Marketing podcast, PreneurCast, is for entrepreneurs, by entrepreneurs. Each week, author and marketer Pete Williams and digital media producer Dom Goucher discuss entrepreneurship, business, internet marketing and productivity.
Pete’s back, and this week the topic of discussion with Dom is pricing. Increasing your price is one of the 7 Levers of Business, so Pete introduces the concept of “price elasticity” and talks about 6 factors that can help you when putting your prices up.
Pete discuss with Dom the concept of “price elasticity” and the factors when putting your prices up
Transcript:
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Episode 047:
Pricing
Pete Williams: Hello, hello everybody, it’s Pete Williams. You may remember me from some previous episodes of PreneurCast. I haven’t been around for a while, but you’ve been in the safe, capable hands of Dom. How are you, buddy?
Dom Goucher: I’m good. The wanderer returns!
Pete: How’s it been without me?
Dom: Lonely. Good to have you back, buddy.
Pete: Good to be back. It’s been a crazy couple of week with the wedding and the honeymoon and a little bit of sickness, which didn’t sort of go down too well; but back on board and ready to crack on!
Dom: Cool. And I do want to say thank you, again, to the two folks that popped on for the interviews. We’ve got some great feedback, actually, on both of those—and thank you to everybody that commented on it, especially the business coaching or coaching in business. A lot of people gave great feedback. That was an interesting thing, that a lot of people really don’t know what business coaching is about or haven’t come across it.
So it was useful to find out about that one. Obviously, the perspective on networking as well, that real-world stuff was great. But it’s just not the same as having you here, mate.
Pete: Well, I’m definitely back, and be back for a while. I’ve got no major trips that will affect the podcast in the near future, so definitely back on board.
Dom: Cool, cool. Well, before we dive in, I just want to do that really official thing that I do that I try not to sound all official about. Talk about our sponsors and, again, this week, we have the great service. The book summary service Read It For Me is sponsoring the podcast. And if you go to ReadItFor.Me/PreneurCast, you can watch a little video that Pete and I put together about the membership area for Read It For Me, where you can see the great interactive—well, not interactive—but multimedia book summaries or book reviews, depending on how you want to use that service.
It’s a great way of getting an overview of a huge library of business and personal development books that are out there. Steve and the team do a great job of summarizing those books and making the content accessible and memorable. So it’s both a good overview and a great review. Even if you’ve read the books, the material that they produce is great to review things and just give you that bit of a reminder about the main points in the book.
That’s ReadItFor.Me/PreneurCast. If you go there, you’ll also get a discount on your membership. So follow that link and join. Have a look. And there’s a free trial, anyways, so you can try it out for yourself and have a look. So Pete, this week, you’re back. What are you going to wow us with after two weeks away?
Pete: Well, I thought we should discuss pricing, which is obviously a big element of the 7 Levers that is, as we’re seeing, a continual underlying tone of the show. So, I thought we should talk about pricing a little bit and how pricing matters, how you can affect pricing, how you can manipulate and change pricing. Because, obviously, as part of the 7 Levers, we’re trying to increase people’s prices by 10%.
And a lot of people don’t really understand how to do that beyond just increasing their price. I thought we could discuss some ways to justifiably increase price and the perception around your products. So that could be a good conversation to be had and give us some actionable and some theoretical concepts around price that could help with the 7 Levers.
Dom: Great one, I love this conversation. You and I have had this conversation before. In fact, I think it was one of the first-ever really kind of serious conversations you and I had was around my pricing. And then when we did the mastermind together, the 7 Levers Mastermind. It was pretty much everybody that we talked to, this was the big sticking point, putting your prices up.
Just saying to somebody, “Put your prices up,” will basically cause them to run away with both of their arms waving in the air. Ask them anything else; put big luminous signs on their windows, big A-board outside, custom details, all that stuff—no problem at all! But ask them to put their prices up. It’s a good one to talk about. And as you say, it’s a justification both to yourself and outwardly about putting your prices up. That’s a big thing, a big issue.
Pete: Absolutely. The term that’s a good place to start is price elasticity. It’s a term from economics. And if you’ve done any sort of business or commerce degree, you’ve probably come across the term price elasticity. The way I like to describe it is, there’s a link obviously between the price of your product and the price itself.
There’s like an elastic band between them. Generally, you can only stretch that so far. That a price of a product is the price of a product. To try and stretch that length between a high price and the product is how elastic you can make that price elasticity. Does that make sense at all?
Dom: Yeah. But that to me is one of those mental restrictions.
Pete: Exactly. Absolutely.
