Alon Ellis is a partner at Deloitte Monitor. He is leading Deloitte Australia’s Pricing Strategy & Margin Management capability
In this episode, Alon shares how he believes it is value-based pricing but understands what value means not from your perspective but on customers’. He talks about not giving everything away to the customer as you are in the business of providing a service or a product, and you have to be profitable.
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Why you have to check out today’s podcast:
- Learn how to sell on value and what that actually means not from your point of view but from the customer’s point of view
- Learn how to communicate simply and straightforwardly your value and the pricing strategy that aligns with it
- Understand the economic analysis in every pricing decision
“Make it easy. And this is the hardest thing in pricing. Let’s assume that you’re entirely on board with value-based pricing and you’re thinking about getting the consistency and all that kind of stuff. The simpler you can make your pricing without losing big valuables, the better.”
– Alon Ellis
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Topics Covered:
01:18 – How Alon’s curiosity led him to a career in Pricing
02:36 – How he went from industry to consulting to industry to consulting
06:57 – What is pricing consistency
08:58 – Having an economic analysis in every pricing decision
13:20 – Analytics versus value
15:41 – What is economic value estimation
17:23 – The difficulty when customers don’t care about the features and benefits you make
18:58 – Factors you can’t reduce to purely analytical process
20:21- How Australia and the US differ in terms of companies not understanding their product’s value
21:31 – Why salespeople need to be confident in communicating to the consumers that price is fair and reasonable
25:39 – How do the market perceive discounts
26:48 – Alon’s pricing advice that would greatly impact your business
Key Takeaways:
“Sometimes I get to kind of almost the extreme customer advocacy. So, everything is about us giving away stuff to the customer, or the other extreme, you know that trying to screw over the customer. And that’s never going to create a long-lasting relationship. You need them to be somewhere in the middle.” – Alon Ellis
“We always need to sell on value, but we need to make certain we understand what that actually means not from our point of view but from the customer’s point of view.” – Alon Ellis
“I believe it’s always value-based pricing as the number one way but they actually have to understand what value means from the customer’s point.” – Alon Ellis
“There’s nothing worse than a client who’s invested lots and lots of money into features that they think should have some value. But you’ve actually done this while you figured out that no one really cares.” – Alon Ellis
“This is where the psychology, the real world comes in. And that’s where, I think you can’t reduce this into a purely analytical process.” – Alon Ellis
Resources:
Connect with Alon Ellis:
Connect with Mark Stiving:
- Email: [email protected]
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.)
Alon Ellis
Make it easy. And this is the hardest thing in pricing. Let’s assume that you’re entirely on board with value-based pricing and you’re thinking about getting the consistency and all that kind of stuff. The simpler you can make your pricing without losing big valuables, the better.
[Intro]
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the consistent relationship between them. I’m Mark Stiving. Today, our guest is Alon Ellis. Here are 3 things you want to know about Alon before we start. He is a partner at Monitor Deloitte. That’s impressive. He went from industry to consulting to industry to consulting. That might be an interesting conversation. And he’s training for a half Ironman, and you should see how buff he looks. Welcome, Alon.
Alon Ellis
I am lost for words at the beginning of a podcast. This is going to be tough.
Mark Stiving
It’s going to be really tough.
Alon Ellis
I’ve been training up to this.
Mark Stiving
Yeah. How did you get into pricing?
Alon Ellis
I’ve always had a curiosity. I had to decide what was the price of anything is. I remember when I was a kid going on holiday. And you go through a market in some faraway place. Everyone’s bargaining and there is always something to it. But it’s an interesting problem. Pricing means everything, everything means pricing. And that to me, I find interesting. I started off in a very weird little startup that did auto and home insurance price optimization, which is a bit of a mouthful, and not that interesting for barbecue talk. But it’s interesting because we basically had one way of doing things for a very niche, very complicated high-data volume sector, and the idea and how to price. And I basically got into that, found it fascinating. We went through all these different auto home insurers, mainly in the US and UK, doing price optimization and helping them take into account lifetime value and price elasticity and make more sophisticated pricing decisions.
