Mark Stiving is a great guide to pricing expertise. The author of Impact Pricing, he now leads a pricing education firm of the same name and is actively promoting pricing excellence through his excellent series of blogs and podcasts. If podcasts are your preferred way to learn, this is an excellent series to follow. Mark attracts informed and opinionated speakers and is willing to challenge them. He goes beyond the ‘usual suspects’ to speak with people like Daniel Elizalde, a leading expert on The Internet of Things (IoT). This is important as he is one of the drivers of pricing innovation in the IoT space and pricing experts need to hear perspectives from experts in this (and other) areas.

Ibbaka partner Steven Forth participated in a podcast with Mark Stiving recently.

Ibbaka spoke with Mark on May 14, at the height of the Covid 19 pandemic.

Ibbaka: Why pricing? What brought you into pricing?

Mark: The first tease happened when I was, let’s say I was eleven years old. I went into the grocery store with my mum and noticed all the prices ending in nines.  I always wondered why companies do that. We can do the math, it is not that hard.  Fast forward a dozen years or so and I am in a doctoral program at Berkeley. I get a chance to play with scanner panel data. This is the data we get from grocery store sales.  I have yogurt, ketchup, and tuna fish data. This gave me a chance to mathematically or statistically determine if this nine cent thing even matters. The first thing I did was to test a discrete variable if the price ends in nine.  It turned out to be statistically significant.  This 9 thing works, it that wasn’t very satisfying.  Then I created a series of mathematical models to test different hypotheses on how buyers make decisions.  We tested the models against each other to see which one best fits the data.  It was fascinating.   It turned out the model that fit best was buyers use the right-hand digits if the left-hand digits are the same, but if the left-hand digits are different, then buyers completely ignore the right-hand digits.  This result was pretty fascinating, but the big result that came out of that work was my mindset.  I became addicted to asking how people use price to make decisions.

Ibbaka: How people use price to make decisions. That is fascinating. Can you unfold that for us?

Mark: It makes me a little nervous to say those words in this world of behavioral economics.  Many people probably think of behavioral economics when thinking of price and buyer decisions.   Although I do find that interesting, I’m even more interested in how buyers perceive value.  I have always been an engineer, a very logical person.  So I always assumed that people make decisions logically. The question then becomes how is it that people use price to make decisions when there is so much going on. When I ran into Tom Nagle’s book The Strategy and Tactics of Pricing, which I first read in the second edition, and he was talking about Economic Value Estimation™ that to me was the holy grail.   It assumes people are logical. Price becomes part of the decision. It transformed the way that I think about pricing. 

Ibbaka: Tell us how you went from getting your Ph.D. to how your career has unfolded.

Mark: I went into the Ph.D. program because I love going to school.  I could have kept on studying forever. As I got close to graduating I realized that I was expected to go and become a professor somewhere. I thought, ‘Oh, that is the job you get with a Ph.D.?”  Luckily I landed a job at Ohio State, which is also where I earned my undergraduate degree. I created a pricing course for them and taught pricing at the MBA level. I really enjoyed teaching pricing, but about four years into this a very good friend of mine who had done well in his career asked me to start a company with him. So I moved back to California.  That was such an amazing learning experience. That was back in 2000 and I wish I knew then what I know now. We grew the company from 2000 to 2006 when we sold the company.  I left the company that bought us during the market crash.  Our market, new production homes, crumbled. 

After everything fell apart, I found myself in a deep depression. I thought of myself as a failed CEO.  With the market crashing, few jobs available, and a ridiculously large mortgage, I decided I could pretend to be a pricing expert.  After all, my Ph.D. is in pricing so why not?  I joined National Semiconductor and worked with the technical staff on pricing. It was another incredible learning experience, but after a few years in, I decided it was time to become known as a pricing expert. In 2010 I started blogging and in 2011 I published my first book.  Since then I publish as much as feasible to share what I’ve learned while building a reputation in the pricing space.

Ibbaka: You did a stint with Pragmatic Marketing?

Mark: Yes, to finish the story, I went from National Semiconductor to Maxim, and then in 2013 went over to Pragmatic Marketing, which is now Pragmatic Institute. They wanted a pricing class and asked me if I would create one for them. When I presented it to them, they said “You think exactly like we do, would you like to become an instructor?” Pragmatic could be the single best job in the world. I loved it. I spent 6 years teaching and learning about product management, product marketing and how they all tie to pricing.  I left there a year and a half ago, but only because I wanted to create more content and do more things, and they wanted to own everything I created.  

Ibbaka: You have started your own company, again, tell us about your vision for your company. What is the impact you want it to have?

