Impact Pricing Podcast

Special Episode: 2 Pricing Professionals Debate

Mark Stiving is a widely recognized pricing expert and marketing pro who teaches companies how to boost revenues and realize their true value. He is the host of the Impact Pricing podcast, helping people win more business at higher prices through value, and has authored three books which all revolve around pricing.

Ron Baker is the Founder of VeraSage Institute, dedicated to helping professional knowledge firms bury the billable hour and trash timesheets. He has published seven books around the topics of business and pricing, and also is a radio talk-show host for The Soul of Enterprise.

In this episode, Ron engages in a pricing metric discussion with Mark as they share their insights on cost-plus, hourly pricing, and subscriptions.

Why you have to check out today’s podcast:

  • Deep dive into discussions about different pricing metrics, focusing on cost-plus, hourly, and subscriptions
  • Find out why putting time in your service and charging by the hour isn’t an ideal way to charge clients
  • Understand why providing value is better than charging hourly or using cost-plus pricing

“There’s always going to be people and businesses that use cost-plus and other inferior methods like hourly. They’re going to be out there, but they’re just not where my focus is. My focus is on the other end, trying to help people price and create more value so they can capture more value. I’m not interested in working for people that want to price in an inferior manner, because I think that means they’re not providing enough value to you.”

– Ron Baker

Topics Covered:

01:17 – Mark’s five top reasons/times when cost-plus pricing makes sense

04:36 – Reacting to Mark’s five reasons / doing value-based pricing along with cost-plus pricing

08:13 – Pricing in micro and macro level businesses: cost-plus vs value-based

11:37 – Why Ron refuses to pay by hourly billing + how auto mechanics price their work

16:24 – Talking about Ron and Colin’s difference in perspectives

18:04 – How Mark charges clients ‘hourly’ and what Ron has to say about it

23:04 – Discussion around subscription + today’s topic in general: pricing metric

27:25 – Mark’s tax guy + why hourly billing isn’t ideal for Ron

31:17 – On announcing a price increase: Do something nice for your customers

Key Takeaways: 

“If I could categorize everything I just said, I’d categorize it in two categories. One is sometimes, customers demand it – so that would be Apple and government, and sometimes, it’s just more efficient as a business to do cost-plus than it is to do value-based pricing.” – Mark Stiving

“In the world of cost-plus and efficiencies, one could make the argument. I’m not saying this is true by any means, but one could make the argument. If I was in a very low margin, highly competitive business, it might be less expensive and more efficient to just do cost-plus than to spend time trying to figure out what each customer’s willing to pay me.” – Mark Stiving

“One of my favorite sayings is customers hate price increases, but they’ll hate it a little bit less if you blame increasing costs.” – Mark Stiving

“The billable hour is what I’m crusading against, but on a larger perspective, the billable hour is cost-plus pricing.” – Ron Baker

“At a macro level, there’s no way that costs justify price or determine price. Can’t be. Otherwise, no business would ever go bankrupt.” – Ron Baker

“If somebody really did abuse you, then why would you ever work with that person?” – Ron Baker

People / Resources Mentioned:

Connect with Ron Baker:

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.)

Mark Stiving

What you are about to hear is two powerful pricing professionals duking it out over cost-plus pricing, hourly-based pricing, and anything else we feel like debating. Hope you enjoy it.

[Intro]

Mark Stiving

I am so thrilled to be here today with Ron Baker, one of my pricing heroes. I was recording Colin Jasper the other day on a podcast. Ron and Ed have obviously heard it, and then Ron talked about it on The Soul of Enterprise. I just re-listened to it this morning, and you’ve got to hear the passion in Ron’s voice when he tells us all the things we said wrong. And so, I said, “Hey Ron, I got to respond to this. Do you want to just record something or do you want me to write something?” And he said, “Hey, let’s have a conversation and record it.” That’s what you’re about to listen to. We’re going to have a conversation recorded.

So, Ron, thanks so much for doing this with me. I really appreciate it.

Ron Baker

Thank you, Mark. This was a great idea. I’m glad you thought of it.

Mark Stiving

Yeah. So, should I just let you abuse me for a second or should I tell you what I think is going on?

Ron Baker

No. Tell me what you think is going on. This is your idea, your show, so you control it.

