Impact Pricing Podcast

Ep126: Pricing Lessons from Pizza Pricing with Michael Hurwich

 

Michael Hurwich is one of the foremost and sought after Pricing, Revenue & Strategy Management Consultants known around the world. Michael is a highly effective and energetic business leader with over 20 years of experience in Strategy, Revenue Optimization, Mergers & Acquisitions, New Product Development and reengineering business processes. Michael works closely with leadership from the C-Level to line management to develop and execute clearly defined pricing strategies. 

In this episode, Michael takes pizza as an example to explain pricing as there are commonalities shared by businesses when it comes to pricing strategies and tactics that resonate with the whole concept of pricing pizza. 

Why you have to check out today’s podcast:

  • Learn how value and demand factors, not cost, help you increase price  
  • Find out how you win customers and gain their loyalty 
  • Learn how to harmonize your pricing and the value that you deliver 

         

“Definitely focus on demand, supply and demand issues. When something seems very busy, there’s a tremendous opportunity to elevate your price, so long as you’re delivering value in the marketplace.” 

 – Michael Hurwich 

      

Topics Covered:

02:03 – Why talk about pizza 

03:29 – A variety of pizza suiting everyone’s preference on every location 

04:44 – Why are organizations leaving money on the table when pricing pizza 

08:07 – Pricing being all about value, the supply and demand 

11:36 – How do we avoid price transparency 

15:20 – What is price transparency and the goal of moving consumers to purchase more than they otherwise would have 

19:17 – Pricing and elasticity of demand 

22:03 – Talking about loss leader products 

24:03 – How to earn your customer’s loyalty 

26:56 – His best pricing that can greatly impact one’s business 

     

Key Takeaways: 

“The key is to really figure out how to move away and make the price a little less transparent and focus on the value and the demand of those products. It’s all about supply and demand. And the stock market reflects that very well, as does Bitcoin.” – Michael Hurwich 

“It’s really about moving customers to where you want them to end up at the end of the day. And it’s incumbent upon vendors to drive purchasing behavior, not the other way around.” – Michael Hurwich 

“The goal is really to focus less on price and price points, focus more on value and increasing that value perception and differentiation.” – Michael Hurwich 

“In the pricing world, the important component of understanding price is also to evaluate and determine the elasticity of demand.” – Michael Hurwich 

“And one of the things that people, most consumers actually don’t know, they typically don’t know the individual price of a product. What they do know is how much they’re willing to spend when they go out.” – Michael Hurwich 

Better to sell the first slice at full ticket price, the second slice at half price, you’re more than covering your costs, and also covering some incremental fixed overhead, at the same time, an extra sale.” – Michael Hurwich 

      

People/Resources Mentioned: 

        

Connect with Michael Hurwich: 

        

Connect with Mark Stiving:   

                          

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.)

Michael Hurwich   

Definitely focus on demand, supply and demand issues. When something seems very busy, there’s a tremendous opportunity to elevate your price, so long as you’re delivering value in the marketplace. The caveat being that you don’t want to get into an overcharging or rip off strategy. But if the customer acknowledges that value exists, and they’re willing to pay for it, then don’t hold back. 

[Intro] 

Mark Stiving   

Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the tasty relationship between them. I’m Mark Stiving. Today, our guest is Michael Hurwich. And here are three things you learn about Michael; before we start, he has been running a pricing consulting firm, SPMG, since 2001, almost forever. Before that even had a stint in a management consulting firm Deloitte, and you may not believe this. But Michael is the guy who wrote the book, The Joy of pricing. Welcome, Michael. 

Michael Hurwich   

Mark, it’s good to be here. Thank you very much. And I just want to remind the audience that we are roughly equal in age. So just want to let everyone know that we share the same tenure in the pricing world or close to it. 

