Pricing Transparency - a conversation with Xiaohe Li, Stella Penso, Kyle Westra
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Pricing transparency is a fraught issue that sometimes inspires fierce conversation and other times is resolutely ignored.
There are important questions companies need to answer here, questions that cut to strategy and values.
“Should our customers know how we price?”
“Should our customers know what prices other customers are getting?”
“Should our sales people know how we price? (Not the prices, but the process by which the price was set)”
“Should we publish our prices on our website?”
There are two dimensions to pricing transparency:
Internal and External
Pricing Process and Prices
Putting these together gives another one of those 2x2 matrices so beloved of consultants.
The best practice is to have clarity for each of these four quadrants and to link these to your values and strategy. This does not mean transparency is required in each quadrant, as we will see below.
Ibbaka reached out to three people who have thought long and hard about pricing and price transparency. They generously share their thoughts here.
Xiaohe Li Pricing and Packaging Strategy at GitLab
Stella Penso VP of Marketplace Performance at FREE NOW
Kyle Westra Manager at Wiglaf Pricing
Interview conducted by Steven Forth
The four key takeaways from the conversation:
Price and pricing transparency are different things, in some cases price transparency is what matters, in others pricing (process or algorithm) transparency is more relevant.
There are internal and external dimensions to transparency. Begin with internal. If you lack internal transparency you will probably end up confusing your customers.
Pricing should be kept simple and it should support the customer’s buying decision and not get in the way. Too much transparency can sometimes get in the way and confuse the customer.
Value creation and communication come before pricing. Pricing, and transparency, need to support the value proposition and positioning.
Ibbaka: What do we mean when we say transparency and pricing?
Kyle: I first want to separate this into two buckets - price transparency and pricing transparency. Some people use the terms interchangeably, but I think when we dig into it, it’s clear that there is a difference and important to delineate that difference too, so that we’re all talking about the same thing.
When I think of price transparency, it is knowing what the end price is. You can think about a price tag and that it provides price transparency.
Pricing transparency is more about knowing how that end price is determined. Perhaps there is still a price tag, perhaps there isn’t, but you have an idea of the mechanism of the pricing of the product or service that you are purchasing.
Some companies can illustrate one or the other, both, or neither, but in short: knowing the end price is price transparency; knowing the mechanism or the process of pricing is pricing transparency.
Xiaohe: Agreed with Kyle on the differentiation between price and pricing transparency. I’m sharing my views on pricing transparency, for which I have a two pronged approach. Pricing transparency needs to be considered from both internal and external perspectives, while embracing a philosophy of collaboration with both team members and customers .
I believe strongly in full transparency on how the price is determined internally. My practice is to engage team members as early as possible in the pricing process. In this way, by the time we are ready to communicate publicly, all the team members are behind the pricing strategy.
I also collaborate with my customers on pricing strategy to make pricing as externally transparent as possible. For example, I talk to customers about their use cases, how a pricing change is going to work for them, and then make iterations by incorporating their input during the whole decision-making process.
Stella: I think of transparency along four dimensions: the visual (how do we show prices and what exactly do we show), the numeric (how do we express the price), the logic (this is about the pricing; why is the price what it is, what is the construct) and the justification (how are these prices compared to others? Is it really a good price).
Ibbaka: Many of us are moving towards AI-like systems in pricing. How is that going to impact pricing transparency and how we think about pricing transparency.
Stella: The adoption of artificial intelligence basically means dynamic pricing. Real-time pricing of the transaction. There needs to be a pact between the customer and the provider, and this pact needs to be around the fact that this pricing mechanism does work and dynamism (real time adjustment of prices) is in the interest of all parties.
When pricing is dynamic and being determined by AI, the pact needs to be embedded in the brand or the brand promise of the provider. This needs to provide the justification for the pricing or the value of the service.
The use of AI, in determining the price, can be for the benefit of everyone. The provider shouldn’t feel or act defensive or apologetic in its comms. There needs to be confidence that what is being done is in the best interests of both parties.
I feel this pact is very important so that there is no pushback down the line in the transaction and in the relationship with the customer.