Mark Stiving

Okay. So, what I think is happening, my perception is you work in a relatively narrow space of service professionals and I would guess probably of a reasonable size, and so for you, it makes sense to say, “Look, this is something that just makes sense for these guys.” And in my world, I work in almost every industry, product type, etc., and I try to take whatever rule I come up with and I come up with lots of them and say, “What are the exceptions? Why would I not do this or when would I not do this?” And so, I think that’s what’s happening. So, when I wrote back to you, I actually wrote I think the only issue is that you are too adamant that this applies everywhere.

So we had a brief, brief three-second conversation beforehand, and one of the things that you had said on  The Soul of Enterprise is PPS (Professional Pricing Society) is on a crusade to bury cost-plus pricing, and maybe they are, but I’m not. I’m on a crusade to use what the right pricing strategy is for the right situation.

And so let me give you – I wrote six, but I’ll give you the five best ones – reasons or times when cost-plus pricing makes sense. (1) First and foremost, when the government says “We will pay you based on time and material,” cost-plus pricing makes sense. (2) When you’ve got an 800-pound gorilla such as Apple or Walmart that says, “Here’s how much we’re going to pay you. (3) We know what it costs you,” cost-plus pricing makes sense. (4) If you’re in an industry where your base costs fluctuate dramatically, and this happens often in the chemical industry, you can also see it in mortgage rates, at least a cost-plus kicker makes sense. (5) If you are in a business where you have hundreds of thousands of SKUs, so large retailers, large distributors, there’s no way you could do value-based pricing on each one of those SKUs; cost-plus pricing makes sense.

And then the last, when you have read it on the podcast or on the blog that I wrote the other day, and that was on fast growing markets where you’re trying to keep your price as low as possible, grow the market as quickly, not lose market share, but you’re not going to do cost-plus constantly.

I think in those places, cost-plus pricing sometimes make sense.

And if I could categorize everything I just said, I’d categorize it in two categories. One is sometimes, customers demand it – so that would be Apple and government, and sometimes, it’s just more efficient as a business to do cost-plus than it is to do value-based pricing.

Ron Baker

And when you say fast growing markets, you’re really talking about a company that might use like a penetration pricing strategy.

Mark Stiving

Absolutely. So, if you’re in a penetration strategy, cost-plus might make sense, or at least the thinking that way, “As my costs are going down, I want to bring my prices down so I can get more of that share.”

Ron Baker

Right. Well, I totally agree with number one. Sometimes, the government says “This is it, cost-plus pricing.”

Now, I’ll tell you that there are ways around that. You can become a provider. We help companies do that, so I’ve seen a lot of that. And you’re right, I only work with professional firms for the most part. So, I’m dealing with lawyers, accountants, advertising agencies, I.T. firms, consultants, actuaries.

So, the billable hour is what I’m crusading against, but on a larger perspective, the billable hour is cost-plus pricing.

And so, with your examples here, and I even think there’s ways to push back on the 800-pound gorilla by the way, but maybe not Walmart; Walmart’s pretty brutal. But I have seen people push back against Apple using cost-plus.

Now, what I think it’s interesting about the 800-pound gorilla is you’re right –

Walmart will come in and they’ll say to you, “This is the price we’re going to sell that. This is the price we’re going to buy it at.” But at least that constrains the company and lets them know if they can reduce their costs or be more efficient. They’ll get to keep that access. Now, Walmart might come back at them and say, “We’re going to lower the price again” – and that’s the 800-pound gorilla – but at least they have an incentive to invest in efficiency and maintain those gains that they may reap.

The chemical, that’s interesting because I don’t work in that space, but I know that chemical manufacturers have really embraced value-based pricing. In fact, one of the guys who used to work with Reed Holden and Thomas Nagel– I forget his name. You probably know him. You remember him from PPS. Brilliant guy. That’s where he had his whole career; he was in chemicals and he wrote extensively about that.

And I’m not sure about mortgages, Mark. Mortgages are pretty value-based if you look at the difference between fixed rate and variable rates.

Mark Stiving

So let me give you an example on that. If you had a variable rate, what did they tie that variable rate to?

Ron Baker

Well obviously, there’s the cost of capital to the bank.

Mark Stiving

And they charge you a premium over that and that’s the plus, so they are pricing you cost-plus.

Ron Baker

But they’re also looking at your credit score. They’re also looking at other underwriting factors.

Mark Stiving

Absolutely.

Ron Baker

So, there’s a bit of value pricing in there, too.

Mark Stiving

I would agree completely. Even when we go to the next one, which is distribution, there are ways to add value pricing to the story. It’s just the cost-plus really drives it.

