Module 8 Podcast

Start So when you do a PhD in anything, including marketing, you kind of do a year or two learning about research methods and the philosophies of science and, you know, basically doing a lit review. And then after about a couple of years you go out and gather data. And in my case, my PhD supervisor, Richard Elliott, had a brilliant, slightly flawed but brilliant idea that if he could get someone young enough who kind of looked like a high school student, he or she could go into high schools and study kids using ethnography in a natural setting. And it sort of made sense until by the time, I mean, I didn't look young when I was 18. I mean, I looked relatively old then. And by the time I got to my PhD stage, I would have been 2324. So you couldn't have put me in a high school as a as a kid, you know, it would have been rumbled about 3 seconds later. So then we hit on a secondary idea, which is I could go in and be a teaching assistant and at the schools that would let me do that, I could then do observational work during breaks and lunchtimes and stuff. And we found enough schools back in my home area that were happy for me to come in as a volunteer and would allow me access, subject to all the approvals, to go into playgrounds and just essentially watch kids playing. And the reason for all of that was we were working on my PhD thesis. It was all about what's called the social uses of advertising. So not what advertising does to kids, Plenty of research on that. But what does the typical kid do with advertising? And when you reverse that causality, you're talking about active audiences. How do kids play with use, utilize advertising in rituals and metaphor and, and we found loads of examples and it became quite an, a really award-winning paper and so on. And I did six months back in my home area, essentially being a secondary school teacher and, but gathering a truckload of data. Then I wrote it up. And by the time I'd written it up and it was being, you know, reviewed, I'd got my PhD and I was at Minnesota, at my first university. And I'd gone to Minnesota primarily because I turned down Harvard to go to Minnesota. That's another story. But I'd been in my undergraduate life at Lancaster University in England. I've been put in the wrong residence hall. So by chance, and then by chance, all the other five students in that residence hall, they were all going to be Americans because it was an American Exchange residence corridor. But they all happened to be from Minnesota, from different schools in Minnesota. And this is when I was 1819. So, you know, 5-6 years later, by the time I've got my PhD and I'm a junior, junior professor, I went to Minnesota because I had five or six very close friends in and around that area. And I had a social network ready to go. And it was sweet because the University of Minnesota, who realized I'd turned down Harvard to come to the University of Minnesota. We're really worried that, you know, the Twin Cities aren't, you know, if you don't know people, you're pretty screwed. And it's, it's, you know, it's virtually Arctic, like in the winter and stuff. So they were worried this guy from England just wouldn't be able to settle and then they'd lose me. So all these lovely old professors will all like trying to take me to social events and poker games and basketball games. And I'd always have to say, look, that's great. I got to go at 8:00, though. And they're like, where are you going? And I said, look, you know, I got to, I got to go somewhere. And they eventually twigged that I got a better social network than most of the people in the in the Twin Cities, you know, anyway, So I chose Minnesota. I was a junior professor there in 1990. I would have been 90, maybe 9697 when I got there. There's always one professor. I think when you were a junior professor, that kind of becomes your guide on the process. And for me, it was Mark Bergen, who'd come from the University of Chicago. He knew he was a Minnesotan originally. He was like the best teacher in the school. And he taught pricing. And he was just a pricing nerd. And so it really changed my life in the sense that I became kind of influenced by Mark in the sense that he was teaching case studies, which I'd never seen before. And he was also doing a bit of consulting on the side, which was very admirable in my opinion. And he was just into pricing, and that's all he talked about. And he was really interested in me because of ethnography. So we've covered ethnography way back in Module 2, right? It's on site, participant observation, extended periods, very qualitative. And I talked about my thesis and he thought it was great and all that, but he had no interest in advertising at all. What he wanted to do was do an ethnography of price. And what he meant by that is that all these theories from economists about pricing and how pricing works and price theory and elasticities and sticky prices and menu costs, but almost no one had studied The Dirty business of setting prices. Yeah. And so he'd looked at my method and gone. We could get rich and to work with him and his ragtag assortment of pricing nutters, and we could write a paper. And so that's what we did. We went up to Portland, OR to a big, large B2B company that was selling parts to the, you know, all the major automotive companies and B2B companies that were up there. I can't remember now. We were up there quite a bit. And all we did is we studied pricing