Mark Stiving
Would it be fair to say that you are helping insurance companies move away from a cost-plus type pricing mechanism more to value-based pricing?
Alon Ellis
Yeah, look, it’d be a combination of that, and just getting more rigorous. Pricing and insurance is a funny thing. People think that they’re doing cost-plus. The actuarial background is really about loss reserving, I need to have enough money in cases of catastrophe. And people thought, ‘Okay, well, that must be the cost and I’ll just slap on 20%, or whatever the number is’. And then some product managers say we need to be a bit more competitive in this area, that area. Young men are a good example, they are particularly bad drivers. So, we need to do something a little bit different, we need to make it a little bit closer to the margin for whatever arguable reason. You always have this tension between the 2. And the main thing that we did that first company was to put a more rigorous framework around the whole thing because none of it was value-based pricing, was a good intent on value, and then all the different parties within the organization would just fight with each other to try to get their way.
Mark Stiving
Right. It sounds like all companies. Before we jump into the topic I really want to talk to you about today, can we talk about your career path for a second? How did you go from industry to consulting to industry to consulting, or I guess a better question is, why did you do that?
Alon Ellis
I’ve got 3 young kids now. And I always ask them like, ‘Oh, what do you want to be when you grow up?’ They come up with all sorts of crazy answers. I couldn’t come up with any useful answers when I left university. I just thought I’ll have some fun. This will be interesting. The company that was interviewing me though, really, an interesting group of people. I interviewed in a house startup scene in Australia. It’s still not anonymous, but it was particularly small back then. And it just seemed cool and interesting. It’d be fun. To be honest, at the beginning, it was just to do something a little bit different. I went to the states and that was great fun. And then one thing led to another and I lived in the US for a while, wanted to come home in order to have kids and so that led me to Deloitte Consulting about 5 years. That was great fun, you get to see different industries, get to apply that same conceptual framework but into like paying utilities or transport and logistics or retail and you’d see like that the concept of bleeding across from 1 industry to another world is always the fun part of consulting, I then had an opportunity to come up at. Between all these (by the way) the startup I was in got bought out as well. Then you got to see what being an American corporate is like, which is a unique experience. That was fascinating, we became part of LexisNexis. But then I went to Deloitte. And that was partly coming back to Australia, partly to see different things. Then I had some challenges. They were going to basically restructure the entire business and bring it up a level of sophistication, there’d been a whole lot of investment and all other things going on that were quite interesting in this transport business. The new MD was a super interesting guy, he asked me to join. And so, I can’t refuse, did that for a few years, and you get to be on the front line. I think that was one of the nice things that is difficult in consulting, even when we do value share agreements and things like that. It’s not the same as being at the negotiating table or being right on the front line and making the decisions, you’re not advising, you’re deciding. But then, like most consultants, I’m somewhat irrational. And I missed the chaos of consulting. After a few years, I went back in and now I had Deloitte Australia’s pricing practice. Among other things, there’s always some interesting and random things you get to get involved in consulting. It’s a fascinating industry to be.
Mark Stiving
Yeah, the best thing about consulting, I think, is that you see so many different situations, opportunities, so you get a really broad perspective. Then when you go apply it in a specific company, now you get to go do the execution part, to see it work and go do something. It’s both of them have their pluses, I could see why you’d go back and forth, if you could. So nice. When I asked you what you were passionate about, you had said pricing consistency, I might have guesses on what you mean by that, but tell me what you mean, when you say pricing consistency.
