Fearlessly raising prices without losing customers

Mark, thank you for coming on the show. How are you?

I am fabulous today, Alex. This is gonna be fun.

It is. I'm looking forward to it. And it's a, it's a, it's an interesting topic, fearlessly raising prices without losing customers. And for those who don't know Mark Stiving, he's a pricing expert, speaker, and multi-time author. But Mark, tell us a little bit about your story and how you came to be doing what you're doing.

I actually love telling the story because I remember being 12 years old and going to the grocery store with my mother, and I would see prices that ended in 9, right? So 69 or 99. And I always wonder, why do companies do that, right? Do they think we're stupid? We know 99 is really a dollar.

20 years later, I was in a doctoral program at UC Berkeley and And I had a chance to play with scanner panel data. Now, this is the data that grocery stores collect when we use our loyalty cards.

Right.

And I could statistically test if 9 cents works or not. Turns out it does. And it works because we are lazy subtractors. I became addicted to understanding how companies— first, how people use prices to make decisions. And then later, how is it the company should make decisions given that we understand how people make decisions using prices?

So what, what we'll talk about a lot today as we talk about pricing is always value, right? How is it that a customer values our product? Because buyers trade money for value. Always doesn't matter what the situation is. I am not giving you money unless I think I get more value than I paid you in money.

And so the real question becomes which buyers, how much money, and what's the value? Sorry, that was just a ramble for you.

No, that's good. That's great. I guess my initial question relating to that story you just told before we go deeper on the topic is how effective is that? You know, the, you know, when stores are using $0.99 versus a dollar, like, Is there a, like, can you statistically measure how much more effective that is versus if you were to use round numbers?

So it's hard to say this is the precise difference, but here's what I can tell you is that let's split the world up into 2 different decision types. One decision type is a lot, in fact, if you ever read Danny Kahneman's book Thinking Fast and Slow.

I've heard of it. I haven't read it.

Oh, fabulous. System 1 is the automatically response thinking. I'm not thinking very hard.

I'm just—.

It's like I'm buying the candy bar at the cash register. System 2 is I need to go buy a new car and which car is going to meet my needs. And, you know, what's the price of this one and what's the MPGs? And so it's a very deliberative thought process. If you think about the deliberative thought process, that's typically, uh, In B2B, we emphasize that more.

And that is typically much more driven by value, the way I think and talk about value. If you think about the System 1 type process, the really fast, I just made a decision type process, that's driven by a field that you may have heard of called behavioral economics. Dan Ariely wrote a fabulous book that became really popular, Predictably Irrational.

Right.

Which describes a whole bunch of ways that we are just irrational. But that's because we don't stop and think. We just make decisions.

Right.

And so that 9-cent fits under the predictably irrational side, the behavioral economics piece. I tend to think if I'm going to run a business or coaching a business, I tend to think most of your effort and energy has to be around what's the value I'm delivering? How much value am I delivering? How's my buyer making that value decision?

And then when it's time to communicate with our buyers, there's little tricks we can use like 9 cents or good, better, best, or the order in which we present options. These are things that can influence decisions a little bit, and we might as well take advantage of them when we can. But you can't run a whole company by saying, hey, I'm charging 10 times what I should, but I ended the price in 9.

Right. Okay. I think we should probably define value then before we go much further. What is value? How do you define it in this context?

Oh man, that has gotta be the single hardest question in the world.

Okay.

What is value? So I'll give you the easiest definition. Value is what a customer is willing to pay for something.

Yep.

And so when I think, when I think of value-based pricing, I think of— I define it as charge what a buyer is willing to pay.

Right.

Now, here's what I tell you. It's impossible to do because you can't read your buyer's mind. In fact, even if you want— if you personally know you want to go buy something, you don't know how much you're willing to pay. So how is it that I could know how much you're willing to pay?

Right. It just isn't possible. But what is possible is we can get closer and closer, right? We can watch decisions that people make and we can make better pricing decisions tomorrow than we did today. But we adopt this attitude of value-based pricing as our goal or our objective, knowing that we can't be perfect.

