Impact Pricing Podcast

Ep179: Pricing Power: Making Pricing Profitable with Ayon Bhattacharyya

Ayon Bhattacharyya is the Founder of Biz Growth Spurt, a consulting firm based out of New Zealand. He has experienced pricing in half a dozen companies, and he’s a passionate animal welfare advocate.

In this episode, Ayon discusses pricing power as he enumerates its four different levels while talking about value-based pricing.

 

Why you have to check out today’s podcast:

  • Understand how pricing power relates to price elasticity
  • Find out what Ayon’s four different levels of pricing power are all about
  • Discover how Mark’s will I? which one? concept relates to these levels

“Think about your pricing power, and think about how – whether it’s sort of competitive advantage, perceived value, all of those things – what can you do differently to improve your pricing power today.” 

Ayon Bhattacharyya

           

Topics Covered:

01:18 – How Ayon got into pricing

02:33 – Defining value-based pricing and relating it to airline pricing

05:57 – Pricing power vs. price elasticity

09:50 – Ayon’s four different levels of pricing power

13:33 – Describing the levels: (1) Cost chaser

15:04 – Describing the levels: (2) Market pricer

15:46 – Describing the levels: (3) Value conqueror

18:16 – Doing behavioral economics at a cost chaser level

19:09 – Applying Mark’s “will I? which one?” concept to Ayon’s levels of pricing power

22:19 – Talking about value-based and fixed pricing

25:26 – Ayon’s piece of pricing advice for the listeners

 

Key Takeaways: 

“Pricing power is essentially your ability to charge a higher price without losing customers. Another way to say that is a company’s ability to get the price it deserves for the value it delivers.” – Ayon Bhattacharyya

“A maturity suggests that you need to get there over a period of time; you grow into it. It can’t be something that you just start out with that, at level three. But that’s not what I’m trying to say here. You can actually start out and you can be an early-staged business and you can start out as a value conqueror. You don’t need to progress from level one to get to level three. You can start at level three.” – Ayon Bhattacharyya

“There are some businesses that can just start at a higher level, but I think generally, it is a journey. I think of pricing strategy as a journey, not just an outcome.” – Ayon Bhattacharyya

 

People / Resources Mentioned:

Connect with Ayon Bhattacharyya:

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.)

Ayon Bhattacharyya

Think about your pricing power, and think about how – whether it’s sort of competitive advantage, perceived value, all of those things – what can you do differently to improve your pricing power today.

[Intro]

Mark Stiving

Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the deliberate relationship between them.

I’m Mark Stiving, and our guest today is Ayon Bhattacharyya, and I’m never saying that word again. Here are three things you’d want to know about Ayon before we start.

First off, he lives in New Zealand; it’s got to be my favorite country on the planet. He’s Founder of Biz Growth Spurt, a consulting firm based out of New Zealand. He said he’s experienced pricing in half a dozen companies, and he’s a passionate animal welfare advocate who just adopted a puppy, Louis, and he hasn’t shown me a picture of him yet.

Welcome, Ayon.

Ayon Bhattacharyya

Hi there, Mark. Thanks for having me back. It’s great to be here.

Mark Stiving

It’s going to be fun.

Hey, remind us. How did you get into pricing in the first place?

Ayon Bhattacharyya

I think my first kind of accidental sort of step into pricing was the role at a global airline. I think up until that point, I’d sort of been just developing my analytical skills through commercial finance, but decided I wanted to take a break from it, and pricing just seems like a very natural segway with the sort of analytical capability that I had. But I didn’t truly appreciate pricing until many years later, I think probably about eight years later, when I actually sort of got much more involved with value-based pricing.

So, with the airlines, obviously, it was a brilliant way to sort of start my journey on the whole technical pricing and segmentation. Really sophisticated pricing and inventory systems; they’ve got price fences in place. That was all fascinating. But it was the psychology of pricing that I was really drawn to. That behavioral economics and understanding value perception – that really drew me in, and that came later.

Mark Stiving

Nice. We’re going to dive into some other topics later, but sometimes, my guests say something that’s just like, well, I’m really curious about that. And so, I want to tie airline pricing together with value-based pricing for a second.

So, give me your definition or your thought of what value-based pricing is, and then how does airline pricing does it? Do you think they do value-based pricing or not?

