Ep102: Unlocking the Black Box of Pricing: Why Pricing is So Easy in Theory but Not in Reality with Alessandro Monti

Alessandro Monti is a pricing enthusiast and expert on all topics related to monetization, conversion, upselling, and digital pricing history. He’s an experienced consultant, advisor, mentor, and speaker in all fields related to price management, sales excellence, marketing, and corporate strategies.

He’s also a dedicated professor and lecturer for Marketing, Pricing, Sales and Digital Transformation at the CBS International Business School in Cologne.

In this episode, Alessandro talks about the importance of learning the pricing basics, the fundamental pricing relationships that must be considered before pricing a product, and how a customer perceives a price ‘fair’.

 

Why you have to check out today’s podcast:

  • Learn why history is important in pricing, and the other fundamental factors to consider in coming up with a price
  • Find out what the ‘Blackbox of pricing’ is all about and why not all people know about it
  • Learn the importance of why as a pricing professional you need to live, breathe, and ace the basics first before you come up with pricing shortcuts and beta tests

 

“Learn the fundamentals. Understand the basic mechanisms. In the long run, this will yield you far better results than just the ‘easy and quick’ approach to pricing.”

– Alessandro Monti

 

Increase Your Pricing Knowledge: Become a Champions of Value INSIDER!

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Topics Covered:

01:06 – Alessandro’s first touchpoint into pricing, what made him stick to pricing – Price as the central hinges of the economy

03:05 – How did his Ph.D. in Business History help him in working at Simon Kucher & Partners?

05:29 – Alessandro and his coaching and consulting business, the kind of clients and businesses he typically coaches

06:52 – Why pricing is so easy in theory but not in real life? The complexities, the abstract, and the real deal

09:20 – Connecting the dots, the quantum parts of the decision making: future decisions that customers take

12:07 – ‘Unlocking the Blackbox of Pricing’: How to answer the ‘what should be the price’ question

16:17 – What is a fair price? How do you decide what fair means? The Fair Transaction the concept of fairness

20:04 – The Fairness Index – telling a reason for your price increase than telling nothing without spooking your customers

21:08 – The 10x approach of pricing Softwares as explained by Alessandro

23:09 – The hardware pricing /The digital ecosystem of hardware in the subscription businesses

24:09 – Alessandro’s pricing advice: “Try to understand the fundamentals. Don’t try to hack yourself somehow through the price or go for some shortcuts. Understand the basic mechanisms and this will yield you far better results.”

25:10 – The fundamentals of pricing and the factors affecting it

 

Key Takeaways:

“Price is the central hinge of the economy.” – Alessandro Monti

[on coming up with price] …the discipline is so complex; it seems to be easy. But the complexity every time I start the lecture on elasticities, in the end, it’s difficult because it’s so abstract. Then you’ll realize, ‘Hey, this is real life. There is some reaction to price changes and in demand.” – Alessandro Monti

“The concept of fairness is so individual. At the end of the day, I’m a big fan of, ‘Hey, if I’m able to charge at the level of individual’s willingness to pay, and I deliver value, and the customer is willing to pay for that.” – Alessandro Monti

 

Connect with Alessandro Monti:

 

Connect with Mark Stiving:   

  • Email: mark@impactpricing.com
  • LinkedIn

 

Full Interview Transcript  

(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.) 

Alessandro Monti 

The whole complexity of pricing, just try to understand the fundamentals, at least the basic mechanisms, the ups and downs, elasticities. It will help, definitely.

Intro 

Mark Stiving 

Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the historical relationship between them. I’m Mark Stiving, today our guest is Alessandro Monti. Here are three things you want to know about Alessandro before we start. He is a professor for corporate management and organization at Cologne Business School. He’s done stints at both SKP and Wolters Kluwer, two companies that I truly respect in the world of pricing. And he went to UC Berkeley as did I. Welcome, Alessandro.

Alessandro Monti 

Hi, Mark, thanks for having me on the show. It’s good to be here.

Mark Stiving 

Hey, how did you get into pricing in the first place?

Alessandro Monti 

Yeah, we all have a story that we can tell. And, you know, it’s always interesting to know how we kind of entered into this adventure. Now, the first touch point was of course, during studies, microeconomics. I’m a trained sort of an economist. And of course, you get the standard pricing approach, the supply and demand things there. But the real, let’s say, management world touchpoint with pricing was my first job, which was at SKP. And since then, this topic, well, yeah. caught my attention. And yeah, I’m all in into this topic. So that’s, that’s the story.