We're not going to get there. Okay, so that's the easy definition of value.

Okay.

Now, there's a whole bunch of other ways to think about value, but I'll give you one of my favorites. And there's something called inherent value versus relative value.

Okay.

Typically, when we buy something, we tend to make 2 different decisions. We first say, will I buy something in the product category? So let's assume for a brief moment that you are not in the market for a new car, mostly because you're leaving the country you live in, right? So you're not in the market for a new car.

So it doesn't matter. You have not said yes to the will I buy a new car decision. As soon as you land in the Bay Area, you got to get a car. Oh, now I'm in the— you just said yes to the will I decision. So what do you do once you say yes to the will I decision?

You then say, oh, which car am I going to go buy? And you start shopping different models and different dealers, and price becomes really important in this will I decision. But what's fascinating is that when you're making the will— I'm sorry, that was the which one. When you're making the will I decision, am I going to buy something in the product category?

Mm-hmm.

What you're looking at is what's the value of solving the problem? So what's the value of having a car? As soon as you say, yes, I'm going to buy a car, your mindset switches to the which one decision. And you say, what's the value of a Toyota over a Ford?

Right?

So now you're looking at the relative value of these 2 items.

That makes sense.

One One way to start thinking about value is inherent value versus relative value.

And then, because I think, and, and I'm gonna use myself as an example here, fairly new startup trying to figure out pricing and, you know, how do you do it? Is, you know, especially given what you've just said in terms of it's impossible to truly quantify that, you know, that number exactly, even for yourself.

So how do you then go about figuring that out if you bring a new product to market?

Okay, go ahead and give me the second hardest question.

Well, we haven't got that long together, so I'm gonna ask all the tough ones.

Okay, good. So it turns out I wanna answer the question, First, how would I do it if I'm having a startup and I don't have a lot of experience with my product and my customers and, and I haven't really proven product market fit yet? So in that case, here's what I'm thinking. What do I think I could get away with?

Right.

How do I get my foot in the door? Because I don't need to go make a ton of money yet. I need to prove product market fit. I need to get customers so I can get customer feedback, and then I can actually determine and understand what the value of my product is. Because once you see people using your product and you can start asking them questions and talking to them, now there's a way for us to define how much value they're getting.

And so, so this is a tool that I use called a value table. A value table has 4 columns associated with it. And by the way, what I'm about to tell you, you can do as a startup, it's just really hard.

Okay.

Once you get product out and you start getting customer feedback in, it's much, much easier to do what I'm about to show you.

Right.

And that is, I start with the solution. So the 4 columns, by the way, are solution, problem, result, and value.

Okay.

So we start with the solution. The solution is either your product as a whole or it's one of the really cool features. You think this is a great feature and you love talking about it to clients because it's so amazing and it's different from my competitors and whatever it is, you think it wins you sales when you talk about that feature.

So you built that feature because it solves a problem for a customer. Can you articulate that problem? And I find almost nobody can do that. It— we have this thing called the curse of knowledge. We know our products so well, we have forgotten what it's like to not know it.

Right.

So I end up holding people's hands all the time to figure out what's the real problem that you're solving. Once you can articulate that problem in a way that resonates with buyers, it's like, oh my gosh, that hurts if I don't solve that problem. Yeah, I really have that problem. Then you can say, well, if I solve that problem, what's the result that you're gonna achieve?

And since we're talking about the B2B world, results are measured in KPIs. What KPI are you about to move because they bought your product and solved this problem. Once you can define those KPIs, now you can put a dollar value on it simply by saying, hey, what's using business acumen? What's the value of moving the KPI from this point to that point?

Is there a, and I'm anticipating the answer is it depends or no, but is there sort of like a, Let's say you create $100 of value. Is there sort of a framework to figure out, okay, you create $100 of value, so someone might pay $20 for that, for example? Like, is there a relationship between that at all or is it different for every situation and every buyer?