Ron Baker

Yeah, especially when you got 1 million SKUs. I mean, I’ve heard stories and read stories from PPS about auto parts manufacturers, and now it’s like Grainger that literally have, like you say, hundreds of thousands of SKUs, and now they have different versions of them. Is that a form of value pricing as opposed to cost-plus?

Mark Stiving

Right. Let’s go back down this path. I think both fit. If I’m coaching a distributor or retailer or somebody who’s got hundreds of thousands of SKUs, they have to price, I would say something like, let’s find the brands, let’s find the product categories, let’s find the places where people have a higher willingness to pay, and I hate the word markup because it implies cost-plus pricing.

Ron Baker

True.

Mark Stiving

But let’s use a higher markup on the products where customers are willing to pay more. And so yeah, we are doing value-based pricing along with our cost-plus pricing. No qualms about that.

Ron Baker

Yeah. I mean, this is tough because when I think about this on a micro level, our costs are relevant to pricing. Well, not really. I mean, at some point, you’ve got to cover your costs. And when I look at it at a micro level, I look at costs as a floor that we should never go below. So, if you’re going to do the plus to the cost, that’s the floor that we never go below. This is where I think options are so critical because then you get two more options that are at an even higher price that can generate more profit.

But when you think about this on a macro perspective, costs are completely irrelevant, because value is what determines the price customers are willing to pay, and it’s those prices that justify the costs that businesses can occur. In other words, we don’t pay twice as much when we get a hat versus a coat. A coat doesn’t cost twice as much as a hat because it costs the manufacturers twice as much to make a coat as a hat. Manufacturers are willing to invest in the additional costs it takes to make a coat because customers value it twice as much and are willing to pay twice as much more in price. And so, at a macro level, there’s no way that costs justify price or determine price. Can’t be. Otherwise, no business would ever go bankrupt.

Mark Stiving

So, I would absolutely agree with that, but businesses don’t live in the macro level. Businesses have to make decisions for their products and their situation.

Ron Baker

Yeah, but the macro level explains human behavior across all economies, and that’s why I find it useful.

Mark Stiving

I thought it was microeconomics that does that.

Ron Baker

Well, it’s micro applied macro across. I mean, that’s why economists don’t give a crap if businesses go out. You never hear an economist talk about worrying about business bankruptcies because they know there’s going to be somebody to replace them.

Mark Stiving

Yep.

Ron Baker

That takes us far afield.

The other thing is this idea that customers demand it. I’m sorry, but outside of the government, and I’ll give you one example from my realm – Collins’ bankruptcy law; well, at least in the United States. I’m not sure how this works in Australia.

Bankruptcy in the United States is mandatory. You have to use the billable hour. It’s in the bankruptcy. It’s in the federal bankruptcy law. It’s written into the law. So, there is no way around that. Now, if you’re defending the creditors, not the debtors in bankruptcy, then you can charge value prices. But when you say the customer demands it, I don’t agree with that. I never asked the airlines to move to dynamic or yield management pricing. United Airlines never came and asked me, “Hey Ron, do you mind if we use yield management to price your airline tickets in the future?” Hotels never asked me if they could go to revenue management. I didn’t get a letter from Uber asking if surge pricing was okay. And I don’t think I could go to any one of those companies and demand another form of pricing. They’d tell me to go fly a kite.

So just because the customer demands it means nothing to me.

Mark Stiving

Okay. So let me push back on that. And by the way, I’m thrilled.

Let’s jump to the hourly billing. And I have to say, I felt comfortable in my position on cost-plus pricing. I do not feel comfortable in my position on hourly billing against you, so I’m about to get my clock cleaned.

Ron Baker

No, it’s the same. It’s the same thing. So, you might have a very defensible position in some areas. Hourly billing might be satisfactory. I can tell you the difference, but let’s keep going. Push back on the on the customer issue.

Mark Stiving

Absolutely. So, I’m going to step away from hourly for just a second, and I’m going to say this. Companies make blue boxes. Customers ask for red boxes. Who cares if customers ask for red boxes? We make blue boxes, right? Henry Ford said “We make black cars.” You can have it any color you want as long as it’s black. We don’t make colored cars. Customers say, “I want a colored car.” Someone says, “Okay, let me serve you. I’ll give you what you want, a colored car.”