Mark Stiving 

So why do you stay? You’re all in, but why?

Alessandro Monti 

It’s, I think, prices in general. I once read, that was an article, and the quote was, well, they’re the central hinges of the economy. So, the price at the end of the day clears markets. Price is something that you feel as a consumer immediately, it’s sometimes pain, and sometimes pleasure. So, it has a behavioral component. And, yeah, that’s, I think that’s what makes prices and, you know, dealing with pricing quite fascinating, for me at least.

Mark Stiving 

Yeah, so I’ll buy into the fact that it touches almost everything. So, it’s so powerful. And yet I love the fact that so few people understand it. And which means that when we can advise them, we can have huge impacts on their lives and their businesses. So, you got a Ph.D. in business history, I have never heard of that before. And then you went to work for SKP. How did a Ph.D. in business history help you in SKP?

Alessandro Monti 

Well, it helps. It’s helped first of all, from the, let’s say, methodological perspective, you know, learning the, I’d say, more scientific tools and techniques. So, it really does help in then tackling all those pricing questions that of course, you know, should be tackled from, let’s say, a more profound way, okay? So, I always go, you know, the fundamental way when it comes to pricing, so it helps, you know, to have the tools and techniques sort of this research perspective at hand. So, it definitely helped. Well, just on a side note, when I talk to my SKP partners, because I actually did the Ph.D. while being at SKP. So, they kind of allowed me on a sabbatical. And when I kind of told my project and say, well, Ph.D. and has this history component, yeah, I saw some question marks there and say, Well, how does that now kind of translate into our everyday business? And at the end, I think it dates. At the end, the, you know, research, the business history Ph.D., helps you to understand probably the present and also get sort of a hint on what will come eventually in the future.

Mark Stiving 

Nice. And so, is it a quantitative Ph.D.? When you do business history, you’re still doing a bunch of stats and quantitative research and things like that?

Alessandro Monti 

Yeah, well, you can do both ways. You can approach both ways. Now, what I did actually is I went into historical archives. So, I really dig deep into the documents from the, let’s say, early 17th century, and had to research them and had to read them and had to understand how, let’s say, executives back at that time, decided on pricing and pricing strategies. Of course, you can do the quantitative approach. You need to have the data set, so you need to have some numbers eventually. For that period in history, it’s already like a jackpot having documents at all. So, the point here was really to understand the decision making at that time. So, it’s a more qualitative approach at the end.

Mark Stiving 

Nice. Well, what do you say we jump to the current day? And nowadays, you’re a professor, of course, but you also do coaching of businesses in the world of pricing and strategy. First off, what kind of businesses do you typically coach?

Alessandro Monti 

Well, in the last couple of weeks, I have been involved with quite some, well, some, few of the early-stage startups.  So, it’s, it’s basically digital, it’s the tech-related, the startup scene that I have been involved with. And I have been in touch also with small and medium-sized companies. So not the kind of blue-chip big ones, but rather either it’s a startup. So, we have quite some new, interesting, founders that were once students with us, and then decided to, you know, found their own businesses and try to establish a startup. And they called me up and say, ‘Hey, Prof, I remember your lecture. Now I need the real deal with the prices. Telling me what should the price be?’ And of course, I’m really happy to walk them through some pricing stuff. So that has been my involvement with coaching and consulting. Yes.

Mark Stiving 

Nice. I have been teaching pricing for probably 20 some years. And one of the things that I find fascinating is, I think I’m explaining it really well, and then when someone goes to actually apply it, it’s just so hard for them. And I think it’s because we’ve internalized all these concepts so well that we can do that. And yet even, even if you paid attention in class and you learn the concepts, applying them is still really hard.

Alessandro Monti 

I agree. You know what, my impression is it’s because the discipline is, is so complex. It seems to be easy, ‘Hey, it’s a price. It’s a price tag, I sell the product, and yeah, I cash in and everything’s okay.’ But the complexity, anytime I start the lecture on elasticities, you know, my students, you know, I hope nobody is listening, but at the end, it’s, it’s difficult because it’s so abstract. But then you realize, ‘Hey, this is real life. There is some reaction to price changes and demand.’ So that scares some people off. But once they have reached this sort of tipping point, and everything then sort of starts to make sense.

