Strategic Pricing: The Critical Role of FP&A in Successful Pricing

Alrighty, welcome to whoever may be out there. We'll get started in a couple minutes here, but in the meantime, if you're out there and you can hear us, please let us know where you're coming from. Go ahead and add that to the comments. We'd love to know where you're joining us from for this FPNA tomorrow session that we're going to kick off here in just another minute or two. Tomorrow session that we're going to kick off here. Alrighty, we're excited. For those of you that are out there with us, we see people starting to join, so please let us know where you're coming from. All right, got people starting to join. I can see them on LinkedIn there. Give it just another. Another minute here. All right, I'm gonna go ahead and kick off our. Our countdown timer and then we'll. We'll get started here. I just like to kick off this timer. It's kind of fun. That's really the whole point of this timer. All right, here we go.

Foreign.

Welcome to our first LinkedIn Live for FPA tomorrow. I've done several of these for FP&A today, but this is the first one for FPA tomorrow as we're new podcast that I'm thrilled to have with me two amazing guests. And we're going to talk about a subject that I think is underutilized across the business, often misunderstood, and something that finance and FPA can make a bigger difference in than they do today. And so our subject is how pricing and how FP&A can influence pricing, how we work together, how we should be a part of that. And I have two pricing experts here with me. I have Nate and I have Curran here with me. And I'm super excited for you to get to hear from them because they know a lot more about pricing than I do. I've dealt with it for sure. And really excited to jump into the subject. So please let us know where you're coming from as we jump into things. Tell us where you're located, you know, any questions you may have or things you'd like to learn from today. We'd love to hear your thoughts. Tina, thanks for joining us from South Africa. Welcome. Alrighty, so where we're going to kick this session off is we're going to start by asking our guests to just tell us a little bit about themselves and their background, how they ended up where they're at today. So, Nate, why don't we start with you?

Yeah. Hey, I'm Nate Kmink. I Am calling from Atlanta, Georgia. So I actually started out as a mechanical engineer and, and as an engineer I learned a whole bunch of inferential statistics, which is like super nerdy. And then I went into super nerdy.

Oh, wait, sorry. Go ahead, Nate.

Oh, sorry. Yeah, yeah. Well, it turns out they somebody in marketing got a hold of that, said that sounds terrible, let's call it AI instead and that's probably better. So I started as a mechanical engineer and then when I did my mba, a bunch of the commercial bankers said, hey, we've never seen anybody do this before. This is pretty cool. And so I figured out, hey, I've got a shot. So I ended up working for Cummins Cummins Diesel, who's a Fortune 500 company. And I got to do what's called product planning. And that was at the intersection of forecasting, engineering and pricing. And so I got to do pricing for, with, with a lot of zeros behind what I was doing. And so it was just a wonderful experience and it was very useful and I've been able to apply it to a lot of businesses around the US since then. So that's me.

Well, thank you, Nate. Let's go ahead and turn it over to current if you want to go ahead and introduce yourself.

Hi everyone. Thanks. Thanks Paul for having me. My name is Karan, Karan Sood. I am joining from Toronto, Canada. I stumbled into pricing and I say stumbled because almost everyone in pricing stumbles into pricing because no one, no one goes to pricing. No one says, people say fine, I want to go in finance, I want to go in marketing, I want to go in strategy sales. No one says I want to go in pricing because it's such a small niche within marketing. When we were in school, they said, hey, here's the four pages on pricing. And that's pretty much it. So I stumbled into pricing. I started my career at GM in the automotive industry that parts pricing there. So almost every GM car at one point had some version of my, my hands on it. And then I worked in print and digital advertising for a number of years. So almost a billion dollar organization. And then I worked in CPG and retail selling protein powder and health supplements and then I switched on to electronics hardware. So I worked across several different industries. And what's unique is that in almost every organization has sat in almost a different team. So, so I've sat in sales, I've sat in marketing, I've sat inside supply chain and finance. So I have a bit of a perspective on almost how everyone views pricing and and hopefully we can bring it all up today with the, with, with Paul and Nate. So looking forward to this.

Thank you so much for sharing. And I agree with you, right. There's no specialization for pricing in school. Nobody goes to under, you know, college and thinks, I'm gonna go get a pricing specialization. Just like nobody goes and gets an FPNA specialization. You say, I want to do finance. And then you realize, oh, FPNA is part of finance. That sounds interesting. I'll try that. Or you get out in the real world and somebody's like, ah, we got to figure out pricing. You understand numbers, you understand a little bit of marketing or whatever they want. Why don't you be our pricing person? And I'm going to guess it probably started something like that. You were given a project to about pricing and before you know it, you became the pricing person. So I think it's very common. Obviously, some organizations have dedicated pricing. We had a pricing team when I was at American Express, but often it's more of, oh, we need to figure that out type of thing in a lot of companies, especially smaller. So I want to start with something I found really fascinating and I think both of you have heard this, so we'll start with you current on this question. Well, I, I read a study, it was made available on LinkedIn where it said SaaS companies were spending more time on average during a year focusing on janitorial services than pricing. So why don't we start with that? What's your thoughts on that? I know you read the study and then we'll go to you, Nate.

