Supported by Greenhaven Road Capital, finding value off the beaten path.
Part-of-the-reason See’s Candy is a great business for Warren Buffett is because of the pricing power. We’ve also noted how Restaurants sometimes do, and sometimes don’t have pricing power. A good brand, said Pat Dorsey, is worth maintaining only if it confers pricing power.
If the price is so important, why is it discussed so little? Hermann Simon recalled walking into the Harvard bookstore and “at least 100 were on advertising (and marketing) and how many were on pricing? One. My book, Confessions of a Pricing Man.”
Today we’ll look at Simon’s book. To get a sample there’s this 2017 talk.
Pricing power may be a clear idea, frequently emphasized, but the real-life implementation is anything but. Pricing is a mix of psychology, practice, and consumer preferences that changes with time. Simon addresses this early noting “…for many goods and services, prices have many dimensions.” These go by different names like premiums, fees, taxes, surcharges, subscriptions, etc.
Whatever it’s called, the only thing that matters is perceived value. How valuable a customer perceives the good or service determines how much pricing power business has.
Much of Simon’s work comes back to figuring out what-job a customer hires a business to complete. Before Adam Savage and Jamie Hyneman starred in Mythbusters, they were commercial, literally commercials, artists for companies like Coca-Cola.
In his book, Every Tool is a Hammer, Adam Savage writes about one particularly difficult job for Toys “R” Us. They’d contracted for a certain effect over a series of commercials but the effect wasn’t working. Savage wrote, “When it came time to set it up for filming, a key component exploded into three separate pieces. It was immediately obvious to Jamie and me that the rig was DOA.”
According to the letter of the contract, Jamie and Adam failed the job they were hired to do. But that’s not right at all. A company didn’t hire them for any particular effect so much as their expertise creating effects. With forty-plus people standing around the hired job became clear: effectively and efficiently create something cool.
Savage explained, “Jamie’s response to this incredible pressure was both surprising and inspiring. He didn’t show any emotion, neither perturbation nor anger, not even nonchalance. He just calmly looked a the producer and said: ‘To get this done by the end of the day I figure we have three options…’ Then he carefully laid out three brand-new solutions, complete with the pros and cons for each as they related to the original storyboard.”
One spectrum to think of jobs-to-be-done is the convenience to experience one. A business succeeds when they identify which their customer prefers, providing it, and then promoting it. Simon wrote, “…value alone does you little good unless you can communicate it successfully.”
Once a business creates a solution they need to tell their potential customers about it. At a talk in New York City, Lee Child was asked about the press junket. Child said the book tour was necessary because he’s often flagged down by his ‘biggest fan’ and asked when the next book will be released. “Eighty percent of the marketing is just reminding people the book is out,” said Child.
Like any system with a variety of variables, the price fluctuates. There’s a stark difference in pricing power between high-dollar-Jonny hotels and working-Joe hotels even though both provide a bed, a roof, and a hot breakfast. One tool for pricing power is how it’s framed.
The German National Railway wanted more riders but they had a problem. When consumers compared the costs per-mile between driving a car and riding a train, the car won out. It was cheaper to buy gas than sit on your–butt.
However, that’s not the only cost of driving. There’s also insurance, wear-and-tear, and opportunity costs and depreciation. However those costs aren’t salient and when things aren’t salient people have a hard time coming up with those other factors.
Faced with this kind of thinking, The German National Railway had two options before them. They could make the automotive costs more salient, or they could make their costs less so. They chose the latter and created the BahnCard which accessed discounted tickets. Now consumers compared the cost of gas to the price of a discounted ticket(!) and neglected the sunk costs of each.
The price depends on the context.
For Veblen goods, people want to pay more. Sometimes people pay more because they’re unsure of the value and slide into you get what you pay for thinking. Sometimes the price is a placebo, ask anyone who chooses Advil instead of Ibuprofen or Diet Coke instead of a store brand.
Instead of ferreting for a silver bullet solution, a business should make a lot of small bets.
Simon published his book in 2015 and included research covering the span of his career in the industry. He praised Gillette for innovating with new razor blades, maintaining pricing power, and succeeding at a high price.
And the effects of this moment in 2012 had yet to ripple to the far edges of the pond.
What changed was the job to be done. The internet reduced transaction costs. Why for example, does Apple have pricing power? Simon writes:
“A strong brand, a cool design, user-friendliness, and system integration. That combination resulted in much higher customer-perceived value, higher prices, higher value, and astronomical profits.”
And in 2010 the same could be said of Gillette. Then the perceived value shifted, as customers wanted more convenience.
One subset of pricing power is price differentiation, which Simon writes, is “high art.” If pricing relies on this weird mix of contexts then it makes sense that perceived value is:
- different for the same person at different times
- different for different people at the same time
This is part-of-the-reason for movie windows and why things bundle and unbundle. Chris Dixon wrote in 2012 “The benefits of bundled pricing are proportionate the buyers’ variance of preferences for the goods.” Simon writes, “The driver behind (successful different price differentiation)…is the fact that individuals at different times have different levels of willingness to pay.”
Like much business advice, this is easier said than done. Much of business is making the trains run on time, not studying topographic maps to consider and test new routes. However pricing tests can be quite valuable. Marc Andreessen wants businesses to charge more, in part to see how viable they really are.
Profits sustain businesses and the best way to earn more is to raise the perceived value and raise the prices.
Thanks for reading.