Episode #116: Interview with pricing expert, Tim Smith

Biography

Dr. Tim J. Smith is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right and Pricing Strategy, and founder of Wiglaf Pricing. He has been a keynote speaker and workshop leader on a variety of pricing topics to professional audiences across the globe. Smith began his career as a research scientist in quantum mechanics. He’s an Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, a member of the American Marketing Association, Business Marketing Association, and American Physical Society.

He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago Booth School of Business.

Segment One—Ron’s Questions and Summary of Answers

You have a PhD in physical chemistry. How did you get into pricing?

I fell into it! Became an entrepreneur in technology and sales and discovered that value-based selling was basically the same as value-based pricing. Selling and math make a pricing professional.

Your first book was Hawks, Seagulls and Mice, (2006), what was it about?

It looks at the structure of sales and marketing across different industries, and how they vary.

In Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, 2012, you write:

The science of pricing refers to the act of gathering information, conducting quantitative analysis, and   revealing an accurate understanding of the range of prices likely to yield positive results.
The art of pricing refers to the ability to influence consumer price acceptance, adapt structures, and align pricing strategy.

Is pricing more art or science, or conceptual? You write it’s not an engineering challenge, but a strategic challenge?

It’s a strategic science, which puts it closer to an art.

You wrote in your latest book, Pricing Done Right

Although price not a competitive advantage, pricing may be.” Rethinking the unit in pricing, and change your industry, such as hourly to fixed prices, Zipcar, iTunes and music, etc.
 You can imitate a price, but it’s march harder to imitate a pricing structure, which can be a          competitive advantage.

Why does cost-plus pricing continue to be endemic?

Because it’s simple, common, mechanical. It’s a form a satisficing (satisfy + suffice). It’s precisely wrong, rather than approximately right.

The shift from setting prices to communicating value is really a business model change, isn’t it?

Yes.

Clayton Christensen’s new book, Competing Against Luck, argues that the job the customer is doing with your product or service needs to be understood.

It goes back to Ted Levitt, nothing new, really.

Segment Two—Ed’s Questions and Summary of Answers

Why Wiglaf Pricing?

Wiglaf is a character in the Anglo-Saxon epic poem Beowulf. He is the son of Weohstan, a Swede of the Wægmunding clan who had entered the service of Beowulf, king of the Geats. Wiglaf was Beowulf’s advisor, and helped him slay his dragon.

Your mantra

You have a mantra, three questions: What’s my alternative? Are you better or worse? And why should I care? [these are the questions customer’s ask themselves].

If a customer isn’t profitable, they aren’t a customer—they are a leech. It’s all about servicing customer needs... profitably. Not every customer is your customer, or your target customer.

What are some of the biggest mistakes organizations make regarding their pricing strategies?

Treating price as an outcome; what price do we need to   make this sale. Pricing is a verb, not a noun—it’s a process.

Do you think discounts are needed in some industries?

They are in some industries, but they need to be managed dynamically, and planned, over time. Unplanned discounts are ripe for better planning. Key question to ask: how will this discount improve the relationship with this customer.

Segment Three

Tim's latest book is Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, 2016, he lays out five key decisions of a Value-Based Pricing Framework:

  1. Business Strategy
  2. Pricing strategy
  3. Market pricing
  4. Price variance policy
  5. Price execution

Also, four pricing strategy issues:

  1. Price positioning
  2. Price segmentation
  3. Competitive price reaction strategy
  4. Pricing capability

Should pricing be centralized or decentralized?

The extreme of both have failed in most firms. I advocate cross-functional teams (marketing, sales, finance and pricing). It’s an enabler, not a replacer—it can’t be alone. Is pricing too important to leave to the pricers?

It’s fascinating research coming out of Germany, demonstrating most profitable firms are those that don’t have complete centralized or decentralized decisions. There’s no way a centralized pricing group has the same tacit knowledge of the sales force in the field. You have to marry that tacit knowledge with the explicit knowledge of the pricers.

This is the approach of Target Costing at Toyota, Nissan, IKEA, etc.

You write neutral pricing is default strategy (least likely to have price wars), and that penetration pricing cannot generally be defended from a strategic viewpoint (failures are greater than success, e.g., Amazon).

GoPro failed with it as well. Just because you have a lower price doesn’t mean people want it.

What industry does the best job at pricing?

Some have the algorithms down well (airlines, hotels), but no one industry has the strategy down. Some individual firms do, such as Eastman Chemical, and Peugeot with its Vespa sales into India.

Sports, music, and other event based industries are dynamically priced. We still don’t have a perfect model,   but things are changing.

Is there really such a thing as price gouging?

Price gouging is a legal term. It’s illegal. Outside of that, it’s buyer beware.

Value a feeling?

You write: “Beyond economic benefits, there are behavioral, emotional, hedonistic, and psychological benefits. Though calculating the impact of these benefits may be difficult, their impact on customer choices often outweighs purely economic arguments alone.” Is value a feeling more than a number?

 It goes along with it, but I wouldn’t have used the same words.

Pricing legend Robert Cross posited that people with musical ability make good pricers. Do you have any theories on what makes a good pricer?

I’d put diplomacy as number one.

The pricing profession has grown dramatically in the past 15 years or so, do you think professional pricers have lessened, or increased, price wars?

I would like to say yes, but look at the current price wars in airlines, hence they are unprofitable. Freedom includes the freedom to be stupid. Amazon and Wal-Mart were trying to show how low they could sell a book, even below cost.

What advice would you give to someone who wants to get into pricing?

Read my books, join the Professional Pricing Society, understand your business.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.