Dom: Isn’t it? Everyone listening to this podcast has to admit—you all have to put your hand up, right now, and say, “I have said before, how much for X?” So, for example, “No way would anyone pay that much for a case for a phone, nobody would pay that much for a handbag,” but people do. Yet, we live in this constricted world. Whereas, you say there’s a tight little elastic band between the two.
Pete: And it’s something that obviously, you as an entrepreneur, as a business owner, have around your own products. You have this—how elastic do you allow your link between product and price. But also, there’s a number of ways to help the link that price-product relationship in your marketplace with your customers as well.
Dom: OK.
Pete: So, there are probably five or six different elements that affect this price elasticity and the link between price and products. So we thought we could talk through a lot of this to give some context and some ideas, and hopefully, start some thinking processes for listening around how they can start manipulating and manufacturing this price elasticity in their businesses.
Dom: Cool, cool. We like lists, we like checklists.
Pete: So look, the first point to start with is actually place. Now, a really obvious example is, think about the airport. When you go to the airport, it has its own pricing economy. It’s almost like it’s its own little world that has completely different prices. A bottle of water, some headache tablets and all that sort of stuff, generally in most airports around the world, has a premium attached to it. The product is exactly the same, but the price is more expensive. Have you experienced that?
Dom: Oh, absolutely. Even worse with all the security stuff that went on. It’s amazing how expensive a bottle of water is once you’ve got through security on an airport.
Pete: And it’s because of the place you’re in. So the place has a huge impact to price. Generally, you say, “How much is a bottle of water,” and most people will say, “Oh, two dollars,” hypothetically. But when you go to a different place such as an airport, you pay for it without even thinking twice. You might grumble a little bit, but you still pay for it.
The economy is still there for bottled water inside the airport. If you look for example, where I’ve just been recently, the Maldives, for our honeymoon. It’s obviously a beautiful island or series of islands, where everything has to be flown into it.
There’s no real local economy there or manufacturing economy to actually make a lot of food and drink, so it has to be flown in. Obviously, there’s a premium attached to that because of the place. Go to a sporting event or the movies, there is a premium attached to that because of the place.
Dom: Absolutely. I remember the first time I paid over five units of currency for a coffee. This was in the days before Starbucks was prevalent. It was actually in Venice, and you go to the famous square in Venice and sit down for a coffee, my recommendation is that you ask how much it’s going to be before you start trying to drink the coffee.
Because you might waste some of it with the shock when they tell you how much the coffee is there. But it’s the place! It’s the place, whatever it is, whatever the justification is. Whether it’s “because I have to fly this stuff in,” or whether it’s because, “Hey, you can’t go anywhere else now, because you’re through security,” whatever it is, place has a very big affect or potential affect on price.
Pete: Absolutely. And the distinction here is that some of this happens by default. Obviously, if you open up a retail store inside an airport or if you have a resort in the Maldives, by default, you can charge more price. It’s kind of obvious. But there are ways to manufacture place, to actually allow you to charge more.
The Starbucks example that you just mentioned is somewhat of a manufactured place that allows them to charge more for it, as opposed to Dunkin’ Donuts, because of the actual ambience and the environment, and the free Wi-Fi, and the experience you get when you go to a Starbucks. That allows them to essentially charge more.
It’s still coffee. Yes, they can jazz up the actual coffee with different beans and the taste of the coffee is better. But at the end of the day, a lot of it is the wrapping around that cup of coffee. And the wrapping is the place that they’ve created.
Dom: I like that; it’s a really good example. An even better example of that one to me, again, personal experience—is a place somewhat famous to the younger people, like you’d be—is a place called Café Del Mar in Ibiza. It’s a bar and it’s next to the sea. It’s pretty much like most other bars that are next to the sea, really, in all honesty, except for the environment that they’ve created, the vibe they’ve created around this place.
It’s almost mythical now, but it grew over time. They created it and now they can pretty much charge whatever they want. Ironically, or interestingly, they don’t rip people off or extend the prices beyond reasonable believability for a beer and things, but there’s a premium.
You want to sit down at Café del Mar, have a beer. You’re going to pay a little bit more, but you’re going to be a part of the environment, part of the ambience. They’ve created this place, as you say. It’s a really good example of how you can justify an increased price for what might be considered a commodity product.
Pete: Absolutely. Well, look at another commodity product. This example is used quite a bit, but it’s such a powerful example: Tupperware. Think about it. The products that are sold at Tupperware are just plastic containers, and drink bottles, and spatulas, and stuff like that. If you go down to any sort of home-ware store in your local shopping mall, they’ve got the equivalent products, just as good, almost the same materials.