Yeah, I read the study and I think it came out of the house of Patrick Campbell and Price intelligently a number of years ago. And when I saw that, I had two questions. I mean, you know, one question and one comment I think, but I still think about one is like, who is spending that much amount of time on janitorial services? That's a lot of time for janitorial services, right? I'm not surprised. Right. I'm not surprised because I've been through that entire journey, so I know how much time companies spend. I've been in companies where we spend barely any time at all. And to a company that we're very, very robust. And the second comment I think, and I think Paul, you just mentioned it a couple of moments ago was this notion of what is a pricing analyst. And a lot of companies, what they do is they misclassify pricing people into like business analysts or they make them a sales analyst or they'll make them a financial analyst and have them sit under finance, sales analyst system sales and business analysts maybe, you know, could be anywhere. And what then happens is that, and this is the real what happens is none of those people end up being well versed in the area of pricing. They become great financial analysts, make great models. They become great sales guys to help sales guys sell more and business analysts to put together good business cases. But the art of pricing goes beyond just number crunchy, that goes into like cross functional alignment on what the goals are. And with FPA for example, being a key, key, you know, key stakeholder there. So I think it's the misclassification and that misclassification leading to people not going into the pricing career in a way. And they end up going into financial careers and marketing careers and sales careers and not so much as pricing. And what happened like finance is a key example, like fpa and pricing needs to work closely from the start of the year almost when you're creating budgets and forecasts all the way down to, you know, your revenues and, and margin and no one is more, more, well, worse with how and where revenue comes from as you're pricing people. So I think it's, it's where the cross collaboration really shines and why pricing people need, we need more cross collaborators than pricing, than just spreadsheet junkies, which, you know, which anyone can be for most part.

Nate, what's your thoughts on the study? I mean, you think we spend more time on making sure we have toilet paper than we do pricing?

I mean, you got to have toilet paper, you know, or, or some form of wipe. If I, if I can do a shout out to Atlanta based good wipes here, but the, the I, I would, it's interesting to me because I feel like one of the things I see happen a lot is it's because there's not a pricing person whose job it is to get all of the perspectives you end up having finance and ops, that arguing with sales. And it's more about who's better in an arm wrestle than it is about like, okay, well what do we need to do to increase pricing? I do want to offer a little tidbit and it's that it's, it's amazing how easy it is to increase profits by being good at pricing. So I've, I've spoken to CEOs and companies all around the country and I've been adding up how much, you know, hey, this is how much extra profit we identified and the number's over a hundred million dollars in the last nine months just from presenting a bunch of ideas and ways to increase pricing. So it's, it's incredibly easy to do that. But like we've been talking about, because there's not a specialization, it takes somebody who has. You have to fall into it like, like Curran and I did, and then start to do. Then you also have to do the math that says, oh, wow, like this investment is really going to pay off. So we should actually spend some time on this. But it's not obvious, right? It's not obvious to the normal business person. It's honestly what I see happen more often than anything else is people just do cost plus pricing. They say, oh, well, I want, you know, 20 margin. So I'm going to get really good at adding up my cost and I'm going to add 20. Well, the truth is nobody cares how much it costs you. All they care about is, is, is this good enough? You know, is it, am I going to get a return on investment for this thing that I'm buying? And so it's cost plus pricing is good enough to make a profitable company. And maybe it's not obvious that what you thought, you know, 20 might be what you're used to doing, but if you do two or three things, you can add 3% to your, your top line, which immediately falls all the way to the bottom. I'll say one more thing. I saw a study that says this and I did the math and proved it. The average company will get an 11 increase in net margin, net profit, you know, actual dollars in the, in the bank from a 1% increase in price. Now for the spreadsheet nerds out here, how that works out is if you have 9% net profit as your percentage point, then a 1% increase in price on the top is going to end up. The math works out. Right? But that's, it's shocking when people hear that, right? That's, that's a surprising statistic. So I'll stop for right there.

No, thank you. I appreciate you sharing that. And as I hear both of you talk and we talk about pricing, I definitely can relate to it. You know, the conversations of, hey, cost plus. I mean, I've been in meetings where company, okay, finance. What does the price need to be like, well, here's the margin we need to earn. What is the right price for the market? You guys tell me. Product marketing, sales. It's not my job to finalize this price. I have to ensure we don't lose our shirt.

Yes.

And then I'll share my opinions on it. But you know, the, the as long as you meet the requirements of the company from a financial perspective, that's something you need to weigh in on because you understand the market, the customer, the sales a lot better than I do. And those led to good discussions when I framed it that way. But I had a few times like will you tell me the price? No, let, let's, let's open it up to more of a discussion and kind of speaking to that discussion before we jump into that part of it. I know we'll get there in a minute. Couple other questions I want to go through and you know, before I do that, just want to welcome all those who are telling where they come from. A couple other people. So you're aware we have someone from Ottawa, Canada, we have London, Tennessee, Sri Lanka. So thank you everyone who's joining us. Kurt, I want to ask you a question. You know you've spent your entire career in pricing as you mentioned. It's not something anyone comes out of school saying hey, I'm going to go into pricing. So tell a little more of that backstory and why you've stayed in pricing. What is it you love about pricing?

Yeah, so I think Nate mentioned it a little bit in between which is like fastest way. And I say pricing is the smartest and the fastest way to increase revenue and margin. And it's so under focused in almost every company. And you see that, you see it coming through the pandemic and after the pandemic where companies they're cutting, you know, cutting jobs and cutting headcount, etc. But you see on the other spectrum there are companies who are raising prices at the same time. You don't hear any job losses coming out from those companies because at the same time it's a lucrative and a fast way to get to higher margin and revenue. And to what the Nate's study that he pointed out the 1% increase in price leads to 11% increase in profit margins coming out of McKinsey years ago. It still holds true. And I do the math every single day where people say hey let me cut prices by 20% and my immediate answer is at 60% margin, for example, you would have to raise, you would have to sell 50% more. Are you willing to do that? So there's simple. So and when you start and when you flip it the other way and say hey let's increase price by 3% and your sales would only have to drop, would have to drop a 20% before it actually makes, you know it, you Know before start losing money. So it's very lucrative from, from, from making margin and thinking about like think about cable companies and telecom companies. They were making money in their sleep increasing prices year after year after year. How do cable got to a point where it made no sense for them to be at that price compared to Netflix? Because over the years they kept on raising prices and they relied on consumers not caring enough about a 3% inflationary or 4% or 5% price increase that over time that's where most of their margin was coming from. So it's where a good chunk of a profit margin can come from. As long as you know in your smart about when to increase price, how to increase price, how to communicate that price increase in the market because you can fall flat that you have seen cases this year of people rolling back their price increase because customers complain. But that's where the magic happens where you make sure you have the cross functional know how and alignment on when, how and you know how much of a price increase you can, you can, you can put through and being smart about it. So and so that's where I think the magic happens.