So although it's different for every situation and buyer, let me give you a good, a really good rule of thumb and that is If you are selling a will I product, meaning someone's not looking at a competitive alternative, they're just looking at your product and you could deliver $100 worth of value, you should be imagining that you're gonna get 10% of that.

10%, right.

10%. And the reason is because we're asking somebody to do something different. We're asking someone to take a risk. There may be other costs they have to do. They don't know it's actually gonna deliver. So getting a 10x return on your investment seems reasonable, right? If you can reduce the risk, as in it's guaranteed, they believe it more, you can end up getting higher than 10%.

Okay. 10% is a really good number to start with.

And then if there's, if there's competition.

Yes, that's where I was going next. If there's competition, then the best you can do, what I tend to think is the best you can do is whatever your competitor's price is plus half of whatever the differentiation value is.

Okay.

So let's assume that your product is better than your competitor's product and your product generates an additional $100 of value that your competitor doesn't generate.

Right.

So you should be able to price at 50, at your competitor's price, Plus $50, which is half of that value.

I'm with you.

Now, when that differentiation value becomes really, really large, as in it swamps the competitor's price, then you're moving back towards the 10% number. You don't get to be at the 50% number. Now, so can I give you the ultimate example here? Yeah, here you go. If you don't mind.

Definitely.

It's not the 10% number, but it shows you the difference between will I and which one dramatically.

Okay. Yeah.

And that is, how much value do you get out of having air to breathe?

Quite a bit.

Quite a bit. Like everything I own, you could have it right here. Here you go. Um, how much would you— I just captured some fresh Reno air. How much would you pay me for this?

Probably nothing. I'm in New Zealand. All right, it's pretty good. Yeah, yeah, yeah.

And so the point is, air is either worth everything you own if there's no competitive alternative.

Yeah.

Or absolutely nothing if we consider the competitive alternatives.

Yeah. Okay.

Right. And so this is exactly what happens in our sales situation. So, so let's make this a really important lesson, though. And I'm sorry, I just sound like I'm excited because I am. Let's make this a really important lesson. And that is sometimes buyers don't consider competitive alternatives. When they buy your product.

Right.

So they're not price sensitive. Price isn't driving that decision when they do that.

Okay.

So I'll give you, I'll give you a couple of examples. I'll give you my 2 really good examples. One is you're driving out in the middle of nowhere. You see the sign that says last gas for 75 kilometers. You pull off to get gas because you looked at your gas gauge, you only got an 8th of a tank.

And it turns out the price at that gas pump is 4 times the price in the city. Are you buying gas?

Probably.

Yeah, because price isn't driving that decision. Something else is. There's no competitive alternative.

Yeah. Yeah.

Now, here's my favorite. If you use an iPhone, then what you're probably thinking to yourself is, should I upgrade to the new iPhone 15 or not? But what you're not thinking is, should I upgrade to the new iPhone 15 or switch to Android?

Yeah.

If you use an Android phone, you're thinking, I need to upgrade my phone. Should I buy the LG, the Nokia, the Samsung, the— right? And there's a whole bunch of competitive alternatives there. It turns out Android has 72% market share worldwide of mobile phones.

Yeah.

Apple makes 85% of the profit.

That makes sense.

Because there's no competitive alternative. Those of us who are choosing, I use an iPhone. And so those of us who use iPhones, we want to upgrade, it's Apple or not.

Yeah. Yeah. The decision is, should I upgrade this cycle or next cycle is usually the decision, not maybe I'll switch to a Samsung this time around.

Yes. And so it's only the will I decision. So here's what most companies face, right? Almost all tech companies. Hey, I've, I've sold my platform. So let's say that you wanted to buy a CRM, you end up buying Salesforce as your CRM, and then you say, hey, I'd like to upgrade to their new AI sales module.

Well, you're not gonna go look at HubSpot and say, I wonder if their AI sales module is better than Salesforce's. I've already got my whole company running on Salesforce.

Yeah, you're locked in at that point.

Right. So it's a will I decision.

