutes to destroy it, of course. That's not my argument, that's really everyone's argument that I acknowledge. But with a pricing structure that's so selfish, I think you could argue it's selfish. I think it actually ends up destroying value. So in one transaction, yes, it might be great, but ultimately you've got to be able to deliver a fair exchange of value. And I think if you've put yourself into a position where you've got a unique process, a new unique product, a unique solution, much like the Henry Ford example, you should be able to charge a premium for your time or you know, for your expertise. But I don't think that premium should necessarily be linked to the customer's output. Of course, I think from a pricing perspective and from a business strategy perspective, for every single business on planet Earth, the goal should always be to deliver a lot more value than what you charge. And I think that's an overarching sort of theme. And we saw this sort of play out from a trust perspective in an Australian example with Uber. So anyone that remembers the Link Cafe siege that happened in the Sydney CBD, that was back in 2014, December 2014. What happened was Uber's automatic surprising algorithm kicked in. So obviously the siege happened, everyone wanted to get out of the city, everyone called an Uber. And what happened is the pricing for those Uber rides was like four times what it used to be. And it was a really bad thing for the brand because they seemed like they were profiteering from an event that was horrible and disturbed a lot of people. And ultimately, Uber had to come out, apologize, refund everyone that they charged, and issued a public apology, was then in damage control. And the damage to the brand as a result of that situation was worth a lot more than you know what they were able to charge in additional fees just for that small period of time, which they ultimately then refunded. So when designing a profit strategy and a profit methodology, which we're going to talk about next week, I think that the fairness has to come into it. And I don't think you can blindly justify a price just purely because of the outcome for the customer. I think it's still got to have a relationship with the cost to deliver that advice and it's got to make sense to the customer as well. And ultimately, a good pricing strategy builds trust and builds rapport and builds brand value and it doesn't destroy it. Okay, Mina, so maybe you can help us close it out. And what can we do, Hatt? Before we go and think about our pricing strategy, what's a little bit of homework for our listeners today?

SPEAKER_01 17:55

So, first thing you got to do, Stuart, is obviously understand whether you're a price maker or a price taker. So if you're a price maker, like in the case of koala, what can you do? What's your unique selling proposition where you can actually price yourself higher than what the rest of the market is actually offering? So think about, you know, how do we remove risk from the consumer like Koala did? How do we improve the quality of a highly commoditized market so that we've actually got something more to offer and uh people or your consumers actually see that value? Or if you are conceding to be in that sort of price taker environment, what are you doing to distinguish yourself from the rest of the competitors out there? So, like Stuart mentioned in the mortgage brokering example, you need to actually be able to provide more value. So, for example, in that example, we refer to you know providing more value in terms of how to build well, you know, a lot of mortgage brokers, for example, don't even know how to structure loans to be the most tax effective. Or if you are in a product-based industry that is highly commoditized, you need to think about what you can do to reduce that risk. So, again, back to the Koala example, what after sales services are you providing? What guarantees or warranties are you providing? Again, what we're trying to really hone in on here is how do we drive more volume by leveraging your cost base of that product or service that you're actually delivering? So I guess it really starts with what we said from the start. You need to plot yourself on that value map. And you really need to be honest with yourself because if you're just too optimistic, then you're not doing yourself any favors. If you really land in that dense middle, admit it and stop pricing yourself as though you're trying to provide something that your competitors aren't. Understand what you can, where that value gap lies and what you can actually offer. If you are a genuine price taker, focus on your value or your delivery. So the engine component of the divert flywheel. Don't focus on both at once, no, but and also don't focus on neither. You need to wait and understand what you can actually drive in either one of those components to yield the greatest result for your business. So, what you could do is go back over your last five deals and ask yourself one question. Honestly, did your price signal what you wanted it to signal, or did it quietly undercut your own credibility before the work or the product was actually even sold? All right, that's it for this week. Now that you know whether you're price maker or price taker, hopefully, and you've stress tested the value story sitting underneath your price. Next week we'll actually start talking about pricing models and how to price your actual product or service. So until next week, bye for now.