Mark Stiving 

I’m glad that you think you’re as old as I am. That’s really nice. So, Michael and I are actually friends; we talk quite often. And it’s lovely when I get a chance to have a friend on the podcast because that means we’re going to be a little more jovial than usual. And Michael said he wanted to be on the podcast today. And he said, let’s talk about pizza. And I said, what, you buy a pizza shop or something? And he’s like, no, let’s just talk about pricing pizza. So, Michael, let’s talk about pricing pizza. 

Michael Hurwich   

Sure, Mark. I mean, who doesn’t love pizza at the end of the day? Pizza and hamburgers are the two most popular foods in the United States and probably around the world. Anywhere you go, someone is having a slice of pizza, they’re ordering a pizza for a sporting event, or some high-profile event, it’s delivered to your door, you can drive through and pick up a pizza slice and even walk-in or dine in and have a pizza. So, the reason I wanted to talk with you today, Mark, about pizza is I find that you can; it’s analogous with almost any business in the real world. You can find commonality in terms of how pizza is or is supposed to be priced. And there are some common pricing strategies and tactics that resonate within the whole concept of pizza as you would in big business. 

Mark Stiving 

Yeah, I would say, that it’s fair to say that pricing, almost anything, there are so many things that are common or similar about it. And so, it makes a ton of sense to talk about something that we all know and enjoy and love and can imagine and understand. But before we get into pricing pizza, I got to ask, now I grew up in the Midwest, and in the Midwest, we ate pepperoni pizza, like that’s the one, and then I moved to Chicago for a year. And in the whole Chicago area. Everybody eats sausage pizza; nobody eats pepperoni pizza. You live in Toronto; what do they eat there? 

Michael Hurwich   

Well, it’s usually a combination between, and we’re not alien up here in Toronto. So, the tendency is to go for your margarita pizza, your cheese pizza, or your pepperoni pizza. Canadians, by their very nature, are quite conservative. Folk individuals and tend to choose the bare basics. Having said that, over the years, I think Toronto has emulated and found itself to be more of an upscale city, or at least they’re trying to be in. And there are all kinds of varieties of pizzas now., you know, that are, including stuff pizza and gourmet pizzas, flat pizzas, deep-dish pizza, like Chicago. The variety is endless, of course, but… 

Mark Stiving   

My favorite is when you coat it with meat, right as much meat as you could possibly get onto a pizza. And in fact, here’s a hint for all my listeners, because I love lots of pepperonis, If I’m going to have a pepperoni pizza. I’ve now started ordering my pepperoni pizzas as I want to double, triple; I don’t care. I just don’t want to see a spot where there isn’t a pepperoni. And oh my god, that comes out so good. What’s your favorite, Michael? 

Michael Hurwich   

You know, Mark, You’re no different. And this is the very reason why I want to talk about pizza today. Because the traditional model of pricing pizzas and the value that’s being delivered is highly disjointed. It’s dysfunctional today. And I know that sounds crazy. But the model has been over the past decade, whether you reside in Las Vegas, or whether you like New York style pizza, Chicago pizza, it’s all about the ingredients there on the pizza. And the pricing is set as such, that we’re going to charge you, you know, for a slice of pizza, if you walk-in ala carte, it’s a convenience purchase. And one of the most interesting things I want to reveal to the audience is that these organizations are leaving money on the table. And why are they leaving money on the table? Because in theory, there are two approaches to pricing a pizza, you can price it on an ala carte basis, or you price for every ingredient that goes on that pizza; you can also price by the size of the pizza, small, medium, or large. You can price alternatively. And that’s the way the model has been for the last couple of years or last decade. And I believe that organizations who follow this type of approach are not capturing the true essence of a demand-based approach to pricing. So, if you look at it from a demand-based approach, it’s actually all about the popularity, it’s a popularity contest. Mark revealed his own true nature of what he likes most on this call. And that’s very important to know because if we find enough individuals like Mark who like a lot of meat, we can then determine how popular that pizza is in the marketplace and price accordingly. And if a meat-based pizza, or in this case of a pepperoni-based pizza, is deemed the most popular pizza in that market or in your market, then my belief is we should reverse how pricing is communicated to the customer. And we should actually charge a premium for that rather than a discount. And you’ll find if you look at any pizza menu, that a cheese pizza or pepperoni pizza tends to be less expensive than one with other types of ingredients on it. Whether it’s a Hawaiian pizza, pineapple and bacon, or sausage pizza, the theories always been that or the perception has been that customers have a preference, or they perceive those ingredients to be more gourmet. Therefore, the vendor is going to charge more for it.  