Mark Stiving 

Yeah. I’m always thinking of new frameworks that I like to apply. And so, one of the thoughts that I’ve been having recently is the difference between quantitative pricing and, I’m going to say, value pricing. Now, I get, we all want to charge value-based pricing, we don’t want to do cost-plus pricing. But the way I see the difference is, I see a lot of pricing people using scatterplots. And trying to say, ‘Hey, I want to move these points up.’ And then I see other pricing people saying, ‘How do my customers value my products? And what are the capabilities? And what’s the ROI going to be for them?’ Do you see a huge difference between those two? And do you see them merging as you work with clients?

Alessandro Monti 

That’s actually a very good point there. Now, you know what, my impression is that the one element that you mentioned, so, hey, we have, you know, the scatterplot. We have, you know, the data, the numbers. It’s first of all, always historic, or at least kind of real-time. And it never is, let’s say, the reflection of possible future customer, let’s say, behavioral elements. I know there are algorithms. I know there is, you know, the machine learning that tries to kind of grasp the complexity of this behavioral element. But the quant part will always, first of all, be the reflection of the data that, you know, I have as an input, and it’s kind of first of all historical data. And now bringing this then towards, you know, future decisions that customers may take, I think that’s the part where we need that business sense, that business judgment. We need that managerial decision-making capability to connect to like virtually and literally connect the dots. So, I see there the shifts towards measurement, but that’s kind of our role as well, you know, to build these bridges between those two worlds and, you know, facilitate things. So, we’re not there still, not there yet, but I think eventually we’ll get there, definitely.

Mark Stiving 

Yeah, you can almost think about this as the difference between macroeconomics and microeconomics. One is we’re looking at the mathematical piece of it and ignoring the individual decision piece. And then the other one, we’re looking at the individual decisions.

Alessandro Monti 

It’s a good point. Yeah, micro-macro, although there are lots of theories that then try to blend those two together and, but then again, there starts the complexity, okay? There starts the real theoretical approach and when we talk, you know, to students, or the customers, or to other interested people we’ll say, ‘Yeah, now tell me, what about the real world?’ So, yeah, fascinating.

Mark Stiving 

Yes. So, the real world is so hard because there’s nuances to everything we do. You can’t take any one concept and say that applies everywhere. It is just so hard.

Alessandro Monti 

Well, I mean, the theory that tries to explain like the whole of real world, I think that’s probably not even the real goal of a theory, it’s always kind of that slice of life that you need to understand in a better way. But, yeah, that’s the scientific approach. I’m always kind of torn in between those two worlds, the scientific world, and then the hands-on, you know, management approach. Sometimes it’s difficult to bring this together, and sometimes not, it really depends on the question that you have to attend and want to solve.

Mark Stiving 

Yeah. What do you see are the biggest problems with your customers, the people that you’re coaching or teaching, helping them solve their own pricing problems? What do you see them as missing most often?

Alessandro Monti 

That’s a good one there. I would have to say, the overall level of knowledge has increased. If I remember when I started at SKP back in 2004, my impression was that this was still, well, I’m not saying a Blackbox. But the level of knowledge was, was not what I now tend to perceive. So, we have come, you know, quite a long way. Major pain points are still what I especially see now with my startups, the question, ‘Hey, what should be the price?’ I mean, the question is so easy, ‘Hey, what should I charge? How much?’ And then I start, ‘Yeah, willingness to pay, and of course, historical data.’ But eventually, there is this key question, ‘How much?’ And I see so many executives and even my sort of students in the startup struggling with that one apparently basic question. So probably there’s still a lot to do in giving them a hands-on approach, a process, you know, how to derive that, well, not perfect price, but that one price that fits in the first place. To then fine-tune and detailed it out. So, easy question, probably complicated answer.

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Mark Stiving 

Yeah, what I find really interesting is the answer to that question probably is less important than the rest of the business. And people think it’s the most important thing, ‘Oh, I got to get the price rates.’

Alessandro Monti 

Yeah, yeah. Exactly. Yeah, that’s the first question, as a founder is that, ‘Oh, oh no. I have the business plan. Oh, oh, the VCs, they want to see something, I have to write something down and…’ Well, yeah, what about your processes? I mean, what about the next steps? What about all the implementation? What about differentiation? What about all the other thing? ‘Yeah, we’ll come to that, you know, later on.’ Where it should be actually right from the start this, whole process and implemented process.

Mark Stiving 

I think if people understood what value-based pricing really meant, and what value really means. And they understood that when they started their company, they would build different products, they would build different business models. They would think about the way they’re doing things very differently.