season. So I watch incredibly boring. I watched managers basically having me in setting prices and talk to them. And I often I was up there on my own. And so I can remember these, you know, dreary days. Oh God, getting a big coffee in a downtown like Marriott Hotel in Portland, going up to this God forsaken industrial park and then basically interviewing people for 8 hours about how they change the prices on valves. And it was kind of like, oh, God, you know, what am I doing? But I loved Mark and I believed in him. And I came back with all this data and then I started presenting it to the guys in in our team. There was a Danny Levy. He was a crazy Israeli academic. And there was me and he was another mate from university Chicago. And they weren't empiricists, you know, they were just pricing theorists, professors. And I started to read him the quotes. And these guys were getting like excited. They were like properly excited. And I'm like, OK, if you think so, you know, because what was coming out of the data? What was that? I'll give you a a small example. The marketers in these companies were saying, you know, my supply prices go up. But if it's only 10%, the hassle of changing the price, communicating the price internally, externally and the bullshit feedback I get, it isn't worth the 10%. So I'll just take it in the pants. I quotes like that and they were going this will change the face of economics. And the reason it was going to change the face of economics was there's this whole theory that I'm completely unaware of that came out of George Akolov's work actually working with Janet Yellen, who became the, you know, the, the we still is, I think, running the Ukus economy. This idea that there's an inertia in changing prices that can be traced back to asymmetrical information. Yeah, in that there's a bounded rationality. This is in the language of economists. Now managers can only see so far ahead. So when they take it in the pants and don't put prices up, the long term effect of that is an irrational price maintenance where prices don't jump until suddenly they go up in a very irrational way. Anyway, there's a big macro theory at the end of this which our little paper from Portland helped explain and and it did quite well. It almost got into the Quarterly Journal of Economics, which is like the greatest achievement of any economist. And I'd never published anything about economics in my life. And we missed it by like an inch. And then it ended up being published somewhere else. And then, lo and behold, a couple of years later, when Akhilov won the Nobel Prize for his theory of partly of asymmetrical knowledge and influence on pricing and other economic decisions, he cited our paper right up front as one of the core examples of this in practice, which was, you know, it's quite the thing, you know, So I've always had a thing about pricing, an appreciation for it. And if I'm honest with you, two other things that Bergen taught me on the side. One was that pricing isn't boring. You know, if Bergen can be the star teacher not just of the marketing department, but the whole Business School on the NBA program teaching pricing, there's obviously something sexy about it somewhere that that no one's shown me before. So it gave me faith that pricing was interesting. And the second thing was, it wasn't just Bergen was doing consulting. When he did consulting and he helped the company set a price that was perhaps higher than the company was anticipating, it was a different kind of value because the companies didn't just know that he'd done something good for them. They could point to the $0.20 for every product they sold that he'd given them input on and reassured them. They could charge, and they could literally calculate the value of his presence. And that'll always stay with me that if you can help a company with price, it's super valuable and they know how super valuable it is. So I've never been an expert in pricing, but my God, I know and appreciate it. And we've brought that into Mini Mbai hope this week. All right, enough, enough. So for the podcast, we've got a nice collection of material this week. Going to start with John Gourville, who you know, is a Harvard professor, wonderful teacher. And John will talk about the, the core reading this week, which is the, the pricing paper, which I think almost every MBA program uses because it's just such a nice clean summary of, of most pricing stuff. So I've tried to get that down to 10 minutes for you just to give you a really super concentrated read. Next, there's an article of mine about Tom Kerridge setting his prices. I think you know correctly, you'll have to, you'll have to decide if you agree when you hear the prices, but I think they're pretty good prices. He's done a good job. And then finally, Helen Jess for module 8 bit existential this week. You'll see what I mean there, discussing the pricing module. So nice and tight, Lots of good stuff. Let's get going with John Gorville from Harvard. That's our first of the material for the podcast. Principles of Pricing Hello there. My name is John Gorville. Or to be straight with you, I'm the artificial intelligence version of him. The real John Gorville is a professor at Harvard Business School, where he's taught marketing for many years, particularly in the areas of pricing and consumer behavior, how people actually make decisions as opposed to how the textbooks say they ought to. This voice is a