Alon Ellis
When I started working, I thought, naively, this is the way it’ll work, someone’s going to do the math, and they’ll figure out this is the way the price ought to be set. And these are the rules that you’re going to go negotiate down. It’ll just be executed really well, because everyone in the organization is going to be aligned, and it’s all going to work. And that’s not realistic at all, I realized that was quite naive. What I gained in appreciation for at the time was you might have a good strategy but if it’s not supported by an operating model, and then people have some kind of governance around that, and then you’re monitoring the execution of that. It results in a consistent and thoughtful conversation at the frontline. Doesn’t mean anything, right? We’re spending a lot more time these days, making certain that we’ve got that end-to-end consistency, and just getting the value out of all the thinking. And very often organizations know what they need to do, they might need a little bit of support, getting through some of the decisions or putting some numeric accuracy on to some of the decisions. But that consistency is a really hard thing. And particularly where people have gotten so excited about analytics, that’s been really good. And that’s been very helpful. But some of that has come at the cost of execution and thinking about how to make certain there’s consistency in the kind of conversations people are having with customers. You’re not opening up all sorts of alternative routes for someone to get a different price and then essentially undo the good work that you thought you were doing.
Mark Stiving
Yeah, I remember working in the semiconductor industry for a while. And one of the things that we would do, stupidly, is compete with ourselves. The customer would come negotiate with us over here, then they go through a distributor and negotiate over there. And we’re constantly trying to figure out, are we negotiating with ourselves or not? So, is that the type of thing you’re looking at?
Alon Ellis
That was a big part of it. I’m going to give you a couple of examples. When I was out in industry, I was in a transport business, and the business had been part of a lot of different acquisitions as well. Some of the business was priced on a unit, so I’ll come over to your business and I’ll pick up 10 boxes, and there’ll be $1 of the box. Some of it was on base-plus kilos. Coming out to you will be $8. Then it’ll be 20 cents per kilogram of product or whatever it might be for argument’s sake. If you’re a customer, you have perfect information. You can say, well, today I don’t have many items. So, I’ll use the base rate, and they’ll come over and they’ll pick up two items. It’ll be 2 boxes. Tomorrow, I’ve got a ton of stuff that needs to be picked up. I’ll make the call out on the other aid. Because a lot of these organizations didn’t have a good fact base, didn’t have good systems in order to actually understand what was going on. The customer is able to triage these things. They’re able to have perfect information about not only you but the different versions of you because salespeople have made all sorts of deals and 20 account numbers and all that sort of thing. But then also have all the other competitors and to be able to basically find the gaps in the way that you’d set up your pricing. And then on top of that you have sales people going rogue and the typical shenanigans you get with salesforce tough problems. It’s getting that right, it’s a tough thing, when you put a salesperson into the role, and then go find that balance between, I’ve got to create value for the customer. Sometimes I get to almost the extreme customer advocacy. Everything is about us giving away stuff to the customer, or the other extreme, that trying to screw over the customer. And that’s never going to create a long-lasting relationship. You need them to be somewhere in the middle. The other big consistency problem we had was making certain that we’re not giving away the house, everyone understands that we’re in business to provide a service, but we have to be profitable in order to do that. That’s actually a really important thing. Yeah, that kind of economic analysis in every pricing conversation.
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Mark Stiving
You brought up two interesting concepts that I often think of as being separate. And I’d love to get your opinion on this. Or I should say being opposite. It feels to me like there are two types of pricing, people, techniques, etc. And one technique I’ll call analytics, where I’m going to go through and I’m going to crunch the numbers and I’m going to find the deals where we sold a below-average price for the volume and we want to move those deals up. And then the other side, I’ll call value. And that’s where we teach the salespeople what value looks like to a customer. And we’re having a conversation, we’re actually selling value, and not just hey, here’s the price of the product and here’s what the delivery looks like, things like that. And I look at those as two very different things. Do you see them as opposites? Do you see them as simpatico, complimentary?