You and Ed talked about my book keeper story. I want to pay my bookkeeper an hourly rate. If there are enough people like me who want to pay their bookkeeper an hourly rate, some bookkeeper will come along and say, “Hey, let’s serve this customer. Let’s give this customer what they want, which is an hourly rate. It may not be optimal for them. Maybe they would have been better off if they said, ‘Hey, I’m going to go serve different customers and value price them instead or subscription price them instead’. But if there’s enough customers who say, ‘I want an hourly rate’, someone’s going to come along and serve us, just like someone’s going to make a red box.

Ron Baker

That’s true. And those professionals, I do not work with.

Mark Stiving

Right.

Ron Baker

So, they’re not in my pool. I know they’re always going to be out there. There’s always going to be people and businesses that use cost-plus and other inferior methods like hourly. They’re going to be out there, but they’re just not where my focus is. My focus is on the other end, trying to help people price and create more value so they can capture more value. I’m not interested in working for people that want to price in an inferior manner, because I think that means they’re not providing enough value to you. I don’t know about you, but I won’t pay anybody by the hour. I don’t pay my landscaper; I won’t. I refuse paying by the hour. I demand a fixed price from plumbers. The only one that gets away with it is the auto mechanic.

Mark Stiving

Yeah. So, explain that one to me. What would you think an auto mechanic should be pricing if they were going to do project-based pricing?

Ron Baker

Well, I’ll tell you. You know anything and I’m sure you do because you work in a lot more spaces than I do, but auto mechanics – and I’m talking the technicians that work on the Mercedes and the BMW and all of that, these are highly skilled knowledge workers, actually. And when they diagnose a problem, they go to a book and they say, okay, well, you need whatever, new valves, and they get an average price and they quote that price. It’s based on an hourly rate and it’s based on number of hours they expect. They can do it quicker; they get bonused. Some of these guys are making 150 grand a year. To me, that’s a form of value pricing, even though it’s couched as hourly, and like you say, predominantly computed on a cost-plus or hourly rate method. But if they’re more efficient, as they tend to be over time, they get to reap that reward.

Mark Stiving

Yeah. So, the one I think of when I think of auto mechanics, and this hasn’t happened to me in 20 years, but I remember back when I was really young and I would drive old, beat-up cars, the engine would start making a noise, and you’re driving into the shop, and you’re like, it’s making this noise and you try to pretend that you know what the noise is, and then they’ve got to go figure out what it is. And so now, how do they price that?

Ron Baker

Yeah. This is getting into the complex issue that you and Colin were talking about. What do you do about these complex issues? Well, they have a diagnostic fee. I just had a problem with my car. I had no idea what it was. All the idiot lights came on. My dashboard looked like a Christmas tree. And I thought I knew; turns out I was wrong. They said it’s going to be $200 for us to diagnose it; so there’s a diagnostic fee. And then they say, “and then it will be X to fix it,” but they break it up into phases. And that’s how you deal with complex problems.

Mark Stiving

And I guess that’ll be much easier nowadays because they’ll probably just plug their computer into your car and say, “Here’s what it is.”

Ron Baker

Exactly. It’s exactly what it is.

Mark Stiving

In the old days, they ripped the car apart before they knew what it was.

Ron Baker

Yep. And you can do the same thing with litigation. In fact, there are firms out there that do it, that charge nothing by the hour, law firms.

The issue I have with Colin is he never thinks about it– well, I’ll just say this. I don’t think he’s ever worked for a firm that value prices exclusively, and I certainly don’t think he’s ever worked with a firm that doesn’t do timesheets, as the two are, as we talked about the first time I came on your show, the whole timesheet thing is inextricably linked with hourly rates. I mean, you’re going to charge by the hour. Guess what? You’ve got to measure it. And if you measure it, you’re going to charge by it or you’re going to compare your price to it. I don’t think Colin’s ever worked with a firm that doesn’t do it, and I’ve worked with thousands of firms that don’t do it. And therefore, our perspectives are completely different, like day and night.

And I don’t know if he’s saying it can’t be done. I don’t know if he’s saying it shouldn’t be done. All I know is it’s being done. The firms that are doing it are more profitable. They have higher morale in their team and they’re not burning out their people. And there’s no acknowledgment.

Now, to be fair, if all I worked with were firms like the Big Four, maybe even the top ten that do nothing but charge by the hour, that keep timesheets, that practice the way it was done 100 years ago, I might be bought into that too and not want to alienate any of my potential customers by railing against the methods that they use. But that’s not who I am. I rail against it because I think it’s wrong.

