Impact Pricing Podcast

Ep146: How to Handle Pricing Implementation During Inflation with Frederico Zornig

 

Frederico Zornig is the CEO of Quantiz Pricing Solutions – a pricing consultancy that aims to increase the profitability of their clients through strategies implementing improvements in the Pricing, Revenue Management and Commercial Excellence processes. He earned a PhD in Pricing from the International School of Management, and he was a professor for 11 years.

Frederico initially fell in love with pricing while he was pursuing his MBA at the University of Illinois. It was 15 years ago when he decided to start his own consulting firm.

In this episode, Frederico discusses insights you should take note of in terms of price implementation and inflation. He shares stories that illustrate how the price of your goods can totally make a difference to your business.

Why you have to check out today’s podcast:

  • Discover how strategic pricing is critical to defining winners and losers in today’s increasingly competitive environment
  • Learn about price implementation and how to go about getting people to adopt new strategies
  • Learn how you can handle pricing when inflation occurs

              

Give price the importance it deserves. I have seen some companies not paying too much attention to the area, and I have seen companies that really believe that price can be a game-changer. 

Frederico Zornig

           

Topics Covered:

01:34 – How did Frederico get into pricing and what is it that attracts him to keep going?

04:51 – The advantages of being a pricing person who got to lead sales and marketing as well

08:11 – The do’s on making people adopt new strategies and have them implemented in their company – the incentives and the importance of having a strategic commercial policy

14:43 – Companies focusing on revenue and not on profitability; measuring margin dollars instead of margin percentage

19:22 – In having sales compensation plans, how do we convince people to hold or negotiate price?

22:20 – Tips on how to handle pricing in the middle of inflation

25:53 – Having information about your competitors or none at all – not being afraid to raise in relation to volume

27:59 – What is Frederico’s advice that could be helpful to the listeners’ business?

         

Key Takeaways: 

“Pricing is a journey. I believe in that. The company has to go into that journey if they want to be really pricing experts or go after pricing excellence. It’s not going to happen in one or two years.” – Frederico Zornig

“The customers have to understand that if they behave the way we have the incentives created, they could benefit of that commercial policy.” – Frederico Zornig

“If you create really strategic commercial policies, you can really change the way the market is built.” – Frederico Zornig

“I always take inflation into consideration. If I’m not coping with inflation, I’m staying behind.” – Frederico Zornig

“Companies that really understand the value and pursue a pricing discipline – a pricing focus – they could benefit enormously in terms of results. Big, big results.”– Frederico Zornig

                   

People / Resources Mentioned:

                   

Connect with Frederico Zornig:

                    

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.)

Frederico Zornig

Give price the importance it deserves. I have some companies not paying attention too much to the area, and I have seen companies that really believe that price can be a game changer.

[Intro]

Mark Stiving

Today’s podcast is sponsored by Jennings Executive Search. I had a great conversation with Jon Jennings about the skills needed in different pricing rolls. He and I think a lot alike. If you’re looking for a new pricing roll or if you’re trying to hire just the right pricing person, I strongly suggest you reach out to Jennings Executive Search. They specialize in placing pricing people; save that three times fast.

Mark Stiving

Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the quantifiable relationship between them. I’m Mark Stiving, and today, our guest is Frederico Zornig. Here are three things to learn about Frederico before we start.

He is the CEO of Quantiz Pricing Solutions – a pricing consultancy. He earned a PhD in Pricing from the International School of Management, and he was a professor for 11 years. He stuck it out.

Welcome, Robert.

Frederico Zornig

Hi, Mark. Pleasure to be here with you.

Mark Stiving

Hey, how did you get into pricing?

Frederico Zornig

A good question. Actually, let’s make the wide story short. I pursued my MBA at the University of Illinois. At that time, the late 90s, Kent Monroe was a pricing professor there. I really fell in love with the subject so I decided to work with pricing since then, pretty much. So I joined J&J in the United States, I did some pricing work with them, then I moved back to Brazil to implement the pricing project down here to structure on the pricing department for J&J Brasil. I became a director for J&J – Sales and Marketing Director here, but then I left the company to start my own consulting firm. And that was 15 years ago.

