Impact Pricing Podcast

Marco Bertini   

Prices speak very loud to customers, very, very loud. And so, we should be listening to what they say and incorporate that into what we do. 

[Intro] 

Mark Stiving   

Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the justifiable relationship between them. I’m Mark Stiving. Today, our guest is Marco Bertini. Here are three things you want to learn about Marco before we start. He is a professor at Esade in Barcelona. That’s a university, by the way, a really good one. He’s co-author of The Ends Game: How Smart Companies Stop Selling Products and Start Delivering Value. His co-author is Oded Koenigsberg. And here’s this one, he used to play professional basketball. Welcome, Marco. 

Marco Bertini   

Thank you very much. I’m actually the proudest of the last one there. 

Mark Stiving 

It’s got to be a huge deal, right? Not very many people get to play professional basketball.  

Marco Bertini   

It was a big deal at the time, but then I got injured, you know, and that was the end of that career. 

Mark Stiving 

Yeah. And you had to stick with academics. Oh, God, how horrible. How did you get into pricing? 

Marco Bertini   

The short version of that story is I was doing my MBA, actually, at my rival school now a school called IESE, which is across the street from my current employer. And so, one of the visiting professors there at the time was a chap called Robert Dolan who wrote the book Power Pricing. And, you know, I got to speak to him speaking to him. And he got me interested both in doing a Ph.D., and the topic of Pricing. So the rest is history, so to speak, that I went to do my Ph.D. at Harvard Business School, and a bit different to him, I got really fascinated with this sort of paradox, at least in my perspective, the prices are, you know, to economists, they’re the summary of all information that you want in a marketplace. But at the same time, if you have any training in psychology, you get to learn pretty fast that there is so much Psychology, so much Sociology, behind prices. So, I found that sort of dichotomy. Very, very interesting. And I started researching from there. And you know, it takes me to today. 

Mark Stiving 

Yeah, the whole behavioral economics side of the business is really fascinating. But that’s actually not what your book is about, which is interesting. 

Marco Bertini   

My Ph.D. was in Management with a sort of background in Decision Science, that at the time of Behavioral Economics was called, the much more boring name. And then that’s kind of my origin, but then working with Oded, you mentioned him before, he’s the co-author of the book, he comes from operations. So, it’s a very, very different background to me. And the mixture of two sorts of heads, discussing the topic of Pricing, we came to something that as a matter of fact, actually has a lot of Psychology in it. It’s not official, we don’t talk about Behavioral Economics, we don’t make it explicit. But there’s a lot of consumers and a lot of behavior in there. But of course, a lot of things that come from the operations tradition, such as inefficiencies and waste. 

Mark Stiving 

Yeah. And so, the name of the book is the Ends Game. And I’m going to make the wild assumption that came from the end justify the means. 

Marco Bertini   

Absolutely. Your wild assumption is completely accurate. 

Mark Stiving 

Okay, so give us the overall thirty second what’s this book about? And why does anybody care? 

Marco Bertini   

Okay, so maybe it’s a little bit longer than 30 seconds. The first observation, when you talk, and I’m sure you’ve experienced this when you talk to organizations about pricing, they tend to focus mostly on that pricing decision, right? Should it be higher? Should it be lower? So, the number decision but then I always thought that there is a much more important strategic decision that comes beforehand which is really about all that a second before I put a number on something, what should my customers actually be paying for? Right? What is the metric decision? Because I think that we thought, it dictates a lot of things. So, from there, okay, we looked around. And again, as I think, you know, you find books and subscriptions, you find books on pay-as-you-go, you find books on pay-for-performance. And everybody talks about these things, and everybody’s excited, but nobody puts them together. Observation number two. Observation number three, we are marketing professionals and marketing professors. And so, we said, let’s think about this from a customer perspective. Right? And if you look at it from the customer perspective, this metric decision really, really affects them, because it allocates the risk in any transaction. And if you want later we can go more into it. But basically, what we discovered is that when you think of it from a customer perspective and how customers derive value, the ends to the means they’re looking for, then all of these models out there actually fall into one very nice neat line. And we kind of got excited about that. And we decided to write a book on it. 