synthetic one, but the ideas are his, and the team at the Mini MBA asked me to walk you through the reading. You've been assigned this module, so here we are. The piece you're reading is called Principles of Pricing, and I wrote it with a colleague of mine, Robert Dolan. Bob Dolan. Bob's a marketing professor, too. He was at Harvard for a long stretch and later served as the Dean of the Business School at the University of Michigan. He's one of the sharpest minds on pricing strategy of his generation. And the two of us put this note together to give students a clear, usable framework, not 100 pages of theory, a way of thinking. So let me give you the heart of it in the time we've got about 8 minutes. The big lessons, the first principle, and if you take nothing else take this, is that you should price based on value, not on cost. Most companies do the opposite. They look at what the product cost them to make, they add a margin they feel comfortable with, and that becomes the price cost plus pricing. It feels safe, it feels rational, and it leaves an enormous amount of money on the table because it has nothing whatsoever to do with what the product is actually worth to the person buying it. To make this concrete, Bob and I use the image of a thermometer, a vertical scale. At the very top of that thermometer is the true economic value of your product to the customer, what we'd call the objective value. That's a real calculable number. It's what your product does for the customer compared to their next best alternative. If your machine saves a factory $200,000 a year more than the competing machine, that difference is part of your objective value. Below that, lower down the thermometer, is the perceived value. That's what the customer thinks your product is worth. And here's the thing. Perceived value is almost always lower than objective value because customers don't have perfect information. They don't know everything your product can do. The gap between the true value and the perceived value. Closing that gap, is the job of marketing. That's what your communication, your selling, your positioning is for. Every dollar of real value the customer doesn't perceive is a dollar you can't charge for. Then below perceived value sits your price, and below price at the bottom sits your cost. Now look at the spaces between those points, because that's where the whole framework lives. The gap between the customer's perceived value and your price. That's the customer's incentive to buy. That's their surplus, the reason they say yes. And the gap between your price and your cost? That's your margin, your incentive to sell your profit. The art of pricing is setting that price in the band between your cost and the customer's perceived value. Too low, and you're handing the customer's surplus you could have kept. Too high above perceived value, and they walk away. And cost plus pricing, It ignores the entire top half of the thermometer. It ignores value completely. That's why it's such a costly habit. The second big lesson is just how powerful price is as a lever. People underestimate this, and the numbers are genuinely startling. Consider a typical large company. If it could raise its prices by just one percent, 1%, and lose no sales as a result, its operating profits would rise by an average of around 11, or 12%. Let me say that again, because it deserves a second pass. A 1% price increase can produce a double digit percentage increase in profit. There is no other lever in business, not cost cutting, not volume growth that delivers that kind of return for that little effort. And yet most companies spend enormous energy chasing volume and trimming costs and barely think about price at all. The third lesson is that you have to understand price sensitivity. And price sensitivity is not one number. It varies enormously depending on the customer and the situation. In the note, we talk about the factors that drive it. How easily can the customer compare you to alternatives? If comparison is hard, sensitivity drops. Who's actually paying? The person choosing or someone else? Think of a doctor selecting a treatment that an insurer pays for. That doctor is not very price sensitive. How significant is the expenditure relative to the customer's total budget, and how much does the customer care about quality or risk in this particular category? The practical insight is this. Because price sensitivity differs across customers and situations, a single uniform price for everyone is rarely the profit maximizing choice. This is the logic behind price customization. Student discounts off peak pricing. Different versions of a product at different price points. You're not being arbitrary. You're aligning price with the value different segments actually place on the product. The airline seat that costs a fortune the day before the flight and very little six months out? That's not chaos. That's price customization capturing value from people who value the seat differently now, and this matters. There's a clear line between legitimate price customization and conduct that's unethical or illegal. Charging different segments different prices based on their genuine willingness to pay is ordinary, defensible marketing. Colluding with your competitors to fix prices is not predatory pricing. Pricing below cost to destroy a competitor is not. The framework is a tool for capturing the value you create. It is not a license to abandon your