Right. Gotcha. So there's more, more, sorry, there's less, what's the word I'm looking for? There's less impact on or pressure on pricing if in a will I decision versus a competitive type scenario. That makes a lot of sense.

Absolutely. Absolutely. And so the trick here is learning to think that way, putting yourself in the shoes of your buyers and saying, what decision is the buyer making right now? Are they choosing between my product and a competitor's product or are they choosing between my product or the status quo?

And I suppose like, you know, for earlier stage companies, the status quo is, does the status quo almost become like a competitor because it's like if you bring something very new to market, You're almost, that inertia is harder to overcome versus when you're Salesforce and it's a will I decision.

Yes, but, but I'm saying you're still, you're still in that 10% range, right? It says, hey, if I could show you I'm gonna make you $100, wouldn't you pay me $10 for that?

Right.

Yeah.

Okay.

And that's what it takes to get them off the status quo.

Interesting. Yeah. And I suppose what I just did is exactly what most startups do, which is immediately discount themselves right at the start, right up at the front.

Yep.

Let's jump forward a little bit because we, you know, I framed this conversation around fearlessly increasing pricing. So let's talk a little bit about that. Let's maybe jump forward a couple of years and startup's doing well and has a bunch of customers. And how do you fearlessly increase pricing without losing customers?

So can I tell you that almost every client I work with today is scared to raise prices?

Yeah, I can see why.

I argue that every listener is out there going, I can't raise prices, right? I'm scared to raise prices. And if you decide, hey, I'm gonna raise all my prices 10% to all my customers, I gotta tell you, I think that would scare me too, right? I'm totally with you.

Yeah.

And so the question isn't, can I get away with a price increase? The question becomes, how do I get away with a good price increase? So instead of saying, I'm gonna raise prices on all products and all customers across the board, we step back and ask ourselves which products that we have Are we delivering a lot more value than we're charging for in money?

Right.

Ask ourselves, which buyers do we have that are receiving a lot more value than they're paying us for? And then what situations do we run into where buyers aren't using competitive information or buyers trust our, the referrals or references? So in each of these, we could start saying, oh, here's how I want to raise prices.

We do it very intelligently. Based on how understanding how we deliver value to our customers.

So it's situational. We don't just do a blanket 10% across everyone and see what happens.

That would be my recommendation.

Because that would be pretty fearless to be fair to try and do that, but they're probably not the smartest move. Okay. So I'm with you. So in other words, we look at our customer base and we intimately understand how are we driving value and how much value are we driving for different customers, different types of customers, and then look at that map and say, okay, where does it make sense to potentially increase pricing as it relates to a customer type or a product type?

Yep.

So for the sake of argument, let's talk about Netflix.

Okay.

Right. And so Netflix charges essentially the same price to everybody. They've got a little bit of product differentiation, but essentially the same price to everybody. Netflix does regular price increases and they do it across the board.

Yeah.

And I have to tell you, at the last price increase, I actually dropped my Netflix account. And I just asked myself, am I watching Netflix enough? I've got these other streaming videos or streaming sites. But here's what Netflix would have done and probably should have done.

Okay.

They look at every user and they say, how many minutes are you watching a month? And those that watch, you know, the top 20%, they're willing to take a price increase. They're gonna bitch about it, but they're gonna take it. The people who barely turn on Netflix, if you charge them a price increase, they will churn.

But how do you as a company get away with that? Especially someone like a Netflix who has like, there'll be visibility on it, I suppose.

Okay. So, so part of the trick is new customers always have to pay the highest price.

Yep.

So if you're gonna publish your prices, which Netflix does, we publish a high price. So let's assume that the— that today you're paying $17 and they wanna raise the prices to $19. And so on the website they change it to $19, but they never call you and say, hey, you have to pay $19 now.

And you just get to keep paying $17. Why is that a problem?

True. Yeah. Okay. I guess I'm not gonna go complain about that.

And there's a second rule in pricing. I mentioned value-based pricing was charge what a customer is willing to pay. There's a second rule in pricing that goes hand in hand with that rule. And that is I get to charge different prices to different customers based on the value they get.