Mark Stiving   

That’s actually really cool. Now, I got to say, in all honesty, I didn’t even think about the question, ‘What do you charge for?’ until I started studying subscriptions, and in particular, SaaS business models. Right? Because the thing about a SaaS business model is once I’m charging you for software, now I can charge you for absolutely anything, right? Is it a user? Is it a license? Is it a click? Is it a download? Is it a gigabyte, or there’s a gazillion thing I can charge you for? And now it becomes a conscious decision. But what I found most fascinating is once you realize that, then you can go back to every single business and say you had to make the decision, what are you going to charge for? Right? Was it a conscious decision? Or was it just, this is what everybody has always done in the past? And so, this is what I’m going to do in the future.  

Marco Bertini   

I was just going to add, I think you’re absolutely right. That means it usually it’s not a conscious decision, I think, right, there is an element of what is the tradition in our industry. But I think also, I believe, if you try to scratch the surface of that tradition, what is happening is that we know this from a cost-plus tradition, right? Whatever comes in, in terms of inputs, comes out in terms of outputs in a business, because it’s very easy for me to account for this. So, I charge for products because my components and raw materials kind of come that way I do costing based on products. So, the easiest thing for me to do is just put a margin on that. And then you know, and let it be. And I also would agree with you completely. When you start scratching the surface, you realize that SaaS models, SaaS industries, of course, are perfect for this. But if you look at it from a customer perspective, that question is literally applicable to anything that you sell. Almost by definition, right. And then if you know, if you’ve got an eager company, and you’re curious and inquisitive, then you can start having a nice discussion around, we’re for a customer-focused, and we’re promising our customers that we’re going to deliver them dissatisfaction because we promise ends in our marketing material. What are we doing charging for anything other than those ends? Right? And if we do, because we have to understand what are the consequences of that? And most companies don’t necessarily think that way, I think, intuitively. 

Mark Stiving   

Yeah, I think we could talk about this for hours. And we just might, by the way. But I want to start by asking do you have in your mind or do you teach a definition of value? So, what does value mean? When you think of ends, that’s the value. Right? So, what’s value to a customer? 

Marco Bertini   

I mean, being academic my answer is going to be, it depends. It depends on the sense that in the classroom, it really depends on where the kind of things that I want to focus on. So, I guess, in the simplest form, I know that my students, my executives in a classroom will think about value in terms of magnitudes, how much do I think something is worth to me, something along those lines, right. And so, when I know that’s going to be the case, in the classroom, I’m always very careful with that element, at least you’ve got two dimensions here. One is a dimension of magnitude, right, which is perfectly fine. And then we can decide how much of that magnitude you want to appropriate as a business. But in that resolve, there’s a whole dimension around the metric itself, which led to this book, which is really about risk alignment. Okay. And those two things, by the way, are very, very important from a customer perspective. Because if we think about something we say all the time, we say to companies, you know, there is such a thing as an objective value, your product delivers a certain amount of value in the best possible conditions. And then there is a perception of value that the customer may have. And that perception is typically inferior, right? Because of a lack of information, whatever that may be. Okay, so then I’m very careful to say, okay, that perception that is smaller, is exactly based on these two dimensions. One of them is perceptions about the mean, how much value does something give me? And then perceptions about the variance? How likely is it to actually am I likely to achieve that means, right, that expectation? As a business, I need to work on improving those two things, making expectation, the mean, reach the reality, and reducing that variance if I can, because if I reduce that variance, and I’m being technical, I suppose now, anybody who’s risk-averse, with a big variance stays away. Right? And most of us are risk-averse. But if I’m able to sort of take the risk off the customers, they’re more likely to join in the marketplace, they’re more likely to buy from me. And just better things happened overall. Okay, 

Mark Stiving   

I love what you said, but going through my mind are counterexamples. And I’d love to hear you talk about them and explain why they aren’t. Most of us use cell phones nowadays. And in the old days, we might have paid by the minutes. And nowadays, we have a bucket of minutes. So instead of me paying for my usage, or paying for the real benefit, I’m getting, I’m now paying for the certainty that I’m not going to get overcharged or have to pay hundreds of dollars when I make too many phone calls. 