Mark Stiving

Wow, great. You know, it’s funny because I’ve never met Kent Monroe. I’ve seen him speak once and I would really like to meet him one day. So maybe you can give me an introduction someday.

Frederico Zornig

I think, until today, he was my mentor and was the greatest professor I ever had. So that’s why I’m here.

Mark Stiving

Yeah, nice. Why do you stand pricing? Why do you think pricing attracts you or keeps you?

Frederico Zornig

Well, my background is Engineering, but I never wanted to work in manufacturing or things like that. So I went to the business world, started as a Sales Rep, and then I moved as a Sales Manager before my MBA. And then I went to work with Marketing, and Marketing was completely subjective. Do you like or you didn’t like this movie or this ad? I really had a hard time with that, being an engineer, or deciding on what do I like. I couldn’t find quantitative stuff. And then, when I was at my Marketing MBA at the University of Illinois, I ended up knowing about pricing, then I got a click. You see, sure, I can use some mathematics, statistics, processes. That will work for me. And then I also like to work with pricing. I found that that would fit completely. I think it’s the midterm between pure mathematics, but it’s not just qualitative stuff and subjective stuff, like a pure marketing professional would be in terms of advertising and things like that.

Mark Stiving

Yeah, I think pricing is funny in that way. I’m an Engineer too, and it attracts us because it’s a number, but then once you get into it, you realize it’s still really wishy washy, right? If you try to pick somebody’s willingness to pay, they don’t even know it themselves, so how can we figure out what it is? So there’s still all this art and black magic going on around pricing, so it’s pretty fascinating.

Frederico Zornig

Yeah, I agree. It’s a mix, but you cannot rely just on the subjective. There’s where you can put some numbers and make some good stuff in terms of analysis and things like that.

Mark Stiving

That’s fascinating. You had mentioned that you went to J&J as a Pricing person, and then you went to Lead Sales and Marketing. I actually think that’s really fascinating, because explain why it makes sense for a pricing person to lead sales and marketing.

Frederico Zornig

Well, I think you’ll have a better understanding in terms of profitability, in terms of which products you could raise prices, which products are really sensitive, where you cannot really make much effort in terms of trying to make more money out of one unit, you can make more money out of volume. Actually, it was very peculiar because I did the project – the pricing project, pricing area, the commercial policies, the new pricing list – and then J&J allowed me to be the Sales and Marketing Director. So I have to be the guardian of the project. I have done it. I couldn’t get there, so you know guys, forget about it. It is not something that’s going to happen. No. More than ever, I have to defend what I have done and say. No, this is going to work. This is going to be good for the company. And it was very good to the company. So I stay like four years as the Commercial Director for J&J.

I cannot say many details in the numbers 15 years ago, but we multiply results in terms of contribution margin, in terms of percentages, and I remember I even received a call from the global CFO saying, “Fred, that’s fantastic. That’s what we’re really looking after in terms of getting results.” And those were the things that were giving me the confidence to start my own consulting firm. I was thinking, I can reproduce that for other companies – what I have done here. Of course, I don’t have all the time that I had at J&J. At J&J, I had one year to develop the project, and then I stayed for years as their Commercial Director. Usually as a consultant, I don’t have all these time. They are going to expect something much shorter. But even though, I have some clients that enter into that journey and they believed that this is more long term achievement. It’s not something that you’re going to really change completely the game in like one year, but as you go step by step, you can keep improving what you have done before. And I think pricing’s a journey. I think Bohan says that very well in the pricing activity studies that he presents, you know. I believe in that. The company has to go into that journey if they want to be really pricing experts or go after pricing excellence. It’s not going to happen in one or two years.

