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Tim Smith on the Pitfalls of Pricing (Audio) · Bloomberg Intelligence

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  Speaker 1: This is taking Stock with Kathleen Hayes and Pim Fox
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  Speaker 1: on Bloomberg Radio. Pricing it's crucial to business survival and success,
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  Speaker 1: but it's arguably the most difficult business function to get right.
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  Speaker 1: Occurring to our guest here in studio with us today,
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  Speaker 1: Tim Smith. He's the founder and CEO of Wiglaf Pricing.
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  Speaker 1: He's an adjunct professor at De Paul University, and importantly
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  Speaker 1: he's the author of the new book Pricing Done Right,
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  Speaker 1: the pricing framework proven successful by the world's most profitable companies. Congratulations, Tim,
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  Speaker 1: and welcome to the show. Thank you for having me so.
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  Speaker 1: First of all, tell us about your your pricing model.
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  Speaker 1: What is that? What is it that you have analyzed
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  Speaker 1: and distilled down that a lot of companies don't really grasp. Well,
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  Speaker 1: I've been taking a look at pricing as an organizational challenge,
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  Speaker 1: not as a algorithm or a methodology challenge that was
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  Speaker 1: handled in my textbook Pricing Strategy. In this book. When
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  Speaker 1: I'm looking at is great. We have all this technologies, methodologies.
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  Speaker 1: How do you implement it? If you're like ge or
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  Speaker 1: if you're Emerson or Abercrombie and Fitch, how do you
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  Speaker 1: actually apply these questions. Well, let's talk a little bit
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  Speaker 1: about the details of pricing on an industry by industry basis,
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  Speaker 1: because just before you came on, you were talking about
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  Speaker 1: how sometimes the pricing strategy for one industry at one
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  Speaker 1: particular time in history doesn't apply to what's going on currently.
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  Speaker 1: Give us the sort of current state of pricing, and
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  Speaker 1: then what you see is a better way to do it. Look,
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  Speaker 1: the the past state that I'm transitioning or the industry
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  Speaker 1: is transitioning, was cost plus finance. I'll go out there
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  Speaker 1: and say this is my margin I want you to do.
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  Speaker 1: We'll get Marketing would say great, I'll make products that
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  Speaker 1: should get that margin, and say also say yeah, nobody
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  Speaker 1: go buy that, give me a discount and I'll sell it.
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  Speaker 1: It doesn't work. So we're throwing that paradigm away of
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  Speaker 1: cost plus pricing and arguments and replacing it with value
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  Speaker 1: based pricing, focusing on the customer and how that specific
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  Speaker 1: customer set sees the offering be at product or service
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  Speaker 1: and they're willing to pay for it. And a good
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  Speaker 1: example of how something works one and the other one
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  Speaker 1: doesn't work in the other. You take a look at
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  Speaker 1: Um Johnson, who worked at Apple, worked out wonderfully. You
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  Speaker 1: know this single price, everybody pay this basic price. Ron Johnson, right,
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  Speaker 1: formerly the CEO of Apple, Yeah, Ron Johnson. And then
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  Speaker 1: he transfers that same concept method diality to J. C.
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  Speaker 1: Penny and complete disaster. He just destroys the company and
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  Speaker 1: he has to go after a year and a quarter.
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  Speaker 1: So tell us then a little bit more, because I
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  Speaker 1: think for a lot of people it's still sort of
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  Speaker 1: sounds like management speak. The culture around value based pricing,
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  Speaker 1: how does that work? What is it? The cultural value
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  Speaker 1: based pricing is focusing on the customer. And if I
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  Speaker 1: had to put that in a simple paradigm, I'd say
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  Speaker 1: from the customer's perspective, the customers asking when they approach
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  Speaker 1: your company, what's my alternative? Are you offering me something
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  Speaker 1: better or worse? And do I care about that differential?
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  Speaker 1: And so the pricing comes down in prices against the
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  Speaker 1: competitor adjusted for the value differential. That's the new culture,
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  Speaker 1: the concept everything focusing on customer valuation, not something else.
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  Speaker 1: Have you met chief executives who do not know the
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  Speaker 1: price of their products or how the prices were arrived at? Oh,
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  Speaker 1: I've met many chief executives who don't know the specific
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  Speaker 1: means at which the price has arrived at. And let's
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  Speaker 1: talking public news. Take a look at Granger. Granger went
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  Speaker 1: from four thousand products to one point six million products.
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  Speaker 1: Grangel went from about a four billion in revenue to
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  Speaker 1: about nine to ten billion in revenue. Granger quadruple its
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  Speaker 1: profitability over that same time period. There's no way you
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  Speaker 1: can expect that CEO to know the price on one
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  Speaker 1: point six billion products with millions of transactions every day.
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  Speaker 1: Managing a customer like ge versus managing a small customer
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  Speaker 1: who's running a mom and pop garage doorshop, there's no way.
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  Speaker 1: So Tim, you know you point out, I mean, some
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  Speaker 1: people have to rely on discounting, others hardly discount at all.
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  Speaker 1: But if I'm running a company I've never done it,
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  Speaker 1: hats off to everyone who does. But if I see
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  Speaker 1: my competitor cutting their price, I would think my knee
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  Speaker 1: jerk reaction is I better cut mine too. Well, that
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  Speaker 1: is the knee jerk reaction. You can destroy your company
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  Speaker 1: that way, or that's the right reaction. It's not one
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  Speaker 1: or the It's not a one size fits all solution.
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  Speaker 1: Think about two cars Porsche versus Volkswagen. Have you ever
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  Speaker 1: seen a Porsche discounted? Probably not unless it's already used
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  Speaker 1: it on Craigslister eBay. Right, you don't discount pors but
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  Speaker 1: Volkswagens they compete heavily down at the bottom end of
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  Speaker 1: the GMS, etcetera. It depends on who your target market
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  Speaker 1: is and how that target market is price sensitive. Not
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  Speaker 1: every customer is price sensitive. You speak about the and
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  Speaker 1: just to correct myself, uh Ron Johnson, he was never
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  Speaker 1: the chief executive of Apple. He was the senior VP
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  Speaker 1: of retail operations and then went to J. C. Penny.
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  Speaker 1: But talk about the different departments inside an organization and
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  Speaker 1: their responsibility for getting pricing strategy at least on the
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  Speaker 1: on the radar. So, as I studied in the past,
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  Speaker 1: we had finance setting margins, marketing going out and developing products,
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  Speaker 1: and sales going and discounting it away. What's changing to
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  Speaker 1: get in pricing right is we're adding those three in
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  Speaker 1: the initial all the way through to the end decisions
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  Speaker 1: with a new function, a pricing professional, and it's Emerson's ge.
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  Speaker 1: Lots of companies have added in this new function the
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  Speaker 1: role of the pricing professional is to add analysis, so
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  Speaker 1: accuracy of decisions and diplomacy to try to get the
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  Speaker 1: two sides to talk together in a positive manner. Well,
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  Speaker 1: thank you for talking with us. Tim Smith is the
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  Speaker 1: founder and the chief executive of a Wiglaft Pricing, adjunct
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  Speaker 1: professor at DePaul University, and the author of the new
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  Speaker 1: book Pricing Done Right. This is Bloomberg