Mark Stiving

Yeah. So, I actually don’t know where he comes from and how he makes his decisions like that. I just love exploring both sides of every story, or all sides of every story.

Ron Baker

Me too.

Mark Stiving

So now that I have you, Mr. Hourly pricing shouldn’t exist in the world, Ron Baker, I need you to coach me in my business. Is that fair?

Ron Baker

Sure.

Mark Stiving

Because I charge hourly.

Now, to be fair, here’s what my hourly looks like. If you want to talk to me for an hour, it’s $1500 and you can go online and put a credit card in and I’ll talk to you for an hour. It is not a continual hourly thing. And then the second hourly I do is if you want a quarterly program, I will talk to you for an hour a week for a quarter, and that’s only $15,000.

Now, both of those, you could say those are hourly. In fact, I would define those as hourly. But if I were trying to think why I do that and how to get out of it, the reason I do it is because I don’t want to diagnose your value. I already know I’m going to make you $1,000,000 when I talk to you on the phone. And so, decide you want me, decide you don’t want me; I don’t really care. This is a really easy sell.

So now, what should I be doing?

Ron Baker

Wow. No, I love that. I mean, I don’t view it like you’re charging them for an hour of your time. I think you could drop the hour and just say, I’ll have a phone call with you and it’ll be five grand or whatever it is, or I’ll have a phone call with you once a week for $15,000 a month. I don’t think you have to put a time limit on it. You don’t put a time limit on it. What if you give them $1,000,000 idea in 10 minutes? They’ll be just as happy.

Mark Stiving

Nope.

Ron Baker

I’m not going to hang on the phone with you for an hour because I got to use up my hour, which is the mindset you’re putting them in when you frame things. So, I just think it’s a framing issue. It’d be like an airline charging you four bucks a minute to fly. Well, what if they get in the headwind? I just don’t want my customers thinking about that because they’re trying to enjoy their flight.

Mark Stiving

Yep.

Ron Baker

Take time out of it.

Now, here’s the objection we get to that, from lawyers and others – “What if the customer doesn’t let me off the phone?” Come on, really? Are they going to keep you on the phone 24 hours? Is that possible?

Mark Stiving

Yeah. Actually, although I say an hour, I’ll easily give them 90 minutes or 2 hours, if that’s what it takes to solve the problem.

Ron Baker

I’m sure you will.

Mark Stiving

Let’s go do it.

Ron Baker

So, I would just remove the time.

Mark Stiving

Okay.

Ron Baker

The framing of time. That’s all.

Mark Stiving

Okay.

Ron Baker

Don’t frame your value in terms of time because then you get into that whole thing. Well, how long did that take you? If I gave you $1,000,000 idea, who cares what it took me?

Mark Stiving

Right.

Ron Baker

This is why advertising agencies, I think, are so when they you know, back in the Mad Men days, they used to get paid a commission based on the ad spend and how many times the ad ran and all of that. Then they moved to hourly billing and you’d have a guy like Don Draper at a lunch who sat down and pulled out a napkin and wrote something down, and that was a million-dollar campaign, million-dollar idea. How do I charge for that if I’m billing time?

And if I train my customers on billing time, when I try and value price that two second idea, they’re going to say, “Well, how long did it take you?” And that’s when you say customers demand it, that’s what the buyers of law firms are doing. They have been taught to frame the value of their law firms by time, and we’ve got to change that conversation.

Mark Stiving

Yup. Okay. So just so you know, I want to share this with you. Typically, I’ll do a quarter’s worth of weekly phone calls with the client because I really want to talk to them every week. I want them to talk to me every week. And then after that, I’ll do a retainer subscription with them. It’s like, call me when you need me.

Ron Baker

Beautiful. And does anybody ever abuse it?

Mark Stiving

Never.

Ron Baker

Never happens.

Mark Stiving

They don’t have enough time to spend with me. They’re so busy doing other stuff. The idea that they want to spend time with me…

Ron Baker

I did a deep dove on concierge doctors and direct primary care physicians, and one of the fears that they had moving away from the fee for service model that all the doctors or any other insurance company gives them so much per procedure they perform per visit and all that, they said, “Well, if we go to an All You Can Eat subscription model, my God, we’ll have the cyber access patients and they’ll camp out and we’ll never get rid of them. They’ll be calling us, texting us in the middle of the night.” None of that happens. In fact, they have to retrain, reeducate their customers to come and see them more and communicate with them more because that’s how they can keep them healthy rather than just curing them get sick.

