Why work 30% harder just to make the same amount of money? - Talk Marketing 032 - David Abbott
Why work 30% harder just to make the same amount of money? – Talk Marketing 032 – David Abbott
Martin Henley 0:14
Hello there, my name is Martin Henley this is the Effective Marketing Podcast on The Effective Marketing YouTube channel. If you have spent any time here at all you will know I am on a mission through this channel to provide you with what it is that you need to be more successful in your business. As far as I know, the only way to be more successful in your business is through your sales and marketing. So not only on this channel am I giving you everything I know about sales and marketing. I am pulling in anyone who can bear to talk to me to drag from them all of their sales and marketing knowledge also.
Martin Henley 0:49
Today’s guest is an engineering science and economics graduate. He has been working in marketing since 1987, which I’m sure he won’t mind telling you is 35 years. In that time, he has held a host of Marketing Management and Marketing Directorships and run his own sales and marketing consultancy. He is the author of How to Price my Platypus. He is the platypus guy. Today’s guest is David Abbott.
David Abbott 1:29
Hi, how are you?
Martin Henley 1:30
I am extraordinarily well. Thank you, David, how are you?
David Abbott 1:34
I’m great. Thank you very much for inviting me to talk to you and your audience. It’s, it’s great.
Martin Henley 1:39
Thank you so much for agreeing to come and have this conversation. And I am probably excited about this because I’ve got views about pricing. This isn’t about my views on what you know but I’m hoping you’re going to confirm my views, my issues. Everything I do is about getting people to think a little bit differently about the thing that they don’t want to do the sales, the marketing, the the pricing in this instance. It seems to me that everything everyone thinks about pricing is exactly the opposite to what they should be thinking about pricing. We will get to that. We will get to that, so that’s fine. You are an incredibly busy person. I listed before you gave me the thing about the platypus, I listed the four or five things that you are busy with currently, according to your LinkedIn profile so I am enormously grateful that you’ve decided to spend this hour and 15 minutes with me. Thank you so much.
David Abbott 2:41
Martin Henley 2:44
Okay, is there anything you’d like to say before we start?
David Abbott 2:48
No, just that I’m looking forward to talking about this too, because I wouldn’t have written the book about pricing if I wasn’t keen about it. So yeah, I’m looking forward to having a really good conversation with you.
Martin Henley 2:58
Fantastic, excellent. Okay, so the way this works is a really simple formula. There’s only five questions. The first question is how are you qualified to talk to us about pricing? The second question is, who are your customers, what is it you do for them, how do you add value in their lives? The third question is, what are your recommendations for people who want to get better or see some improvement in their business through pricing? The fourth question is, what do you recommend people read? And the fifth question is, who can you throw under the bus who might bear to have a conversation with me and help my miniscule audience out? So question number one, how are you qualified David Abbott to talk to us about pricing?
How are qualified to talk to us about pricing strategy?
David Abbott 3:41
You’ve mentioned a little bit there, I’ve been working in marketing for quite some time. And pricing is one of the classical four Ps or seven P’s, whichever you prefer of marketing. In some respects, though, it’s it’s a bit of a neglected P, which is why I’ve taken a specific interest in it. So as well as all of the experience I’ve gained through a marketing career and applying the issues around pricing, to any particular problems. For the last 10 years, I’ve been researching this psychology behind how we make pricing decisions. Partly that’s research where I’ve actually conducted pricing experiments. Partly it’s about reading the academic research to see how that decision making process, the hidden psychological decision making process applies to the pricing world.
David Abbott 4:44
I’m fortunate to have a daughter who is a doctor of psychology, working in the NHS. So I run everything through my daughter and make sure that anything was I’m talking about from a psychological point of view, is actually correct. So you do get people in marketing, different elements of marketing, some of whom come from a psychology background, and apply it to the marketing side of things and some people who come from a marketing background and are looking at the psychological side of things. I’ve come from the latter.
Martin Henley 5:20
Okay, so what did you call it? It’s the neglected P?
David Abbott 5:25
Yeah, it seems that way to me. You go online and go to Amazon and start looking at marketing books and you can find any number of books about strategy, can find loads of books about positioning and brand, you’ll find anything you want about integrating marketing, marketing, communications, start looking at books on pricing, and they are there, but not as many. There’s a there’s a mixture between some which are fairly straightforward, almost trivial, and some which are almost academic, you know, real heavyweights. The list of options, things that you can read to get your head around pricing is, is far more limited. My experience working in a variety of organisations is that a huge amount of time is put into deciding how you’re going to launch a particular product, or you’re going to develop a new channel, or you’re going to …. whatever it might be, the strategy side, the communication side, gets a vast amount of time and effort and focus. Pricing is almost the last thing and tends to be a little bit of a finger in the air. You can almost hear the groan. What are we going to go for? Because nobody wants to go in too cheap, and leave money on the table or too expensive and lose a sale. There’s, there’s this kind of angsty moment, they pick a price and then that’s it done. They don’t think about it again unitl maybe a year later when it’s time for a price rise. So I don’t see price being treated the same way inside organisations as the rest of the marketing mix.
Martin Henley 7:17
No, and I don’t either. Here’s my theory. Everybody knows that pricing is a verb. But nobody thinks it is something they do. People seem to think it’s something that’s done to them. So basically, the market decides the price or your competitors site, decide the price or, but it’s not something you do yourself. You and I know that adjusting your price in the right direction, up, I would recommend is the most immediate way to affect your profitability. What I tell people is that they are 100% in control of their price. Of course, you can be reckless with it but I don’t think I mean, I’ve got lots of things. I don’t want to get caught up in what I’m thinking. The most price sensitive people on the planet are salespeople, because I don’t think customers care about price anywhere near as much as salespeople will claim. Everyone knows if you want to get rid of a salesperson, you tell them it’s too expensive, and they will go away. The salespeople will go away, because they’re looking for an excuse to go away, so this is where I sit. Pricing is huge, something you’re 100% in control of you know, you can be completely reckless and nobody will ever see value in what you’re doing and you might not never sell anything. So you’re talking about the psychology of pricing, what is the psychology of pricing?
What is the psychology of pricing?
David Abbott 9:01
Absolutely, I’ll get into that. I just first of all to agree with you, I’ve seen the same thing. In the various roles, they include some time spent on the road, going out and visiting people, selling things to them. I would not claim to be a sales specialist or a sales expert, but I have been there at the coalface and have some experience of it. You’re absolutely right. Price is the easiest excuse to say no to a sales person. As a consequence when I’ve worked inside organisations, almost universally every single time the the salesperson comes back into the organisation having been out to visit a customer the messages were too expensive. You know, if if only we would drop our price?
David Abbott 10:20
I apologise for that. So when the salesperson comes back into the organisation, the message that they’re sharing is that now if only the pricing was cheaper, we could sell bucketloads loads of whatever it is, because that’s what they’re hearing all the time. I absolutely agree with you. The evidence is that when organisations lose a relationship with a customer, 80% of the time it’s for a non price reason. One half of what I do is I’m a portfolio marketing director for a number of clients. Over the past 10 years, I’ve, worked with lots and lots of different organisations, and we’ve gone out to, to secure services, it might be a new website, it might be an exhibition stand, it might be rebranding, whatever it is. I can’t think of one single instance where we’ve ended up going for the cheapest of the options in front of us. That’s not because we’re avoiding the cheapest, it just happens that we we haven’t gone for the cheapest. What we’ve gone for each time when we’ve narrowed it down to three people who will then come in and present it to us as, we’ve gone through the organisation that understood us, who got our challenges, who related to our goals, who we felt comfortable, they’re going to help us achieve exactly what it is that we want to achieve. Price was then a secondary issue. I think far too many organisations think the price is the number one issue and that is not my experience at all. So I just wanted to say that first. Yeah, you’re gonna say something?