Alessandro Monti 

Yeah, I agree, Mark. I think that’s…but you know what? My impression is that so many really brilliant founders, however, are kind of driven in a different direction because they, you know, want to scale probably too early, too fast. They’re sales driven, ‘Hey, I need the numbers, I need the volume.’ And the VCs, you know, lurking in the background and say, ‘Hey, I want to see numbers.’ So that eventually, the value aspect then just put in the second place. So, yeah, that could be something to work on and established the true sense of, ‘Yeah, what is value?’ By the way, this has been, coming back to the historical part, a question since like ages, what is value? What is the true and fair price? We see this like in the Medieval Ages, we see this in Ancient Rome, etc. So, it’s been kind of a universal question since, since ever?

Mark Stiving 

Well, I think that’s a great question that I’ll ask you. What is a fair price? How do you decide what fair means?

Alessandro Monti 

Yeah, I saw that coming. Yeah, fairness– the concept of fairness, Gosh! This is so individual. At the end of the day, I’m a big fan of, ‘Hey, if I’m able to charge at the level of individual’s willingness to pay, and I deliver value, and the customer is willing to pay for that. That seems to be like a fair transaction.’ Now, that’s kind of the I would say, the small version of that, when we extend this into spheres, we have political impact, we have social impact, availability of products. I mean, we see this now, actually, as we speak. And in Europe, we have, you know, the vaccine for the COVID is rolling out. The question, what is the fair price as the pharma, you know, companies, they will tell you something else that, ‘the authorities’. So, I think, the notion of a fair price has to include also the bigger questions, bigger questions that tackle society, and whole countries and nations. But that’s, that’s something where there is the touchpoint, ‘Hey, there’s the government’. We need to intervene. And we need to make sure that everybody receives this. Tough question, though. Yeah, I admit.

Mark Stiving 

So, I was interviewing Reed Holden, a few episodes ago. And one of the things he said, and I wish I would have pushed back on it, but I didn’t at the time, is he said, ‘As we build these relationships with our big customers and their long-term strategic relationships, we need to charge them fair prices.’ Right. And it’s like, well, I don’t know what that means. What is a fair price?

Alessandro Monti 

Yeah, a fair price again, let me see what, you know, the ancient Romans would have answer to that. Back in the days, the fair price was, ‘Hey, I got my costs, this was labor, this was raw material, and I apply a decent markup, that is at least deemed to be decent. I’m not kind of, you know, exaggerating like, I’m not doubling up, but it’s not like 5%. And it’s okay. And everybody will be fine. Nobody’s questioning this.’ So that was since many, many decades and centuries, the perception of, ‘Yeah, this is a fair price, because for the product, you had these expenses, you work on it, you produce something, applied a markup, and that was okay, right? So, from a mere, let’s say, theoretical perspective, cost plus seems to indicate, ‘Hey, that’s a fair price. And at the end,’

Mark Stiving 

I think even today, in our world, people look at cost-plus as fair.

Alessandro Monti 

Yeah. Definitely. Because everybody understands. That that was the cost, of course, the company needs, you know, to source the material, it needs to distribute stuff. And it’s accepted. It’s widely accepted.  By the way, I had once a really nice master thesis from one of my students, there was a question saying, ‘If I adjust my prices and I’m not giving you the reason why I just adjusted my prices, so for example, I increased it. So how would you then perceive this adjustment to be?’ And then the student kind of created like a fairness index. So, you ask certain questions, and you’re able to then create this kind of index.  And you know, what? Just giving no reason, performed far worse than giving the reason, ‘Hey, I had to increase because of costs, I had to increase because of competition.’ So, this actually scored better results with customers versus the scenario and just saying nothing. So, because competition, because certain market developments and cost seems to be something as fair for the consumers. So that was quite an interesting result there.

Mark Stiving 

I could easily see were blaming costs, increasing costs is a reason that people would accept a price increase. Now, here’s a really interesting one, because if you’re going to think about cost-plus is defining fair, how do you price software? So, the price of software is never fair, because the incremental cost is always really close to zero.