Marco Bertini   

Yeah, so I think there’s a number of things you could talk about here. So, one of them is this taxi meter effect that you’re alluding to, right? I don’t really like being charged on a go basis. And I really don’t like having surprises in my bill. So, to the risk of being tautological, I could say, well, what is the real value that you’re looking for in this sort of situation is, one of them is certainty. So, when you value certainty, then you have to price in a certain way to deliver that particular kind of value, right? An analogy may be somebody who tells me, Marco, I read your book, and I really like what you’re saying, however, I just like to own a car, I really, really get enjoyment from owning a car. And I say, ‘Well, you’ve answered your own question.’ If the value driver, if the ends you’re looking for when you’re buying a car is ownership, because you just like the feeling of owning one, then you’re right, you’re completely aligned. Right. And then another issue with mobile going back to the mobile, the cell phone plans is that, unless I’m mistaken, a lot of the times these minutes can carry over from one month to the other, which is exactly, which makes it a usage-based model because your payments, right is adapted to the actual usage, because there are minutes rollover, right? So, at the end of the day, it becomes a usage-based model. And you see these not only in cell phone plans but also like in some of these, what are they called consumables or subscription services? Like in Instant Ink for printers? 

Mark Stiving   

Yep. Yeah. Nice. Okay, so I like your tautological argument. I’m going to steal that from now on. It’s what you wanted. It’s kind of like, telling, being an economist and saying, what’s a util, right? A util is what you maximize, it’s what you want. So, you made a decision, you maximize your utils, right? It’s a cheap way out, but it works. 

Marco Bertini   

It depends on your audience, it can work, otherwise, they come back to you and ask you about a question and you try to find your way out of that. 

Mark Stiving   

Right, but in the end, I actually met with a bunch of companies who, in the tech world who sell software, probably middleware type stuff, and their clients, one of their biggest problems is the certainty question, right? I want to know that I’m not going to get charged a million dollars at the end of the quarter. And so that just becomes something they value and something that we have to address as we put together the pricing model. So, I got to ask you, what’s the difference in your mind, between a business model and a pricing model?  

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Marco Bertini   

Okay, so we were very, this is a good question because we’re very careful in the book. I believe it didn’t slip out in the book. I don’t think we use the word business model in the book, I believe. And because I remember, all the time while running it. Business model, to me, is a word that is typically used for the stuff that we talk about in the book. However, it’s to me personally, it’s a bigger concept, right? We’re talking about not only whatever decisions you make to generate revenue for the business, but also whatever decisions you make to manage the cost structure of the business, your sourcing plan, your logistics, so it’s basically the ins and outs of the business. Right, so I tend to focus more on the revenue side. And I guess I could use the term revenue model or pricing model, I tend to like the word revenue model more, for a couple of reasons. One is more personal and much more pragmatic. The more personal reason is that at least the course that I teach, and the stuff that gets me excited is getting companies to think about and reflect on how they take whatever they make for customers, all that goodness they create for customers, and how they convert that into revenue efficiently. So, I like that question. By the way, I start my courses, then pragmatically, when you talk about pricing as a word, per se, unfortunately, it’s a pretty loaded term. And it’s loaded in a negative sense, it tends to be seen as a more tactical sort of decision, more short-term decision, it tends to have that baggage. And so, to escape it, you know, I often try to stay away from the term and I think actually the word price may actually not be in the book either. For that reason, I am not a hundred percent sure. So, I don’t want to bet on that. But I remember having that discussion and trying to steer away from it. 

Mark Stiving   

Nice. Well, it’s kind of interesting, because the thing you talk about, which is what are you going to charge for, I clearly and consistently call that a pricing metric. 

Marco Bertini   

Which is very valid. Yeah, for sure. Absolutely. I think it becomes semantics to some extent. Absolutely. 

Mark Stiving   

Yeah. Cool. Okay, so, one of the things I teach in one of my courses, and I’m asking this because I think it might be you, I have no idea. But in the theater in Spain, they charge by the laugh. Was that you? 

Marco Bertini   

That’s in the book. That’s definitely in the book. And it’s not me, but it’s one of my friends. A good colleague of mine is, he ran that experiment. We’ve got our new, it’s a theater, right? Very close by to where I live, maybe about 20 minutes from here. Yeah, so that’s a good one. The pay-per-laugh, right? 

Mark Stiving   

Yes. Have you been to that theater? 

Marco Bertini   

Yes, of course, several times. 

Mark Stiving   

And when you go, do you try not to laugh? 