Martin Henley 12:03
Yeah. It’s not my experience, either. I mean, it’s categorically not my experience. So I’ve got a presentation, the most powerful clothes in the world ever, I call it. It’s about selling, and we go through this thing, I get people on a rope, like a tug of war. So I get someone to suggest a buying signal, how much is it? And then the next person will come up with a response, and then response, response, response. So it’s kind of like an objection handling, price objection handling thing. When somebody says as an objection, it’s too expensive what I tell people to say is, what do you mean by that? The best time I ever did this, we came up with 20 things that the buyer might mean by the phrase, it’s too expensive. So it’s more than I was thinking about spending. It’s more than I’ve got budget for. I don’t have any budget for anything at the moment. It’s less than what it’s costing us currently. I can’t go to my boss and tell him that figure he’ll have a fit, or they’ll have a fit. So we came up with 20 of these things. One of them was, I never had any interest in what you were saying, I’m just trying to get rid of you. Which is why I know that salespeople that will run a mile once somebody says it’s too expensive. Sales managers, we talk about the psychology of the buyer and pricing, you’re going to talk about that you’re the expert on thst.
David Abbott 13:38
The psychology of the seller of course is, we’re not adding value to the world, we’re not worth what we’re trying to charge, occasionally we get away with it and we should be very happy about that but we expect to hear most of the time that we’re not delivering value. That’s the kind of default human position if you like is, of course, I’m not worth as much as I hope to get, you know. So I think the thing is, like lay it on both sides. 100%, the most price sensitive people on the planet are salespeople. The other thing that persists is this myth that if your price were lower, you would start selling bucket loads, like you’ve said, which is categorically not true. They’re not buying because you are marginally high, or else the objection wouldn’t be you’re too expensive. The negotiation point would be is there something you can do about the price to help us to make this happen, you know? So what was I saying? So it’s because you haven’t presented the value in a way that they appreciate or they haven’t got the value. Like you’re saying there’s so many layers to the value. These people are interested in us they trust us. They seem to have a good reputation. They’ve got good testimonials, you know, the quality of their work looks at these are all parts of the value proposition that just simply haven’t been met if somebody is telling you it’s too expensive they take. They’re not telling you that you’re too expensive, they’re telling you, they don’t value what you’re offering is what I’m saying.
David Abbott 15:08
Exactly. This is where the psychology starts to come in. We like to think that we’re completely rational, we were the, the apex of, of evolution. We are as advanced a race, as you could imagine, and we make all decisions completely, logically, and rationally. In reality, 99.9 recurring percent of all of the decisions that we’re, we’re taking in the day, and there are 1000s, and 1000s, and 1000s of decisions. What I’m going to say next is an internal decision. We are making all of these decisions, subconsciously.
Martin Henley 15:48
David Abbott 15:49
Subconscious is completely invisible, absolutely, completely invisible to our conscious brain. So when we encounter a price, our subconscious does a huge amount of work in assessing, is this a reasonable price to pay? Then present an answer to our rational brain, which then rationalises why it was the right decision all along, whether they say yes or no to that price. That’s the psychology that’s happening all the time. It’s not just with pricing, that’s with any any decision whatsoever. Anytime we’re ever faced with a decision, there’s a chunk of stuff that happens subconsciously, and then our conscious brain rationalises why we’re just about to make the right decision. You can see the evidence for that, not only all the psychological research that takes place, but even in even in B2B at really senior levels you see examples of somebody who’s pride means that they’re chasing an acquisition, and the price starts going up, but they’re going to make their mark on the world, they’re going to achieve this, this huge organisation by bringing these two companies together. They end up pursuing it beyond the point at which it makes economic value but as I say, pride and has come into it,
Martin Henley 17:19
David Abbott 17:21
Yeah, absolutely. You get into all sorts, all sorts of things. If that can happen at the very senior levels in organisations, then clearly anywhere in business, and anywhere from the consumer point of view. These psychological aspects make a difference. And there’s a lot of evidence backing this up. So there’s, there are many books on the the psychology of how we make decisions, just in a general point of view. I’ll mention one later when we get on to like it’s question four. One example, of this kind of decision in business is a pricing thing called anchors, an anchor, actually not a bet about precision. So when we encounter a precise price, it feels smaller to our subconscious brain than the round price does. So 19 pounds 27 feels smaller than 19 pounds does. Even though 90 pounds 27 is 27 Pence, dearer it feels smaller, because precise prices just feel small. Even more importantly, when we encounter a precise price, it feels like there’s some logic behind it, there’s some science behind this, we’re less likely.
David Abbott 17:34
That’s my evening smoothie? I’ll trim that bit as well.
What is the psychology in the way that you present your price?
David Abbott 19:11
Right. So if you went to somebody who was going to develop a website for you, and they said, Sure, we can do that for 5000 pounds. Well, what you’ve just heard is, let’s lick my finger, stick it in the air, you know, let’s, let’s guess, 5000 That feels about right. If they say it’s 5,180 it feels like there’s some reason for it. When somebody says 5000 they’re inviting you to start negotiating, say I was hoping for three, because when you say 5000, you’re hinting that negotiation will take place in 1000s and five hundreds. If you say it’s 5,180 you’re hinting that negotiation will take place in hundreds and 10s. If you get the that’s expensive kind of reaction the temptation then is for people to Oh, I could not 5% off or I can knock 10% off. Well, clearly, you’ve just plucked another number out of thin air. If you if you can knock 10% off, why couldn’t you knock 11? Or 12? Or 13?
Martin Henley 20:15
David Abbott 20:16
If instead you got your pad and pen paper out and you did some calculations, and you looked at them and then you said, I could knock 3.9% off. Well, that feels like there’s a reason. Again, if you say, Yeah, I can knock 10% off you’re hinting that negotiation will take place and 10s and fives, you’re inviting them to say I wanted 30%? Should we meet in the middle? Call it 20?
Martin Henley 20:43
David Abbott 20:43
If you say, .9, you’re hinting the negotiation will take place in one’s and point ones. They might say, why don’t we call it 5% between friends? And you might say, okay, yes, I can cope with that. All of those changes in the way that you approach the negotiation, you think about the price and how far away it might, if you were expecting to negotiate in the first place, all of that changes depending upon the amount of precision that’s used when the price is first presented to you. Now, that sounds like a very consumer thing to do but Harvard Business Review, published an analysis of mergers and acquisitions. These are people buying and selling companies. It turned out the more precise the company was offered onto the market, the closer the final price was that was paid. Even in these these huge mergers and acquisition deals, we’ve got teams of accountants and solicitors on both sides, where you’re going through a highly analytical process, even in as analytical a process as that the more precise the initial asking price, the less negotiation and the closer the final price was. That’s why I think psychology is such an important aspect to all of this.
Martin Henley 22:06
Okay, good. It’s interesting that you say mergers and acquisitions because I was involved, it was like a round table rather than a presentation, but the guy was involved in mergers and acquisitions and selling businesses. That’s what I think he was doing, he was dressing businesses for sale. So we’re sat around, there’s only five or six of us around this table, and he sits down and the first words out of his mouth, I’m not even joking, where I’ve got 10 ties at home that cost 300 pounds each. We’re all looking at each other, like, who cares about this guys ties?
David Abbott 22:45
Good for you. Lovely,
What indication does price give of the quality of a product or service?
Martin Henley 22:47
Well done, I’m glad your life is exactly where you needed it to be. Then he went on to say, but I have never spent more than 10 pounds on a tie in my life. The point that he was making brilliantly, is that the psychology is that if you don’t know anything about what you’re buying, the best indicator as to the quality of that thing is the price. So these 10 ties had been bought to him, bought for him as gifts. The people buying the ties, didn’t know anything about ties to get him the greatest tie, other than the price, which is why they ended up spending 300 pounds. So the psychology I think, this is where I think it’s almost exactly the opposite, because we all think that we want to buy the cheapest, but 100% of the time we want to buy the most expensive that we can afford, because that’s how we believe we are getting quality.