Thank you for sharing that. And I really like what you said of being strategic and smart about it. I worked at a company where you know every new product, every contract we did, we always had to put a value prop to help justify what was the value we were giving the customer versus what we're charging. And it was a little extreme in that they always wanted a range around it had to be 4 to 1 to 8 to 1 otherwise you had to justify why. But it was really good exercise when it was done right to really force you to think about okay, what's the actual value the end customer's getting and am I pricing appropriately? Are they getting more value than makes sense for what I'm doing or less value in some cases which the CEO would always be like all right, well then you need to add more to the product, you know, software type based products. And so it was a really, that was an eye opener for me. Is it just kind of a whole different way to think about price and how much of a focus it was at that company. So I really appreciate you sharing that. You know Nate, I have one more question for you and then we're going to jump into a number of pricing questions I have. But you, I think you alluded at it earlier when you went to MBA school they saw some things you hadn't done. But how did you go kind of from engineering to MBA to now being Kind of an expert around forecasting and inflation and pricing. Maybe tell a little bit more of, kind of that story and what's interested you and what you're doing today?

Yeah, definitely. Good question. It's interesting because I got to do a whole bunch of forecasting for my own business and then when I was at Cummins, but I didn't. And I really enjoyed it because I'm a. My brain is naturally wired to be a futurist, so. But what ended up happening is, is after I left Cummins, my wife and I took a little bit of a sabbatical and, you know, we actually bought an RV and drove around the country.

This is your RV journey. I've heard about this.

Yeah, yeah, but that's. We're not going to talk about that because that would take about an hour or 12. But. But when I was on the road, I started freelancing and found out that there's like, forecasting is an area that's really difficult. Like I joke about it now, it's like, man, forecasting sucks. But that's my job. It can be fun for the right person. So I ended up freelancing and then that is what turned into the company I have today. Now, the reason that I have refreshed and gone back to all the different pricing, you know, I think I looked up the number of different pricing methodologies that I've worked with different companies on. And it's like 15, 16 different ways of increasing prices in forecasting. I have a lot of companies that are, you know, when inflation started happening, it was like, well, what's that going to do to my business? And the number one thing that inflation has done to businesses is it's turned into a margin squeeze most. So your costs are increasing. Right. So since inflation started, if I, if I just pick a point in time of say, December of 2020, right. That's kind of when things started going up. We've had over 20 increase in just in consumer price index overall. And in some specific areas, it's more like 40% increase in overall price. So the money you're getting today is worth 20 to 40% less than the money that you were getting at that time. And so the net result of inflation is that there will be a future margin squeeze. It's still at 3.4%, which sounds okay, but that's actually still not great. And we're looking at more than a year, maybe two years, best case before we get back to the 2% year over year, that's the target for the federal Reserve, like, and there's a whole lot of stuff that has to happen. I'm not going to get too far into that today. But what that tells us is that over the next two years at minimum, and potentially the next six to seven years depending on are we going to have another wave of inflation? Could that happen? That pricing is going to become one of the most important things that we get good at over the next half decade? Because for 40 years we didn't have inflation, we didn't have that much of an issue. And now all of a sudden it's become an issue again. And so we can't just do our normal, you know, add a 3% price riser into your contracts and it'll increase by 3% year over year. We have to get better at increasing prices. Now during the pandemic, you could just say like, oh well, you know, hey, we're the only ones that have this stuff, so you just got to pay the price. But when supply catches up, you don't have that luxury anymore of saying, yeah, I just have to pass my costs on to you because it's starting to become more competitive again. And so if we get better at the value side of what we're offering, like, hey, you know, yeah, I'm offering, yes, my, my stuff is whatever price, but I can get you a 10 to 1 return on investment if you'll, you know, for every dollar you invest in this technology or this capability, you're going to get at least $10 in profit in the future. I think I, I think that. Tell me if I actually answered all your questions, Paul, but I'll stop there.

Sounds good. Thank you. I appreciate that one. Nate, I want to get your thoughts. Karen, what her. And what would you say about kind of inflation and what we've seen the last few years in pricing? Kind of just addressing what Nate mentioned there a little bit.

Yeah, I think Ned had it right. Like a lot happened in the last three or four years and fluff stuff was flying off the wall. Like, even if it was a digital product or a physical product, it didn't matter. Companies couldn't just build fast enough and the supply chain wasn't catching enough fast enough. But now, as much as the inflation is at that 3% level, which is still high, some industries are getting caught up faster than the others. So. And for companies that are coming out of the pandemic, there's two ways to go around this. You have companies like P and G, for example, that raise prices during the pandemic to the tilt like 6%, 7%. Year, quarter after quarter, year after year, they increase prices. Now they're at a point where they're like, okay, the prices are high, but can they sustain it? And companies that are innovating and which are very good at innovation will be able to stick with that price point perhaps for a little bit longer and maybe ride it through the entire wave. And those companies will be cashing it in at some point. P and G does that all the time. They do that all the time where they increase prices, add more value to the product, make sure it penetrates the market well, and then they, you know, they cash in. And on the flip side, there are companies, and you just saw Target, Target came out with this whole inflation fatigue strategy right now where they have taken massive price drops from 4% to 16% across the board. And now that's a major price drop. A 4% price drop or 10% price drop on something that's like a 30% margin item would mean the sales would have to jump up quite significantly. Now can Target do it? Maybe, maybe not. That time will tell. And on the flip side, companies have made that reducing prices strategy, like Ikea made this huge investment and said, hey, we are going back to where we were three years ago almost because our costs have come down, so we want to pass it on to you. So they made this a strategy. They didn't say we are cutting prices because whatever. Like they said, hey, here's a commitment to lower prices. Here's a $600 million commitment to lower prices by actually doing all these things and, you know, rationalizing your pricing and reducing prices to pre pandemic level. And they're banking on the footfall. So I think there's two ways you can hide with the price changes or, you know, the price reductions, or can you can be more open about it and make a strategy out of it. And I think if you are able to make a strategy out of it, then you might be in a better shape than just passing a price increase and just price decrease and just letting it rip in the market because no one will notice. Some people may not notice Target decrease the price by 10% and just so. And that's just lost margin at that point. Yeah, so I, I think, you know, that's where, that's where I think it's, it's going.