Alon Ellis
This is the problem with pricing. There’s lots of different ways to interpret anything. I’m always a big believer in selling value. But you may not understand what value is in the eyes of your customer. And this is probably the biggest problem that big organizations face. Once you’re big enough, it’s very hard to understand how a customer has interpreted, or what they use the service for and what it means in terms of their economics. My view is, we always need to sell on value, but we need to make certain we understand what that actually means not from our point of view but from the customer’s point of view. As a consultant, you often get called in because the client thinks that the price is being discounted too much. We should be selling on value. But when you get people to describe value, they can actually articulate it, or they’ll come up with all sorts of things that are very hard to actually value and justify to the CFO. One of the exercises we often do at the beginning of one of these engagements is you try sell to me. Explain to me why buy from you versus a competitor. And they’ll come up with things that might be nice, but very hard to economically justify, it’s manufactured here. It’s all sorts of we’ve got this consistency in terms of some engineering thing that actually customer doesn’t understand. Having those conversations in terms of the customer’s economics, what’s even harder, having the conversation in terms of knowing what the customer can do as an alternative. That’s really hard. I believe it’s always value-based pricing as the number one way but with the big understanding, they actually have to understand what value means from the customer’s point, which is very, very difficult.
Mark Stiving
I could not agree with you any more than that. That’s just incredible. I have conversations with people all the time, where it’s like, what’s the value of your product? And they have no clue. They give me some really cool thing they can do. And it’s like, well, why do they care? Who cares, right? And in the B2B space, I’m a really strong believer of the fact that anything that you want to claim as a feature or a benefit, you should be able to turn into $1 value for your customer. And if you can’t do that, you just don’t understand the value of your product.
Alon Ellis
Yeah, what we kind of frame it as is economic value estimation. One of the really nice things with Monitor is the strategy arm of Deloitte, all the pricing people connect globally. When something comes up, and we’ve got people who are trained consistently across the world, but there’ll be some niche question about pricing for quarry services, or cement or something that you’ve not come across the floor. You reach out to the network. And then you’ll get someone within that pricing network, who will tell you about all these different features that are actually really, really important for pricing within some sector that you’ve never worked in before. And you finally understand, ‘Oh, hang on a second, that really, really matters.’ As an outsider, I wouldn’t have understood that. I can explain now, what the unit economic difference is for the customer. I can justify that quite differently. Or the alternative, we’ve got a bunch of people who do a lot of procurement work. We’ll talk with them and understand when they’re doing the buying on behalf of clients, how do they evaluate the tenders? And where do they stack all the different features? And what does that practically mean for them? You basically get a bit of meaning in the mind, there’s nothing worse than a client who’s invested lots and lots of money into features that they think should have some value. But you’ve actually done this while you figured out that no one really cares.
Mark Stiving
Right. Well, in the ideal sense, they hire you before they go build all those features to say, what’s the value of the product?
Alon Ellis
Yeah, you would, that is the ideal, right? Australia’s also an interesting economy to just view in contrast to the US, I think it’s been 29 or 30 years since we had a recession. And now we have the first one in that time period, because of COVID. Think about it. If you’re in management, and you’ve never worked outside of Australia, we’ve had ups and downs within sectors, but basically, at a macro level had unbroken economic growth for an incredibly long amount of time. Basically, the timespan of many people’s careers. It’s entirely possible for you to get to a point in your career where you’ve only operating in a growth market. You’ve always added features added skews, added things in order to and demonstrates the growth of the business that you’re operating. And now someone comes in and says, ‘Oh, hang on a second, you build all this stuff and not all the customers really care.’ It’s very hard to justify one of the ways that you’ve understood the alternatives that customers have and how hard they’re pushing. They haven’t necessarily had to face into that before. It’s a very young, very significant shift in the market yet.
Mark Stiving
Yeah, that’s kind of interesting, because I would think that even if you’re in a slow growth, or a reasonable growth economy, on a regular basis, you still want to win, which means you want to do better than your competition, which means you want to understand what’s valuable to your customers.
Alon Ellis
You are right. And I think the answer differs in different sectors. The ones that are more easily globally competitive, you’ll see more of that. Some of them are a little bit more protected, just because the barriers to entry are higher, and there’s going to be all sorts of nuances across the market. So, it’s not a one-size-fits- all but I think it’s also entirely possible to believe that everything you’re doing the customer is going to love because that’s part of being in a business. You want people to have that belief. You want people to say, ‘Oh, you know, we built this thing, and it is the best thing since sliced bread and look at all the great stuff it does.’ Surely everyone’s going to love it. They drink the Kool Aid because that’s part of having a passion for being in the company. This is where the psychology, the real world comes in. And that’s where, I think, you can’t reduce this into a purely analytical process.