Alessandro Monti 

Yeah, I mean, with software we have seen value-based approaches perform like nicely with customers. So, the very famous kind of ’10X Approach’ seems to solve the equation. Because you know, the narrative, there is, ‘Hey, look, basically, I have here a software, let’s assume it saves you like two hours of your daily work routine. So, two hours that you could like, technically use, you know, somewhere else. So, you have those opportunity costs. And I am willing now to charge 10X the value of these kind of two hours that you save.’ So that’s a narrative at the end of the day that that is understood. And that could be an approach in selling this fair story. So, software can use this. And its value at the end of the day software, the whole digital world. It’s about the value and monetization.  We have so many monetization paths now in the digital world because the digital good now has all these fascinating characteristics that the offline good does not have. And it just opens up so many opportunities and options that you have to go value-based.

Mark Stiving 

And what’s so fascinating about this is that software companies don’t have a choice, right? digital companies really have to do value-based. And yet, now that they do that, you can look back at hardware companies and start to say, ‘Oh, you know, we don’t have to use the pricing metric we’ve always used. Or we could do subscriptions on hardware, or we could write there’s so many different things that we could take now that we think about it’s so much in software, how do I turn around and apply that back to hardware? The biggest problem with hardware has always been I’ve got this physical cost, and I need to make sure I cover my cost. So, cost plus feels right. It’s just like, ‘Oh, get rid of that. Get rid of that!’

Alessandro Monti 

Yeah, I think that that was the trend. What was it, in the 1990s? ‘Hey, let’s go servitization,’ right? So actually, the hardware is just the byproduct and let’s earn big money, you know, with the no installation, you know, any other fees, the service, etc. I see that actually with Apple, by the way, starting from the mere hardware, you know, selling. And now they move into this recurring revenue, into the subscription.  And I think they still are not there where they want to be, but it’s a shift. So eventually, I mean, in the near future, the hardware selected, the product, the item, probably not as that important as the whole other digital ecosystem.

Mark Stiving 

Yep. Yeah. Nice. Alessandro, this has been a lot of fun, but we’re going to have to wrap this up here. Final question, what’s one piece of pricing advice that you would give our listeners that you think would have a big impact on their business?

Alessandro Monti 

Wow, just one. Actually, that’s what I tend to also tell my students. But it’s not limited to students. I think that’s going to something that is of value to everybody involved in to pricing.  My advice would be, learn the fundamentals, try to understand the fundamentals. Don’t try to hack yourself somehow through the price. Or don’t try to go for some shortcuts. Eventually, that’s not going to really pay off. As you know, the other option — learn the fundamentals understand the kind of basic mechanisms. And I think in the long run, this will yield you by far better results than just the ‘easy and quick’ approach to pricing.

Mark Stiving 

And what would you think those fundamentals are? You don’t have to describe them. I’m just curious which fundamentals we’re talking about?

Alessandro Monti 

The fundamentals is basically, well, understand that with price, it’s just then not automatically sits. There is, of course, you need to have a look at your costs internally, you need to look at the competition, you need to look then at the broader market, you need to differentiate, you need to then have a basic understanding on the behavioral component of that. So, it’s just so much more than just, ‘Hey, let’s try this. Let’s test this online. And if it performs better than the other option, yeah, that’s the best option.’ Well, probably not. So, again, what we then started discussing the whole complexity of pricing, just try to understand the fundamentals, at least the basic mechanisms, the ups and downs, elasticities. It will help, definitely.

Mark Stiving 

Awesome, Alessandra, thank you so much for your time today. If anybody wants to contact you, how can they do that?

Alessandro Monti 

I’m on LinkedIn, so feel free to just reach out to me and I think that’s the best way to get in touch with me, absolutely.

Mark Stiving 

All right. Thank you. Episode 102 is all done. To our listeners, would you please leave us a review, these are very valuable to us. They’re very helpful. Josh Chris recently said, Empowering, insightful, and actionable.

“Whether you’re well established as a pricing innovator, or just getting started carving out a profitable niche that’s ready to grow, this is a must listen podcast for you. Mark does an incredible job leading conversations that cover a huge breadth of topics related to the ins and outs of building a thriving pricing strategy with leaders who have actually experienced success themselves. Highly recommended listening and subscribing.”

And thank you Josh for that. Would you please see if you can do better than Josh did? That was pretty good though. We’re working on a new website right now, impactpricing.com is now going to be the place where we host all of our content, main feed on the main page. Feel free to swing by and see if we’ve got that launched yet. We’ve also recently upgraded our studio so the AV quality of our courses is getting better and better. Our content’s always been awesome. But come check out the AV quality. If you have any questions or comments about the podcast or about pricing in general, feel free to email me, mark@impactpricing.com. Now, go make an impact.

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