Mark: I was amazed by the Pragmatic business model. They teach classes in product management, product marketing, pricing and as a general rule they are going to put between 20 and fifty people in a room and charge them $1,000 per person. That is a really nice day rate. I thought, if I can do that in pricing, just in pricing, that would be a great business.  I have started down that path. But what I am really doing mostly at this time is mentoring people and companies. I love teaching. I have been a scuba instructor, I have taught at university, I just love to teach. To me being a mentor to companies and individuals is what gets me up in the morning everyday.

Ibbaka: So you get to talk to a lot of different people about pricing, and get many different perspectives. What is changing in pricing?

Mark: Didn’t just have this conversation?

Ibbaka: That was for the podcast, now we get a chance to ask you!

Mark: When I look at what is changing in pricing, it seems that technology is becoming more used, but is still not used well. In B2C firms where there is lots of data and choice making is simpler, technology works great. They have all this data and use it to tease out how buyers make decisions, especially with respect to price.  But as soon as you go to the B2B world, where you have a salesperson negotiating with a customer and trying to communicate value, all of that data becomes much less useful. Companies try really hard to be data-driven, but the thing that has not changed about pricing is that most companies have no idea what value means, and their business should be creating, communicating and capturing value.

Ibbaka: Recently you have been writing about the value capture gap. Tell us what you mean by the value capture gap and why it matters.

Mark: It is what we as pricing people have been thinking about for many years. The problem is, when you talk to an executive and tell them they have a pricing problem, they tend to be in denial. Or when you tell them that their people don’t understand value, they say ‘oh yeah, we got it.” But when you ask them the question “Are you capturing as much value as you think you should be out of what you are delivering to your customers?”  I don’t think I have yet met an executive who thought they were capturing enough value. The concept ‘value capture gap’ is really meant to get executives to wake up a little bit. It would help us as pricing people get their attention.

Ibbaka: What do you see as the root causes of companies struggling to capture value?

Mark: I would say the single biggest problem in capturing the value companies create is everybody in the company has their fingers in the pie.  It is really, really hard to coordinate everybody. I think it is an organizational problem. You can’t just take a pricing team and tell them to go help people to create value, communicate value, and capture value because there is so much going on. Think about value and all the places it touches in a company. The last place it probably touches is finance, and finance has one of the biggest interests in the problem. The first place it touches is product management. How am I going to decide what feature or capability to build next? If product management doesn’t understand value then how are they going to make that decision? You move up the chain to product marketing, you look at most companies' web pages and they talk all about the features of their products, but almost nobody cares about the features of the products, they care about the value they will get. We have to talk about value to the customer, and once we understand this it changes the way we communicate to the marketplace.

Move on up to salespeople. Most salespeople want to go out and spew pitches about features and give customers ROI calculators, which is at least moving in the right direction. If salespeople just understood what value means to the customer, they would have much better conversations.

And then there are pricing people running around screaming the word value, but they don’t have any influence in the company and they can’t get anybody to do anything.

So it is the organizational problem. Too many people are involved. If executive teams got behind this, they could change things dramatically.

Ibbaka: What stops them?

Mark: Very interesting question... 

I think executives have so many levers they can pull, so many things to think about, that pricing just isn’t a problem to them. That is where the value capture gap comes into play. It grabs the essence of the entire company. The company exists to create value for customers, and of course the company needs to get a piece of that value. Executives tend to be focussed on the big picture issues, like what is the next acquisition or big technology trend. Pricing itself does not matter to them. But value capture is something that does.

Ibbaka: A number of large companies, especially in the medical technology industry, have been investing in customer experience. Do you have any thoughts on how customer experience and customer value are related?

Mark: Absolutely, but first define customer experience.

Ibbaka: Well, I would like to push that back on them, but what I see them doing is developing customer journey maps and looking for where the pain is at different touchpoints. I am not saying that is how they should be approaching customer experience, but that is how they do. If they get beyond the pain they may get to delight, but it seldom gets beyond delight to value.

Mark: In the world of subscriptions, there is a department called customer success. Anytime we have recurring revenue, whether this is a subscription or something like Uber where customers keep on coming back, there is a recurring revenue situation. My single favorite thing about the difference between a traditional business and a subscription business is that the traditional business doesn’t really care if you use their product. Imagine you go into a car dealership and buy a car. It doesn’t really matter to them if you drive it or not. On the other hand, in the world of subscription, they care a lot. If you are subscribing to the car though, if you are not using it you are not going to continue with the subscription. That is why subscription businesses invest in customer success. It is hugely important. They care about how to onboard the customer and get them using the service as quickly as possible. They care about getting them to use the service more and more over time so that they buy more of it. Customer usage becomes key.