Mark Stiving
Yep. Well, it’s funny because you almost sound like Australians are different because we’ve been in this perpetual growth mode for such a long period of time, but I got to say, here in the States, you see so many companies who still don’t understand the value of their product, they still throw in features because they think it’s cool, or they would like it, or the engineers liked it, or whatever it happens to be. And so, it’s the exact same problem. It isn’t. I don’t think it’s unique to you guys.
Alon Ellis
Yeah, everyone has their own nuances. The thing with the US is, size is just incredible. You can imagine how much easier it is to get into an organizational contract with, the business is so big that unless you have a guiding framework, and someone has made the decision that we will price on value, and everything will be done in the customers’ economics, and this is what it practically means. There’s no room for misinterpretation, it’s America. A business can get absolutely enormous. And without that guiding set of principles, one part of the business gets really excited, the engineer says, ‘Oh, we need to have X, Y, and Z’ and suddenly that becomes disconnected for marketing. These things can happen. It’s entirely possible, just without any deliberate effort to get into that mix.
Mark Stiving
I think that’s a really nice thought I would bet you there’s less than two dozen companies that do that.
Alon Ellis
But less than two dozen very successful.
Mark Stiving
They’re very successful. Yes, exactly.
Alon Ellis
The nice thing is, when I was in that industry role, we were doing a turnaround. Things were not going well when we came in. We redid the entire go-to-market. You had a sales team that had not had the confidence to push back on a discount request for a long time. That is very complicated pricing structure, it was impossible to justify and you lost credibility and give the go-to-market wasn’t clear. When we redid it all we relaunched it in this sales conference. We basically indoctrinate everyone in here’s how to sell and this is the process, and this is the way we’re going to do it, it’s going to be amazing, they still didn’t fully believe it; until you then sat with them. You did a couple of negotiations, and they came out of it, and I got a 10% increase on an account that they’ve never had an increase in. Then they got a push back from a customer and they said this is why it’s going to cost more because there are far better that we’re going to deliver to you. That’s worth far more than the cost of the service if you want to do low value, maybe split your low value into the cost, and you can give us the stuff that’s a bit more complicated. All of a sudden they feel good, they feel like they’re not getting beaten up. They can actually be proud of what they’re doing. That’s an experience to go through, it was quite empowering for the salespeople because without that kind of guiding approach, you can imagine how tough it is. You’re a sales guy, and you’ve been told to do better. And when people are asking for discounts, just push back. And when that doesn’t work, just find more business, it’s soul-destroying, it’s very hard. Having that consistency in terms of this, the way compensation has to be had, this is the numbers that will back it up. These are the materials that will support you in that case studies. Every now and then we’ll have an escalation process with a main guy, he had to get escalated the main guy that we may have something and now I get to be the bad guy. You get to save face and all kinds of stuff. And just from an employee NPS, or how we measure engagement, like it makes a difference. Because people are not being beaten up anymore on discounts.
Mark Stiving
The two things I’m going to pull out of that story, which I think are both hugely valuable. One is that salespeople need to know the value of the product from the perception or the perspective of the customer of the market. So, what is it that matters to them? How are they thinking about it? The second one is that they have to be confident that the pricing that we’re using is reasonable and fair to the customer. And when they have those two things, boy, they could sell the heck out of our products.