You can drive over it in your truck like you can with Tupperware, and it still works. But the place they create—which is in the home—allows them to charge a serious premium on those plastic containers, because of the place. It’s no longer in a retail store. If you walk into a retail store in a shopping mall, you’ve got a preconceived idea of how much this stuff should be because of the context and the place where you’re buying it.
Whereas, in Tupperware, it’s a completely different place. They’re taking the buyer out of that standard-response environment, into an environment that they’ve manufactured that allows them to change the price and the perceived value on the products they’re selling.
Dom: Absolutely. And one of the interesting things they do there is they remove comparison.
Pete: Exactly, that’s what it’s all about. It’s about trying to change the place in which the transaction takes place, which allows you to change the price that you can charge.
Dom: And it almost changes the perception, doesn’t it?
Pete: That’s what it’s all about. This is the whole de-linking of price to product. It’s actually changing the value proposition. And you can manufacture this, you can manufacture the elasticity that you have. Obviously, when you walk into a retail store to purchase some plastic containers, you have in your mind a price range of what those containers should be.
And that is your elasticity of price around that product. How much are you willing to stretch? What is the elasticity around that price, whereas, once you take them out of that environment, you can stretch that elasticity with the place, the environment that you create.
Dom: Good one.
Pete: So, what we’re going to try and do is work out ways to sort of manufacture a different environment and a different place the transaction is taking place in. The underlying product doesn’t change; it’s still a plastic bowl or a bottle of water, or a steak and chips or something like that. The actual product doesn’t change; the intrinsic value of that product has not changed, but the environment that’s being created around that product that allows for some price elasticity.
Dom: There’s a lot to think about, just that one; and we’ve got five.
Pete: That’s it! Let me run to the second one. The second one is process. How the outcome is delivered can make a huge difference. Again, if you think about Tupperware, if you want to extend that example a little bit, the process in which that is purchased is completely different.
It’s no longer being on a shelf where you’re walking. You choose it, and you walk out. The actual purchasing process is completely different. You go to a party amongst friends, so there’s some social influence factors coming into place with this as well.
There’s that live demonstration. There’s that reciprocity where they actually use some of the Tupperware products to bake something in the kitchen and share that. They’re giving away cookies and cakes, so there’s that reciprocity element of the process as well.
It’s a completely different buying process when it comes to Tupperware than it is buying that product in a retail store. The process is completely different. The product hasn’t changed that you end up buying; the intrinsic value of that piece of plastic is no different, but the process has changed the price elasticity around that.
Dom: A lot of that is about standing out, about being the person that delivers not just a better service, but the better experience coming up to the service. And that reminds me a little bit of one of our podcasts a while ago, where you talked about delivering the estimate or delivering some feedback to the client, the original quote in a video form, to stand out and add extra bonus, unexpected value.
Pete: It’s the experience.
Dom: Yes, it’s part of the experience. It does, it becomes an experience. At the end of the day, as people say a lot, people buy from people. And one of the things that helps people buy from people is the experience of working with that person, of being part of the process.
Pete: A really big takeaway around this is when people generally sit down to analyze their business and think about their business in terms of how they can increase the experience. They think about increasing the experience of the product. You have a product value, you have a product that you’re selling. Tupperware is plastic. It may be insurance brokering, it might be lawn-mowing, it might be phone systems installation.
When you think about changing the experience, you think about changing the experience that affects the intrinsic value. So you’re going to offer more in the actual product you’re selling. Is that clear in terms of that distinction? Whereas, what we’re talking about in this instance as a way to change price is changing the buying experience. This is the experience before you made the transaction.
You’re not changing the intrinsic value of what the person actually gets once they make that transaction with you. Like Tupperware; they’re not changing the actual experience you get when you bake if you’re going to use their baking tray, it’s the same experience if you use a baking tray that you bought for a local Woolworths or Costco or something like that—that hasn’t changed.
The experience that’s changed is the actual purchasing experience, and this leads onto another example. There are a couple of hairdressers that have popped up in Australia recently that are exploding because their process has changed. When you go to a hairdresser, what you’re actually purchasing—the intrinsic value, the outcome you’re getting when you exchange money—is a haircut that’s going to last for six weeks, or eight weeks, or three months, or however long it takes for you to get another haircut.
The actual outcome in what you’re purchasing is the same, but the process in which you experience that is different. Let’s talk about these two hairdressers. One’s called [sounds like] Manwhore, which is a hairdressers explicitly for men. And the experience you get as part of the process is completely different. You get a beer when you walk in there. You actually get a beer while you’re waiting for your consultation or your haircut.