David Abbott 23:47
I agree. Price price itself is a huge indicator of quality. Another bit of research that I think really illustrates this beautiful happy
Martin Henley 23:59
I am happy with the research, yes please.
David Abbott 24:02
This is … it’s a consumer thing but again, this applies equally well in business prices. It’s an indicator of quality, but also an indicator of reduced risk. That’s one of the important things for for business. The research was a number of people were were put into a functional MRI scanner, and they were given five different wines and they were told the wines were priced $5, $10, $35, $45 and $90. They were told which one they were drinking, this is the $10 wine, they were asked to rate it. While they were in this scanner of part of the brain called the medial orbital frontal cortex, it’s the part of the brain that’s just behind your forehead and is associated with pleasure. That part of the brain was being monitored. So when they were told it was $5 wine, they enjoyed it a certain amount they rated it a certain amount. $10 wine they rated it higher. The more expensive the wine, the more they said they enjoyed it, and the higher they rated it. Indeed, while they were being measured, the more that part of the brain lit up, so it looked like genuinely, they not only rated the wine higher, and said they enjoyed it more. The more expensive the wine, the more they enjoyed it. Except there was a fib, the $90 wine was also in the $10 bottle. And the $5 wine was also in the $45 bottle. So there are only three wines. So when they were told the wine was a $90 wine, they enjoyed it a certain amount, when they were told exactly the same wine was a $10 wine, they did not enjoy it as much and that part of the brain did not light up as much. The brain was delivering the expected experience, and the clue as to what the experience should be, was the price. What’s interesting is the control group, because the control group were just fed three wines those, yeah, they didn’t know whether it was the $5, the 35, or the 90. They enjoy the $5, the most, the 35 the next and the $90 the least. So what that says about the wine industry, you draw your own conclusions. The fact that the control group like the $5 the most and yet the test group, you know that were right off this $90 wine wow, it’s fabulous.
David Abbott 26:35
David Abbott 26:37
Yeah. They were not they weren’t just trying to be pretentious. They weren’t telling fibs, that part of the brain lit up more.
Martin Henley 26:45
Yes. The thing is, this goes to the irrationality of this, because when I’m trying to convince people of the opportunity of pricing, they don’t want to hear because it’s so entrenched in their head that it’s the price, it’s the price, it’s the price, that’s the problem. Whaat I do is I put up slides, and I demonstrate how much difference people are prepared to pay. It starts with genes. So genes from Asda will cost you 10 pounds, and a pair of jeans from Levi’s will cost you 100 pounds, or actually 120 pounds now. So that is 1,000% or 1200% difference. Immediately, people will start making excuses. They’re better quality, it’s better materials. It’s bla bla bla bla. Let’s not imagine that Levi’s are making their jeans in a factory very far from the factory, where ASDA are making their jeans with more or less exactly the same materials. Then I go on to show them strawberries from Asda, Tescos and Waitrose. Then cars, so I show them cars from SEAT, VW, Audi and Skoda, they’re all made by the same manufacturer, they are ostensibly the same car but the price difference is 20% or 25%. People will say, this is the third one in, I’m demonstrating this the third time, people will say oh, well, it’s only 25% on a car. It’s only two and a half grand difference, you know, yeah. So they will justify it, they will justify it. The best example for me is Coca Cola. So I did this thing years ago with a friend with a customer who was a pricing consultant and we went into Spar, and we bought a two and a half litre bottle of Coca Cola, and we bought a can of Coca Cola, then we went across the road into the pub and we bought a glass of Coca Cola. The price, within like within three metres, in the store was very different. The price across to the pub was very different again, and it’s 10s of percents. Like if you buy a two and a half litre, then I don’t have the exact figures, but people are prepared to pay very different prices is what I’m saying, depending on the location, depending on the presentation, dependent on all of these things. But if the price of fuel goes up by 1% it’s on the national news. People paying 25% more for ostensibly the same car never gets anywhere near the news or anywhere near anyone’s consciousness. I’m talking too much. It’s irrational is the truth the way people decide what they’re prepared to pay for things.
David Abbott 29:44
No, I completely agree and from a marketing perspective, as marketing professionals, I think you and I would describe that as the power of the brand in a lot of instances. I saw a test on TV, where the programme they bought a load of Levi’s and they put them in two piles in one pile, they unpicked all of the branding, they took the Levi’s off it so that we just unbranded. Yhey got a bunch of teenagers to say how much they pay for the the various jeans. The teenagers who were prepared to pay half as much for the non branded as for the Levi’s they were the same jeans. There was no difference clearly, in terms of the quality, but the brand makes a hell of a difference, you know, and brand is so much a psychological issue. What if that isn’t all about the psychology of how we make decisions, what else is brand about, you know.
Martin Henley 30:43
Okay, and what I would say about this, because I mess with the four P’s, the seven P’s, however many P’s they want to have. For me, pricing is about positioning, it’s about deciding where on the price scale you want to be. So that informs the brand or that supports the brand, or that defines the brand relationship, we are the most expensive or the least expensive whatever, wherever you want to be on that scale. For me is just a question of positioning. For example, Rolls Royce have to be the most expensive, but then they invest the most in the cars, but then they probably make the most margin. For me, price is probably one of the most impactful things in a brand, you know, deciding what it is you’re going to charge will do the most to define your brand, I think.
How do you support your customers to overcome their pricing challenges?
David Abbott 31:47
Yeah, I do agree. That probably comes into your your next question, I think, which was the around how does this apply? If I was working with a client, you know, how does this all get used? There’s a pricing process that I can take a client through. Actually, no, let me take a step back. I talk about pricing for a living delivering, you know, we’ve mentioned I wrote a book about it. If an organisation wants a 45 minute or an hour presentation to a sales team to illustrate some of the the psychological approaches to pricing, I can do that, I do half day workshops. I also work one on one with clients and take them through a pricing process which usually take somewhere between six to 10, half day sessions. I’m mentioning this because everything that you’ve just been talking about there, I think is vitally, vitally important. I start with trying to get them to, to think about what’s their current approach to pricing. What’s the basic pricing philosophy? You can only sell one or three things, you can sell your inputs, your outputs or outcomes.
David Abbott 33:06
So inputs, if you’re doing the Cost Plus model for your pricing, so you add all your costs together, and there’s a margin on top, you’re just selling inputs, whatever they may be. If you’re matching what everybody else does in the marketplace, then you’re just selling your outputs, you’re saying that what I do is no different to what anybody else does. If they’re charging a tenner for this, I’ve got to charge a tenner for this. I think it’s interesting when you start to think about outcomes, the difference that you make the value that you add, and that’s where you have to start thinking about positioning and targeting and who who is it that you’re you’re trying to sell this term, why is it relevant to them? Why would they want to pay more for the value that they’re going to get? That’s a really important starting point for me, is figuring that out, because positioning is everything and targeting is everything. If it helps you just to fill that out the rest of the pricing process is there’s an analytical step to understand where margin comes from and what value means for the customer how do they perceive value? What are you trying to achieve with the pricing? What are you pricing objectives? That goes into decisions around the fundamental pricing strategy, or strategies that can be more than one that you’re adopting. Then you’ve got pricing tactics. This is where you might get into buy one, get one free, but you think you got pricing tactics, and then you’ve got how do we communicate a price in a way that makes a higher price stickier. It’s that last area of the psychology particularly comes into play. So that’s what the pricing process looks like. In all of those stages, you’ve got to think about positioning. You can’t do that without understanding your positioning so everything you say is actually right.