judgment. So let me bring this back to you as a mini MBA student, somebody doing this work or about to. When you go back to your organization and look at how it sets prices, ask the simple, slightly uncomfortable question, are we pricing from cost or from value? Be honest about the answer. If there's a spreadsheet that starts with cost and adds A margin, you are very probably leaving money on the table. Then ask, do we actually understand the objective value we deliver in numbers against the customer's real alternative and how wide is the gap between that and what the customer perceives? Because that gap is not a problem to complain about. It's your single biggest marketing opportunity. And finally, remember the power of the lever 1%. When you next sit in a meeting where everyone is grinding away at costs, it is entirely fair. It is your job, really, to ask whether anyone has looked seriously at price. Pricing is not the finance department's clerical task. It is the moment where all the value you've worked to create either gets captured or quietly gets given away. Treat it with the seriousness it deserves. Thank you for listening Bob, and I hope the framework serves you well. Good luck with the rest of the mini MBA. Ritson: Tom Kerridge Knows Pricing Tom Kerridge's prices aren't a RIP off if they're what the market will pay. Mark Ritson, Marketing Week 2022. About 30 miles West of London, down a long leafy lane that will be forever England, there is a pub. And not just any pub. The Hand and Flowers was opened in 2005 by chef Tom Kerridge and his artist wife Beth. They clearly knew what they were doing. Within a year the pub had won a Michelin star for its brilliant cooking of simple British staples. A couple of years later it won its second star, making it the first pub ever to hold 2 Michelin stars. The A A agreed with Michelin's assessment, making it the Pub of the Year in its English Restaurant Awards in 2011. Carriage's menu is a winning mix of sophisticated takes on classic English fare. But the buttered hispy cabbage, £7.50. And sensational is not the only thing in hot water. Down at the Handon Flowers this week Wine critic and all round bon vivieux Guy Woodward took to Twitter this week to chastise Kerridge and his team for their prices. Woodward said the website of the Hand and Flowers by Tom Kerridge claims unpretentious. Proper pub for everyone to enjoy. Relaxed and accessible. Also at the Hand and Flowers, Steak and chips 87 lbs a side of cabbage £7.50. Creme Brulee 2650 And people complain about wine list markups. Kerridge, never a stranger to defending his approach, was quick to jump back onto Twitter and reply. Those prices include everything he tweeted. VAT and service. No additional service charge at all. Also, I pay staff properly and treat their job as a professional career. Perhaps the real cost of dining should be addressed. Unpretentious does not mean cheap. Also, why is profit such a bad word? That response, and the subsequent discussion between the two on Twitter led to inevitable media coverage. Last week, the Independent ran a series of stories on the pricing at the Hand and Flowers. The Times asked its readers if they thought the stake was really worth the price, and the Sun used the story as a launchpad for a feature examining RIP off meals all over the country. The saga illuminates an issue in marketing that we talk about too infrequently within our discipline. Conferences are overcrowded, with tossers predicting the imminent domination of the metaverse and digital maestros dealing with the disruption of everything because of Bitcoin and 4D printing. But very few marketers ever discuss issues that are approximately 9 bazillion times more important for brands, namely things like price setting, the price itself, and it's communication. And no, they're not all the same thing. Each presents its own challenges and, as Chef Carriage nobly illustrates, can be a make or break issue for any business. I'll put my cards down early on the restaurant table this week and declare my total admiration for Courage. Not for his cooking, which I've not ever sampled, but for the premium prices he's set for his very premium food. Why is profit a bad word? He asked in his Twitter defence last week. Well, I can tell him it's a bad word because the world of business is fixated upon top line revenue. Most managers mistakenly believe this figure to be the lifeblood of their business. And yet it is clearly no such thing. Revenue is a distracting means to a much more valuable end. I could take the rather fancy German keyboard that I'm writing this column on, pop it onto eBay and sell it within a few days for 20 or maybe £30. There you go, I just generated revenue. The fact that the keyboard cost me £200 is not the issue. I've made money come in. Do you see how banal and easy it all is? Now imagine I found a way to take my 200 LB keyboard and sell it for £300, hell £500 and make a profit. Now that that's really something, a rare thing, an important thing, a difficult thing, a marketing thing. Any can sell something for revenue. But making money from the sale, lots of money, is a different matter. Profit is only a bad word for those who worship at the tacky over popular altar of revenue. For those who understand business, who practice marketing properly, profit is our totem. It may sound obvious, although I'm splitting 2 parts of the same whole unnecessarily, but just look at sales promotions. If you think