Mark Stiving

It certainly doesn’t happen overnight. Now, what I love about the story that you just shared is I’ve heard, sales people call pricing people the sales prevention team, meaning, we’re trying to get higher prices and we’re keeping sales people from closing deals. And what you just showed was, “Okay, I set the price list or the price policies, and now I’m going to show you that it actually works.” And so, that was nice. It wasn’t sales prevention team.

And so now, what I’d like to do is let’s talk about price implementation. So, you created these policies, and now we have to get the company to implement these new policies or commerce. Now, if you’re the CEO, that’s easy. You just tell everybody, “Go do this.” Well, even then, it’s not easy, but how do we go about price implementation? How do we go about getting people to adopt our new strategies?

Frederico Zornig

Well, first of all, you have to have a very clear strategy on where you want to go or to grow. Let’s put it this way. I have to understand which products I have, which ones are more differentiated, where I can capture more value. There are products that you cannot really capture value. I have to go into the volume strategy and economies of scales and things like that. Even a company like J&J will have both worlds. Then, we have to think about those commercial policies. They have to be somewhat win-win. So, the customers have to understand that if they behave the way we have the incentives created, they could benefit of that commercial policy. That’s a big, it’s a detail but that’s important.

Let’s put it this way. I have operational policies that I can negotiate with my customer about 20% discount, and they assume that they’re right to get those 20%. Now, what if I come to you and say, “Hey, do you know what? Now, you can even make 25% discount but…” but then, there’s the ‘but’ – “…I need you more volume. I need you more strategic products. I need you to comply with my consumer products policy. I need you to make a plan in terms of logistics or to receive a full freight of products or pallets.” So, you can create conditions where a company is going to win, and of course, you have to make analysis and to understand the return on investment in terms of those incentives that are going to give away, how much is going to come back to you, definitely, and then you can offer it to your customer base –a better deal. And then, the sales force, if they understand that and they can communicate well with the customers, it’s a win-win proposition, and that’s what I have experienced. For the 20 years of my career, you can create options, thinking strategically on which behavior you want from your customer, create the right incentives. Let me tell you a story.

I was working with a beer company, and talking to the CEO, they said, “Oh, I have to get out of this price war on the major products. I have to put more product mix in the marketplace,” but they were giving discounts to the trade, to the retailers of the world in terms of beer volume. He was paying their sales team based on beer volume. I said, unless you move out of this and you start to give incentives to the trade to buy your portfolio, you’re never going to end up just selling beer. So, it seems basic stuff, but many companies over sees this and they just focus on the big number. Oh, here’s 80% of the business. But there’s a price war everywhere. Everybody fighting for every 1% market share, and there’s a lot of other products here – water, soft drinks, juices, energy drinks – a lot of other products that is not as hard as this one, and you can make lots of money. So, let’s create the right incentives.

Mark Stiving

I heard two really big lessons in the stories that you just told me. So the first big lesson I heard was negotiations are all about gives and gets. And so, we’d want to make sure we understand what we want from a customer because they want from us a better price if at all possible. They might want other things, but they certainly want a better price. What can we get if we’re going to give them a better price? And that’s really some ROI analysis.

Frederico Zornig

Yeah, and you have to say to your sales team, “Oh, can I get a better price?” The answer is always yes, but the customer have to give me something back, always. And if you create really strategic commercial policies, you can really change the way the market is built.

In this same year project, I remember that we create an incentive because they were buying pretty much 80% of the volume in the last week of the month. We have a little bit of inflation that leads to that type of behavior sometimes. And we create an incentive to guarantee the same price all over the month, so we could spread out the logistics. That would give the company – the beer company – a lot of savings in terms of extra hours, truck availabilities, and things like that.

In the beginning, the sales force will say no, no. That’s a market behavior. It’s always the last week. It’s never going to work as it does. It’s a lot of money we are offering. Probably, it’s going to make sense to the retailers, to the distributors that we’re going to face along the month. By every week, the same amount of products are out of the shell. Okay, let’s try. Because we’re giving price for them to do that, because we are saving a lot of money. I mean, fantastic. They accepted the first month of the project. We did a pilot, and then suddenly, all the Brazilian business was asking, “Hey, I want the new commercial policies. I want the new commercial policies.” They’re asking for it.