Marco Bertini   

Well, so the thing about that is that right now it’s not running. So, it’s something they try for a while, okay. And they tried pay-per-laugh. Right? And I’ll go back to your question in a second. And then they’ve also tried pay-per-love. I don’t know if you’ve got ever seen the video, use that in the classroom. If you don’t, you should. It’s the evolution of pay-per-laugh, where they basically take your sense of humor as a proxy for, you know, affinity with a potential significant other. So, when you go into the theater, you select the gender that you’re interested in. And then they show you affinity in terms of laughing with five potential matches. And then if you pay, and the other person pays, you get to meet each other. 

Mark Stiving   

It’s like match.com. 

Marco Bertini   

But through laughter. Now, there is a very good question, should you try not to laugh? I guess what actually kind of gets in one of the issues in the book, we talked about how this issue, the outcomes, and are not purely under the control of organizations, in many, many situations, especially in services. The outcomes that you’re trying to achieve are a joint effort between the organization that provides the product or service, maybe third parties, but also customers. Think of health care, a serious context, right? If I have a particular condition, and I’ve been told that this treatment is really good for me, but then I don’t think of treatment when I’m supposed to or how I’m supposed to, then I reduce the quality of the outcome. And the company, unfortunately, bears all that risk. Okay. So, we talked a lot in the book about how you need to be able to have, think about outcomes that are quantifiable, that are verifiable, but also, they cannot be tampered with. That is a very, very important condition. And laughter, for example, is one of those things that, unfortunately, you can’t tamper with, right? You can, somebody sort of being very stern, and laughing from the inside, as opposed to maybe something from Germany, right, much more stern as opposed to Spanish guys, like you know, cracking up. 

Mark Stiving   

Exactly. This will never work in Germany. Okay. Let’s assume then, that a company says, Oh, my gosh, I want to go figure out what I should charge for or how do I get closer to the ends? I’m going to guess that you don’t say jump to the end. It’s a stepwise, step-by-step, here’s how you’re going to get there. What are some of those steps? 

Marco Bertini   

Yeah, remember that line that I was telling you at the very beginning of interviews, that’s that journey, right. So just quickly, on the one hand, you got these ends that customers are looking for. And then you think to yourself, if you put yourself in the customer’s shoes, what conditions must exist in order to achieve value satisfaction and end? Well, if you think about it, the very first thing, as a customer, I have to access a product or service, if I don’t access your solution, I can’t benefit from it eventually, two, condition on access, I have to consume it. If I don’t consume it, I can’t benefit from it eventually. Condition on access and consumption, it has to perform, right? Those three conditions together are necessary and sufficient in order to get value. And that’s the theory in the book. And so, if you step back, customers derive value from access, consumption, and performance, okay? Then look at your own business, okay? You sell ownership because you sell stuff. ownership is a pretty, pretty poor way of giving access. It’s a very financially intense and inconvenient way of giving access. And by the way, it has nothing to do with consumption has nothing to do with performance. Okay. So, like I was saying before, when you look at all these models, around subscriptions, memberships, their access models, they’re the first step in that journey, sharing, bundling, pay-as-you-go, those are consumption models. The second step in that journey, pay-for-performance, pay-for-results, call them whatever you want. These are or pay-for-value. These are actual performance models. And so, we’re very careful in the book to say that. We’re not even claiming that the business is wrong and tomorrow you should be selling for performance. We have a whole section of the book based on what needs to happen not to do that. But yes, we are pretty strong, claiming that, at the very least ownership models in this day and age, the technology that we have is pretty much inferior in most markets. And you should be somewhere along that journey depending on technology, depending on your eagerness, and all these sorts of things. 

Mark Stiving   

You should be thinking about moving along that journey if you’re not moving there yet. 

Marco Bertini   

Exactly. We haven’t been moved by somebody else, you know? 

Mark Stiving   

Yes. Well, if you haven’t done it, someone else is going to do it. So, where do you put Google AdWords? 

Marco Bertini   

Google AdWords, so depending on this, I mean, I’m not an expert in that area. I don’t claim to be one. But you know, my sense of that space is that it’s been moving actually, pretty quickly along that journey through the last few years, right? We had and I always get the time, I always get the sequencing wrong. We were getting, we were paying for ads, then we were paying for people seeing the ads, we’re paying for people clicking on the ads, then now we get this data that can tell us whether they’re actually clicking and going to a website and then actually buying, bringing us like the attribution issue. Right? But you see how those models with data, with impact data, is what we call on in the book. It’s getting more and more refined towards actual outcomes that the company paying for the ad is looking for, which is ‘Hey, is this ad actually making people buy?’  before we were measuring, ‘Are they seeing my ad?’ because seeing is a proxy of making them buy. Then we were paying for, ‘Are they clicking to my website?’, that’s a better proxy than seeing the ads. And now we’re trying to see if we can pay for actual, you know, browsing behavior, and then maybe even actual basket size and whatnot. Right? 