the purpose of marketing is to generate revenue, you cannot do enough promotional activity and discounting. But if you relish the higher focus on profit, you'd run a few sales promotions as possible because while they may drive demand, they eviscerate immediate and longer term profits. I actually think there are marketing morons out there who think a 30% discount still preserves 70% of their profits because they simply do not understand basic operating costs. And then there was the long, often fatal death spiral that follows the over reliance on discounting that comes with time. You do it, your competitors do it, you do it some more, your customer expects it. And then only then do you start to glimpse the real reasons why price setting is so important to marketing and business. How, someone always asks me, do we get our prices back up after such a long period of discounting? Of course the answer is that you don't. That you must learn to sleep on the uncomfortable bed of turds. Now 30% more turds than last week. Then you and your revenue obsessed organization made for yourself. And the reverse is also true. Increasing prices is the path to a better life. Chef Carriage is not alone. Everyone from the boffins at Wharton to the prescient consultants at McKinsey have concluded the same thing. The single most effective way to improve corporate profitability is not to increase sales or cut costs. It is to raise prices. Even a single percentage point bestows dramatic fiscal benefits. Those who are more revenue minded scratch their heads and worry about losing customers or the decline in unit sales that might occur if we put prices up. Both are likely consequences of price increases, but so are higher profits. And researchers confirmed that in most cases of incorrect price setting, most marketers err on the volume side of the equation at the expense of value. They sell more stuff but make much less money. So let us praise Tom Carriage for his ability to set a premium price and stick to it. The Hand and Flowers is a famous pub, but it's also tiny. Carriage has the reputation and now the fame to drive enormous demand for his cooking. He would be an idiot to charge anything less than the market would pay, and he can service too. Many badly trained marketers start their pricing calculations by either looking at competitors or looking at their cost of goods. Cost plus pricing has probably robbed more companies of more money than any other fallacy in the history of business. Instead it is to demand, and the source of that demand, the consumer, that all eyes must turn. Is Carriage's steak worth £87.00? Well it depends on who you ask. All the neo Marxists and digital misanthropes who lined up on Twitter last week to lambast Tom and his ridiculous prices need to fall off until they grasp the concept of segmentation. They may not think that his steak is worth £90. Others clearly do. The point of pricing is not to ensure everyone thinks something is good value. It is to ensure that the target segment thinking everyone else is unimportant. They can say what they like from the discomfort of their differently coloured bubbles on the other side of the segmentation chart. The hand in flowers is not aimed at them. Get thee to ALDI. My only criticism of Carriage is the way he tried to defend his pricing. Last week. He made an elementary error by attempting to use cost to make the case for price. The minute you stoop to an inventory of ingredients, you always besmirch your brand and belittle your pricing power. Never allow anyone to see behind the curtains of price and into the toilet of manufacturing. Your margin is your customer's outrage. Instead, focus on all the amazing levers of pricing sensitivity you can pull to increase price while maintaining or occasionally even increasing demand. The emotional impact of scarcity, the close up tactical hand trickery of behavioural economics and the ability to anchor or frame price to your advantage. The option of bundling or rundling your way to higher prices while making the customer feel they have just grabbed A bargain. And of course, there is the hardest but surest pricing move of all building a strong brand before you set your price. Steve Jobs never sold anyone a mobile phone. He sold them an iPhone. Samsung is currently discounting the Shard of its new foldable phone because it's a foldable phone, and one that almost everyone who knows Samsung knew would become discounted almost before it was launched. While all the heads on social media debate whether differentiation actually exists, let me remind you that it does, and that it has been continually shown to be the most effective way to reduce price sensitivity. Tom Kerridge knows that already. That is why he writes books and appears on TV and generally does whatever he can to be famous. His fame fuels his brand, which in turn desensitises the customers to high prices, which thus enables him to charge £90 for steak and chips with fancy gravy. And thanks to the notoriety of his premium prices, Carriage is about to get a lot more famous. And that means, you guessed it, Tom should start thinking about a price rise right about now. The Briefing Hello and welcome back to The Briefing, your mini MBA talk through by two people who at this point I think genuinely look forward to Thursdays. I'm Jess Hammond. Speaker 4 And I'm Hal Whitman, and she's right. I do look forward to it. It's the highlight of my week. Don't tell the other