They give you a head massage. The process, the experience is completely different. So, this is another way to change price elasticity by changing the experience of the actual product as opposed to the process. It’s a bit different, but it still takes that process element into play.
Another one is a hairdressers that’s popped up in Sydney, called Hot Cuts, and it’s actually a topless hairdresser. They charge a premium. You still get the same haircut that you would’ve if you went down the road to the five-dollar haircut place, but the experience is slightly different because your hairdressers are topless.
Dom: OK, I’m not even going to mention the word ‘market-research’ with any seriousness with regard to your examples. I’m just going to change the subject over to my example, which embodies both place and process.
Pete: That’s fine.
Dom: Before we get our rating changed on this podcast, in all seriousness, while you were talking about your excellent examples, one popped into my head, which all biases aside (because I am slightly biased) one of the businesses, services, product ranges that embodies both place and process to me is, drum roll, please! Apple. Why?
Because, first of all, from a place point of view, the Apple Store is a phenomenal place. It’s a phenomenal environment. It’s a world apart from most retail spaces that anybody has ever experienced. I’m not going to wax on for too much; but the process, again, buying something from Apple, certainly from one of their retail stores, the process, before you even get the thing, is again, amazing.
If you go to an Apple Store, you can stay there all day. Try it, try it—as long as you can bear it and certainly as long as your partner can bear it, try it. See how long you can be in an Apple Store without being harassed or bothered. You can pick things up, you can play with them, you can poke them, prod them.
You can do what a lot of tourists do and check your e-mail. You can try anything out. You can ask them any questions. Their staff is actually trained and knows the answers or they’ll find somebody. I have tried these guys seven ways ’til Sunday, I have asked them the most esoteric questions I can, they’ve got the answers.
And they don’t try and sell you anything. They are literally there to help you experience the product, which is a part of their process. Because they know that very few people have experienced the product. Most people are PC-oriented and are afraid of Apple machines, and think they’re strange and weird and odd.
And so, they’ve enhanced their process. Their scene is a premium product. Their scene is a premium price—I’m not going to get into that right now, but they are. And yes, their market share is growing and growing, and growing. I really believe it’s a large part to do with the place and the process of these Apple Stores that are springing up everywhere.
Pete: Well, if we’re going to talk place and talk Apple, let’s talk the iTunes Store.
Dom: OK.
Pete: If you look at this now, there’s a huge, huge place factor that comes into the pricing of the apps that is available in the iTunes Store. Because if you think about it, people are paying $300, $500, $800 for an iPad; but then tweet and Facebook, and bitch and moan about paying $7 for an amazing app.
Dom: Don’t get me started on that.
Pete: And this is a huge rant that we could both go on around this. The value people perceive that iPod and iPad apps, and iPhone apps have is completely different because of the place it’s now in. And that was caused by all these developers who had no marketing skills thinking the best way to actually sell something is to discount.
So that context was set very early in the iTunes Store of what value is for an iPhone app, because there are some amazing apps, and some amazing games. Think about it. Two, three years ago, you’d be paying $300, $400, $500 for a console, and you still do right now for Xboxes, PlayStations and stuff like that, and you pay $80 to $90 for a game.
And those games are exactly the same games, or very similar in terms of their graphics and their gameplay and their levels, in terms of how developed the game is, for stuff that’s now available on the iPad, the iPhone, for $3, $4, $5.
Dom: There would be a riot if somebody tried to charge more than $5 for a game, wouldn’t there, on an iPad?
Pete: The place, if you go into a gamers’ shop in your local mall, you’d happily pay $60 or $70 for some sort of—I’m not a video game player—but Call of Duty 7 or whatever it’s up to nowadays. People pay that much for those games because the place is different even though the game is essentially, exactly the same. So that’s a huge, huge issue. Now, if you’re selling in the iTunes marketplace, you’re an app developer, you can’t do much about changing the place.
It’s a huge preconceived notion of what price is and the elasticity of iPad and iPhone games caused purely because of the place where you’re selling it, and you only got that one place to sell it, and that is the iTunes Store. So, as a marketer, there are some huge issues around that that you cannot change that perception, you cannot adjust that elasticity, you cannot stretch that price elasticity because of the place and the context that’s created is so strong.
Dom: So, have we got all of the tools that we can use if you’re in a situation like that?
Pete: Well, that’s what you’re trying to do. You want to try and operate in areas that don’t have that fixed, rigid confines that are created. Another one that we can affect that doesn’t really apply so well to iTunes, but another method or another tool in your arsenal when it comes to de-linking this price and product relationship is the package, the packaging.