Martin Henley 35:05
Excellent. I’m glad, I love to hear that I’m right, I really do. What I want to talk about is there’s a page on Wikipedia, I don’t know if you’ve taken the trouble to look on pricing. It lists something like 38 pricing strategies, and there’s some duplication in there. What I always say to people is if there are 38 pricing strategies, shouldn’t you have one? As you say they basically have a stick a finger in the air and see which way the wind is blowing approach to pricing. It’s what can I get away with most of the time, which then when they’re told they’re too expensive they don’t resist because you know, that’s what they thought when they were pricing is can we possibly get away with this?
Martin Henley 35:53
The one I’m interested in now, is this cost plus pricing because I think there is a fundamental issue with that. I’ve got lots of issues, this isn’t even my issue. The issue is that people are so incredibly bad, businesses are so incredibly bad, at actually working out what their costs are, specifically when it comes to sales and marketing. On average, the top 500 companies in the world spend around 30%, on sales and marketing. They have a cost of sale of 30%. I’ve never met a business that has factored that into their costs. So businesses might think they’re selling at a 20% margin but actually, they haven’t factored in this cost of sales so they’re losing 10% every time they sell something. It seems to me that that is particularly dangerous.
Martin Henley 36:53
The other thing when it comes to price plus is I’ve never met a business owner who hasn’t wanted to be the best in their market. What I say to them is you can’t provide a Rolls Royce service on Robin Reliant money, but that is what they’re doing. They’re trying to be the best and the cheapest at the same time. Is it any wonder that being a business owner is such a stressful business If that is your situation? You’re trying to produce the most at the lowest possible cost. So this cost plus pricing strategy it seems to me, is dangerous.
David Abbott 37:32
Yeah, I agree. If you do it well, if you accurately add up your costs, it does have the advantage of ensuring that you shouldn’t have a negative margin, because you’re always making a sufficient margin to cover those costs. If you’ve added them up correctly. My my issue with it is, what the hell you there for? If all you’re doing is taking a few inputs, processing them in some way and sending them out the door? You add value, obviously, you know, from an economic point of view, you’re adding value by putting the various bits together, but you’re not exactly thinking about it in a value add frame of mind, you’re not thinking about the difference that you’ve made to your customers in any shape, or form. If you develop something that is superior, you know, helps your customers do something better, faster, whatever then developing that this new product or service, you’re actually able to deliver it slightly, it costs you slightly less to implement than whatever it’s replacing why should your price go down, because you’ve you’ve now improved your customers lives with whatever the superior thing is. Because the cost of delivery has gone down, your prices have gone down. That doesn’t make any sense to me whatsoever. I think that the most appropriate thing is for people to pay for the value that they’ve had delivered. This is not about trying to gouge customers, we saw pricing being abused at the beginning of all of the the COVID issues, when suddenly masks that you could get a packet 10 for a pound suddenly it was 20 quid to buy one mask or something. You couldn’t buy hand sanitizer for less than 50 pounds a bottle. Ridiculous price gouging then. I’m not interested in that. I think that’s immoral. What I’m interested in is this, if you’re an organisation, and you’re operating on wafer thin net margin, if you’ve taken all of the costs into account, if your margins are one, two or 3%, then you’re vulnerable. It doesn’t take much of a change in the marketplace to damage your business significantly, possibly even take it under. You haven’t really got much money to invest in your team, invest in developing new technologies or anything, you’re just about eking by. If on the other hand, you’re making a reasonable margin for what you do net, at the end of all of the costs, then you can invest in your people, you can grow the organisation which creates new opportunities, so people get opportunities for promotion, their career can carry on through your organisation. Dyson. Dyson charges a fortune for his vacuum cleaners, but he’s created a university for for designers, to bring on the next generation of people who create new things. If you’re charging a fair amount of money for the value that you’re creating, that’s where it goes, it goes back into making a secure, successful organisation where people can develop rather than just hanging on by the tip of your fingers and hoping that something doesn’t happen tomorrow that takes the company under. That’s where the pricing comes in for me
Martin Henley 41:22
100%. I think you’re right when you say the price gouging that went on at the beginning of the pandemic, that comes from this idea that it’s supply and demand.
David Abbott 41:35
Martin Henley 41:35
The more demand there is, the higher the price, the blardy blardy blar. So that’s how entrenched it is. The other thing that’s really entrenched is the idea that businesses are supposed to be operating under this ridiculous pressure. The more you charge, the more you have to invest in delivering for your customers, this is the Rolls Royce thing. If you are charging the bare minimum, you better hope that the bare minimum flies, because if it doesn’t, there’s no spare to invest anything else in it.
David Abbott 42:11
Martin Henley 42:15
I think this is really, really important. Okay, so what I recommend to clients is that they have to do the cost plus equation, because they have to make sure there’s margin in what they’re selling because if there’s not, they’re going to go out of business. They have to do that. Then I tell them, they should also do some competitor type pricing and they should make sure that they are 10, or 20% more expensive than all of their competitors. They won’t want to do that ao they might negotiate down. For me, you should always be at least making some margin and preferably a healthy margin and then you should always be the most expensive in your market, because then you’ve got a shot at being the best in your market, because you have got more money than everyone else in your market to invest in providing this solution. As we’ve established already, people want to buy the most expensive thing and we didn’t quite say it, but we both thought it, you get a better class of customer when you charge more, because the Rolls Royce customer will have something else in the garage. If it all goes wrong with the Rolls Royce, and you have to keep it for a couple more weeks, they’ve still got something to drive around the Robin Reliant customer if something goes wrong, and you need it for a couple of weeks longer, the wheels have come off in their life, you know. There’s lots of good reasons, I think, for being the most expensive in your market and that is my recommendation. That’s everything I think about price and I’ve just got I’m just gonna grill you for the rest of our time together.
David Abbott 43:50
I think there’s some really important points in that. This relates into one of the things that I do with the clients when I’m working with them is I’ve developed a model where I take their P&L, I split it into appropriate chunks. I put it into the model and the model tells me what their sensitivity to discounts and price increases is.
Martin Henley 44:13
What effect do changes in price have on the profitability of businesses?
David Abbott 44:14
What I mean by that is I’ve modelled a number of different organisations and when I look at the average, roughly, for every 1% discount that you apply, you need around about 3% more sales, just to make the same actual pound note profit. A lot of organisations they’re happy to give 10% away. Every organisation is different, which is why I model every client that I’m working with but looking at the average, that means 10% discount, you need 30% more sales just to make the same pound notes. Really success ought to look like 40% or something like that otherwise, why the hell are you bothering? Why work 30% harder just to make the same amount of money. The converse is what happens when you apply a price increase, well you can afford to lose some of your customers. That is usually anathema to an organisation. The idea that you might lose even one, oh, my goodness the sky is falling, it’s the end of the world. In reality, it’s roughly the same ratio. If you had a 3% price increase, you could afford to lose 10% ish of your customer base, and you’d still be making the same pound notes. So you’re now working 90% as hard as you used to be, and making the same money. In reality, pretty well every single organisation that I’ve ever dealt with, when they’ve implemented the price increase, almost nobody’s even noticed. Again, this goes back to psychology, this is the psychology not of the buyer but of the company and the salespeople within the company. We stress like mad about price increases, we’re going to get this pushback, that pushback, we’re going to lose half of our customers …. in reality, it almost never happens. People are staying with an organisation because of the level of service, because of relationships, because they love the product, whatever it might be. They’re not abandoning ship simply because of a two or 3% increase in price. As you said, right at the top of the podcast, if you do that 2 or 3% increase, and you don’t lose any business go straight on the bottom line. So I think there are some really interesting insights that come out of that price sensitivity analysis. Now we we should treat discounts much more carefully than we do. I think companies are trigger happy when it comes to discounting. I’ll knock 20% of that, without really understanding what that means in terms of what breakeven looks like. So I think their trigger happy when it comes to discounts, and incredibly nervous when it comes to a price increase, much more so than they need to be.