Mark Stiving   

Yeah. So, what I love about that example, in fact, I love your explanation of it, too. as you go along those steps, you could almost imagine each of those steps is performance, right? Because I want to pay you when someone sees my ad. Oh, no, I want to pay you when someone clicks on my ad, oh no, I want to pay you when someone pays me money. Right? So, each of those is a different level of performance and different ends, essentially, for what I’m after? 

Marco Bertini   

Well, if I may, we have been careful with what we call ends, performance, what the customer is actually looking for. Right? The question is whether I know what that is, in the sense that I can measure it, or I have to rely on a proxy. Right. And so, we distinguish between actual ends and proxies. And so, in the case that we’re talking about here, what seeing an ad is clearly a proxy. I’m okay paying for that proxy because I’m okay paying for that proxy, but ultimately, the advertiser, they’re looking for cash from transactions and nobody doubts that. Right? But I’m happy to pay for the eyeballs because I think it correlates somewhat with that transaction. But the moment you come to me with a better proxy, I’m going to shift to that or I’m going to demand that you shift to that. And by the way, the whole issue around is online advertising that a lot of marketers are saying, well, it’s very measurable. But now it was said it’s actually, it’s also very murky. I don’t exactly know what I’m paying for these days. But show me the data because the data is there. Right?  

Mark Stiving   

And so, what I often teach, and I think it’s perfectly consistent with what you just described, is, I use the word value metric to say, this is how a customer measures the value of what we just delivered. And I use the word pricing metric to say this is what we’re going to charge for. And I think the value metric and the pricing metric need to be highly correlated with each other. And I think that’s almost exactly what you just said. 

Marco Bertini   

Yeah, I’m thinking on my feet now, I’m probably because this is that term, I use them differently but I think exactly what you… I think those are the two dimensions we’re referring to before. I think one is about aligning when I make money. So, do I make money when the customer gets benefits? Right? And the other one is, then how much of that? So, one is a risk, and one is allocation? How much do I take? 

Mark Stiving   

Marco, I am having so much fun. I think I could talk for hours about this, but we’re going to have to wrap this up. Let me end with the final question. What’s one piece of pricing advice that you would give our listeners that you think could have a big impact on their business? 

Marco Bertini   

Okay, so I think one piece of advice, I mean, I would have a lot, unfortunately, but I can only give you one. So, one piece of advice that I would give to listeners is, don’t assume it’s just a numbers game. This is one of my biggest pet peeves when it comes to pricing. It is certainly a numbers game, but it’s much, much broader. So, anything you can do to integrate whatever you do with prices with your overall branding, or corporate strategy is well worth taking the time to do it. Because as a psychologist by training, prices speak very loud to customers very, very loud. And so, we should be listening to what they say, right, and incorporating that into what we do. 

Mark Stiving   

Nice. And I love the phrase, ‘Prices speak loudly to customers.’ That’s pretty cool. So, Marco, thank you so much for your time today. If anybody wants to contact you, how can they do that? 

Marco Bertini   

So, through LinkedIn, of course, it’s like a common means that we’re using these days not to use the word ends. And also, through my website, I have a website called www.marcobertini.com.  

Mark Stiving   

Very excellent! And I assume it’s spelled the same way your name is. 

Marco Bertini   

Correct. Absolutely. 

Mark Stiving   

All right, Episode 96, all done. To our listeners, would you please leave us a review? These are really valuable to us, and they help other people find the show. THEDraftKing wrote us a review. It said, “Actionable Insights.” 

Mark’s content has made an immediate impact on my business, as we adopted his value-based pricing mindset to go after a new market opportunity. Every episode I listen to has one or two great nuggets of insight that can I apply to my job.” 

Thank you THEDraftKing. Also, please don’t forget to join our free community. You’ll find that at community.championsofvalue.com. That’s where you’ll get access to all of the content that I put out for free. Those are my memes, my blogs, my podcasts, my videos. If you have any questions or comments about this podcast or about pricing in general, feel free to email me [email protected]. Now, go make an impact!