I, I appreciate that and I love you got into the strategic side of things and I want to get a little more into that. But before we do, I have a practical question I want to ask. But before I ask this. I'm just going to let the audience know if you have any questions, you know, put them in the comments, Tom. We'll take them throughout the podcast here. We'll be happy to address as many questions as we can. So please go ahead and add your questions as we're discussing this or let us know your thoughts. We'd love to make this interactive. So what I want to ask before we jump into a little more strategy is in your guys's view, what's the role FPA and finance should play in pricing? Like, how should they be involved? Why is it so important that they play a role? Because I think often FPA doesn't play a role or finance doesn't play a role outside of maybe just looking at it and be like, all right, margins are good and moving on. So why don't we start with you current what's your thoughts there? And then we'll go to you, Nate, on that.

Yeah. So I mean FPNA holds the keys through strategic financial decision making in the company, so there's no escaping from that. And pricing holds the keys for how that, how those trans, those targets translate into sales goals and pricing goals and product goals in a way. So I think for them to work together. My biggest issue throughout my career with FPA has been sometimes the lack of communication on what exactly is the strategy? Where exactly are we? Because remember, pricing requires a key, a very, a very clear North Star. In almost every organization, you either are pricing your product to increase revenue, you're pricing your product to increase margin, or you're pricing your product to increase adoption and just sales and market, you know, units in the market, digital or non digital and both on all those strategies require different, different pricing strategies. And if FPNA and pricing are not aligned on January 1, when or December or October the year before, about next year, then it's just going to be, you know what Nate say the dog's breakfast in the end because they won't be aligned. There's finance is going to have one view of how financial and revenue metrics are what financial revenue metrics are and pricing is going to have another. So I think the clear communication key is where, where I think they really need to work and cross collaborate. And the second one is transparency, I think and I think that's on both sides. Finance is always, you know, the finance people are always finance sense. They know what they're doing, they feel they know what they're doing, they know what the numbers are, they know what price. You know, everyone in Finance will have an opinion on price. That's a given regardless of where, where and where in finance you are and, and the transparency between the work or where we are or what FPA has for a budget or a forecast or whatever for a year and, and having it open to pricing people and pricing people opening up their models and how they price open to FPA is where I think a lot of work needs to be done. Right now they both work in a very siloed world of like, here's my model and my workable, why don't you submit your work? And the other side is pricing. People are also saying the same thing. Why don't you tell me what you want and what you have? So I think it's a bit of, there's a little bit of collaboration and getting to the same sort of level and is what's required between FPN and pricing because they're both very strong, they both are very in a strong pricing team and a strong FPNA team can possibly do each other's job in a way like, you know, you can, you can be a very prudent pricing analyst in finance if you, if you, you know, master a few concepts and same goes for, same goes for pricing. I feel pricing people need to know more fpa, they need to know more accounting, they need to know more about accruals and, you know, NPV, etc. So I think it's a little bit of a transparency and opening up to each other that's required.

I like how you said there's definitely some transparency and opening up to each other and making it more collaborative that's required. I think sometimes, like you said, we're in our own silos. Nate, your thoughts on that question?

Yeah, that's a great question. I think I want to, I want to acknowledge the one foundational piece that you said first before. I'll move into what I would say is more of an advanced approach. And I, I think it's actually incredibly important for the FPA team to be the ones that say, are we going to make or are we going to make money or are we going to lose money at that price point? Right. So that's, that's like, you know, hey, one, on one basic level, you've, you've got to be there and be a part of that conversation because if, if it's just, oh, well, we're making margin, but you're not covering your variable costs and your overheads and you're actually a good example that I've seen happen is it's surprising now that the cost of capital is higher. It's surprising how often, you know, just having working capital, laying out there, how much that actually costs. And that's not something we've had to think about for probably 15 years now. Right. All of a sudden it costs it. Working capital is expensive.

Money's not free anymore.

Money's not free anymore, yes. Which is, I'm not going to go down that road, but that's actually probably a good thing overall long term. But anyways, I want to, I want to, I want to focus on one other piece of this and it's going to be what's called psyops, right? So sales, inventory and operations planning. That's a very classic process that I often have seen some really good psyops processes that are run by finance because of how important the forecast is in. The most profitable companies are going to be the ones that have exactly the right amount of sales to match 100% capacity of operations. And what I mean by that is that first of all you're, you're either 100% utilizing your assets or you're going to be fully utilizing your labor. And if, if your demand is higher, right? So let's say you, you could hit 120% of your capacity. Well, that's good. But if you have a really good forecast and you have a really good scops process, it's going to let you know early enough that you can actually increase price in order to reduce your win rate to the point where you're still at 100. So for that, let's say it's for that last 10, 15, 20% of the volume that you do, you get an extra 5% on that entire volume. That's it. That's all straight to the bottom line, right? So it's amazing how much additional, additional profit opportunity you have if we do a really good job, if FPA can do a really good job of forecasting and being able to align operations and sales so that demand and fulfillment are as close together as possible, I've seen that be somewhere between 10 and 30% increase in net profit margin when done. Well, for specific, for real companies that exist today that we've done work with, you know, who wouldn't love to have an extra 20%? You know, let's say you're, you know, for every million dollars in profit, I'll give you an extra 200, 000. I mean that's wild, but it's, it's incredibly effective when it works out. And, and FPA Plays a critical role in being able to pull all those pieces together.

