Today’s guest on the Pricing Heroes podcast is Dr. Danilo Zatta. The Financial Times has described Dan as one of the “world’s leading pricing minds.” For more than 20 years, he has been advising corporations and private equity investors across industries and geographies about commercial excellence, monetization and profitable growth.
Dan is also the author of more than 20 books, including, an international best seller that’s been translated into 10+ languages, The Pricing Model Revolution: How Pricing Will Change the Way We Sell and Buy on and Offline and, his most recent work, The 10 Rules of Highly Effective Pricing: How to Transform Your Price Management to Boost Profits.
What is it that fascinates you about pricing?
Pricing is indeed really fascinating, for multiple reasons.
First pricing is of key importance. It is the fastest and strongest profit lever: with inflation, volatile raw material prices and changing customers willingness to pay it is also on the CEO agenda of most companies
Second, it is great that with psychological pricing you can influence customers’ choices. One example is that you can steer customer preferences with psychological pricing. Research around behavioral science even won the Nobel prize and a lot of it can be applied to pricing.
See the example of anchor prices. In this case you introduce a very high reference price which creates the impression that other prices are more convenient.
Imagine you sell two wine bottles in a supermarket and normal customers come and shop. With normal customers I mean no wine experts. One bottle costs 5 euros and the other 3 euros. Empirical studies show that 80% of the shoppers will buy the cheaper wine to avoid wrong price decisions and only 20% will buy the bottle for 5 euros.
If you want to sell more of the more expensive wine without reducing the price or without costly promotions what you can do is to use psychological pricing: you just introduce an anchor price. This means next to the bottles for 5 and 3 euros you now offer one for 10 euros. Like this the situation changes: customers will probably not buy the most expensive bottle but will think that a bottle for 3 euros is too cheap or not good enough. Now 50% of the shopper buy the bottle for 5 euros, 10% the one for 10 and 40% the one for 3 euros. The bottle that before was chosen by 20% of the shoppers now sells more than twice as much.
This is the magic that pricing can do.
How effective is psychological pricing in facilitating choice, and are recent advancements in technology, such as AI, having an impact on its efficacy?
Behavioral psychology can be very effective and recent advancements in technology such as AI will help make it even more effective. Already today there are a lot of articles written by practitioners and academia on the various ways in which behavioral pricing also called psychological pricing helps for example guiding customer preferences.
I find this topic fascinating.
In your own practice, what pricing methods or topics are you currently focusing on?
I am currently working for several corporations and PE investors across industries and geographies, both B2C and B2B on TopLine transformations.
Typical projects are pricing transformations e.g. from cost plus pricing to value based pricing. Or the migration from manual price management to a modern pricing solution like the ones offered by Competera to better capture willingness to pay and increase profitability.
Then also changing pricing models and introducing modern monetization is a key aspect to be successful in the current very dynamic market context.
Tell us about your best selling book, The Pricing Model Revolution: How Pricing Will Change the Way We Sell and Buy on and Offline.
The central idea is to understand the needs of the client and how a pricing model can overcome purchasing barriers to satisfy a need in a profitable way. This requires a clear understanding of customer needs and what they value.
The book illustrates how to create a sustainable competitive advantage via innovative pricing models. It shows how in a high number of industries the old transactional price model is replaced by more innovative price models.
In the old transactional world you sold a product saying ‘give me x euros and I sell you and transfer to you the property of this good’.
One example is the automotive industry: in the past you would pay x euros to buy a car and then you would get and own it. Today many car producers do not sell you the car any longer: Volvo for example intends to sell more than 50% of the cars via a subscription, where clients just use the car without owning it. Like this Volvo owns the car and the relationship with the client and can upsell and cross sell along all the customer life cycle more cars and services. This monetization model is superior to the transactional one exactly for these reasons.
Nio, another car producer, is not even selling the cars any longer in Europe: you can only have them via a subscription model.
Another example is a comedy theater: imagine you sell fun comedies. You sell the entrance to the theater for 35 euros. Spectators arrive at the theater, pay the entrance price, and then enjoy the comedy.
Suddenly taxes on theater prices are increased. Also your prices increase. Spectators stay away – you massively lose revenues. You start generating losses.
You risk going out of business.
But the quality of your comedies did not change. They still provide a lot of value as they entertain spectators who laugh and enjoy the shows.
Your problem is the price model.
So the question is: how can you change your price model to monetize the value delivered and become profitable again.
Here the solution found by this company: Pay per laugh (Watch video on YouTube).
Why is it important to think deeply about pricing models now?
The reason is that our clients’ needs are changing and with them we need to be prepared to better capture the value that they perceive.
In some cases not all your clients need to be addressed with new price models, but maybe for some segments new price models can become a decisive source of competitive advantage.
Here is one example.
Imagine you are the CEO of a premium producer of dishwashers. Your clients are large hotel or restaurant chains. You sell the machines for a high price in a transactional model getting so much money and handing over the property of the machine.
You are a hidden champion, growing in your market niche globally. At some point your target market is saturated: it becomes hard to grow further.