things I do that this is the highlight. Speaker 3 Your secret's safe with me. How was the West Village, The pilgrimage? The veal. Speaker 4 Oh, the veal delivered, sat at the bar, had the whole thing, glass of red and the bartender. Different guy, obviously, 40 years on, but he had the same way about him. It was like the building remembered me, even if nobody in it did. But melancholy, Good melancholy. Speaker 3 There's a lot of good melancholy with you lately, Hal. Speaker 4 It's my time of life, kid. It's all good melancholy from here. What about you? Did you take the long weekend? You keep promising me or. Speaker 3 I took the Saturday. Speaker 4 Half a win, I'll take half a win. Speaker 3 I took the Saturday and I genuinely did not open the laptop so I'm counting it as personal growth. Baby steps. OK, Module 8 pricing, the scary one. Speaker 4 The not scary one, I keep telling you. What's on the pile this week? What are we working with? Speaker 3 So there's the Tom Kerridge piece, the £87.00 steak one. There's a written article he calls an ethnography of pricing about how and why to put prices up. There's the, I'm just going to say it, the IGF one Seven steps to kicking your price promotion addiction. Speaker 4 It's a real title we don't censor on this show. Speaker 3 We bleep precisely one word and it isn't that one. And there's a Harvard case in the pack, principles of pricing, which I know you actually read this time because you texted me about it at what was it, half 10 at night? Speaker 4 Half 10 at night, fully gripped by a pricing note. That's the man you're dealing with and I loved it, so I'm calling that one for me upfront. Speaker 3 It's yours, we'll get to it. Should I do the carriage one since you teased it so hard at the end of last week? Speaker 4 Please set it up. Speaker 3 OK so Tom Carriage Chef has a pub called The Hand and Flowers. First pub in the country ever to get 2 Michelin stars and a wine critic goes after him on Twitter for his prices £87.00 for steak and chips, £26.50 for a Creme brulee, 750 for a side of cabbage and Kerridge fires back. Says those prices include everything. VAT service. I pay my staff properly, I treat it as a real career. And then he says the line the whole article hangs on. Why is profit a bad word? Speaker 4 And Ritson's answer to that question is basically the entire module. Speaker 3 Right. His answer is profits become a bad word because business is obsessed with revenue instead revenues. The vanity metric. He's got this great bit where he says he could put his fancy keyboard on eBay, sell it for £30 and congratulations, he's generated revenue. Anyone can generate revenue making actual money on the sale. Lots of it. Consistently. That's the rare hard marketing thing. Speaker 4 And a keeper line from that piece, the one I'd write on the board, the single most effective lever for profitability isn't selling more units, and it isn't cutting costs. It's raising price, even 1%. The Wharton people, the McKenzie people, everyone who's run the numbers lands in the same spot. Speaker 3 And most marketers won't do it because they're looking at the unit sales chart and not the profit chart on the next page. They genuinely rather sell more stuff and make less money. Speaker 4 Volume over value, he hammers at the whole module. Marketers air on the volume side almost every single time. Speaker 3 Now I liked this one, but can I push on something? Speaker 4 You always can. That's the show. Speaker 3 Ritson admits Carriage actually made a mistake in how he defended himself. Carriage itemized his costs, staff VAT ingredients and Ritson says never do that. Never let anyone see behind the curtain he's got this line. Your margin is your customers outrage and I half agree, but there's something a bit uncomfortable to me about never explain your price. It feels 1 short step away from Never be transparent with people. Speaker 4 That's a fair attention, but I'd split it in two. There's explaining your price in terms of your costs, which is the trap, because now the conversations about your factory and your invoice. And there's justifying your price in terms of customer value, which is the move he actually wants. Don't tell me what the leather cost you, tell me what the bag does for me. Speaker 3 OK, value not cost. I can live with that. It's not don't explain, it's explain the right thing. Speaker 4 Exactly that. And honestly, Jess and I know this is a strange thing to say about pricing. Speaker 3 You're about to get emotional about pricing. Speaker 4 I'm about to get a little emotional about pricing. Pricing is the closest thing in marketing to a pure expression of whether you believe in your own product. A discount is a confession. Every time you mark it down, you're whispering. I don't quite think this is worth it. A held price, a confident price, is the opposite. It's faith made numerical. Speaker 3 Faith made numerical. That's actually lovely. How? Speaker 4 Don't sound so shocked. Speaker 3 I'm not shocked, I'm OK. That's the perfect way into the Ugg piece actually, because that's the whole article. The discount death spiral. Speaker 4 Walk them through the acronym. It's a tortured acronym and he knows it. Speaker 3 He fully knows it. I can. He says he wishes it spelled success or winners, but it doesn't and he refuses to torture the words into shape just to make it pretty. So Aygomph, 7 steps. Ignore the sales line, get the price right. Manage senior