So you're saying the reason the airline oversells things is so they can get as close to 100 as possible.

Airlines. Airlines have been doing surge pricing and capacity based pricing since the 80s. And I saw a study that said it's somewhere between 30 and 50, something like 40% of their overall profit is because of that activity. Because of that last 3 to 4% of their revenue is, is a massive part of their overall profit.

Yeah, I mean it doesn't surprise me, right? The airline industry is probably one of those examples we can all go to that has made pricing a key part of a strategy. First class business class. The way they've stratified pricing, everything they've done is to try to maximize that curve. Right. If it's this person will pay a hundred dollars, I want to get a hundred dollars from them. This person will pay 500, I want to get 500. Right. They don't. They try not to leave anything on the table. Hence why they charge for bags. Now if you want to use the bathroom, I think some of them charge, right? No, not quite yet. But you wonder sometimes. It's really interesting and I can see you're about to say something current's like this.

The subjects Ryanair almost got there for charging for using the washroom. But also remember Ryanair also most profitable airlines in the world. They made a strategy out of low cost airlines. They pioneered it and then they did it and they did it well. So it's, I mean overall strategy matter. But the whole, the whole point of being the lowest in the market and then getting share to a point where they're one of the top three most profitable airlines probably globally. You gotta, you gotta give them credit. And I think I want to point to what Nate said earlier about, about the, the psyops. And I think it's, it's such an important and underrated concept in a way especially for people who are sent, who are selling physical goods, for people who are selling physical goods, knowing how much to produce, how much the sales is going to be and not having access can be a, can be the difference between, between profitability and no profits almost or even bankruptcy. You've seen companies that went bankrupt because they couldn't control the amount of returns they ever had, they ever got from their products because they couldn't forecast it properly or had too much access. And why companies like, you know, like Homesense and TG&Marshall are thriving right now because people are getting, there's so much over abundance of goods in other channels that is getting, getting down to their, into their, into their channel. So I think it's, it's, it's quite amazing how much science, how psyops can work, can effectively work. So either that's finance, either that supply chain working with finance, or either it's, it's a, it's a mixture of both plus sales in it. But I think definitely sales need to be because you need to have a very clear forecast. Not from the rosy glasses sometimes the sales wear sometimes because sales is bound to be optimistic. They're paid to be optimistic. Right. But that's where that optimism sometimes could be, could be quite, quite damaging sometimes when it's not rooted in rooting in, rooted in analytics and knowing what the demand is. And I think that's where Nate's work really shines and how can you better get to that equilibrium? So kudos for that.

So Nate, we got a couple great questions coming in from the audience. I'm going to throw those up on the screen here. But when you said sells and optimistic, it reminded me many of you will know who Steve Young was. If you're in the US and grew up watching football like I did, you'll recognize that name. One of the best quarterbacks ever. And he was comparing cells and the whole business to football and he referred to sales people as your wide receivers. Like you need them, but they're your divas. They're high maintenance. You got to take care of them. He's like, finance is your offensive line. They don't get any appreciation. They just kind of take care of the quarterback. So it's kind of funny, when you were mentioning sales, it reminded me of that. And yes, they definitely can be optimistic. Sometimes we have to be there to validate and ensure that it's realistic. So here's the first question I want to throw up and we'll send this one to you current. So from a high level perspective, how does products versus surfaces differ in pricing strategy comes from? Peter.

Sorry.

So the question is from a high level.

Yeah.

How does the strategy get.

I mean, yeah, I think that's a great question. So, and I think that's where services is so much, there's so much optimization that can happen in service pricing. Not that they can't happen in product, but service. When you say, when people talk about value based pricing, value based pricing really thrives in services because that's where you can really talk about how are you creating value? How, how are you increasing revenue for your customer? How Are you reducing cost for your customer? How are you reducing, you know, risk for your customer or time spent on something? So that's where value, when people, people misunderstand value based pricing. Value based pricing is not really a product in a cpg. I mean it, it has applicability there, but it really shines in service based and you know, software based based based models because that's where you can really quantify versus product. Product is a little bit of, can be all over the place. Product can have some version of value based pricing when you're talking about high tech gadgets and you know how that can have some notion of value pricing. But Prod can also be selling cookies at Costco which and Costco wants to be, to be at 1099 day in, day out for the entire year and sell 5,000 cases a week or you're out. So your product pricing there is very, I wouldn't say it's cost, but it's also cost plus some little bit of flavor of competitiveness in there. So I think product strategies and service strategies very, very vary. So product, you can have a notion of competitive environment in there. It will happen. You may not want to price based on competition, but you do want to take that into account and you want to, and you want to make sure that you are adding more value to your product product compared to the competition. So when you say competition based pricing doesn't mean match your competitor. It basically says hey, add more value to your product so that you can be above and beyond that that competitor's price. So how much, how much premium and how much you know, how much of negative you want to be compared to your competitors. And then there's flavors of some, you know, cost based price. I mean, you know, as Nate pointed out, cost based pricing has a role somewhere in almost every company. Cost based pricing has a role because it sort of sets the benchmark of what is the lowest you have to be for you to be maintain your profitability and to be a viable, thriving business. Because if you don't have that or you don't know what your costs are, you're going to be in deep trouble. A lot of companies don't allocate the cost. Probably they don't know what the cost structure is because something is a fixed cost that's not allocated properly. So it just sits in a bucket somewhere else. It shows up six months later when an auditor calls up and says, hey, where's what's this cost? And then you start allocating. So it's, you know, it's cost based. Pricing has role, competition has a role. You know, so. And then value based pricing has a role in product, but services really thrives on value. So if you're in service, you really need to ask yourself a question, what is the value I'm providing and how am I quantifying that value?