Martin Henley 47:36
Yes. You’ve nailed it. This idea that the more customers you have and the more transactions you have going on, the better your business in is, is lunacy. Less is definitely more when it comes to customers and transactions. The less customers you have, the less complaints you’re going to have, the less transactions you have, the less opportunity there is for something to go wrong. Actually providing to a smaller group at a higher margin, is in 100% of instances, a better business. Of course it is I mean, this is just one of these stupid, I don’t even want to say myths, because it’s a reality, that persists because no one questions it. More customers, more customers, more customers. Well, that’s more work, that can’t be good, you know, less work has to be better, has to be better. So, yeah, it’s really interesting.
Martin Henley 48:34
What was the other thing that you were saying that caught my attention there? Yeah, this disparity between the cost of discounting, the small percentages versus the increase. It’s well documented, you don’t have to put your price up by very much but we’ve covered this already.
Martin Henley 48:53
There are many facets to this value proposition. The reliability, the quality, the availability, the delivery, the reputation, there’s 20 or 30 aspects always to this and price is never the most significant one, it’s never the most significant one. If you go to your customers and say I’m putting my prices up by 10% and they say, well, okay, then I’m going to go, Well, what would they say? I don’t know. What you have to do is, I think, is temper that against the other aspects of the value proposition. So you can say, okay, the prices are going 10% across the board for all of our customers and if they say, well, we can’t afford to do that, then you have to go to one of these other negotiation points. You can say, okay, we can continue to service for you at the same price, but we’re going to be less available, or the product is going to be less available, or we’re going to deliver less regularly or whatever it is. This goes back to what you were saying before, the price has to reflect the value that you’re delivering and the value that you’re delivering comes in many, many guises. So that’s where I want to get back to.
Martin Henley 50:13
The other thing that I want to say is that there is a caveat to everything that we’re saying in this conversation, which is about commoditisation. Which is, by the time you’re dealing with a procurement department, you’re dead. When all they care about is the price, then that is the only instance, in whic you should stop selling to those people immediately because as soon as the price goes dow somewhere else, they’re going to be gone anyway, you know?
David Abbott 50:39
Yeah, your right, you’ve got to decide where it is that you want to play. If you’re going to target customers who only care about price, then you will be treated like a commodity. I don’t want to say that adopting the lowest cost is not an appropriate pricing strategy. It works for Ryanair, now, but most organisations never even stop and think about their pricing strategy. Ryanair has, they are very clear about the strategy, and what it means, and how to achieve it. The thing is, it’s very, there aren’t many companies who can occupy the very lowest price possible. Generally one company’s the lowest, and there might be a couple who are quite close. There are many companies who can adopt a premium position in the marketplace, because there are many different ways to target different customers, or to present value in different ways. Or whatever it might be. It’s much easier for companies to find something different, they can present some difference in terms of value at the top end, than then it is to fight over who’s going to be the cheapest in the marketplace.
Martin Henley 52:11
Yeah, the thing I think about Ryanair, are they a customer before we start talking about them?
Martin Henley 52:16
Martin Henley 52:18
All right. They have clearly thought about their pricing. They are the cheapest but I still don’t know. If you think about the way you buy an airline ticket, I don’t know, because I haven’t been on a flight for three years. But when you buy an airline ticket, the first thing is availability, who is flying from this place to that place when I want to actually fly? Then the second criteria is price. So firstly, these are the flights that are available now I’m looking at the price. I would argue that air travel has largely become commoditised. Even in that instance, there will still be somebody on the plane who spent 10 grand to sit in a nicer seat and have a nice champagne glass. So, you know, even in that instance, it doesn’t work. I don’t know how successful Ryan are but I think in terms of market sentiments, they are the worst off of all of the airlines because everybody knows that you have to pay for every single item and they give the impression now that they are money grabbers. They will be charging for the toilet at some point is the joke. You have to pay for every single thing, they’ve just broken it down It isn’t necessarily less expensive. So I think I’m probably thinking about the customers that I’ve serviced, who are small to medium sized businesses at best. I think if your business has become commoditised, it’s over for a small to medium sized business, because there is always going to be a Tescos come along, and they will undercut you and they will make sure their suppliers are making losses on what they’re selling to undercut you. So I think that’s the danger for small businesses. If it’s commoditised, it’s over. You can’t compete, you literally can’t compete.
David Abbott 54:20
No, the definition of a commodity is the only way to compare one option versus another is the cheapest. Yeah. So if, if there’s no other differentiation other than price, and your customers are buying on price, then you’re absolutely right, you know, trying to be the cheapest all the time, is incredibly hard, and it only takes somebody slightly larger to come along who’s got a volume advantage compared to you and your out of business.
David Abbott 54:51
David Abbott 54:52
It’s a tremendously precarious place to be. Which is why all of the companies that I work with are ones who have some differentiation in the marketplace and because of that differentiation they have some value proposition in the marketplace that a competitor might not have and they’re able to charge an appropriate amount of money for that value that they’re delivering.
Martin Henley 55:17
Good, and that’s, that’s the way it has to be. Because if if there is no differentiation, other than price, you’re dead and it’s just a question of time before somebody comes along and wipes you out. You have brought us brilliantly around to the value that you deliver for your customers. This is diametrically opposed to what businesses think is going on, because they don’t think they are delivering value for their customers, because they don’t talk to their customers to find out the value of delivering. So again, this is going to be a big adjustment for lots of businesses. So how do you put a valuation to the actual value that you’re delivering for your customers, customers?
What is the pricing process that you use?
David Abbott 56:04
There’s a process that I take a business through, it’s easier to show people what it looks like so as an audio medium, we’ll let we’ll do our best. There are a number of steps. The the first step is to understand what are the criteria that a buyer is going to use to choose between you and a competitor. Not why you they’ll choose you rather than a competitor but what are the criteria. It might be stock availability, might be the size of the range, it might be the number of colour options that you’ve got, that can be offered. Might be a whole load of different criteria. Uou then you then drill down into why they care about that criteria, you really get to really understand the benefits they are deriving from them Once you’ve got a clear understanding of those criteria, you can weight them, because they’re not all equally important. You can score yourself against them, score the competition against them, and you end up, once you’ve done this, with a number, which is a proxy for the value that you’re delivering. If you do better at delivering against the criteria, you score higher than the competitor, the when you’ve multiplied your score times the weighting, you added it all up, you’re gonna have a higher score. It’s a way of trying to mathematically derive an approximation for how much value do we deliver compared to a competitor. Then you can graph that against the price that we’re all charging and what you what you see is a graph with dots all over it, where there’s you versus various competitors. From that, you can then make some decisions about where you might price appropriately. That all sounds a bit esoteric so let me give you a very concrete example. There’s one client I worked with who repair white goods, things like washing machines. We did this analysis and two things came out of it. One was that they were undercharging compared to the competition for the value, the level of service that they delivered. So they just added 10 pounds on to their price, no change in demand whatsoever. So that’s straight on the bottom line. But because we gone through the process of really figuring out from the customer’s perspective, what does value really look like? What’s important to them? What criteria do they use to make a decision? Because of that, we identified a number of premium options that we could introduce such as specific times of day to come in to fix the machine. We identified a number of premium options, we added those into the sales model, and rejigged the website, presented the most important information to the customer right at the top, we did all of that and after about three months 50% of all of their sales were premium options and the premium options had a higher margin than the non premium options. That’s why I keep using the word value all the time. That’s a little value process that I take a customer through that applies, I hesitate to use the word science, because it’s not formal, rigorous science, but it’s more scientific than what most organisations do, which is stick that finger in there and think we’re about here in the marketplace or a little bit better than them or, or everybody else is charging this so let’s charge that. It’s a bit more scientific than doing that and it gives you some insights into what you might do with price and how you might adjust the value that you’re delivering.