Mark Stiving

So I think, the way I usually look at this – and tell me if you do it differently, please – is I usually ask companies to go through what are your costs to serve a customer? And if you can outline what all those costs are, then we could say how can we lower some of those costs if we get our customer to do something different and now we know what our gives and gets could be, right? I can now say this costs us a lot, so if I could change this behavior, if I could reduce this cost, I could share that with my customer in terms of a lower price.

Frederico Zornig

It’s a part of it. You keep some, you give some, and it’s a fair deal. It’s a win-win, really.

Mark Stiving

It’s absolutely win-win for both. Okay, so the other lesson I heard you teach us a second ago, or observation that I really want to point out is I think I heard you say way too many companies focus only on revenue and not on profitability.

Frederico Zornig

That’s also true, right? That’s also true.

Mark Stiving

I have a client that I’ve been working with right now who says we measure ourselves based on revenue growth and margin percentage. And although those are okay, I would much rather be measuring margin dollars.

Frederico Zornig

I agree. No, I have a good story about that. I was negotiating a large project with a Spanish company that does business here in Brazil, and the Latin America president of the company told me, “Fred, we want the project and we have to increase our sales percentage from 27% profit to 30%.” And then I mentioned to him, “Well, you really don’t want to sign this contract with me.” And then he said, “Why not? That’s my goal. I have to reach 30% margin in Brazil.” I said, “Well, it’s going to be the easiest project I have ever done. Also, however, just calculate how much price increase I have to give in your prices, but the value is high, yes?” “So, we’re talking dollars’ margins. We’re not talking percent?” No, no. We’re talking percentage.” And they have this target that I really fully don’t agree.

At the end of the project – how fun it was – we suggested to develop a new product line for them to compete with the original Brazilian companies, because it was an international company – Spanish company – doing business here. They have a strong brand. And they say, “Let’s fight another market, the C and D markets here” because they were really focused on A and B type of consumers, and then suddenly, they used to have two plants in Brazil. Now, they have six. They are the market leaders, but their percentages remain the same or even lower a little bit. But their contribution margin after six months of the project, they were already building one or two new plants and the CFO came to me and said, “Fred, we never saw so much money coming to this company.” I said, “Great, right? That’s fantastic. That’s what we wanted.”

And you know, at the beginning, the focus would be completely different. It was to really increase percentages, which does not mean- that’s basic, but I mean, what does it matter if I have 90% of a business and my business so it’s small, right? Doesn’t mean anything.

Mark Stiving

Yes. So in our situation, and I’ll say this for pricing managers or directors of pricings in big companies, we may want to manage margin dollars, but we often just have to do what the executive team says, right? So if the executive team says, “We want revenue growth and margin percentage”, that’s what we managed to.

Frederico Zornig

Yes, and I can understand that situation as well especially here in Brazil, where usually, we are working with subsidiaries. So we’re not we do not have the power to really change the goals or the strategy. We have just to comply with whatever it comes. And sometimes, that’s what they’re asking us to do. So I can understand. I may not agree, but sometimes that’s your job, right? I remember, I think, General Patton or another general in the US, one of the wars. I remember some phrase say, oh, but we didn’t know it was Saddam Hussein, right? You didn’t kill Saddam Hussein. But that was never the mission. The mission was something else. And I agree with that statement as well. We have to do the mission. What’s the mission you have to do? Of course, you can try to show that the mission should be different from what you’re being asked to do, but if you can’t move that, I’m fine. I played by the rules. I delivered whatever project they asked me to deliver.

Mark Stiving

Yeah. And to be fair – I don’t want to pick on CEOs or CFOs – the reason that companies often say “we care about revenue growth and margin percentage” is because that’s what they believe their stock price moves on,  right? So they’re worried about the market capitalization, and so that’s what they want to manage. They tell us to manage that. That’s what we manage.