Ayon Bhattacharyya

To answer the first part, my definition would be willingness to pay essentially. There’s lots of different definitions of value depending on what you look at. You could look at economic value, you could look at the emotional value, you could look at perceived value. But essentially, what we’re measuring is the benefit that you get from paying for a product or service. And value isn’t just the product or service; it’s the end-to-end experience from the sort of buying process through to the service that you get after you purchase the product, through to the onboarding process and the sales process, and all of that sort of stuff.

Mark Stiving

Before you answer the second part, I got to tell you that I’m 100% in agreement with you on your answer on value-based pricing.

Ayon Bhattacharyya

We’re in tune. We’re aligned. We’re in tune.

Mark Stiving

Do you think airlines do value-based pricing or not?

Ayon Bhattacharyya

There’s probably a long-winded answer, but I’m going to go with the short one. I would say more dynamic pricing to value-based pricing, but there’s a lot of overlap between value-based pricing and dynamic pricing. It’s just a different approach, I think. Rather than kind of saying yes or no, I’d say it’s a different approach. It’s more using supply and demand as opposed to measuring perceived value.

Mark Stiving

So, I think that’s a fair comment. I mean, I actually didn’t know the answer to this when I asked so now I have to think about it, and it seems to me that they use mathematical algorithms to try to get at what somebody is willing to pay so that they can capture that. And so, if you just take willingness to pay as the definition of value-based pricing, then you’d have to say, yes, that’s value-based pricing, but if you take a step back and say, most of the time, at least when I do value-based pricing, I want to understand the value drivers; I want to understand how people make decisions and why they value this more than that and how much they value it. And I would argue the airlines don’t do that at all.

Ayon Bhattacharyya

Well, I’m thinking about this on the fly, because I’ve never actually been asked this question, which is really great because it’s got me sort of thinking. But I do disagree, actually.

I think that when airlines do their price segmentation and they price airlines, they understand that the value drivers are around your urgency to fly. And so, if you book a last minute ticket, your value driver is flexibility, and they will price you a premium on that flexibility, as opposed to if you book 12 months out and it’s a leisure trip, then it’s a different set of value drivers; you pay a cheaper price.

Mark Stiving

Okay. I think to some extent, that’s right, but not completely, but we’ll leave it there.

Let’s move on to pricing power, because I think pricing power is a fascinating topic. So do me a favor and define pricing power.

Ayon Bhattacharyya

So, pricing power is essentially your ability to charge a higher price without losing customers. Another way to say that is a company’s ability to get the price it deserves for the value it delivers.

Mark Stiving

Is there a difference between pricing power and price elasticity? I’m sorry for making you think here, Ayon.

Ayon Bhattacharyya

No, it’s good. I’d be disappointed if you weren’t.

I think the two are tied together. I think pricing power, if you’ve built that inelasticity within your pricing power, then you have a pretty powerful level of pricing power. If it’s very, very elastic and it’s commoditized, then you have a low pricing power.

Mark Stiving

Yes. I’m sure that they’re related. I think that if you were to ask Stephan Liozu who wrote a paper on pricing power, he would probably disagree that they’re the same thing, but in my own mind, I’m not sure that I could tell the difference, because as we’re trying to get pricing power, what we’re also doing is decreasing price elasticity. We’re making it so that a change in price, especially in an upward direction, doesn’t impact demand very much.

Ayon Bhattacharyya

Yeah. I mean, I prefer to think of it much more in terms of perceived value. And that’s a dynamic thing, right? It’s not static. Perceived value can change and can be changed over time, depending on the efforts of your sales and marketing teams.

Mark Stiving

And in really short periods of time.

Ayon Bhattacharyya

Yeah.

Mark Stiving

When it’s sunny out, I don’t care about an umbrella.

Ayon Bhattacharyya

Exactly. That’s a good one. And how you actually identify the value drivers and how you innovate the pricing model is also a very interesting part of that perceived value. I see some really, really interesting things out there, like that theater in Barcelona, the one with facial recognition that charges you by-

Mark Stiving

You have to describe it for our listeners now.

Ayon Bhattacharyya

Yeah, absolutely. Please don’t ask me the name. I can’t remember, Theater…something, something. But it was facial recognition software, essentially, that they put into their theaters, and they completely flipped the pricing model from a fixed price to a totally variable price, depending on the number of laughs.