Mark Stiving

And I have to say, in my mind, I haven’t had to do this yet, but it wouldn’t bother me to fire a customer.

Ron Baker

Sure. If somebody really did abuse you, then why would you ever work with that person?

Mark Stiving

No, absolutely not.

Okay. Last thing I want to talk to you about and then you can ask me anything if you had anything. But I just thought it was going to be funny is we talk about subscriptions. Both of us talk about subscriptions a lot. We love them.

Ron Baker

You wrote a whole book on it that I use tremendously, by the way, in my book.

Mark Stiving

Thank you. Well, I haven’t heard of your book.

Ron Baker

Quoted from it and borrowed some of the concepts.

Mark Stiving

Now I have to get that on order here pretty soon. But what I was going to point out was, well, first off, you give me one of the best examples of all of when a subscription doesn’t make sense. So how could you subscribe to a funeral, right?

Ron Baker

Right.

Mark Stiving

And so, it’s one of those we might love subscriptions, but there are times where it just doesn’t make sense.

Ron Baker

Right.

Mark Stiving

And so, I have no qualms about saying, I don’t know, we’re still trying to figure this out. When does it make sense? When does it not make sense? But if I took subscriptions, hourly billing, and value-based pricing versus let’s just say hourly pricing, then in truth, all we’re talking about along this entire spectrum is the pricing metric. And the pricing metric is what do we charge for? I could charge you for an hour of my time. I could charge you for click. I could charge you for a month. I could charge you for a project. What am I charging you for? And that’s what this entire conversation is about.

Ron Baker

Agree. I think you interviewed Marco Bertini, the author of The Ends Game.

Mark Stiving

Yep.

Ron Baker

He doesn’t call it the pricing metric. Well, I don’t think he writes about the pricing. He calls it the revenue model, which is what do you want your customers to pay for? Not how much, not the price they’re going to pay, but what are they buying? So, you get into the situation where, you know, Ed subscribes to his Roomba vacuum cleaner. He’s not paying for vacuum cleaners, paying for a continuously clean house, which is, you know, Amazon just bought this company for, whatever, $1.9 billion or something and there’s a subscription company in the Netherlands that is for eyeglasses and contacts. And they say, “When you buy contacts and glasses, what are you paying for? It’s not the exam. It’s not the new prescriptions. It’s not the new lenses and the frames. You’re buying perfect eyesight. That’s what we want our customers to pay for.”

And when you start to think that way, and I think subscription forces you to think that way, it forces you to go, what is the customer really buying, and then work backwards, I think that is far more optimal than selling services.

The big mind shift for me, Mark, getting into subscription was get over the idea that the way to add value as a professional or consultant is to add services brick by brick, stack up services, the more services you stack up. No, it could just be a five-minute call with you, and you asked me a question that sends me down a completely new road. There’s probably more value in that than any service you could have provided with your hands. And we have to decouple the services from the pricing and the revenue model, I think. That’s why I love the DPC and concierge docs. I’m paying them to stay healthy. I’m investing in my health. The services are incidental. Sure, if I poke my hand and need stitches, I can run in and get it, but that’s not what I’m buying. I’m buying the ability to do that on demand, but I’m also buying access to them and keep me healthy. It’s a different world view that I think is going to be really hard for people to get their head around.

Mark Stiving

Yeah. And you probably saw this in my book – I consider what is it the people are buying. We measure that using the value metric. And so, the value metric is how do I measure value of what it is that I’m buying? And then the pricing metric is what does the company charge me for?

Ron Baker

Right.

Mark Stiving

And ideally, we want those two to be very highly correlated.

Ron Baker

Yeah, and that’s the challenge.

Mark Stiving

The cleaner Ed’s house is, the more he pays Roomba.

Ron Baker

Right. I love it. Turns out he’s on the line. I love it. That’s great.

Mark Stiving

Alright. So, Ron, this has been a fabulous conversation, as always. I love talking to you.

Ron Baker

Yeah, me too. This is wonderful. Thank you so much for doing it.

It’s interesting to me that cost-plus pricing, even just in the regular business world where you’ve got some pretty well-known name brands that probably are still doing cost-plus pricing. And I ran across this and you probably know this, but I think it was– who was it? Herbert Simon? Herman Simon? I always forget. He’s a Nobel Prize winning economist. He coined the term satisficing.