So you search for new growth opportunities.
What you find is a new target segment: cool and young entrepreneurs opening small bars and cafes. These might be in ski resorts or next to beautiful windsurfing spots, like in the northern part of the island Sardinia where I was windsurfing this summer.
The problem is, that you are premium and too expensive for these small entrepreneurs.
In addition many of their bars and restaurants are only open in the winter or summer season: so why shall they pay a high fixed price for only e.g. 6 months of use?
You question yourself: how can I maintain the premium and sell to this new target segment.
Here is what the company Winterhalter did: they offered a pay per wash pricing model.
You as a small pub owner pay only for the washing cycles, which is what you want. You get the machine, it is installed, you get washing powder as well as spare parts – all this without being charged. However you pay 300 euros for so many washing cycles.
This allowed Winterhalter to win new clients, profitably grow and maintain the premium. They were so successful that they have been copied.
Can you provide an example of a company that changed their pricing model? What did they change? Why did it work? How successful were they?
Sure: let’s take a concrete example of AI pricing.
It is the one of a young man, Mac Harman, who scented the business opportunity just after graduating from the Stanford Graduate School of Business: he had observed that his in-laws’ fake Christmas tree didn’t look much like a tree and that was when the idea came to him. He set off for China, where he met a tree producer and designed 16 models based on a variety of Christmas trees that were the shape of a real “Christmas tree,” like a spruce, for instance.
In October 2006, he had more than 5,000 trees sent to the United States, where he opened a pop-up in a mall in Stanford. The business went very well. After creating a website, in the space of one month he had, in fact, already invoiced $3 million. Since then he has broadened his selection of trees, some of which are sold at over $2,000, and has added decorations, stars, garlands, and other products.
Balsam Brands – this is the name of his company – was successful, despite selling seasonal products at prices far higher than their direct competitors. Since then the start-up founded by Harman has grown even further, and today faces new challenges with regard to pricing. The Californian retailer of luxury fake Christmas trees and seasonal decorations – whose brands include the popular Balsam Hill – earns over $200 million, 80% of sales taking place during the last three months of the year.
This is a managerial and financial “asymmetry” of crucial importance to the company’s business activity. To manage the seasonal sales and at the same time protect the profit margin and make revenue grow, Balsam Brands has therefore decided to introduce artificial intelligence (AI) into their pricing.
The algorithm is self-training, generates recommendations, optimizes prices on the basis of demand, and thus overcomes all the challenges that previously existed, which included a particularly intense repricing process, as well as the lack of an overall tool for managing prices on the basis of market trends. Using a personalized ERP platform, Balsam Brands has automated weekly repricing, adjusting prices according to the business plan and taking decisions based on the data processed. To make their best offer to their customers, Balsam Brands takes into consideration a number of price factors and more, such as web analyses and market trends, the latest sales figures, price scales, intelligent business constraints and the rules of price rounding. During the 2020–21 trading season, the AI algorithm generated 24,000 recommendations on optimizing prices for the retailer.
They were based on its historical transactional data, on trading constraints, on the architecture of total pricing, the availability of the inventory, and other essential information. As a result, Balsam Brands cut its repricing time by 50% and reached its pre-established business objectives, generating over 3.5% extra revenue and an over 3% extra profit margin. Joyce Lin, senior e-commerce business manager of Balsam Brands stated on this: “While our business was growing, it was important for us to base our pricing decisions on market trends, website analysis and other crucial data that’s difficult for a pricing manager to take into account simultaneously. Intelligent algorithms have made our pricing management efficient, helping the team save 50% of the time spent on routine tasks. AI is revolutionizing traditional pricing strategies and processes, so we can’t wait to extend this technology to other regions.”
After having written the book I discovered that your company, Competera, provided the software solution to achieve these great results. Congratulations to you and to your colleagues for this.
How can a business or their pricing teams assess their pricing maturity level and choose the right model for them? Are there general principles they can follow?
General principles to ensure that when you elaborate a new pricing model you take into account the following points:
- Fully understand what kind of needs you want to address
- Set up the best fitting pricing model
- The define the appropriate price metrics (e.g. are clients paying per km, per laugh, per usage in hours)
- Then you define price ranges and price points
So as you can see there are a series of decisions to take and a structured path to follow
What works best in which industry and for which company?
There is not a rigid rule, as it always depends on what the precise customer need is and how to find an innovative way to satisfy it.
In the book I present several price models. You could however create new ones, e.g. combing them and creating hybrids. The sky's the limit to what you can do.
Still you can observe that some pricing models are more common in certain industries like subscriptions in the software market.
Can you recommend any books, podcasts or other resources to our pricing community?
I am a bit biased: as we dedicated this podcast to the book ‘The Pricing Model Revolution’ I recommend my second Wiley book called ‘The 10 Rules of Highly Effective Pricing’ which was just released.
But there are of course other great authors of pricing books. One is Maciei Kraus and another is Kai-Markus Mueller. They both wrote different books that I read and recommend.