Frederico Zornig

Exactly. There’s a lot of value. I think Amazon just proved that, right? For 20 years. They never turned into profit for 20 years, and it’s one of the most valuable companies in the world – just based on growth, growth, growth, growth. And Robert Phillips is the pricey and revenue optimization there and I had classes with him back in 2000. This guy’s a genius, and he’s sitting there for Amazon, so they know what they’re doing.

Mark Stiving

Absolutely. Let’s talk more about price implementation though. Do you ever get involved in sales compensation plans? How do we convince those people to hold price or negotiate price?

Frederico Zornig

Sometimes, that’s not our major focus. Here in Brazil we have a lot of loss for employment payments and things like that, so it’s something that is really delicate to work with. We have to involve HR personnel to change commissions or things like that. But sometimes, they ask us to think about how they compensate people.

So actually, at this moment, I’m working with a large retailer in Brazil where we are changing the way we are going to compensate them. So every percentage point of discount they save, it’s going to translate them to some additional pay. And why was that? Because here in Brazil, it’s common for companies to work with a very large discount rate, and that’s because in the past, we had a lot of inflation and we have prices that were frozen by the government. So companies are afraid that this could come back, because we always have some inflation, right? Now, you’re running 10 or 11 a year.

So what companies need do to play safe? They usually have a very high price list and they discount a lot. And why is that? Because if the government comes and say, “You have to freeze your prices again,” I can just keep getting discounts and raise my price, so it’s like a strategy that remains. But what’s the negative side of this?

Once I’m used to give 50% discount, I cannot sit down with my customer and say, “By the way, I have more half percent discount to give you or 1% discount to give you.” The guy is used to 50. He wants to talk about 55, 60; that’s a lot of money. So sometimes, we advocate to companies to reduce what we call a price list sincere, sincerity, or something like that. I don’t know their word, but the more sincere with your price list, then you can reduce the level of discount. But to change that mindset for the sales force that are used to large discounts, it’s tough, and we are in the process of changing that in one retailer company here in Brazil. So we’re incentivizing them to say “hey, every discount that you can save, don’t go back to the 50. You know, you’re going to keep a lower level of discount, so play with us.” And it’s working.

Mark Stiving

The good news is every percent saved is pure profit, so we can share that with the sales person. That’s okay.

Frederico Zornig

Yeah, part of it. Yeah.

Mark Stiving

Hey, I didn’t plan on asking this question, but I’m going to ask it. We, in the US, are just now starting to face inflation again. So we’re up in the 5-6% range. So we and most of my peers don’t deal with inflation much at all. Give us some advice on how do we handle pricing in inflation?

Frederico Zornig

That’s a good question. Actually, I just did a pricing course in the US – I’m not going to mention where nor the professor – and they showed us a case that for 10 years, a mattress company in Chicago was not raising their prices, so they could not calculate elasticity because there was no change in price. And then, I challenged the professor. He said, well, that’s not the case, because if you’re not changing your nominal price, the real price is becoming lower. Even if you have one or 2% inflation a year. That means one or 2% lower prices a year are not nominal, but relate to other goods. And by doing so, by thinking so, I have already a price variation where I can estimate your elasticity. Because you are becoming cheaper and cheaper, and probably, that’s one of the reasons you’re selling more and more. We just have to understand how much of your price no variation which for me is a price loss every year. It’s giving you an edge – a competitive edge – in terms of lower prices, regarding to other goods that is benefiting you in terms of all of your mattresses. It was a good discussion.

So for me, one of the things you have to keep on, you have to have a benchmark – an inflation benchmark – and you have to be tracking it. You have to be ahead of it. You cannot be below it, because otherwise, you’re losing. You’re losing from inflation. Even in Brazil here, it’s common to make those mistakes. People say, “Oh, last year, I raised my price by 6% and I don’t have elasticity because my volume grew by 4.” But like I said, inflation is 10-11. So if you raise your price by six, in real terms, you’re lowering your price by five. That’s why probably you are getting more businesses here. You’re becoming cheaper than the market. So you have to choose a benchmark.