Right.

Now, it's not always easy to do that, but it's perfectly legitimate to do that.

Why doesn't a Netflix do that then? Why do you think they don't have that approach?

I have no idea. It could be that they're huge. It could be that they worry about what people say and think about. It could be that they don't care if you churn.

What about if you only have one product?

How do you do Well, you can imagine Netflix only has one product.

Yeah, true.

And they just charge different prices.

What about if you get it wrong? Can you backtrack?

Yes, yes, yes, yes, yes.

Okay.

I don't know about in New Zealand, but I gotta tell you what happens normally in the US.

Okay.

So you've got a cable subscription, you're on Dish Network, DirecTV, one of those, and you say, I wanna get rid of it. And what you have to do is call to cancel your subscription.

Yeah, I've heard cable is ridiculous like that. It's, it's very difficult to not have cable.

They spend the next half hour convincing you you don't want to do that. And by the way, I'll lower your price. And oh, what if we kept the price here? And so I actually teach this to customers, right? If you, if you decide that you're gonna raise prices on each one of your companies, each one of your customers, when a customer calls you and says, hey, I'm gonna leave.

I don't like your— I don't like the fact that you raised my price. Usually you can get away with something like, we're so sorry we did that. I tell you what, you've been a loyal customer. How about if we hold your price constant for another 90 days and then we'll raise your price?

Right.

And usually people just want to be heard. And so that's enough to make that happen. But if they say, no, I don't want that, then we say, well, we'll just keep your price the way it was before. Maybe we keep them. We don't have to lose customers.

Right. So that's sort of your get out of jail free card as if you get a customer complaint around the price increase, you can then, you know, just keep them where they're at or give them some time before the price increase. And usually that works.

Yes.

Interesting. Is there anything else you think that we haven't touched on that you think is a really important part of this conversation? I've asked you as many tough questions as I can think of.

Oh, so let's talk about the types of value that people perceive in the world of subscriptions.

Okay.

Okay. So when you're trying to win a new customer, the only thing they can use is something called perceived value. So it's whatever they believe based on your marketing or what they've talked to other people about or what the referrals or reviews say. So it's always their perception of what they think is going on.

Once they buy your product and they're using it, they now have experienced your value. So are you truly delivering value to them so that they, they've experienced it when you ask them later, hey, are you getting value? They say yes. And then there's another type of value that goes to the next level.

And let's call that proven value. And I don't think enough companies do this at all. But what we should be doing is all those KPIs we talked about, how we're gonna move this KPI from this number to this number, we should be measuring those before implementation.

Mm-hmm.

And we should be measuring those after implementation so that we have the evidence for the customer that, hey, you are getting this much value from our product. These are your numbers. Because what ends up happening over time is there's a lot of consolidation that goes up in the subscription world. And what we want to do is not be the ones that get churned out.

And, and if we can prove that we're delivering value to our customers, then we're much less likely to get churned out.

Why do you think so many companies don't do that?

It's work.

Or don't do it effectively. It's work.

That's work. That's work. I mean, what you wanna do is you wanna go get the deal, get the sale, and then you just assume people are gonna love your product. They're gonna love it forever.

And then you move to the next. Yeah. Yeah, you're right. And this, if you were a more transactional SaaS product, how would you go about doing that? You know, is that where you're doing like a customer survey? Let's say you have like a zero-touch sales process and you don't have a CS function or, you know, like, is that where you'd be using, you know, survey tools, for example, to get feedback that way versus if you're in enterprise sale, you're obviously talking to a customer.

Yeah, maybe what I might do is I might do a whole bunch of customer interviews, actually one-on-one interviews so that I've collected the information and I can aggregate that to say, hey, most companies do this. Most customers experience this. The other thing, here's a huge hint and now we're gonna talk about brief technology for a second.

And that is if you are selling a cloud-based SaaS product, you had better be monitoring usage of every feature. You wanna know how much each customer uses of each feature.

Yeah.