Mark Stiving   

Hang on; I got to push back a little bit. So, I got two push backs for you; the first one, I’m going to give you why pepperoni pizza costs more than a cheese pizza. Because it costs more to make it. Now, you and I both know, the pricing should not be driven by costs. But our customers don’t know that. And so, when they look at a pizza that’s got just cheese and no pepperoni on it, they say, well, shouldn’t that be less expensive than a pepperoni pizza? And they think they’re getting ripped off if you charge them more? What do you think of that amazing theory? 

Michael Hurwich   

I think it’s probably true. You’re correct about that. And you and I, having been in this business long enough, will definitely agree that pricing, I think we can commonly agree that pricing is not about cost. And to be frank, there’s a percentage of the audience or the customer base that probably will focus on the cost elements and ask the very question to the vendor on why are you charging me more for a pizza that has less. In other words, less is more. And I think the challenge is with pizza vendors as well as most organizations, whether in the pizza vertical, industry vertical, or whether you’re manufacturing complicated, heavy-duty piece of equipment and selling it with all its features. The key is to really figure out how to move away and make the price a little less transparent and focus on the value and the demand of those products. It’s all about supply and demand. And the stock market reflects that very well, as does Bitcoin. We don’t know the intrinsic value of some of these items. And we’re not interested in the cost. All we’re interested in, is the supply and the demand of those very particular products. And to that end, what we could do or recommend to your audience, is to get away from breaking it out into sort of this good-better-best pricing approach. And really either harmonize the pricing practices by joining the two prices, cheese pizza and pepperoni pizza price together. So, you don’t have a differentiation of 40 or 50 cents a slice between a typical cheese pizza and a pepperoni pizza. It brings the lower price up to the medium price. And then all the additional pizza slices or pizzas with all the other additional ingredients, those are perhaps a higher price point. And so, we consolidate maybe three segments three product categories to two product categories. Your high demand, well-received product offerings are probably; it’s probably a Pareto principle 80/20 rule, 80% of all sales are from cheese pizza and pepperoni slices. And the other 20% are upscale gourmet slices. And to that end, the key is now not to figure out what to do with the cheese pizza slice or the pepperoni pizza, but really how to figure out how to price the gourmet slice, which is now becoming the anchor price, price by which the customer will decide whether it’s a niche product, and they’re willing to pay for that gourmet experience. 

Mark Stiving   

My mind is going in a whole bunch of different places here, because there are always so many lessons you can learn when you think about these. So, we’re going to use a gourmet slice as an anchor. What we’re really saying is when somebody comes in, somebody might be willing to pay what the sheet that we’re looking at what just happened have some pizza slice prices on it says, cheese for 429, pepperoni for 469 topped for 509. I don’t even know what topped means, but that’s okay. But if I were to sell a gourmet slice for $7, then I’ve got some people walking in the door who are willing to pay me seven bucks for a slice of pizza that’s got these gourmet toppings. And I’m capturing more from my customers from my marketplace. So that’s really nice. And at the same time, I’m using my high demand products to bring more and more people in and keep the business flowing. 