expectations. Focus on differentiation. Use brand tracking. Change the focus from promotions to advertising. Keep the focus on profit. Speaker 4 And the case study running underneath it Tyrrells the crisps. Speaker 3 Yes. So KP buys Tyrrells, and the brand's been so addicted to discounting for so long that it's basically profitless. They pull the promotions and the average price jumps 29%, but volume sales immediately drop 27%. Speaker 4 Which is the terrifying middle of the story. Speaker 3 It's the bit where anyone would panic. Profitless brand now also down 27% in volume but they hold their nerve because they know the real price is the right price and the market will come back to it and it does. 40% volume growth since they removed the promotions plus the margins back. Speaker 4 And the line I'd underlined for the whole class, price promotions are the crack cocaine of promotional activity. The first hit looks like free sales, but a lot of those sales are just pulled forward from your own customers who'd have bought anyway. You've borrowed from next month, and then you do it again and again, and your customers learn to wait for the discount. Speaker 3 And the differentiation bit, he picks a proper fight in there. Speaker 4 He does and it's a real marketing world, Stoush. So for anyone newer to all this, Byron Sharp, the book How Brands Grow, the argument that distinctiveness is what matters and differentiation is a bit of an old world idea. And Ritzen's response is no, you want both. Distinctiveness drives your volume fine, but differentiation drives your margin. And if you've spent years discounting, you've stripped the differentiation out, so now you've got nothing left to justify the price you suddenly want to charge again. You have to rebuild it first. Speaker 3 And Tyrrell's rebuilt it on more intense flavour, tastes better, more interesting. Not unique, just relatively different on three things. Not 12. Speaker 4 3, not 12. That's the recurring written number. Nobody can hold 12 things about a bag of crisps. Speaker 3 OK, the third article, The Ethnography 1, and this is the one I found weirdly the most human of the three. Speaker 4 Tell them why, because the setup is great. Speaker 3 So young Ritson, brand new assistant professor, gets cornered in a university canteen by an economist called Mark Bergen, who's obsessed with the idea of studying pricing in the wild. Actually watching companies do it. And they end up embedded in AB to B parts company in Portland, OR watching what the executives there call pricing season. And the big discovery is this thing called menu costs. Speaker 4 Which is such a good idea? Explain menu costs. Speaker 3 So a company wants to put a price up, but the sheer hassle of doing it, updating the price sheets, the sales force tension, the customer complaints, the internal arguments, the hassle is so off putting that they just don't. They leave the price where it is. One manager says he'd rather take one in the pants than go through it. Speaker 4 And on its own, at one company, that's a rational little decision. But Ritzen's economist zoom out and see the whole macro economy of it, Millions of companies all flinching from the same hassle, so prices across the entire economy go sticky. There's a Nobel Prize that cites their paper from watching people be too tired to update a spreadsheet. Speaker 3 And the practical core of it, the CHEAT SHEET bit, is the utpal de lacquer advice on how to actually communicate a price rise. Be open about it. Say price increase those exact words. Don't say price adjustment. Don't hide it in a smaller pack. Give people warning. Give a real specific reason and link it back to the value they're getting. Speaker 4 In the Pret example, the coffee subscription, the whole article basically holds up that one e-mail from Pret as the model 6 weeks. Notice the words price increase right there. Simple reason, no weasel words. Speaker 3 It made pricing feel less like a dark art and more like just telling people the truth. Well, which is why I said human. It's the least swaggering of the three pieces, and I think I liked it the most because of that. Speaker 4 Did you like it more than the carriage 1? Genuinely. Speaker 3 I think I did, yeah. Carriage is the fun one. The Ethnography 1 is the one I'd actually keep. Speaker 4 Interesting. For me, it's still the Harvard case and I want to do it before we run out of Rd. because it's the spine under everything we've just said. Principles of pricing, Dolan and Goreville. Speaker 3 Go on then, sell me a Harvard note. Speaker 4 So the core idea is value based pricing and they draw it as a thermometer at the very top. The objective value, what your product is genuinely worth to the customer in hard terms versus their next best alternative. Below that, the perceived value, what the customer thinks it's worth, which is usually lower and the gap between those two is the job of your marketing. Then below that sits your price and right at the bottom your cost. Speaker 3 And the space between the price and the cost is your profit. Speaker 4 That's the firm's incentive to sell, and the space between perceived value and price is the customer's incentive to buy. And the whole game is you set price in that band above your cost, below what they think it's worth. And the disaster, the thing they warn against cost plus pricing, just taking your cost and slapping a margin on top, because that completely ignores the top of the