And again, another tired and worn-out example; but if you really understand this and think about it, it makes perfect sense. Think about a book. If you go into a bookstore or you go to amazon.com, what are you willing to pay for a book that’s say, $10 to $20, depending on where you are in the world, and the economy? Roughly $10 to $20 is probably a good range or price elasticity for a book. Is that fair?
Dom: Yeah, I can see.
Pete: But if you think about it—and people listening to this show have probably been to some sort of business seminar on some level, and they’ve gone and they’ve bought a home-study course in a three-ring binder from some of the speakers there. They charge for that sort of stuff, $500, $1500, $2500? The price point changed considerably for a three-ring binder, doesn’t it?
Dom: Yeah, I guess so.
Pete: But the information inside there, in a lot of cases, you could go down to Barnes & Noble, or Borders, or Amazon.com—and speaking of that, if you actually go into Amazon stores, I believe they’re starting retail stores now, which is another conversation.)
You can walk into a physical bookstore and pick up a book for $20, which has as much if not better information in there for $30 compared to $2500. But the value proposition has changed completely because of the package in which the information comes. The information is very much the same, but the package is completely different.
Dom: That, again, works in both directions, doesn’t it?
Pete: Absolutely, that is the issue. If you’re trying to be an author and produce a book, you’re not going to be able to change the price of that product much. Trying to sell a $500 book is going to be very, very hard because of the preconceived notion that the package creates.
The lesson in all this that you have to work out is, go through each of these items, where or how are you selling the product? Can you change the place in which you sell it to allow you to have more price elasticity? If you’re an information author or marketer, is a book the best place to sell your information and your education compared to a three-ring binder?
Because you have more price elasticity by changing the package in which your product is seen. So, the lesson in all this as well is: can you package up your product differently to allow for more price elasticity, or are you just forcing yourself into some confined space because of the package in which you’re putting your product?
Dom: Nice one.
Pete: And then, there’s also another element which is probably not as definitive as place, process or packaging, but it’s the promotion in which you tie in with your product. A very rudimentary example of this is if you offer some sort of risk reversal or risk reduction or risk removal, a money-back guarantee or things like that. That is a type of promotional wrapper that you put around your product that allows for some stretch in price elasticity.
Now if you’re offering a money-back guarantee on a $20 book or any sort of book—it’s not going to allow you to charge $200 for the information. In some circumstances it might, if the place is also different. If you’re selling a book at a seminar that people are being predisposed to, that might allow you to actually stretch the price elasticity a little bit because you’re mixing two or three of these elements together.
But promotion does give you a little bit of stretch. If you’re a menswear store and you say, ‘we offer money-back guarantees or risk reversals on our suits, take the suit, wear it. If it doesn’t help you close the deal, come back and we’ll give you your money back,’ or any other sort of weird guarantee or risk reversal around a suit, you may be able to charge 10% or 15% more because of the promotion that you’ve put around that particular product. So that’s a very easy way to allow you to stretch your pricing a little bit more away and de-link it from product that little bit by having some promotion.
Dom: OK.
Pete: Does that make sense?
Dom: I’m in a little bit of a problem connecting the word ‘promotion’ with the example you gave, I’m going to be honest with you.
Pete: Yep.
Dom: I understand the example, and it’s a good example. But my brain, not having any education in economics or otherwise, I was too busy messing around with computers, so I don’t map the word. But the example is solid.
Pete: Fair enough. I guess the link we could try and make you is that a money-back guarantee is more of a promotional tool than anything else. It hasn’t changed the intrinsic value of the product someone is getting, but the promotion of that product is the way that can fall under that description.
Dom: Got you. Got you, OK.
Pete: Because, remember, we’re not trying to change price by changing the intrinsic value of the product. There’s plenty of ways to change intrinsic value of a product to allow you to change the price. For example, if you’re a lawn mower service provider, so you go in and mow people’s lawns, that is your product.
Well, if you start offering gutter-cleaning as an additional service as part of the product people get when they purchase their lawn-mowing, they get free gutter-cleaning, you’re actually changing the intrinsic value of the product. The product people are buying has completely changed.
Dom: Yeah, that’s a completely different conversation, though, isn’t it? That’s a good point.
Pete: Exactly right, exactly right. So, what we’re trying to do in this particular conversation here is change and de-link price to product without changing the intrinsic value of that product by changing everything that goes around the product. Money-back guarantees, risk reversals, to me, fall under that promotion bucket, that promotional wrapper.