So, you’re kind of sitting there in your seat, and this software is recognizing whether or not you found it funny enough to laugh, and then the charging model is a pay per laugh charging model. So, at the end, you can kind of see how many laughs you got, and you can see how much you paid, and of course, there’s a price cap, so you’re not paying like €1,000 or something crazy like that and leaving a very unhappy customer that never returns to the theater again.

But yeah, I believe they’ve got a price per laugh model, a price per cry model, and a price per what the- I don’t know if I can use this, but that’s the bleating F-word.

Mark Stiving

I would hate that because I would be sitting in the theater the whole time trying not to smile.

Ayon Bhattacharyya

Yeah. And so that puts it back to, I guess, the artist, to improve that content to make sure that you can’t resist laughing. So that’s a good thing; it improves the product.

Mark Stiving

It does.

So, let’s talk about the levels of pricing power. So, Ayon has a paper on his website – https://bizgrowthspurt.com/ – and he talks about pricing power there, and he’s defined four different levels.

First off, can I ask, are these your four levels or did you get those somewhere else?

Ayon Bhattacharyya

No, these are the levels that I’ve come up with from information, experience and all the rest of it. These are the terms that I use.

Mark Stiving

So go ahead and give us the terms, and then we’ll go back and go through them one at a time.

Ayon Bhattacharyya

Sure. So, the first one is cost chaser. The second level is market pricer. The third level is value conqueror. And the fourth level is price optimizer, and that’s your utopia. That’s where we aspire to get to.

Mark Stiving

And so, take a step back from this for a second. We’ve seen in our industry before, pricing maturity models. Is this similar to a pricing maturity model as in how are we going to get to where we’re capturing the most value we can in our company or our industry?

Ayon Bhattacharyya

It’s funny you should say that, Mark, because it actually started out as a maturity model, and then I thought about it and I thought about it some more. Well, actually, a maturity suggests that you need to get there over a period of time; you grow into it. It can’t be something that you just start out with that, at level three. But that’s not what I’m trying to say here. You can actually start out and you can be an early-staged business and you can start out as a value conqueror. You don’t need to progress from level one to get to level three. You can start at level three. Now, level three obviously assumes that you’ve also got aspects of the other two. So, they’re not standalone. It essentially is a cumulative thing. But that it’s not tied to the business life cycle is what I’m trying to say.

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Mark Stiving

So, it’s not saying that when I started my company, I could start out at a level three pricing power type company.

Ayon Bhattacharyya

Absolutely. You could essentially aspire, you could get the right help and expertise, and you could aspire to be a level three. You don’t have to start at level one. You could start your company and you could launch your price as a value-based price, and you could do the segmentation work and all that sort of stuff.

Mark Stiving

Okay. And do you think it would be fair to say if I’m a level one company today- By the way, let’s describe these. Level one is cost chaser. What is a cost chaser?

Ayon Bhattacharyya

So, a cost chaser is essentially a business that’s got very little differentiation. They are in a sort of a red ocean, very competitive environment, could be a fairly commoditized proposition. They’ve got a lack of customer data. They don’t really understand their customers. They don’t really have customer segmentation. And so, what they do is they adopt the simplest approach that they can, and that is to take costs and to add a margin to that. So that is your cost-based pricing approach. It’s the simplest one.

Mark Stiving

One of my favorite negative things about cost plus pricing is, let’s pretend that we have a product that costs us $50 to make and we want 50 points of margin so we raise the price to $100 and we charge $100 for it. And then our CEO says, “You know what? We can cut half the cost out of this thing.” So instead of $50 costs, we now lower the cost to $25. What does that do to our price? Our price goes to $50 and we just gave away all of our cost savings and the margin that we used to make on our product because we’re doing cost plus pricing.

Ayon Bhattacharyya

Yeah, absolutely. The customers don’t care what your product costs. They care about the value that you’re giving them. So why should it influence price?

Mark Stiving

It is absolutely insane.

Okay. So, what’s a market pricer, for level two?

Ayon Bhattacharyya

So, at this point, you might have a bit more data. You’ve probably started to think about your customer segments. You have some competitor data and pricing that you can actually benchmark against. So, you’ve done the work around assessing market environment. And so, whilst you’ve got your cost base, you can also overlay that market data to be able to benchmark that and to have a competitive price. I don’t love this, but this is so better than just a pure cost-based price.