thermometer. It ignores value entirely. Speaker 3 Which is the exact same sin Ritzen's banging on about looking at the cost, looking at the volume, never looking at the value. Speaker 4 Same sermon, different pulpit, and there's a stat in there that'll stop the class dead. If Coca-Cola raised its prices 1% and demand didn't move, net income up 6.4%, one cent on a can, about $300 million. And then they say the average big U.S. company 1% price rise 12%, jump in net income 12 for 1%. Speaker 3 That's the number that justifies the whole module existing. Speaker 4 That's the number I texted you about at half 10. That's the one. Speaker 3 OK, should we do the lecture because I had a moment from the module class. Speaker 4 Go on. Speaker 3 Price sensitivity, the bit about who actually pays, the cardiologist, choosing a stent for a patient life or death, expert decision, and crucially, the doctor isn't the one paying for it, so they're barely price sensitive at all. And then the flip the retired golfer who plays 200 rounds a year and loses 3 balls around. And Ritson, well, the Harvard note points out he's not making a 1 LB versus 3 LB decision. He's making a 600 versus 1800 LB decision. He just hasn't done the maths. Speaker 4 And that completely reframes how you'd sell to each of them. Same product, totally different sensitivity because of who pays and how the cost stacks up over time. My favorite bit of the lecture was the price customization stuff. The idea that the same product can and maybe should be different prices to different people because they don't all value it the same. Cinema tickets cheaper for kids and pensioners at the quiet times. The plane seat that costs a fortune 3 days out and nothing six months out. It's not a trick, it's just meeting different people where their value actually is. Speaker 3 As long as it's not the dodgy version, the notes quite careful about that. There's a difference between price customization and the genuinely unfair or illegal stuff. Predatory pricing, price fixing. Speaker 4 Right, they make that line very clear. Charging different people different prices? Fine. Colluding with competitors to fix it? Not fine. Anyway, should we do the thing? Speaker 3 We should do the thing. Hal Whitman, 60 seconds. The entirety of pricing starting now. Speaker 4 Pricing is the most powerful and most neglected lever in the marketing mix. A 1% price rise can lift net income by double digits. Yet most companies obsess over cost and volume and barely touch price. Price from value, not from cost. Cost plus leaves money on the table every time. Understand the thermometer objective. Value at the top, perceived value below it, and your marketing's job is to close that gap. Know your customers price sensitivity, who pays what the alternatives are, how the cost adds up. Discounting is an addiction. The first hit is free, the spiral is not. Differentiation drives margin, and profit, not revenue, is the point. Revenue is vanity. Profit is the job. Speaker 3 Time and OK, that was good. That was a nine. Speaker 4 Another 9. Speaker 3 Another 9, the thermometer bit was clean and you landed. Revenue is vanity, profit is the job. Like you'd planned it. Speaker 4 I absolutely did plan it. I'm not ashamed. Speaker 3 I know you did. It was still good, right? New York? What's the weekend? Speaker 4 So this weekend there's a jazz place I used to go to, tiny basement room, and I'd more or less stopped going because going alone started to feel a bit sad. But I've decided that's a daft reason to give up something you love. So I'm going Saturday night sitting at a small table ordering an old fashioned, listening to a trio I've never heard of by myself on purpose, and I'm going to enjoy it. Speaker 3 Good. That's actually Hal. That's the healthiest thing you've said in eight modules. Speaker 4 Don't get used to it, right? Preview US Module 9. Speaker 3 Module 9 is marketing communications, which is the big one, isn't it? The one everyone thinks is the whole of marketing. Speaker 4 It's the one everyone thinks is all of marketing, and the module's basically about why that's wrong and also why when it's done right, it's still magnificent. There's a brilliant piece in there about Marks and Spencer. There's the long and the short of it, and there's a work report I have a feeling you're going to want to talk about. Speaker 3 I've already read it, I've already got notes. It's the multiplier effect and it's mine. How? Speaker 4 It's yours. I wouldn't dare. That's module 9. Everyone do the reading. We'll see you next Thursday. Speaker 3 Bye everyone. Summary OK. So that's it. We're done with Module 8. Pricing is over. I hope I've made it interesting. I think one of the, one of the big challenges that I really wanted to address with the mini NBA this year was I know many of you are reticent to do the pricing module because pricing just seems boring. And I really wanted it to be a sexy module that's interesting and show you the power and importance of it. And so I, I hope I have succeeded. I, I, I encourage you to get more into price. It's such an interesting underutilized muscle that marketers could be much more not in charge of, but certainly involved with. All right, enough of pricing. Next week we head to module 9. It's the much more comfortable, familiar territory of advertising, marketing, communications, IMC promotions, whatever you want to call it. We're going to talk about comms next week. See you then.