Martin Henley 1:00:13
Brilliant. It’s, you’re right, it’s not scientific, because there is still room for them to think, oh, but we do this better, or we do that better and they won’t really know. It comes back to like really good marketing, which is just having a better relationship and a better insight into the challenges or the desires of your customers.
David Abbott 1:00:40
Martin Henley 1:00:42
What you were saying at the beginning is that this doesn’t get anywhere near as much attention as it should.
David Abbott 1:00:55
Because of what I do the portfolio marketing director, all the experience I’ve had, because of all the clients I’ve worked with, one on one with on pricing. I’ve seen quite a lot of organisations now and I’ve seen the marketing structures inside those organisations. I’ve only twice in all of my time, come across anybody that had specific responsibility for pricing inside an organisation. Generally, it’s the sales director that ends up having responsibility.
Martin Henley 1:01:31
David Abbott 1:01:31
I know. It’s because they’re the ones who are facing the customer and they’ve got to actually negotiate and whatever. It’s a little bit of responsibility tacked on to his sales responsibility. It’s not because they have any expertise in pricing, it’s not because they sit down there at the desk at eight o’clock in the morning, and think about okay, what am I going to do to optimise pricing for my organisation today. No. Only twice in all of that time have I ever met anybody inside an organisation with that specific responsibility. The vast majority of organisations, a lot of them are SMEs, but there are some big ones too, the vast majority of organisations, when I start working with them, they say, you know we’ve never even thought what the hell our pricing strategy is. We don’t even know what a pricing strategy is, nevermind what ours is. We’ve never stopped and thought about this at all and that’s why I think pricing isn’t the neglected P. Every one of them has thought about positioning to a certain extent. They’ve definitely thought about how we’re going to promote ourselves, what marketing we’re going to do, we all know what products they are selling. Ask them about price, then.
Martin Henley 1:02:50
Yeah, nothing. What is the thing about that? This is the thing that will make the biggest difference to your profitability the most quickly. This is what I would say to any business that I went into ahen I was doing The Effective Marketing Company properly and visiting people in their businesses. Just put your prices up, put your prices up by 50%, no-one was ever going to do that. The same amount of work for more money should be a no brainer for businesses, it absolutely should. Having more to invest in delivering value for your customers should be a no brainer for businesses. Having more to invest in winning sales should be a no brainer for businesses. But the resistance to this is insane. Like this is probably, it probably levels with telemarketing, you know, tell people to get on the phone and start making cold calls they’ll resist that as much as they will resist adjusting their prices. Yeah, I think it’s crazy.
David Abbott 1:04:02
Yeah. It comes back down to confidence and fear. There’s that fear that they will adjust prices and they’ll get some pushback. They’re not confident to do it. They’re worried about losing that one customer out of 100. Not not recognising there’s a 3%, doing the maths 3% price increase, lose one customer, I can guarantee you’re going to be better off.
David Abbott 1:04:30
Yes. The thing is that you’re going to lose the cheapest customer. You’re going to lose the customer that values you least. You’re going to lose the customer that was most at risk. It comes back around to this idea that more customers is better. Like they do the 80/20 thing on customers, the worst, lowest paying 20% of your customers are causing you 80% of your issues, because they’re also operating under under pressure. If their world is dictated by their finances it’s because their finances aren’t right. It’s not because they’re flying, they’re doing well, their customers are happy or their staff are happy, it’s because their finances aren’t right, because they’re probably not charging enough so that it the whole situation is under pressure. It all goes back to this same thing, understand your customers better, understand what they value. This idea of charging premium rates for those new things, is absolute genius. How I feel when I pay a premium rate for some special attention is I feel like I’m a special person who deserves special attention. I don’t feel at all that cost me a tenner. People do it, they do it on these delivery services on Amazon on eBay or wherever you get priority treatment. They do it every time they decide how much they want to pay for the delivery. You know, do I want to in a day or two days or four days. Yeah, I’d be really interested to see data on that. The truth is that people who are paying don’t care about the price. I don’t know the science or psychology, but I want to say that beyond thinking they’re getting the deal is what’s important. That’s what I want to say, as long as they feel like they’re getting the best deal, then they will be happy. It doesn’t matter actually how much they’re paying for that deal. It’s the deal that is important, and that there are facets to that deal that are important.
David Abbott 1:06:43
I agree but again, there are so many, so many aspects to this. It’s partly, if you mean by the deal, you feel like you’re getting something a bit special, absolutely great, in certain circumstances that’s true. That’s often what I’m talking about when the two when I talk about, you know, making sure that you’re providing the appropriate value, and then charging an appropriate price for it. It goes the other way, though, the with regard to deals, who would buy a sofa from DFS at full price, you know, because in the UK, and the there’s always a sale on, and the only time there’s a sale on is when legally they’ve got to have a period at the full price that they could go back to having the sale on.
David Abbott 1:07:35
I like eating chocolate. I consume a lot of chocolate and if I go into Tescos there’s Cadbury’s Caramel bar, gorgeous, and it normally costs one pound 50. Roughly 50% of the time, and it’s like a month on month off, roughly 50% of the time Tesco have got its own special roll back price, whatever it is that the like to call it, a special price one pound. It is absolutely regular as clockwork, one pound 50 half the time, one pound, the other half of the time, on off. They’ve trained me never to buy the chocolate at one pound 50, I can afford the 50 P extra. That 50 P is not the end of the world to me but because they run discount that often they’ve now conditioned me to not buy that chocolate unless it is one pound. Because I now expect I’m doing air quotes now, I now expect that deal to be in place.
Martin Henley 1:08:45
Yeah. Are you stockpiling?
David Abbott 1:08:48
Yeah. I could show you the stash.
Martin Henley 1:08:54
Okay, here’s what I think
David Abbott 1:08:58
Half of my shopping basket is chocolate.
Martin Henley 1:09:00
At one point in my life I had the misfortune or the good fortune, the misfortune, to be selling mobile phone services to businesses. Now, mobile phone service is pretty commoditized. Essentially, we were just a reseller, we had the deals from all of the people, we had all the same phones, it was all the same, all the same, all the same. So it was really difficult to sell. We were going to visit businesses and so the differentiation was me. I’m going to come quite often we were selling to businesses, so we might go and see them on a job and have the chat while they’re having a cup of tea and a break and then we will go and deliver the phones. It was like, you don’t have to take time out on your Saturday morning we’ll come we’ll sort this for you. So that was the big differentiator. Except, of course, that people are canny, especially those kinds of businesses. So what they would do is they would get asked to come out, they would get asked to give them the very best price and then they would go back to their current supplier and say, okay, these guys have offered it at this price, you must be able to do it at this price. If you do it, then, you know, then we’ll continue to do the deal with you. Except the only way to get this deal done on the day, you have to get it on the done on the day, because if you leave, they’re going to go and do it somewhere else, you know, so it has to happen right there and then. So what you do is you sit down and you do the calculation, like what are you paying currently, What phones have, you got what, blah, blah, blah, blah, blah, blah, blah. What you have to say, if you want to do that deal, is literally, but these guys could have done you a much better price than this. Like these guys, whoever they are, have basically been overcharging you by 20%. How long have you been with them? 10 years you’ve been with these guys, well, no wonder they’re overcharging you. Once you plant that seed, that they’re ripping you off, they’re never going to do business with that customer ever again in their lives, and it doesn’t matter now what price I give them because those other people were ripping them off, you know. So typically, I could beat their current price, because they were getting ripped off already and they were getting me. So that’s how the business worked. Until I realised you have to say that to them and there was a particular point in the conversation and delivery and dadadada da, you wouldn’t ever get a deal. So that is where price becomes really important, is where people get a sense that they might be getting ripped off. In that instance, then price becomes really important again, I think.