Mark Stiving

Yep.

Ron Baker

And this combination of its satisfactory and it’s sufficient. In other words, it’s good enough. And I think that’s a lot of people’s attitudes with respect to pricing. Cost-plus, it’s good enough. Our customers understand it; it’s perceived as fair. Blah blah blah. It’s not optimal; certainly not maximizing. But it’s good enough.

Mark Stiving

Yeah. So, in the world of cost-plus and efficiencies, one could make the argument. I’m not saying this is true by any means, but one could make the argument. If I was in a very low margin, highly competitive business, it might be less expensive and more efficient to just do cost-plus than to spend time trying to figure out what each customer’s willing to pay me.

Ron Baker

Agree. I totally agree. In fact, when we deal with firms that do a lot of what people call commodity type services, like real simple tax returns or whatever, it’s like, look, they’re commodity or damn near or at least you think they are. I don’t think anything is a commodity, but separate point. It’s like, okay, look, it’s the market is really dictating the price and you’re just a price taker, you’re not a price maker, you’re not a price searcher. Then just put a fixed price on it and go down the road. The risk on the upside is not much, because the market is dictating the price. So, I have no problem with cost-plus there. I just have a problem with hourly because I think it’s a crappy customer experience because they don’t see the price until they’re done, and that’s a rotten time to find out the customer doesn’t like your price after you’ve done all the work.

Mark Stiving

So, I’m just going to say I pay my tax guy every year. I’ve used the same guy for years. I send him my taxes and when he sends them back, he sends me the bill. Now, he doesn’t charge me hourly, but I have no idea how he charges me. He just sends and I pay for it though. 

Ron Baker

And it varies from year to year?

Mark Stiving

It does. It varies from year to year. Never down.

Ron Baker

Never down. Yeah.

Mark Stiving

It could be my taxes keep getting more complicated and his prices keep going up.

Ron Baker

See, I just can’t think of a situation where we buy something where we don’t know the price beforehand. Now, people have challenged me on this and said, “Well, what about your electricity?” Well, if I was smart enough, I could read my reader, my meter, or install a smart meter and see in real time what my electricity bills are going to be. People say health care. Well, you’re not really spending your own money with health care. But when you buy things that are not covered by insurance with health care, like Lasik surgery or plastic surgery, you know down to the penny before they put a knife on you what it’s going to cost you. And I just think hourly billing violates that at the firm’s peril, because the only time they find out the customer doesn’t like the price is after they’ve done all the work and there’s nothing they can do at that point.

Mark Stiving

Yeah, I could see that is especially true for large items. My bookkeeper, I’m thrilled to pay my bookkeeper hourly because I know it’s not much. But if it came out to be a $20,000 one month, it’s like, what the heck just happened?

Ron Baker

Right. And you wouldn’t pay it anyway, and rightfully so, just like we wouldn’t pay an auto mechanic who did an additional job without first calling us and us authorizing it with a change order. So, to me, it’s just a better customer experience.

One thing I did want to ask you about, and it made me think about it in the article, you were talking about Tesla, but you were talking about blaming increases in prices on your costs. And I get the reason companies do this. It makes me cringe because I don’t know if you saw it, you probably did because you’re a prime member, but Amazon recently, earlier this year, sent out an email to everybody, all their prime members, and said, “We’re increasing your price,” and then they laid out all the things they’ve done over the last year in terms of value. “We’ve added this program to the prime membership. We’ve added this benefit. We’ve opened up another 90 locations of scene-deep delivery.” In other words, they didn’t blame costs, they didn’t blame inflation, they didn’t blame rising wages. They said, “Here’s the additional value. We’re going to continue to make investments and bring you more value in the future. Here’s your price increase.” To me, that makes more sense than planning your costs. Let’s say you.

Mark Stiving

I give companies that I coach, especially right now since we’re in inflationary times, but this was even true before inflation, I give companies that I coach four ways to announce a price increase. I should say four steps. The first step is blame your costs, and I always say that I rarely, rarely, rarely see an example of a company who increases prices and doesn’t blame costs and does it well. The second one is what you just said with Amazon, and that is what value have you added. Alright. Let’s talk about the new value add. The third one is, if true, we haven’t raised your prices for three years or whatever the number is.

Ron Baker

Right.

Mark Stiving

And then the fourth one is, and I love this one because Netflix taught this one to us. If you remember the very first Netflix price increase, they lost 800,000 subscribers and 70% market capitalization or something like that. It was huge.