Really, really good point. I need to do that exercise for my business and I can tell Nate's dying to say something. Yeah, he raised his hand on a podcast.

I'm just, I just. Anyways, okay, I'm trying not. I'm trying to be polite. I, I want to say one other thing. I think, I think current did a really good job of talking about the pricing side of it, but I do think if I go back to the psyops, you know, what's the difference between product and service in. In the. The if. Okay, so how do you define your ideal capacity?

Right.

What's the ideal capacity that I want to sell for airlines? It's easy. There's 192 seats on an Airbus A321 and it leaves on May 23rd at 9 at 7am Right. So that's very easy to, to say, here's our capacity with labor in services. Right. So, so you have to get to. Okay, how many hours? Let's say I'm going to pick an H vac repair company as an example. You know, their labor utilization rate is, you know, for 40 hours a week, I can sell 35 hours worth of valuable time and then I get parts plus labor costs and I get, you know, so it's like it ends up being you're going to forecast your total capacity very differently for service based business when you go into a PSYOP meeting than if you have a product based business. And one of the, one of the reasons I do talk about this is a little bit is it's surprising how often people will say they can't forecast their overall capacity in a service business. And I think that's incorrect. It's actually pretty quite easy to forecast your capacity. And that should, that should. If you can forecast your capacity, that will really help you understand whether or not you can go up or down in, in pricing. Do you have an opportunity to increase price because you're overselling? Do you have an opportunity, you know, maybe if I lower price a little bit, do I have an opportunity to utilize additional capacity?

Thank you. Appreciate that. So I need to do that so I can determine if I should be raising my prices. Got it. I'll come to you for that. All right, we have another question in here from Dave and I'm going to send this one to you first, Nate. So he asks, I think you've had some experience with activity based costing. So he's asking, do you have experience thoughts on effectiveness of ABC models, influence on pricing decisions?

This is a, this. So I've been staring at, I've been staring at this one thinking about it for a little bit because it's a really good question. I think activity based costing is a very good process to follow in terms of giving you an idea of what it could end up costing. Now what I would probably do, the issue I have with activity based costing is it doesn't do a good job of splitting out fixed cost versus variable and the fact that, and so I would really want to get into, you know, if you're going to go really deep on a topic, I think activity based cost is. And meeting that margin is probably your baseline, but I think we actually need to dive into an analysis of. Okay, well here's my true fixed cost and here's my true variable cost in order to identify whether or not we have opportunity to go lower or go higher. Because I think, like I said, I think activity based costing is a good place to start. But if I'm going to build a forecast sheet and I'm going to look at all of that stuff, I am going to absolutely understand the difference between those two because if you have a very high fixed. Right, so, so it's very expensive to be a cost leader is is what I'm going to say. Right. So it's very, you have to have a lot of capital investment in order to have low unit costs. Well, if all you're doing is activity based costing and you're cover, you know, you have, you're, you have to cover your allocations. You're actually going to miss out on the opportunity that you have that your variable costs are very low and so you have more opportunity, opportunity to go in at a lower price.

Got it. That makes sense. Really what I'm hearing there is if you're doing abc, you need to make sure you understand that fixed bucket, how it impacts things, how you think about that, so that you're being making intelligent decisions, so to speak. All right, great. Any thoughts you want to add anything you wanted to add to that one? Kurin, before I go on to the next question.

No, I think, I think Nate added pretty good perspective. The only thing I would say is that activity based costing and pricing based off that should be, it should only can only work and it should only work in a very small subset of industries. And I'm really looking at manufacturing there and manufacturing genetic products, not even manufacturing complicated stuff because then you can really go into value based pricing. But if you're just basically, you know, manufacturing widgets out of a factory that's very competitive, maybe that's where you can really. But if you're manufacturing robots and that's, that's where you can really shine with more value based pricing and you know, or any other complicated piece of equipment. Because there's several ways to add value in the manufacturing process, from service to warranty to, you know, quality of the product or you know, usage etc. There's just a lot there. So I hope that's for various sliver of companies that are really using activity based costing and then making pricing decisions off it because it's dangerous.

Got one more question from the audience I want to cover and then we'll get back to a couple questions I have and we'll wrap up. So Samir asked, how can we effectively balance competitive pricing with maintaining profit margins, especially in highly saturated markets where there's a lot of competition or as we often think of economics, perfect competition, even though there's really no such thing. But what's your thoughts there on that? On that question? We'll start with you current. What's your take?

I mean it's if you really look at cpg, for example, and you look at company like Unilever, png, Kimberly Clark, highly competitive, they're selling, you know, things that every day they're that are highly replaceable with other brands, highly replaceable store brands. But look at their, their results coming out of the pandemic and even right now. And I think what really matters, people focus too much about the price. Where they really should be focusing, even the pricing folks should be focusing is working with the product team to figure out where can they create value. And I think the way to differentiate yourself in highly competitive and saturated markets is to differentiate yourself based on value. And you could be any product. It doesn't matter if physical product or a service product or a wholesale product distribution company. You could be any of these. As long as you're focusing on value. I think when you focus on value you take pretty price out of the discussion, at least not to an ex. It's not a driving factor to an extent it is without the value add value add in there. So I think that's where you're gonna find the healthy balance. I don't necessarily condone Decreasing pricing because it's a competitive marketplace. I would say it's more of, you know, trying to figure out how to stay at the price you are right now. If you are coming out of the pandemic, you had a high price. This is the time to add value to your price and not discount it. Yeah. And the other thing is, I would say use. One thing that gets overlooked is using promotions and discounts constructively. That's a great way of maintaining profit margins, increasing volume without actually making any substantial improvement or changes to your, to your pricing strategy. Sometimes just optimizing your discount by 1% is same as increasing your revenue by 1% or prices by 1%. So go there as well. So that's probably the other place to look for margin.