David Abbott 1:11:44
Yeah, I agree and it just makes me think about insurance companies, car insurance and stuff like that, because everybody shops around now for the absolute cheapest deal and they do it almost annually. I say everybody, there are a group of people where inertia takes over, and they just stay where they are but loyalty isn’t rewarded anymore by the insurance companies. It costs a lot of money to acquire a new customer.
Martin Henley 1:12:24
David Abbott 1:12:26
The best thing for an organisation is to is to have very high retention rates and yet the insurance industry has massive churn because for a couple of decades, at least, there’s always a special deal for somebody who’s just about to join them but disappears after they’ve been with them for a year or two.
Martin Henley 1:12:49
David Abbott 1:12:50
So they’re training customers to churn and churn costs money. Whoever came up with it first probably thought that they were being smart, hey, we’ll steal everybody else’s customers, we’ll have a special discount for new customers for the first year. It’s like an arms race, and the reason it’s an arms race and not an arms win for one country over everybody else is as soon as one country does it everybody else has to follow suit, in order to maintain the status quo. That’s what’s happened and destroyed the industry to certain extent, I think.
Martin Henley 1:13:27
Yeah, to a certain extent. That is, that’s maybe the best example of commoditisation, because nobody’s buying insurance, because, you know, everybody’s buying insurance to satisfy the legal requirement to have car insurance. Nobody’s buying it for fun, and you’re right. I don’t understand why those businesses don’t understand about the cost of customer acquisition. If you spend money on acquiring a customer, and you make depreciating amounts per customer, because you have to keep driving the price down, of course, the business is going to become less and less and less profitable. Yeah, yeah. I mean, that that’s just insane I don’t understand that at all.
David Abbott 1:14:16
It’s because one company did it at the beginning, I’m sure and then as soon as one company does it, everybody has to follow suit.
David Abbott 1:14:22
David Abbott 1:14:23
I talk to a few distribution companies and there was one who was saying that they were planning to test free delivery for a period, they’re going to try it out for six months and see whether that made a difference. I said to them, well you can’t test it because once you’ve introduced it, for six months, your competitors will follow suit and once they follow suit, you can never undo it. If you want to test it, the only way to test it is to find a small geography or to do something very limited for a short period that you can unwind quickly, and you can see whether it does make any sense difference, but it’s incredibly dangerous. As soon as one company does anything like that it’s embedded because everybody follows suit, you can’t unwind it.
Martin Henley 1:15:09
Why do they think that people want free delivery? Two things, why do they think that people want free delivery? Why do they think that people aren’t going to realise that they’re just making up the cost somewhere else, because it still has to be paid for. If I’m having something delivered, I would prefer to pay and know that it’s actually going to be delivered personally. If I’m having something delivered, then I’d like to be able to track it, and I’m prepared to pay to be able to track it, to know that it’s actually going to arrive. This is probably the worst case, where people are offering something for free. Why, how, it does, it can’t where do you get to, in your mind, in your business, when you say there is so little value in what we’re doing we’re not going to charge anything for it?
David Abbott 1:16:10
And delivery, delivery is kind of a core part of the service for a delivery company.
Martin Henley 1:16:16
You should buy this thing, but there’s no guarantee it’s actually going to arrive at your house, how do you feel about that? I’d rather pay a few quid and actually have it arrive, if you don’t mind.
David Abbott 1:16:26
Free itself is one of the psychological things that I talk about with regard to pricing. You should never apply free to the core product or service that you you offer but a hell of a lot of companies already already do a number of things that are included and they stop talking about them. Just bringing them clearly to the attention of the customer at the point where you’re quoting the price as the price, and you get free this, this, this this. So these should be things that have a genuine perceived value for the customer, but are at low cost for you to deliver and not connected with the core product or service that you’re you’re actually selling. Given that they do with all these things for free anyway, let’s talk about them at the point at which you’re quoting, because it’s a differentiator, then between you and the competition.
David Abbott 1:17:19
David Abbott 1:17:19
And you’re not giving anything new away, you’re doing this anyway.
Martin Henley 1:17:23
But does anybody believe in 2022, that anything that comes from a supplier is free, that the cost of it isn’t being factored in. I know they say this in like copywriting and stuff the word free is really powerful. The other thing I think, is that do you want quality customers or do you want cheapskate customers?
David Abbott 1:17:50
Absolutely, that’s why you don’t apply to the basic thing that you’re doing. To come back to what I say, you know, fair price for the value that you are delivering.
Martin Henley 1:18:02
David Abbott 1:18:02
You want to deliver value so I do completely agree. Given that, given that a lot of companies have got these things that they’re including, make sure that people know about them, you know, just make it absolutely clear. The whole thing around free. You’re right we all know that you don’t really get anything for free, but the research does show that we are influenced by that
David Abbott 1:18:31
I think we are because but there are people who are buying Rolls Royces. So I think if you were to sell somebody a Rolls Royce and say, oh, yeah, but you get a free air freshener, free this and then at that point, surely it becomes offensive. I’m spending eight times as much as I need to on a car I don’t need a free air freshener. So I think there’s something about that. In digital marketing they call them lead magnets, you get a free report, you get a free assessment, you get free something else. What you attract is freeloaders, I think, and you don’t want or need that in your business, because you’re in business to make money. People having an expectation that they’re going to get something from you for nothing, I think is really dangerous. There’s also a whole psychology about the presentation of prices. So you have three prices, and typically, you accentuate the one in the middle and that’s the one that people will go for and and all of that stuff.
David Abbott 1:19:31
Or people go for the middle of three anyway, that’s called the Goldilocks heuristic. If you present three prices start with the highest one first, that’s a price anchor. So they look at the biggest number and then everything becomes compared to that.
David Abbott 1:19:44
David Abbott 1:19:45
Four digit prices, if you miss the comma out of it, around about a half or two thirds of people, then process it is as a … it’s easier if I actually tell you the number there. So let’s say I’m presenting price 3924, 3,924. There’s a comma there, everybody reads that as 3924 but without the comma, around about a half, two thirds process, the numbers 394, or 3924, or three and 39 are less than 3000.
Martin Henley 1:20:27
David Abbott 1:20:28
So the present price presentation is important and there are little subtle things that make prices feel bigger or feel smaller, to the reader of the price.
Martin Henley 1:20:40
Like the seven is much smaller than the nine. So if it ends with a seven rather than a nine, that’s why everything online is 297, or 197, or nine, seven or 47. It’s fascinating, this whole thing is fascinating. The most fascinating thing about it is that businesses don’t think about it. They don’t. It’s insane.
David Abbott 1:21:03
It’s neglected. Yes.
Martin Henley 1:21:07
There is one other thing that I want to say, which is I think part of the reason that people think it’s so important, is because people will ask, the buying signal will always be how much is it? Or if you’ve got a new car and your neighbours catch you walking into this house, there’ll be like, how much is it? Do you know what I mean? If you’ve got a new thing, people will ask how much is it? So I think that people think that the price is really important, because it’s the first thing that occurs to you to ask. I think in that instance, they’re asking something different. I think they’re asking, is that available to me? Like, do I have enough money for that thing? That car, that drone, that holiday, that whatever it is that bike. I don’t think they’re making a judgement as to the value of the thing in the first instance, I think they’re making a judgement about, he’s got that thing I wonder if I could have that thing. What do you think?