Michael Hurwich   

I think Mark is, you know, how do we avoid price transparency? In the end, this theory holds true to most businesses. How do you avoid price transparency? And the most common and transparent prices that will likely be compared is the cheese pizza and the pepperoni slice. And so, if you’re a vendor, and you have a bunch of competitors on the same block around the block, the consumer is very good, or the customer is very good at referencing and comparing the most basics of any offer. But when it gets more complex, it becomes increasingly more difficult. Therefore, it’s hard to compare a gourmet pizza even if it’s at $7 a slice because it’s very difficult to understand the nature and quality of the protein of the chicken or the beef that was put on that slice of pizza. And so, if we can avoid price transparency in the industry in the pizza world by changing the nature of how the game is played, for a slice of cheese or pepperoni, then all of a sudden we become less focused on price, more focused on the quality of the product. If some will argue, of course, that if you harmonize the two different prices between a cheese and pepperoni pizza, and you bring the lowest common denominator, the very basic cheese pizza up to the pepperoni slice, then not only have you recaptured some additional incremental revenue that you didn’t have in the past, but at the same time, you’re now asking the customer to focus more on the value. And some would argue there’s a lot of studies that have been put out there, that when you get below $10 on a price point in this type of industry, the perception is that it’s likely a better quality product anyhow, price dictates value. And if you can combine some of these and provide a more simplistic menu, it’s easier for the consumer to evaluate; they don’t get lost. And you don’t get into a pricing game where you’re sort of asking customers to trade off the cost of products by having different price points between cheese pepperoni and all the others. You are forcing the customer to acknowledge that, oh, pepperoni slice must be more must be a higher cost product. Therefore, that’s a rationalization for the price increase. 

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Mark Stiving   

So, explain to me what you mean when you say we’re trying to avoid price transparency? Because I mean, I think there are times where we want to avoid price transparency. And there are other times where we don’t want to avoid it where we want to make it easy for people to make decisions. So, what is it that you think when you say that? 

Michael Hurwich   

What I’m thinking is, you know, I’m trying to, you know, we always talk about in what I call MeSDA. What is your meaningful sustainable differential advantage? How do you get away from being the same as your competitor? And suppose you can adjust your menu and only have a couple of price points. In that case, all right away, you’re different from your competitor, who’s probably still charging different prices, for a regular slice of a cheese pizza slice and a pepperoni slice. If you and I went into ten different pizza restaurants, we’d probably see the same setup on the menu board. It would show us you know, margarita, plain cheese pizza, followed by a pepperoni pizza, followed by all the gourmet pizzas and all the different price points. And it makes it much easier for a customer to go store hopping become less loyal because they’re always trading off between the slice at one place and the price. And they can easily compare one price point and one type of pizza slice with the other stores’ price point and pizza slice. So, the idea is to harmonize that or combine some of these products and come up with one price. And then there’s very; it’s hard to know, why are you charging that price. Is it really more leaning towards the pepperoni pizza or more towards the cheese pizza? And let me introduce one more thing to this whole equation because it’s really about moving customers to where you want them to end up at the end of the day. And it’s incumbent upon vendors to drive purchasing behavior, not the other way around, you know, consumers have become too strong and same with customers have become very strong, given the amount and the plethora of communication information that is easily accessible online, or through friends or through other businesses and so on. And so, the goal is really to focus less on price and price points, focus more on value and, and increase that value perception and differentiation through time. And so, I’m introducing the concept because we really don’t want individuals coming in, in this example, and ordering just a slice of pizza, we want people moving towards the bundle at the end of the day, as does McDonald’s, Burger King, Wendy’s and all the big QSR. So, they’re quick-service restaurants. So, if you’re not forcing the customer to move to a better value proposition, you’re not getting your full share of wallet, the customer comes in the store, you already have a captive audience, and you should essentially provide as much value as you can deliver to that customer at a recently fair price. So, if we then move away from this vertical pricing approach on a pizza slice, and having different price points, and try to transition horizontally from pizza slices to bundles, then we can transition the customer now to purchase more than they otherwise would have purchased and start selling secondary and tertiary items like a coke… 

Mark Stiving   

I want to… I’m going to do the Math using the board that Michael and I are looking at. And by the way, I’ll put this in the show notes so you guys can see it. But a slice of cheese pizzas for 29, a slice of pepperoni pizzas for 69. That’s a 40-cent difference. Most restaurants have around a 25% food cost based on their pricing. And so that implies that the pepperoni they think cost them probably in the ballpark of 10 cents. So what Michael is saying is if we didn’t charge for 69. What if we only charged for 29? We said pepperoni is the exact same price as cheese. We bring more people into our restaurant; nobody eats a pepperoni pizza without having a soda. And if you pay $1.89 for soda, that actually cost them in the ballpark of 15 cents. So, we just brought in more people, sold more soda because we gave up 10 cents on a pepperoni pizza. That’s not a bad decision. 