Mark Stiving

Okay, that makes sense.

And level three, value conqueror. What a great title, by the way. I want to be a value conqueror.

Ayon Bhattacharyya

I actually trademarked that one. I loved it so much.

So being a value conqueror is where you’ve recognized that customers essentially pay for value. So, you start to do that work around really understanding what it is your customers value. You start to kind of think about your segmentation models where different segments have different sort of willingness to pay based on the value, based on use cases, etc. And you’re really leveraging your internal data, like your sales data, your customer data, etc., but you’re also doing some external research as well; you’re doing some pricing experiments. You might be doing some conjoint analysis to really understand the importance of your value drivers, to really understand the willingness to pay. You’re starting to think more about value innovation as well. Like, “I can do all of this research and I can do all of this data analysis, but that only tells me where I am now. What about where I could be in the future? What about my potential pricing power?” Starting to think about that.

And that’s where you look to improve perceived value. And that’s through value innovation, and that is through messaging, and that is through value selling. So that’s where it starts to get really interesting.

Mark Stiving

This feels like panacea. How could it get better than that?

Ayon Bhattacharyya

Well, Mark, I’m glad you asked that question.

The utopia is where you start to automate a lot of these things. So, you’ve identified the value drivers. You’re able to sort of create some preset variables and a pricing engine that takes a lot of the manual work out of it for you. You’ve got a governance framework that enables agile selling whilst protecting your margins. All of that stuff. That friction that existed between product and sales and pricing and marketing no longer exists because you’re all aligned around value.

This is a really tough place to get to. I think only less than 5% of companies actually get there.

Mark Stiving

Yeah, it’s interesting.

So not that I’m criticizing your model, because I actually love it; I think it’s well laid out. One thing I tend to do is move behavioral economics as orthogonal to value. So, I tend to think if I could do behavioral economics at a cost chaser level too, and it doesn’t really matter, it’s different, if that makes any sense.

Ayon Bhattacharyya

No, I agree with that. I completely agree. I think in my experience, a business that is at that level is usually unaware of behavioral economics. I think behavioral economics tends to be something seen more in pricing experts that have a strong understanding of it. And so, it takes that pricing expertise to go in and say, “Hey, you need a value-based price. And by the way, here’s some behavioral economics that can actually help you with that sort of value perception, etc.”

Mark Stiving

Yeah. Okay. So let me tell you, I teach Warren Buffett. I use the quote that he says just before the quote that you use all the time.

So, the quote that you said is, Warren Buffett says, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” And just before he said that, he said the sentence, “The most important thing in evaluating a business is its pricing power.” I think it’s the sentence he says. And I love that. It’s that concept.

Ayon Bhattacharyya

Yeah.

Mark Stiving

And what he said is he said the exact same thing in that “Do I have the ability to raise prices and not lose demand?”

Now, when I teach that – I teach a concept that is slightly different; you may or may not have heard of. You may or may not have heard of me teach it, but I’m going to give it to you, and I want you to try to apply it to what it is that you do.

So, I constantly teach a concept called “will I? and which one?” And the difference is, will I? – there’s no competitive alternative. Which one? – I’m always being compared to a competitive alternative.

So, for example, my favorite example, I guess, is the iPhone. If you’re using an iPhone today, odds are really good, you’re thinking, “am I going to buy the new iPhone or not?” But you’re not thinking, “Am I going to buy the new iPhone or switch to Android?” And so, you’re just making a will I? decision. And so, Apple has tons of pricing power. They can raise prices and we still buy new Apple iPhones.

And so how would you implement that in your levels of pricing power? Or do you?

Ayon Bhattacharyya

To be honest, I’ve never thought about it in that way. That’s really interesting, because the way I think about a purchase decision is that you’re considering price relative to value in the context of the next best alternative. However, what you’ve just outlined there is kind of flips that takes that last part away. It’s just price versus value, not in the context of the next best alternative. It’s just a zero-sum game. That is a really interesting definition of pricing power, as that you are not even considering the next best alternative.