That gives you so much insight as to how much value they're getting, what kind of value they're getting, what kind of problems they have. In the, someday in the future that helps you do better market segmentation. It helps you package your products into the good, better, best packages that'll be really effective in your marketplace or market segment.

So absolutely, you should be monitoring usage of every single feature. And that's another one of those things you gotta put in when you're building the product.

Yeah, it's much easier to do early.

Oh yeah, absolutely. And can I just toss out one more?

Go for it.

Gate every feature.

Gate everything.

Make every feature a feature that you can turn on or off.

Okay, go deep on that.

Eventually, you want to create good, better, best packages for a market segment.

Right.

And the way you do that is by saying, oh, the good has all these features, the better we turned on these other features, the best we turned on all of these features. And that's much, much easier to do when you've got gates on every feature that says I can choose what package I'm gonna put it in.

And is the reason for that because you're able to capture more value across a customer base if you have, because most people go for better and then you're capturing some who are going for best, which is quite a lot more expensive. Yeah.

So when we, when we buy a single purchase item, we almost always buy the one in the middle. And that's because we're afraid to make a mistake. We think that if we bought the cheap one, it wasn't good enough. And we think if we bought the expensive one, we wasted money. So we just buy the one in the middle.

In the world of SaaS, that's not the way people decide. In the world of SaaS, I'm gonna buy your cheapest one because I can try it and see if it actually works, see if it does what I need it to do. And so what we need to have done is crafted a product portfolio So I can get people into my good package at the lowest possible price.

I can get them using the product, getting value and then saying, oh, I really want those features. I'm gonna upgrade to better. Oh, I really want those features. So I wanna upgrade to best. And, and we don't know that coming out of the chute, which, how we're gonna package our products. Watching usage helps us understand that.

Mark, this has been a really interesting conversation. I could probably keep peppering you with questions, but we are getting to time. What is the one thing you wish you knew? If you could go do it all over again, first day on the job, what's the one thing you'd tell your younger self?

You know what I know today that I didn't know for the longest time? And that is, it's about the other person. Right? It's always about your buyer. What's your buyer thinking? In fact, I remember I told you before we went on, I was a horrible salesperson. I was a failed salesperson. And I remember listening to Zig Ziglar tapes.

Hmm.

And Zig Ziglar would say, you could have anything you want in this world as long as you help enough other people get what they want. And I tell you what, I heard that and heard that, but I never understood it. And I think the problem is when we're really young, We don't know what other people want.

Now that I'm old and experienced, I can look at a marketing person and say, oh, here's what they're trying to do. Or I could look at a CEO and say, here's what they're trying to do. But when you first start out, you're like, I don't know what people want. How do I, how do I give them what they want?

And so I wish, oh, I so wish I knew that when I was younger.

Mark, where can people find you if they want to connect with you? Read your books, engage with your content, where's the best places to go?

Yeah, I'm very, very active on LinkedIn. Feel free to send me a connection request as long as you're not gonna spam me. You, you can email me mark@impactpricing.com and then we put out our own podcast called Impact Pricing. We put out a blog a week, a newsletter. There's just tons of content that goes out.

So feel free to, to follow us and ask questions if you want. And, and by the way, Alex, I put together a little free gift for your listeners if you would like.

Absolutely.

So if you go to the website impactpricing.com/revup just for you, then what you're gonna find is at the very bottom, there's 3 different offers that you guys can have. One is an exercise that I do with a lot of my clients called the Valuable Features Framework, and it gets you started thinking about which features are valuable to which customer.

And that becomes really insightful as we do market segmentation and how we're gonna do our marketing. There's also a link to my newsletter so that you could subscribe and there's also a link to a discovery call if you want a discovery call with me, it'll get you 30 minutes on my phone. So it's impactpricing.com/revup.

And Alex, thank you so much. It was fun being here.

Thanks for coming on and apologies for some of the tough questions right out of the gate. But I appreciate you sharing your wisdom. I learned a lot. And I'm sure the audience will too.

Good. Thanks.