Ron Baker

It was.

Mark Stiving

And then the second one, what they did was they said, “Hey, we’re raising prices, but you’re a loyal customer. We’re going to keep your price constant for six months.” And then six months later, they came back and said, “We’re going to raise your price.” And so that’s what I always use for my fourth one. Do something nice for your customers. Tell them that you’re thrilled that they’re part of us and we want to do something nice for them.

So, companies who can do those four steps tend to get less pushback from their customers. One of my favorite sayings is customers hate price increases, but they’ll hate it a little bit less if you blame increasing costs.

Ron Baker

Yeah, that’s probably no doubt true. I just like the approach of focusing on value. But I will say this on your follow up. Here’s the rest of the story on Amazon.

In the EU, they just increased prime membership. Apparently, they got bigger heights than we did here in the States. And guess what Amazon did? They blamed inflation.

Mark Stiving

Nice.

Ron Baker

So even the Amazon doesn’t always get it right. But I mean, I look at Apple and Apple never talks about its costs. Never.

Mark Stiving

Well, to be fair, Apple never raises its price.

Ron Baker

Well, that’s true, because they’re coming out with new tech that does it for them.

Mark Stiving

Right.

Ron Baker

Yeah. They actually lower the price on the older tech.

Mark Stiving

Yeah. And so, what’s your next Netflix price increase announcement? Although I don’t think they’re going to do it again for a while. But if they do another one here, what they’re going to say is “We’re using this to invest in more movies, more content.”

Ron Baker

More content. Yeah.

Mark Stiving

So, what they’re really saying is “Our costs are going up.”

Ron Baker

Yeah. But in my mind, that’s saying to the customer, “You’re going to get more value.”

Mark Stiving

Okay. I’m with you.

Ron Baker

Yeah. I mean, the only reason they can invest in that additional content is that the customers continue to pay it. Otherwise, they’re not going to be long for the world.

Mark Stiving

Okay. Except for their fixed costs don’t matter to they’re pricing.

Ron Baker

Well, do you consider developing content, hiring actors, directors, producers fixed or variable costs?

Mark Stiving

Fixed.

Ron Baker

Fixed? Interesting. Because see, this is the pushback we get on subscription. Well, that’s easy for Netflix. Netflix is a digital platform. The marginal cost of bringing on one more subscriber is zero, and that’s true. But the marginal price of dropping a new season of, I don’t know, Stranger Things or whatever is nowhere near zero. They pay a fortune for that series and other content they develop.

Mark Stiving

Yep, that’s absolutely true, but the exact same story is true with every software package that you own. They’ve got a hundred developers that are working on improving that software package for next year or the next release that’s going to come out. So, there’s constant investment going on.

Ron Baker

Yep.

Mark Stiving

The only real advantage to Netflix and the software guys is they don’t have hard costs. They don’t have a physical product. So, they pay very little variable cost to serve a customer.

Ron Baker

Right. Yeah. They’re not shipping inventory, storing inventory, moving it around, all of that. I guess everybody just loves to pitch about their industry and what makes their industry so special. But I got pushback once from somebody who said, “But Disney letting another person in the park, the cost is zero.” Well, that’s true, but Disney trying to get people to come back to the park means that they have to invest $250 million rollercoasters. Would you rather have that issue?

Mark Stiving

Well, Boeing has to. Oh, not Boeing. American Airlines has to buy a jet.

Ron Baker

Right. Boeing has to. Boeing is a great example, actually. I remember there’s a great story when they took off the 747 for the first prototype flight or whatever, and the CEO of Boeing was on the ground and some VIP woman was standing next to him says, “What happens if it crashes?” And he said, “Madam, I’d rather see a nuclear war.”

Mark Stiving

Alright, Ron, we’ve been at this for 40 minutes.

Ron Baker

Wow.

Mark Stiving

I’m sure both of our listeners are bored to death.

Ron Baker

Well, thank you, Mark. This has been great. A lot of fun.

Mark Stiving

It has, and we should do it again sometime. We just have to find something to disagree about.

Ron Baker

Okay. Fair enough.

Mark Stiving

Excellent. Alright. Thanks, Ron. Will talk to you later.

Ron Baker

Alright. Thank you.

Mark Stiving

I hope you enjoyed listening to that as much as I enjoyed recording it.

Now, go make an impact.

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

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