Dom: Cool. It’s back to the core of the 7 Levers, which is pick one thing and keep the other things the same when you change that one thing. So we’re trying to increase the price. We’re not trying to sell more during a transaction; we’re not trying to do all those other things that we talk about. We are literally just looking for ways to increase the price or justify a higher price, whether to ourselves or to other people.
Pete: Exactly right, that’s what this is all about. That’s a big theme. You have to justify it to yourself as well, and a lot of the price elasticity restrictions come from the entrepreneur not being able to feel comfortable selling the product at that price. So part of it, as you said, justifying it to yourself first, and feeling comfortable in the justification of the higher price before you have to go on and market that, communicate that, sell that to your end customer.
Dom: Let’s come back to that, because that is quite a big topic. I want to keep a linear point here and get to your fifth point. I don’t want to go off on a tangent about that mindset of the entrepreneur right now because my brain’s going to explode if I don’t get the fifth one.
Pete: Yeah, well, we can definitely come back to that if we have time; otherwise, we can talk about that in a mindset-type episode at some point in the future because that is a big thing as well.
Dom: Cool. So number five…
Pete: Number five, the fifth one, is perception. And funnily enough, most of these are all P’s. The sixth one isn’t, but most of them are all P’s, which is weird given that we’re talking about pricing and product; but perception is a big thing as well. And it’s a pretty obvious one, too. For example, if you’re trying to go and get time management advice from David Allen, compared to one of the GDT consultants, the price you’re willing to pay them will be completely different.
If you’re going to get some massage therapy work done by the owner of the clinic versus the staff, you’re probably going to pay a difference. Now, you might argue that obviously the owner is a better masseuse than the staff, but that’s not necessarily the case. And in the example of getting a keynote speaker such as David Allen to talk about Getting Things Done and time management, compared to the keynote presentation of one of his staff, or one of his trainers, or one of his team members would give, would probably be identical in that they use the same slides and the same script.
So the actual product you’re getting in that sort of environment would be exactly the same. But the price point you’d be willing to pay for David Allen compared to one of his trainers would be completely different because of the perception that his market leadership has. There are plenty of other examples to talk about, certain restaurants charge significantly more because the chef is famous. There may be a TV personality, that might not have won any more Michelin stars or anything like that, but they might be more famous, therefore they’ve got that market leader aspect. So the perception is different, which allows you to charge more.
Dom: Yeah, and that is a big thing. You did come across this in the genuine progression of skill, as well as these more abstract examples, but there are really a couple of factors here. One of them is authority—perceived or real authority—and the other one is celebrity, isn’t it? There are two big things in there.
Pete: You’re right. And celebrity and skill are two very different things.
Dom: Truly.
Pete: Yes, a lot of skill allows you to become a celebrity, but there are many a celebrity out there who are not that much more skilled. Think of Dr. Phil, for example. If you look back into his history, he’s not a world-renowned, award-winning psychologist. He’s actually got a very interesting history if you look into it. I won’t go into it on the show, but he would be one of the least or last people you’d probably get psychological advice from, or marriage advice from, technically or skillfully, but he is a market leader.
He is a celebrity—and he would charge ridiculous amounts because of the perception that he has manufactured. This is a clear thing; he has manufactured deliberately, consciously, effectively that positioning and that perception. He manufactured that.
Dom: But that is one of those little side-lessons here is that you can manufacture. We talked about the place, the process, the packaging, the promotion, and the perception and these are all things that can be engineered (to put a slightly less negative sounding word on it) engineered or manufactured, both for you product or for you.
Pete: Absolutely. And there’s nothing negative in my view around doing this. If you think about different airlines to a certain extent, some airlines can be a better experience and they just manufactured that. It’s probably not the perfect example, but there’s nothing negative around manufacturing this. Some people are more willing to pay more, that’s just the nature of the beast; so why not target that particular category of clientele?
Dom: Yeah, if you strive to create an environment for your coffee shop or restaurant, or you strive to create a great process for your clients or prospects to go through like the Apple Store does, there’s no negativity; that’s incredibly positive. It’s a positive attitude for you and it’s a very positive attitude for your customers. You’re not doing anything negative by doing that, people enjoy it.
People enjoy being in a nice environment, people enjoy being in an interesting place or being able to try things out in peace and quiet, or whatever those things are. So yeah, you’re right; it’s not always a negative thing. There is this negative connotation in this idea of engineering or manufacturing these experiences, so you’ve just got to look at it in the right frame as we’d say.