Mark Stiving

I think it’s fair to say that you have a lot of pricing power when that’s the case, but I also think it’s very fair to say we need to find ways to find or create pricing power even in competitive marketplaces.

Ayon Bhattacharyya

Yeah. What I would say in the case of Apple is that they find ways to create stickiness, to make it difficult for you to switch. And that does give them pricing power 100%. That’s definitely a great strategy that they use. But at the same time, it acts as a deterrent to, say, an Android user to go and try out an Apple because I don’t want to get tied into it. And so, it can work both ways.

Mark Stiving

Practical change. I don’t want to try it.

Ayon Bhattacharyya

Yeah, exactly right. Once and you’re done. That’s it. You’re in rehab.

Mark Stiving

Nice. Okay.

And so, what do you advise companies to do to help them move up the path, or do you think of it as moving up the path?

Ayon Bhattacharyya

Yeah. I mean, there are some businesses that can just start at a higher level, but I think generally, it is a journey. I think of pricing strategy as a journey, not just an outcome. And so, I think, really to start that journey is really start with the data that they’ve got and start to unpack that and actually start to see some trends around, “Okay, when I’ve made historical price changes, what does that done to demand? When I unpack my customer insights, what does that tell me about customer problems? And where can I innovate more value based on those customer conversations that I’m having today?” So that would be the starting point. It’s interesting; I find it fascinating today that there are businesses out there that are still using cost-based pricing.

The Latin term, I don’t know if you if you know this, Mark, but the Latin term for both price and value is pretium, and the Romans understood the fundamental connection between price and value. Merchants in ancient Greece would actually adjust their prices based on the personal relationships that they had with buyers, and they would haggle, so they would be a different price for every buyer, depending on their willingness to pay. If you go to a market in Morocco or India, it’s still the case. But in the Western world, we’re often sort of tied to these fixed prices in supermarkets and that type of stuff that actually only came about in the mid-19th century with the Quakers, among the first people to adopt fixed prices, and that was more because it was considered good morals, not because it was good for profitability.

So, it’s interesting that we’ve moved like so far away from value-based pricing in the last 150 to 200 years, but we’ve been doing value-based pricing for so, so long before that.

Mark Stiving

Yeah, it’s interesting. And we’re kind of conflating fixed pricing and value-based pricing. Now I get it that by value-based pricing we’re to do price segmentation, and fixed pricing is the opposite of that. But one could argue that in businesses where you have tons of products, tons of SKUs, fixed pricing makes sense, because I don’t have time to negotiate and haggle for each part. There’s long lines at Costco. Imagine how much longer they would be if everybody was haggling at the cash register.

Ayon Bhattacharyya

Yeah, absolutely. There’s definitely a strong argument to have price tags in the sort of retail industry, but there are still ways you can do segmentation. There are still ways that you can sell value.

Mark Stiving

Absolutely.

Ayon, this has just been a blast, as always. Last question, though, same as last time. What’s the one piece of pricing advice you’d give our listeners that you think could have a big impact on their business?

Ayon Bhattacharyya

I think the biggest thing for me would be to think about your pricing power and think about how – whether it’s sort of competitive advantage, perceived value, all of those things – what can you do differently to improve your pricing power today.

Mark Stiving

Nice. Thank you so much. If anybody wants to contact you, how can they do that?

Ayon Bhattacharyya

Either by my website, which is https://bizgrowthspurt.com/. That’s B-I-Z-G-R-O-W-T-H-S-P-U-R-T. Or you can find me on LinkedIn. And my email address is ayon.b@bizgrowthspurt.com

Mark Stiving

We’ll have some of that in the show notes to make it easy for everybody.

Episode 179 is all done. Oh, wait. I have to make fun of Ayon one last time. I’ve never heard anybody pronounce “heytch” before.

Ayon Bhattacharyya

Oh. Heytch.

Mark Stiving

Never heard that.

Ayon Bhattacharyya

It’s a British thing, clearly.

Mark Stiving

Episode 179 is all done. Thank you for listening. If you enjoyed this, would you please leave us a rating and a review? And please tell your pricing colleagues about our podcasts. If you have any questions or comments about it or pricing in general, feel free to email me: mark@impactpricing.com.

Now, go make an impact.

 

Tags: Accelerate Your Subscription Business, ask a pricing expert, pricing metrics, pricing strategy

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