Once, we started to work with a magazine – the leading magazines here in Brazil, the publishers – and there is no other comparison. Inflation was kind of very different because they have their own inflation because of course of paper and things like that. So we decided to benchmark against other goods that will compete with a magazine or weekly magazine or monthly magazine. It could be a movie ticket. And we selected a bunch of products that could compete in terms of where consumers are going to spend their money. And we’re attracting that those prices will compare wherever you work. Because I’m the leader in that market, how can I know if I’m becoming cheaper or not? So we selected a basket of goods, and if they’re raising their price, we’re going to raise as well, just to give an example.

So, taking to that, I always take inflation into consideration. If I’m not coping with inflation, I’m staying behind.

Mark Stiving

Yup. So, let me ask. Let’s pretend that I’m this mattress company, and I’ve got inflation 1-2% a year. I haven’t raised my prices. The real issue is did my competitors raise their prices? So, if my competitors kept up with inflation, then absolutely, I’m essentially lowering my price relative to my competition. If my competitors never change their prices, then it’s a question of are people replacing mattresses more because they seem to be less expensive relative to the overall budget that I might have?

Frederico Zornig

Then I cannot answer, exactly. We have to really evaluate the situation and if you can find information about your competitors. Actually, that’s a good question. You have to understand, sometimes it’s the inflation of your market, right? What my competitors are doing and if I have this cross elasticity. That’s very easy to do when you have syndicated information like consumer goods, where we can buy must ins or other sources, then you can really understand with price fluctuations where the market share went, and you can make very good models in terms of price gross elasticity. Who is your main offender? How much vulnerability you have against main offender? How much punch you have against him or her? But again, if I don’t have any information from my competitors at all, I would assume that I should be doing my moves. And if I go with my inflation rate, okay, I’m losing 2% a year. If I’m this mattress company like you said, then I’m just keeping my pride.

First of all, I would try to put 1 to 3% to be on top of inflation every year, and then I could measure the reaction of my customers. Am I losing volume or not? And if not, keep raising. Keep raising. Why should I stop, you know? Sometimes, companies are very afraid of changing prices. It’s amazing.

Mark Stiving

That’s so true.

Frederico Zornig

And it’s unbelievable. They freak out. “No, I cannot increase my prices. Oh, I have to be below inflation.” Come on, guys, no, we should be bold. The easiest thing to do is to reverse. “Oh, I was too strong, I charged too much. Oh, okay, lower it. What’s the problem?”

Mark Stiving

Yeah. Frederico, we’re gonna have to start wrapping this up, but let me ask you one last question. What’s one piece of pressing advice you would give our listeners that you think could have a big impact on their business?

Frederico Zornig

Give price the importance it deserves. I have seen companies not paying attention too much to the area, and I have seen companies that really believe that pricing can be a game-changer. I have lead enough. Almost 200 projects I have done. I could say that companies that really understand the value and pursue a pricing discipline – a pricing focus – they could benefit enormously in terms of results. Big, big results.

Mark Stiving

What’s fabulous on results is that almost always profit as much if not more than revenue.

Frederico Zornig

Yeah. I mean, it compares, right? I mean, pricing can go both ways. You can help your company to achieve growth – profitable and sustainable growth, I would say. I’m a true believer on that. Probably, it’s the easiest actions that you could take that’s going to make the major changes in the business results you have. And why you overlooked that?

Mark Stiving

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

Frederico Zornig

Well, they can reach me at my company website www.quantiz.com.br because we are based in Brazil. Give me a message and I will reply on my team very shortly. Thank you, Mark.

Mark Stiving

Perfect. Thank you to our listeners for listening. If you enjoyed this, would you please leave us a rating and a review? The reviews are extremely valuable to us. 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!

Mark Stiving

Thanks again to Jennings Executive Search for sponsoring our podcasts. If you’re looking to hire someone in pricing, I suggest you contact someone who knows pricing people. Contact Jennings Executive Search.

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