Pete: And part of it too, is if you think about it, if you’re talking about the package thing again, people who pay more for a product will naturally work harder at getting the outcome they want. If you’re going to buy a book as compared to a three-ring folder of the same information, people are always going to get better results on the three-ring folder because they’ve invested more in it.
And if your outcome is to help them achieve a goal with the information you’re suggesting, whether it’s weight loss, or business results, or time management—if the outcome is really beneficial for them, wouldn’t it be in their best interest for you to package it up in a way they’re going to actually respond best to the information? So you actually owe it to the person, to a certain extent, to package it up in a way that will ensure they execute on the information they’re purchasing.
Dom: That’s a good way to think about that.
Pete: Yeah, and also, when we come back to this fifth element, the perception element, think about niches or subcultures. For example, we go back to the Manwhore example for the hairdressers. Now, being a male-only hairdressers or a male-specific hairdressers, they aren’t offering you a free beer or anything like that, they could simply charge a slight premium because they’re niche or subculture-focused.
So there are plenty of stores out there that you can pick a subculture, or a niche or a sub-niche that actually is different and specific, and allows you to charge more. In so many instances, the same product just budged up with a different perception of being specific to a subculture or sub-niche allows you to charge a premium because people think this is actually customized. And sometimes it is, and sometimes it’s not; but it allows you to charge a premium.
Dom: Absolutely. And that’s a good example, I like that example. Just by being in the niche, whether it’s so you can say, “Well I’m in a niche, I’m focusing on you, I know more about this niche or this marketplace, we’re being focused,” in a way, it’s a kind of authority. It’s a kind of demonstration of knowledge or specificity, yeah?
Pete: Yeah. And another example, is Hire A Hubby, which is a franchise here in Australia that is like a handyman service, but they target themselves to females, because it’s Hire A Hubby. You may have a hubby, or you don’t have a hubby who doesn’t do all the manly stuff you need. So these guys are there to help that, and they charge a premium that is above and beyond the typical handyman because of the niche and subculture they’re targeting.
Now, the final element is timing. Timing can make a huge difference to price. A very sort of easy example to understand is that parents spend more on their first child than the second, third, or fifth child. So, if you can work out ways that you can target a particular person in a particular buying cycle in a particular time of their life, which is sort of almost like the subculture-niche focus, it allows you to charge differently. Again, another really tried and overused example, which is true, is that if you want a bottle of water and you’re in the desert, or you’ve just finished an Ironman triathlon.
How much more would you pay for a bottle of water at the end of an Ironman triathlon than you would at home, at a local shopping mall, compared to an airport? You’d pay a premium because of the timing—you’ve just finished an Ironman and you need some water. So, that’s a very raw example of that but how can you affect or communicate timing that allows you to charge a higher price or get more price elasticity out of that product price link.
Dom: I liked the example you gave, and I’m only slightly emotionally scarred—so thanks for letting me know that my folks spent less on me than on the other two. So, you reminded me actually of a really great example that I came across. It’s kind of an apocryphal story of a guy who goes to an interview for a sales job, and he goes into the room and there’s the usual smug individual behind the desk with the nasty questions.
And then at the end of the interview they said, “Right, OK, here’s a glass of water—sell it to me.” So the guy reaches down, picks up the wastepaper basket, takes out a lighter, sets fire to the paper that’s in the wastepaper basket, puts it on the table in front of the guy and says, “Would you like to buy this glass of water?”
Pete: Love it, that is awesome.
Dom: Timing is partially about needs in times as well, that’s that example. Sometimes you need it, like at the end of the triathlon. You need the water. Water is an everyday object, an everyday resource. It’s a commodity resource when there’s lots of it and you don’t particularly need it.
Pete: Well, exactly. And that’s kind of a negative example, but he’s manufactured the timing and the need for that water. He hasn’t changed the product, but this is a real big distinction that I love from that story: that’s the sort of unethical style, but the type of manufacturing we’re talking about when we say you need to go and manufacture this need by communicating, by sales pitches, by promotions, by all the stuff you can do to promote and mark and advertise your product.
You should try to manufacture and change the perception that people have around the place, the process, the package, the promotion, the perception, and obviously, as you just beautifully articulated, the timing.
Dom: We’re close to time. I definitely want to talk about that perception thing that we talked about, because that’s a huge issue. It was something that did come up when we talked with our mastermind group, and you and I have talked about it offline as well. For me, there’s almost two action points here. You summed up one of them, which is to find a way to manufacture or engineer these opportunities of place, process, packaging, promotion, perception and timing.
