In this episode, Rohit Agarwal interviews Jean-Manuel Izaret (JMI), a managing director and senior partner at Boston Consulting Group (BCG), about the strategic importance of pricing in business. JMI shares his background in engineering and how he transitioned to consulting. They discuss the challenges of pricing, the role of pricing in business model innovation, and the alignment of pricing with value creation. JMI emphasizes the importance of understanding costs, customer value, and competition in pricing strategies. He also highlights the different pricing approaches for mature industries, luxury brands, and technology companies.
JMI shares his views on impact of product differentiation, why capturing all the value may not be the best strategy, how to think about fair pricing strategy and nuances of dynamic pricing and associated bad reputation. They discuss game theory in pricing, how pricing strategies can vary across different global markets, as cultural perceptions of fairness and pricing differ, and how companies should customize their pricing strategies based on their specific situation and market dynamics.
The conversation further explores various topics, including the impact of inflation on prices, the role of AI in pricing, the balance between simplicity and complexity in pricing, and the challenges and lessons learned in strategic pricing projects. The future of pricing is discussed, highlighting trends such as price differentiation and dynamic pricing.
Takeaways
- Pricing is a strategic lever that can change the trajectory of a business and industry.
- Understanding costs, customer value, and competition is crucial for effective pricing strategies.
- Different industries require different pricing approaches, such as cost-plus pricing, value-based pricing, or pricing to scale.
- Pricing should align with value creation and capture, enhancing both customer satisfaction and profitability.
- Pricing is a cross-functional discipline that requires collaboration between finance, marketing, and sales.
- Companies should consider pricing as an integral part of their business strategy and align it with their value proposition. Capturing all of the value may make customers indifferent between you and your competitors.
- Sharing value and creating a fair pricing strategy is important for building long-term relationships with customers.
- Dynamic pricing can be effective when implemented correctly, but it requires careful communication and justification.
- Game theory pricing can be effective in situations with few competitors, but it requires understanding the dynamics between competitors and finding an equilibrium.
- Pricing strategies can vary across different global markets, as cultural perceptions of fairness and pricing differ.
- Companies should customize their pricing strategies based on their specific situation and market dynamics. Inflation can impact prices, and people's willingness to pay higher prices can contribute to price stability.
- AI models are currently priced per user, indicating that they are here to help rather than replace humans. When AI models are priced per task or outcome, it may indicate a shift towards replacing humans.
- Adding complexity to pricing models can be advantageous for sellers, but companies should be careful not to push it too far, as it can lead to customer dissatisfaction and the emergence of competitors offering simpler pricing.
- Strategic pricing projects require leaders who are open to radical decisions, willing to ask the right questions, and accept the answers from their team.
- The future of pricing may involve more price differentiation, dynamic pricing, and the use of AI to manage complexity.
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Quotes
“People underestimate the strategic side of pricing.”
"Pricing is a cross-functional discipline."
“Humility and being reminded about everything you can learn is always a good thing.”
“The technology industry itself has seen a lot of emphasis on pricing and packaging and the connection between defining the products and defining their prices as a discipline.”
“Companies like Salesforce.com or Uber made their entire business on a new pricing model.”
“Pricing differently was the source of the innovation, essentially, with software as a service.”
“I should price based on my own economics. So I need to understand my costs. That's aspect one. I should price based on what the customers value. What are they willing to pay? And I should price based on competitors and what they are charging. There are three things and you could price based on all of these three and the combination thereof.”
“Essentially, prices are the way to trust that the money you spend or the money you get when you sell something is a good money, is the right amount.”
“Strategy is just a branch of pricing. That in order to have a good strategy, you need to first have good pricing.”
“Capturing all the value is usually not the right thing.”
“If you capture all of the value, usually you make your customers indifferent between you and the others.”
"Sharing value is giving you an incentive for you to buy my product."
“You and I are better off when I sell you something. That's really fundamental principle of society.”
"The optimum share of the value even for unique products is between 50 and 60% share."
“Dynamic pricing gives different prices at different times to different people.”
“Game theory is the fact that when you have very few competitors, looking at where everybody is pricing can really determine the prices much more than the demand.”
“Most companies tend to overestimate elasticity.”
“Pricing right can really determine the outcome of your business.”
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BCG Pricing resource: https://view.ceros.com/boston-consulting-group/game-changer-pricing-interactive/p/1
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Where to find JMI:
Where to find Boston Consulting Group (BCG):
Website: https://www.bcg.com/
LinkedIn: https://www.linkedin.com/company/boston-consulting-group/
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Sponsor:
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