Alon Ellis
Just to give you a silly part of the example. No one had to reset the right card. And there was this system problem that it’s not worth getting into. But basically, it had meant that the system rate card had been cranking up at 5% a year for about 15 years. The market rate stays flat or maybe going up 1.5/2% and so the average discount that anyone was getting was 85% or some kind of ridiculous number. And you can imagine if you’re the one in front of a customer that you haven’t got a credible relationship with, he said, ‘Oh no, I’m going to give you a good price.’ ‘So, what’s the rack?’ And how much am I getting off the rack? 80%, 90% you lose credibility. And can I still have the price that is, you say these numbers, and then the guy just on the other side of the table just laughing at you, and you’re like, ‘Ah, sorry, doesn’t make sense because of blah, blah, blah’, it doesn’t feel good, does it? Look, often it isn’t the customer and it’s not a good way to be.
Mark Stiving
And the last behavior I want a salesperson to exhibit is to walk in the door, hand him a price list and say, yes, but I’m going to give you a big discount. And those are the first words out of his mouth.
Alon Ellis
Yeah, what’s that phrase? It’s like here, once you lose it, it’s very hard to get it back. You don’t want to start a relationship off with, I’m going to give you something and nothing in return is going to be okay. Even if it was small, we would always want to coach the salespeople, we’re going to accept this discount. However, we’re going to get them to lock it into the contract or this different arrangement that helps our supply chain guys smooth their processes. We do the same in other sectors as well. But you just want to have that back and forth. If you don’t, why would the customer believe that you’ve actually given them a good price, or they may actually think that you’ve got so much margin that you don’t really care? You can just give away this money? It’s fine.
Mark Stiving
Right. Alon, we are about out of time. But last question, what’s one piece of pricing advice you’d give our listeners that you think could have a big impact on their business?
Alon Ellis
Make it easy. This is the hottest thing in pricing. Let’s assume that you’re entirely on board with value-based pricing, and you’re thinking about getting the consistency and all that kind of stuff. The simpler you can make your pricing without losing big valuables, the better. Because that pricing structure, the incentive structure, or the alignment into the go-to-market that’ll assist the business for let’s call it three years. These really over complicated pricing structures, make it so hard, it makes it very difficult for people to understand where they fit in, how they need to transition from one tier to another. It needs a scientist to map through it, it just makes it very hard. And it’s not about the numerical complexity. But if you can’t justify it to a five-year-old, then you’re probably making it too complicated. It needs to be simple and straightforward and draw that alignment. This is the value we’re creating. This is the business model of our credit. This is the pricing strategy that aligns to it and then you’re all good. No tricks, no black magic pasta.
Mark Stiving
Yeah, I think that’s absolutely brilliant. One of the things that I always teach is price segmentation, how do you segment your customers into chunks, and then I’m going to charge different customers different prices based on the segment. But in a way, that’s the opposite of what you just said. And if we create too many segments, we create too much complexity. So that says, we’ve got to be really careful as we segment our markets.
Alon Ellis
You never want to be in a position where two people are talking and I said, well hang on a second, you’ve been given a different price. I absolutely know that that can’t be justified, which is a different statement in different sectors? Airlines, obviously, we’re accepting that there are different prices, but in other cases, we’re not. And then all of a sudden, someone’s having to justify the weird different pricing that you’ve given people. And that ends up consuming more time than anything and the credibility of your whole pricing construct and the way you create value and build it to a client is then put into question if you don’t want to have that right. Now, difficulty in all this is actually creating simplicity without losing lots of value. I’m not an advocate of single number prizes. But doing that really well is really hard, but quite important.
Mark Stiving
And that’s the trade-off. That’s, that’s the key trade-off. Thank you so much for your time today. If anybody wants to contact you, how can they do that?
Alon Ellis
LinkedIn is probably the best. So just on LinkedIn.
Mark Stiving
Yep. And your name will obviously be in the show notes so people will be able to find that easily. Episode 110 is all done. Would you please take a moment to leave us a review on whatever platform you use? The vast majority of you are probably on Apple podcasts and Apple doesn’t make it easy to find, let me assure you. However, if you get value out of the podcast, I’d be extremely grateful if you go through the effort to find it, and leave us a review. And finally, if you have any questions or comments about the podcast or pricing in general, please email me at [email protected]. Now, go make an impact!