David Abbott 1:22:13
You’re absolutely right. This is, again, the importance of understanding the psychology of how we make decisions. One of the things we’re influenced strongly by as well is what people around us are doing people who we see as our peers or whatever. That overrides the cost element of the product or the service for quite a lot. TAgain, there’s a bit of research about how strongly we’re influenced by what we see other people doing. There was a researcher called Robert Cialdini, he this was out, somewhere in America, I think it was California. He went to a region or borough and surveyed all the homes there, the property owners and asked them, what would motivate them to conserve energy. Is it to to save money, because it’s important for the environment, because it’s all about the future of the kids, or because the neighbours are doing it. Everybody said, one, two or three, nobody, not a single person said because the neighbours do it. Then he went out into a number of other region,s areas in the town, suburbs, went to a number of these places, tried every single test that he could, every single setup, everything to try and get people to recycle more and conserve energy, because it saves them money, or for any of those other reasons. Nothing made a difference. The one and only thing that influenced anybody to conserve more energy was knowing that the neighbours were doing it.
Martin Henley 1:23:51
Yes and they’ve done these tests in hotels, where they’ve said about washing the towels and things. 90% of guests only have their towel cleaned every other day. You know, that is that kind of messaging. It’s really interesting. It’s fascinating. It’s really fascinating. And of course, chill Dini in the book Influence, like one of the first stories is about the jewellery that goes on sale gets doubled in price rather than half. Yeah, I think like I said at the beginning, I think the truth about pricing is almost exactly the opposite to what everybody thinks. And there is so much opportunity in pricing and people aren’t doing it.
David Abbott 1:24:35
Yeah, I would say in most organisations, 90% of the time that people spend thinking about pricing is how we can execute a discount of some kind or a sale or an offer. And they don’t think about what’s the optimum price that we can charge. How do we present it in such a way that we make the highest price stickier, and how do we improve the price in the future?
David Abbott 1:25:00
Yes. And handling the price objection. I mean, I don’t know if this is true or not. But apparently Mercedes Benz for a period of time taught their salespeople to respond to the question, Can I have a discount is, you need to understand that when you’re buying a Mercedes Benz, you are buying a premium product. And if you’d like to get a discount on the products that you buy, may we suggest that you go and visit the nearest BMW dealer, because they will 100% give you a discount. At which point everyone says, I’ll take the Mercedes at full price, please, you know, so it’s, it’s like, if people, this will make such a difference to so many businesses. If people even like if people thought about pricing on the way in, it will make a huge difference. But if they just thought about pricing with respect to discounts, it would make a huge difference. I mean, imagine if your standard is to give people 20%. And you stopped doing that you would be 20% Better off bottom line? You know, that is insane. How many new customers do you have to bring in to increase your bottom line by 20%? The truth is, it doesn’t matter how many customers you bring in, you’re never gonna do that. Because the margin is the same for all of those customers. This has been a fantastic conversation. Thank you so much. I
David Abbott 1:26:21
I thoroughly enjoyed it. I I never tell corporate about my favourite subject. So
What is your recommendation for businesses that want to do better with their pricing?
Martin Henley 1:26:27
Good. Really good. The question we didn’t ask is if people want to do better with their pricing, what they should, what should they do? I feel like you’ve kind of answered that question a little bit. The obvious right answer to that question is they should phone you.
David Abbott 1:26:45
Yes, I’ll get one. Yeah. Number one for me. I think if I were to give two core bits of advice, it would be discount less, discount only in extremis, if you have the amount of time that you’re discounting for whatever reason, you’ll do better. And be more courageous about supplying a price increase, because it’s not going to be as bad as you think. They’re the two simplest bits of advice. But if you want to do it a little bit more scientifically than that, then you’re happy to talk to anybody.
Martin Henley 1:27:22
Fantastic. And the thing about this is, was the thing that just occurred to me, it’s like the you’re never far like from my mobile phone story. Where there is some deception, you know, because if I asked for 20% discount, and you give it to me, without squeaking, the way my mind thinks is RK, they could always like, they could always have given me this 20% discount. So before the 20% cent discount, they were essentially ripping me off. Now you and I know because we’ve seen enough pricing that they weren’t ripping you off. They’re actually now giving it away. But that’s the way I feel like Black Friday, the way I feel about black Friday’s if you can charge 3% less on that day, charge the percent of all year round, because I’m like you say you teach people to to, to respond to those offers. Okay. Question number four books that you would recommend? What should people read?
David Abbott 1:28:21
Oh, there are two I’m going to mention. All three if you want to include mine how to price your platipus
Martin Henley 1:28:30
I feel like we spoke enough about platypuses
1:28:32 Reading recommendations.
David Abbott 1:28:32
Yeah. I’ll mention the platypus quickly. And then I’ll come back to the the books the it’s called how to price your platypus because there is no price for a platypus. You can’t market it. And that, therefore is a metaphor for the pricing challenges that companies face. Lots of companies they do struggle exactly where should they pitch the price. Nobody wants to be too cheap and leave money on the table too expensive and lose a sale. So the platypus is a bit of a metaphor for that. But it’s also something that hopefully is nice and memorable and sticks. in people’s minds. They remember the platypus guy, okay. In terms of books, because I think so much of this is driven by our hidden psychology. The the two books I would recommend, one is called Thinking Fast and Slow, by Daniel Kahneman. He is an Israeli psychologist, he and his partner, Amos Tversky did a lot of the foundational work on how we make decisions postwar, and you write beautifully, and it is just incredible stuff. It’s mine. It’s mind boggling how weird we are. When we think that we’re really sensible. The second is a book by a guy called Nick Callender Callender with a k. So, K O L E. n dA, called methods of persuasion. And again, it’s it’s similar kind of thing, but it’s it’s More applied. So Kahneman this book is it’s a psychology, easy reader, if you’re interested in psychology, Ross methods of persuasion persuasion is how do we take that? And how do we apply it to the real world? And the kinds of things that we marketers do, because everything that we do one way or another, whether pricing or anything else is really about persuasion.
Martin Henley 1:30:23
100%. Excellent. I haven’t read any of those three books, I’m going to get on a mission to do that. Okay, so last question, who you’re going to throw under the bus that we might be able to persuade to have a conversation with me.
David Abbott 1:30:39
Oh, there’s a couple of people I know. And I’ll happily do an introduction that I think would be interesting for your your listeners, there’s a friend called Alistair greener, who talks about influence, and also talks about presentation skills and how to have the greatest impact when you are presenting. And a lady called Michelle Mills Porter, who is an expert in people, and has developed a number of tools and the apps that you can use to gain an insight into what motivates other people, how they’d like to be addressed. What, what methods of communication work best with them. So if you’re in the job of marketing, or in the job of selling, and you deal with other people, she is an expert in helping you to understand those other people, sometimes quite interesting guests.
David Abbott 1:31:38
Excellent. And are you able to organise like a LinkedIn type introduction like Warren did for us? Yeah, that would be perfect. Thank you so much.
David Abbott 1:31:48
Yeah, no problem.
David Abbott 1:31:49
I have thoroughly I’ve been wanting to have this conversation forever. Because, like you say, there’s not many people you can have this conversation with, they don’t exist. Why I had a client who was doing this years ago. But as far as I can make out, he’s gone back into to work, so he’s not doing it anymore. And then I don’t know anyone else who talks about this or does this, which is insane, because I know 40 PPC consultants, and I know, I don’t know, 100 SEO people, and but I don’t know anyone who does this specific thing, which is the thing which will have the biggest effect, the biggest positive effect. So most quickly, you know, yeah, it’s insane. Okay, so we’ll do the pretend goodbye now. If that’s okay, and then I’ll stop the recording and then we’ll say goodbye like normal human beings.
David Abbott 1:32:47
Well, if I can’t pretend Goodbye,
Martin Henley 1:32:50
goodbye, ta thank you so much for your time,
David Abbott 1:32:53
in lovely hope this has been interesting for all of your listeners. And I’ve thoroughly enjoyed the past hour and a bit and yeah, thank you very much for inviting me on.
Martin Henley 1:33:03
It’s only a pleasure. Thank you for coming. Thanks.
Martin’s original content is based on his very current experience of running effective marketing initiatives for his customers and the feedback from Effective Marketing’s successful and popular marketing workshops.
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