I think great recommendations there is looking at value. How can you add value to the product? That was a conversation we regularly had. Because at the end of the day, if you sell on value and you're not selling on price, you have so much more opportunity. We had a huge problem. One of the companies I worked with, my head of sales, or she's basically was the CRO. She would always be like, if I see heavy discounting, I know they're not selling on value. And there's a training issue there. If they're regularly discounting a one off deal, we get sales people do it. We had a situation where the sales team just constantly doing that and we ended up letting go of that sales team and re starting over in a different location with a methodology of, look, it needs to be about value because we were just giving away way too many margins. And it was fun as the finance guy to be like, no, I can't approve that deal. No, I can't approve that deal. I think they came to hate me, but that's another story. But it was the right thing to do. You know, you got to make those, those decisions. So we don't have a lot of time left. So what I want to do is I want to ask a question here for both Nate and, and current. And then we'll go to one more. One or two more questions and then we're gonna have a little fun section as we only have about 10 minutes left. First question. Is there a favorite kind of framework you like to use that helps you analyze pricing? When you go into a pricing situation where you need to understand the company's pricing, is there a framework or method you use to work through that and understand it better? And Nate, we'll start with you.

Yeah, I, I think there's there's two answers to that, but I'm gonna, I'm gonna step out of the FP and a role and I'm gonna go to the overall business strategy. One of the questions I always like to ask is if I go to the CEO and I ask the CEO, okay, what makes you special in the market? What makes you different? What's your, I'll call it the strategic differentiation. The CEO might give me an answer and say, we're a value leader. And if I go to the CRO or to a salesperson and they don't give me the same answer, that company is losing money all the time. Because what is really important is that there's agreement across the entire organization of are we a price leader? Are we a value leader? Are we a product leader, Are we, you know, service leader? What is it that, what is our position in the market? And so whenever I'm, you know, I could answer honestly. My favorite is value based pricing. That's, that's the way I think about it. Like, to me, value based pricing means that I'm actually adding the most value to my customer. And that's my job. I'm here to make my customer millions of dollars. And if I do that and I get a slice of it, awesome. But at the end of the day, I want them to be successful. So the value based pricing is my favorite. But I think it's really important to make sure that the company is aligned on, well, what is our strategy in the marketplace? Are we a value leader? Are we a, you know, what is that? And it's not just that the CEO knows, it's that you get the same answer from everybody in the organization.

Yep. Thank you. And current, what's your thoughts on that?

I think very similar. Like value based pricing is probably the gold standard of how pricing needs to be done, but obviously doesn't work everywhere. It works in most cases, but not all. So. And those. And the, and so he already mentioned what, where value based pricing works. You should know what, what value you're creating. You do you. And then you also, you know, can you quantify it? And also you have to really be able to quantify because otherwise it's just a statement. A lot of people will say, oh, our company is strategic. Yeah, every company is strategic. Can you quantify that? How strategic, what you mean by strategic? Or they say, oh, we provide great customer service. Okay, great. How do you quantify it? Do you have reduced response time? Do you have 24, 7 support? Things like that? Those are the kind of things that go into value based pricing. And my advice is when you are starting off something, pricing something new, then you need to do from the work, from the grounds up, do your research, know who your competitors are, know what value you're creating, know what the clear, what your clear goals and KPIs are. And you know, as long as you do all of those things and when you price the product, then you can just optimize over time. You know, you don't. People worry too much about their initial price that hey, we're going to launch a product, we're going to have it perfect. There is no perfect price. There was never a perfect price. If there was a perfect price, someone would be, you know, someone, maybe Nate would have been a millionaire or billionaire by now. But there's no perfect price. It's an optimization process as long as you have a framework for what to change. But when you figure out the value that you're delivering, you will, you know, that's where you really have mastered value based pricing or pricing in general.

I, I love something you said about, right, Every company says they're strategic. If you ask a company and they tell you they're not strategic, you probably want to run, right? But what I, I've said, I think this is something for finance professionals to remember and I think you could see this in pricing as well. If a company is strategic, what I mean is they really have a competitive advantage. They're being strategic in what they're doing. You're going to see it in their bottom line. They should have above average returns if they're implementing a strategy that the market is perceiving value in. Right? Because you could have a great strategy, but if the market doesn't perceive it valuable, it's the wrong strategy. And there's something to that to be said for pricing as well. Not to say that you're always getting more than your competitors. Low price can be the right price for your strategy. Medium price can be the right price. Something along the entire spectrum where you have something for low, for medium, for high. There's not a, a right strategy here. There's frameworks to use. Value pricing is the gold standard, as everybody said. And so you need to think about that. And so that's just something I'd say is if you're doing pricing right, you're gonna see it in the bottom line in one way or another. It could be in volume that comes through to the ebitda, could be in your margins. Now it's not always the same way, but you will See it. Right. So I want to ask one more question that came through and then I have a couple fun questions for you guys. So someone asked a little bit. I think it was Damien and Current. I'll throw this one to you. Any thoughts on rebate strategies? I know you probably saw that in the automotive industry a fair amount.