So let’s talk about how all of this fits into pricing and value. In a traditional business a purchase decision is always based on perceived value. Nobody knows the truth of what the real value will be.  That is also true in subscriptions the first time somebody buys. But at the time of renewal the user already knows what the product is like and has a feeling for how much value there is. We just shifted from perceived value to selling real value.

Ibbaka: That is no doubt one of the most important transitions in the economy right now. Speaking of transitions in the economy though, we are all going through the Covid 19 pandemic, and you have made some comments on pricing response. What do you see as the best practices in responding to Covid 19 and have you seen anything you would call a worst practice?

Mark: As a general rule, pricing strategy still works. Everything we ever teach still works. The problem is that a lot of industries have taken a shock in demand. Now that could have been a decrease in demand, it could have been an increase in demand, but there was a big shock to buyer behavior. We are used to buyer behavior changing slowly, but with Covid almost overnight all of that changed. What we should be doing more than ever right now, is understanding how buyers make purchase decisions. If you are an airline right now, you have just seen demand collapse, but it is not going to return right now no matter how much of a discount you put in place. So you have to think through this process and figure out what really makes sense now that the demand structure has changed. And it changed rapidly and dramatically. The advice I would give is to understand how buyers are making decisions. The mistake I see is some companies making a knee jerk decision to lower prices. In many cases this does nothing to affect demand.

There is one unusual thing I would do. There are companies that could go out of business. I would do what would be unthinkable at any other time and offer customers delayed payment terms or even forgiveness. And I say this because what we are going through really feels like a community problem. We ought to find a way to help businesses survive if we can. I don’t like to say this, as it goes against everything I believe in as a pricing person, but it feels like the right thing to do.

Ibbaka: Do you think this rise in community value drivers is a short term blip, or is it something that might persist longer term?

Mark: My gut says this will go away quickly as Covid becomes less of an issue, as things reach an equilibrium state, people will start to become self-interested again.

Ibbaka: It is hard to predict the future, that is why we call it the future, but do you see a timeline for this?

Mark: I have to say I have absolutely no idea when Covid goes away and the economy gets back to normal, but I think we are already seeing people revert to their customary behavior and that in a few months community value drivers will have faded away.

Ibbaka: Going back to an earlier part of your career, my impression is that most business schools do not do a great job of teaching pricing. Do you think that is true, and if it is true, why is this so? What could happen to change this.

Mark: I think it is true that most business schools do a horrible job of teaching pricing. When I taught pricing at business schools I think the course I taught was horrible. If I taught a course at a business school today it would be very different and it would be much more valuable to the students in many different ways. There are relatively few people like us who think about pricing from many different perspectives. If you ask an economics professor to teach a course on pricing you pretty much know what that course is going to look like. If you ask a psychology professor you are going to get behavioral economics, which is interesting but only a small part of the story. If I were creating a new pricing course today, it would be way more about value and way less about what most people think of as pricing.

Ibbaka: Do you think this is going to happen in B-schools or will we continue to suffer from more of the same?

Mark: I do not see this happening. But I don’t think pricing is unique. I was a professor and I can assure you that most professors have little real-life business experience. One thing I think I did get right when I was a professor, is I started every semester by saying I can only teach you two things. I can teach you tools and I can teach you frameworks you can use to think about things. Everything else you are going to have to go out and figure out on its own. It is going to be different in every industry in every company in every situation.

Ibbaka: This reminds me of Henry Mintzberg’s book Managers Not MBAs where he suggests that business schools teach ‘the wrong people the wrong things at the wrong time.” Having said that, I have been quite happy with the MBAs I have hired, even though they have not known anything about pricing when I hired them.

Mark: Let me offer an alternate theory. People who go to business school show an interest in business. They probably did not learn much of use in business school, other than a few frameworks, but they did send a signal that they are seriously interested in business.

Ibbaka: I am sure you spend every waking moment thinking about pricing, but what else do you do to round out your life?

Mark: When I was younger I was an adrenaline junky. I started with scuba diving, which doesn’t seem like that much adrenaline anymore, and went on to white water kayaking, where some of my friends died, so I backed off that and got into hang gliding and then paragliding. Throughout this time I thought I would like to learn how to fly an airplane or even how to play golf, but I always thought of those as old man sports that I could do once my body was no longer up to it. 

A few years ago, I was riding a mountain bike, crashed, and cracked a few ribs. About six months later, I was kiting a paraglider, which meant just standing in a field and flying it like a kite, when somehow the glider caught a gust of wind and started dragging me along the ground. When it finally stopped, I stood up, and my ribs were killing me. At that moment, I said, “It’s time for old man sports.”  

Nowadays, I am a pilot for fun. I have a Cherokee Piper 235.