But for me, the other one is to observe where there might be an existing opportunity. You gave a couple in each place, in each one of these examples. You gave one like the timing where people with a first child spend more money. So, if you have a product that’s relevant to people with children, can it be more relevant or can it be put in front of people with their first child?
Pete: Exactly. Can you somehow find a group, a target market, a list of first-child parents and do a marketing campaign specifically to them with a higher price point? Half of all this, a majority of this is about choosing the right target market. Now, this is an underlying rule about any sort of marketing, you’ve got to have the right message to market match and have the right market which is the right target market.
So if you can find a group of first-time parents, completely different offer because of the timing. I’m not saying change your price across the board; but in that particular marketing element, change the price because you can.
Dom: Definitely. But just one tiny little detail in all of this, is—and this is something that I think is a perception thing that maybe we’ll come back to when we talk about the mindset, what we just talked about there possibly leads people to think we’re saying change your price dependent upon your direction of the wind today, change it again tomorrow.
That’s not what we’re talking about here. We’re talking about increasing your price, finding a way to increase our price and leave it there, not change your price because somebody walked in the door and you decided to put your price up for that person. There’s a very big difference, a very different mindset, completely different and it’s very important that that’s cleared, to me, anyways. I don’t know if we’ve absolutely made that clear.
Pete: Absolutely, absolutely. That’s a very good point to lay this all on. It’s not about predatory pricing or anything like that; it’s about, if a place is different, you are allowed to change a different price. If the process is different, you’re allowed to charge a different price. And you should charge a different price to get that particular sub-target group the experience that they want to pay for.
Because think about it, all these different owners I’ve spoken about create different target markets, different groups; and those groups have different needs, so fulfill those needs. You’re allowed a charge a different price, there’s nothing wrong with that at all.
Dom: This has been great. Pricing is just one of those huge issues. I really hope there’s been some useful stuff in here for the listeners. I certainly got a few extra things, but what I liked about this—and I’m liking that we’re doing this now—is that we’ve got these six points.
It’s not some esoteric chart and something to wander off and think about; we’ve got place process, packaging, promotion, perception and timing. And it’s a checklist. Again, you can take away, you can write on a piece of paper, and when you do your review of your business—which of course you’re doing, aren’t you?
On a regular basis, you can take this out, and you can review what you’re doing and see if there’s either a way that you can observe and look for opportunities where these things—things you can take advantage of, or whether you can engineer or manufacture them. So definitely, there’s a great takeaway from this week’s chat. Got anything to add to that?
Pete: No, I think that’s probably a good wrap-up in terms of the action point for this week. Next time you’re sitting down and working on one of the 7 levers, and it happens to be price, grab out this checklist and start thinking about how you currently operate in each of these elements. Where do you operate from a place perspective? Can you do something in your marketing, in your business to actually change the place in which the transaction takes place and then go through that checklist? That’s the action point for this week.
Dom: Cool. So before we wrap up, I just want to say thank you to our second sponsor, and I ought to mix this up, really, and do this in another order—but we’re very grateful to Audible books, a pretty well-known brand, who, not surprisingly given their name, are a huge library of audiobooks, books in an audio format that you can download and listen to on your MP3 player or audio player of choice.
They have a huge library, over 100,000 titles of all kinds of books, not just business and person development books, but fiction books and non-fiction. It’s a great, great, service. And if you go to AudibleTrial.com/PreneurCast you can get a free trial. Try out this service and you’ll actually get a token to download any book from their library, and try it out for yourself.
It’s a great service because listening to books is a great way to consume information while you’re doing something else, whether it’s cycling to the office, exercising in the gym, or doing the house work. You can be learning while you do those things, and that’s certainly something I do. My other half thinks it’s hilarious, but I actually do it while I’m washing the pots. So, learning loads while doing housework is great! Or so she tells me, anyway.
Pete: I love it.
Dom: I won’t pass that one on to your new wife, Pete. She might unplug the dishwasher and give you something to do.
Pete: Oh, good. So next week, next week’s show, I want to chat about something that’s very, very esoteric almost in its title but very, very applicable when we dig deep into it next week, and that’s ‘marketing nouns versus marketing verbs.’ It’s a concept that I’ve sort of been digesting and thinking about for a while, and I want to have a chat about it next week.
Dom: OK, that’s going to be one of those that you’re really going to have to explain to me, so it could be a good topic!
Pete: Catch you next week.
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Action Step: Next time you are reviewing Pricing as part of your 7 Levers review, use the 6 points that Pete mentions as a focus, and see if there is an opportunity to use one or more of them to justify a price increase.
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PreneurCast Episode 16 – The 7 Levers of Business
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