Michael Hurwich   

No, that’s a pretty good decision. I mean that you know, as you and I both know in the pricing world, the important component of understanding price is also to evaluate and determine the elasticity of demand. So, we clearly need to know by dropping the price for the pepperoni slice or elevating the price for the margarita or cheese slice, what kind of impact will that have on market share? If it’s not significant then and we have some volume lift by dropping the price on the pepperoni, and it offsets Mark, you know, costing approach that he’s introduced, then it might make sense. It’s a better value proposition. I’m more inclined to actually move up the price of the cheese pizza to 469 for me to align with the pepperoni, capture 40 additional cents per slice because a slice of pizza is what we call a convenience purchase; customers are highly inelastic. And we just chose one of the most popular pizza slices in the market. And I don’t think too many people will notice, and then the caveat is so long that we offer bundles combinations as the menu board is suggesting. If we can offset any of these price adjustments with some really favorable bundles, we incrementally will make more money by selling ancillary products, like the salad that’s shown in this menu board or a bowl of spaghetti, a little bowl of spaghetti, or Pepsi or Coca Cola. Not only will we increase our incremental revenue, may not increase our margin, but will increase incremental revenue. And in a way, you can use the bundle as an anchor price as well; by making the single slice seemed less expensive, but somewhat reasonable, even though we’ve increased the cheese slice and brought it in line with the pizza slice.  

Mark Stiving   

Okay, so I want to defend my theory for a second, and you’re welcome to defend yours, too. That’s okay. But I wanted to find my theory in the sense that companies often have loss leaders. And if my customers happened to know, oh, this is the price of a slice of cheese pizza, I should expect to pay this price. So, for example, McDonald’s, at least they used to charge 99 cents for a double cheeseburger, right, and they lost money on every double cheeseburger they sold. But they did that because they could sell sodas and fries with their double cheeseburgers. And I would almost argue that people who buy slices of pizza, either that’s not me if I’m going to buy pizza, it’s a whole thing. So, I have leftovers in the fridge. Exactly. But if somebody will buy a slice of pizza, I would guess it’s something they do regularly. And they actually know what the prices are, they would expect to pay for a slice of pizza, whether it’s cheese or pepperoni or whatever their favorite slices. 

Michael Hurwich  

I think I’ll challenge that. I believe at this price point; most people have no idea what the price of a pizza slice is unless one of their friends tells them. In other words, they said did you try this pizza down the street? Not only is it fantastic, but it’s also 25 cents cheaper. And it’s a great value proposition, but otherwise, I’m not convinced that most people have an idea. You know, we’ve, I don’t like plugging our firm. But over the years, you know, SPMG has worked for chicken restaurants and burger restaurants like McDonald’s in various parts of the world. And one of the things that people, most consumers actually don’t know, typically doesn’t know the product’s individual price. What they do know is how much they’re willing to spend when they go out. And so, they know they just want to spend ten or $15 for lunch. Or if they go for dinner, they know how much they want to spend on their family. So, they’ve established a budget. And it’s all about the budget; you know how much if I’m alone, and I’m running out for lunch on an individual basis, I just want to spend perhaps ten or $15. If I’m with my family, I only want to spend $50, you know, going for a slice of pizza. But on an individual basis, the average individual really doesn’t know whether last week was 429. And now it went to 449. Especially when you incorporate the tax component overlaying on that. 