Yeah. So I mean, I have. So I've managed pricing and I've managed discounting throughout and created probably at this point gone through 8 to 10 million, $10 billion in discount over my lifetime. And they're all very different. They're all very different. Like, because rebates could mean different things. So in the retail industry, you could be a high, low product. So for example, when you're in US you go to stores like Walgreens or in Canada, stores like Shoppers Drug Mart, they have a high, low pricing that, you know, have a high price on day one and day seven is low price. And the, and the difference is a part of a rebate strategy. Or you could be more of a rebate where you're more giving people rebate based off certain. Hitting certain KPIs. So it's very common in B2B or service industry or B2B industries or wholesaling, where you give a price upfront, which is very common. People want to protect their price in the market. They don't want everyone to have different price points. So for example, if I was selling something to Walmart and Target and you know, Whole Foods or whichever retail chain, I would want everyone to have the same sort of list price that hey, here's the price everyone pays. But because everyone will have different requirements for margins, then we. Then you get into the world of rebates and how much rebate does everyone get? Someone gets five bucks off or unit. Someone gets two bucks off the unit, three bucks off a unit. So there's constructive ways to. And it's a great way to structure your pricing when you want uniformity in pricing in the market. Because what happens in a lot of companies which don't look at this stuff is they'll launch a product across eight different retailers at eight different prices and then realize, oh, they're all buying off each other now at some point, or people are buying off cross shopping across different retailers because they're not, didn't control it. So rebase is a good way to control it. And also rebates can be used all the way between manufacturer to. Between manufacturer and seller, sometimes based on, based on production targets, et cetera. So I think it's A very, it's a very loaded question, I would say. But what I would really say is start measuring people. The biggest issue I find with rebates is people don't measure. They're just anniversary of promotion, anniversary of rebate year after year because that's how every sales guy just did it or signed up for it. And you know, our budget was made. But when you don't question it, a lot of bad promotions and bad rebates go through. And I think the same study that showed the 1 to 11% also showed, I think the, the amount of off invoice rebates that are there. So if you're not con. There's all sorts of rebates on invoice rebates, off invoice rebates, volume rebates, kickbacks, etc. Etc. So if you're not controlling that entire spectrum of rebates, you are losing out to someone who is. So I think that's a great and that's one way I've always optimized our pricing is before we optimize price, we optimize discounts. And it's always been very, very beneficial for us.

Great answer there. We only have about four minutes left. So I'm gonna go into a kind of rapid fire get to know you fun section and I'm gonna throw the questions. Who should I go with first? Any volunteers? We'll go to Curran here. First we're gonna do two what I'll call kind of work related and two kind of fun. And the idea is you get about 15 to 20 seconds to answer these. So trying to be quick. First one, in your opinion, what's the number one technical skill pricing professionals need?

They should be very good. I mean modeling should be modeling statistics and probability. I would say probability is probably a good one to learn because over time your models will get complicated and is something to something that you should probably learn and game theory.

All right, so we'll throw that all in. Modeling, statistics, game theory, we'll call it one thing. All right, what's the number one soft skill Pricing. People need.

The art of persuasion, don't we all? Creating a team full of people from execs down to senior managers to whoever you're working on the other side who will have conflicting goals as you and getting them on alignment isn't or that's what separates the people who are doing just pricing to people who are strategic about pricing and able to grade it to a standard where organization cares about it. So I would say that's a Soft skill. Highly recommend the book. Yeah, highly recommend the book or by Robert Cialdini as well. So.

So I don't need to ask you the book you'd recommend. So we'll skip that one. Next one is if you're going to on a. A trip tomorrow and you can go anywhere in the world. Where are you going?

Paris.

Paris. Nice. And then the last thing if I told you you could have dinner with anyone in the world tonight that's alive. Who are you taking to dinner?

Ah, that's. That's a tough one. But I don't know like it be hard to be to Jeff Bezos. I think someone who started who's basically transform entire world and how we operate and buy is probably. Is. Is. I mean you probably want to be a great one. You have to be a great one. Just I think that's probably. It's very cliche, but probably. Probably interesting.

I like it. Nate. I'm going to mix them up a little bit on you. So you're going to get a different set of questions. First one is if you could take anyone to dinner not alive. Who you taking?

Oh.

Oh, man. I had an answer. Well, my answer for somebody alive was obviously Paul Barnhurst.

Oh, of course. So serious.

Anyone not alive, I'm gonna have to go back to. Like, I would love to take some of the. So like some of the people that were involved in the setup of the Federal Reserve. I actually don't know who they are, but I would love to go back and understand some monetary policy theory. That's just me being a nerd. Like I. I love that stuff.

So Alexander Hamilton would be a good place to start.

Yeah, yeah, for sure.

And I'll join you for that dinner.

Okay, sounds great. All right, well then all three. Then we get to get both of those. You, me and Alex. Yeah, there you go.

You get a live and debt. We covered them both. All right, awesome.

Fantastic.

All right, we got about a minute left, so we're gonna go quick here. Next one is, what's your favorite Excel shortcut?

Control 1.

Control 1. All right, next question. What's the technical skill for FPNA professionals? Not pricing.

Yeah. So. Oh, for fpa, it's going to be forecasting. I mean, that's forecasting.

What's the number one soft skill for FPNA professionals?

I'm going to agree with current and say persuasion. Influence and persuasion. 100%.

Great. Well, thank you guys for joining us. I really appreciate you spending an hour with us to talk about pricing. This will be released as a podcast. So if you enjoyed this, please share it with your friends and neighbors. Let them know. And thank you everyone for joining us. Apologies, we didn't get to every question that was out there. We tried to cover as many as we could, but thanks, everyone.

Thank you. Thanks, Paul. This was amazing. Thanks, Nate.

This is really fun.

Thanks, guys.