Mark Stiving   

Yes. So let me agree with you, in that if I went out for a slice of pizza, I have absolutely no idea what you got. Because I never buy a slice of pizza someplace. So, you’re absolutely right. To me, it’s in my budget, it seems reasonable? On the other hand, when I picture people who buy slices of pizza, I always picture UC Berkeley; you walk down College Avenue, there are seven pizza places in a row. And I can imagine those students know exactly which pizza place they want to go to, and what the prices of that slice of pizza, right? And so, to me, it’s you know, the thing I love about what we’re talking about is we can go test it, it’s easy to test this stuff.  

Michael Hurwich   

I think you raise a great point, of course here, you know, we just identified the most elastic market in the world, which is students; student populations have zero income. See, it threw a curveball at me there, Mark. But let’s assume that most of the pizza chains are all over the place and selling into commercial markets and business people as well. But all joking aside, the goal in business is why I wanted to bring the pizza concept because it resonates with everyone, and most people can relate to a pizza or a pizza slice. And the rules hold true whether you’re selling pizza again, or whether you’re selling, you know, automation equipment for Schneider, and it’s, you have to. If you have a captive audience, the customer is either loyal or they’re relatively new, and they haven’t earned the benefit of getting discounts and I know that seems harsh and tough to our audience here. But the customer should pay the price set on the menu for at least the first slice or the first pizza. Now what the organization should do, and they typically do this in college towns, like Ohio State, would offer the second slice, perhaps for half price. And so, the loyalty is earned after the first purchase. Therefore, the customer has now reflected or shown the vendor that I’m indeed willing to purchase a little bit more, and how, asking, really asking the question, how are you going to reward me for that. If you’ll find that a lot of pizza shops, unfortunately, when you ask for a second slice, they quote you for 29 again, just like on this menu board, there’s no discount, and there’s no effort to build any sort of loyalty which brings me home to your book that you just wrote, in a Win, Keep, Grow. Companies are pretty good at winning some business; they’re less good at keeping them and even worse at growing the business. Companies focus on new customers rather than finding ways to reward their existing client base in some matter. And I think in the pizza business, instead of always focusing on the bottom line, you’re eroding when you give a discount. As you mentioned earlier in our conversation, better to sell the first slice at full price, full ticket price, the second slice at half price; you’re more than covering your costs and also covering some incremental fixed overhead, at the same time, an extra sale. 

Mark Stiving   

Nice, Michael, now I have to invite you back because you plug my book, thank you very much. We’re, we’re running out of time. But I do want to end with the final question and you have to tie it back to pizza. What’s the one piece of pricing advice you give our listeners that you think could have a big impact on their business? 

Michael Hurwich   

I think the biggest piece of advice would be definitely, focus on demand, supply and demand issues. When something seems very busy, there’s a tremendous opportunity to elevate your price, so long as you’re delivering value in the marketplace. The caveat being that you don’t want to get into an overcharging or rip off strategy. But if the customer acknowledges that value exists, and they’re willing to pay for it, then don’t hold back. You know, grow your incremental revenue, even organically and make sure that you avoid price transparency; focus on value delivery. 

Mark Stiving   

And so, if I could repeat what you just said, I think what you said was your highest volume products are places you should go look for opportunities to raise prices.  

Michael Hurwich 

Yes, I think so. That’s correct.  

Mark Stiving 

Awesome. That’s a great, great piece of advice. Michael, thank you so much for your time today. If anybody wants to contact you, how can they do that? They can 

Michael Hurwich   

Contact me by sending me an email mhurwich@spmgglobal.com. And yes, there are two Gs in my email, SPMG Global. 

Mark Stiving   

Okay, and that’ll probably be in the show notes as well as your link to your LinkedIn page. Alright, Episode 126 is all done. Thank you so much for listening. If you enjoyed this, would you please leave us a rating and a review? And if you have any questions or comments about this podcast or pricing in general, feel free to email me at mark@impactpricing.com. Now, go make an impact! 

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