Kyle: There was a recent event hosted by the economics department at DePaul University, Algorithmic Pricing and Market Competition with UPenn Wharton Professor Joseph Harrington, which touched on some of these issues. Talking about the effects AI can have on pricing, and the potential for collusion. If there are these third-party providers of price optimization tools and everyone in the industry is using the same vendor’s tool, you have a risk of what I’ll call collusion, even though I’m not sure that would count as intent to collude. It could be incidental collusion as everyone is using the same tool to do their pricing.
In terms of transparency, I think the move to AI will hurt pricing transparency, as most of the tools are very black box. Not only to the end customer, but to the people who are using the tools as well. They don’t really know how it’s making this price determination. I see that hurting pricing transparency. That is not necessarily a negative thing. I don’t think that transparency is a moral imperative for companies, it’s more of a strategic choice and something that must represent their brand and what the customers expect of them.
On the other hand, dynamic pricing isn’t necessarily in conflict with transparency. An example I think about a lot to illustrate dynamic pricing is Uber, and they are a well-known user of that type of dynamic pricing. They do a great job at explaining to the customer what type of fare they are getting and how that fare is determined. It’s changed over time how they’ve decided to display that information. This goes back to one of Stella’s points about graphical representation of the price. They are showing you in broad strokes how they are dynamically pricing your ride. Even if use of AI is increasing, in this way it’s not necessarily cutting against transparency.
Ibbaka: What are the risks of pricing transparency and how can those risks be addressed?
Xiaohe: There are certainly risks in practicing pricing transparency. It is a delicate balance. For example, if potential pricing change information is shared too early, and companies subsequently determine not to roll it out, it could undermine customer satisfaction. Customers may have taken some actions based on the prior information shared.
It could also cause some potential impact to companies’ revenue. For example, you may signal to customers that you plan to adjust your pricing. Some of them may respond by holding off on their purchase until the price changes. So have a plan on the impact before communicating it out.
That is why I emphasize that It’s a fine art to balance the level of transparency, which will best support risk mitigation for both customers and companies.
Stella: There are a couple of risks of pricing transparency: first, too much information can easily disrupt the purchase decision. In selecting which information to give and in what way, the company should prioritize the needs of the customer in making the right decision swiftly rather than bombard the customer with too much information. If you think about the entirety of a day, there are so many decisions that a customer needs to make... unnecessary transparency can dilute or confuse the decision process and not serve the customer’s needs.
Second, price is such a subjective matter that the company, in being so transparent about price, can make some unwarranted assumptions about how the customer is supposed to perceive that price. Companies therefore should obsess about their value proposition and convey the value to its full effect -- rather than giving the wrong level of information in the wrong way.
My recommendation is “just enough” transparency.
Kyle: More transparency isn’t necessarily a good thing even for customers. I think one of the big risks of transparency is that too much information can be confusing to customers. Pricing is already accused of being the “sales prevention department.” We want to make sure that our pricing models and metrics are helping customers make the purchase decision, not becoming a barrier to those purchases.
The competition knows our prices anyway and nothing is very secret in today’s world. In my work, we usually assume with clients that competition knows their pricing. With that in mind, transparency can be a positive differentiator, if it is aligned with your brand, and the types of customers you want to go after.
In my book, The New Invisible Hand: Five Revolutions in the Digital Economy, I explore Southwest Airlines and how they make a big deal about “transfarency.” This is the idea that their fares are transparent and that there are no extra fees. They then compare this to their competitors where there can be many additional charges. Interestingly, Southwest does not claim that their end price is the lowest of the lot. They’re making the claim that with transparency and simplicity customers should enjoy that purchase decision more and trust them as a company more. For Southwest at least, this price and pricing transparency is a positive differentiator.
This is true of Uber as well. Uber has changed their approach to transparency over the years, which is interesting as well. They used to have more pricing transparency, so you would be alerted with different prices, not knowing how much a trip would cost until the end.
Around 2016, Uber ditched the multiplier approach and instead showed the end price. That is ditching pricing transparency in favor of price transparency. The strategic decision they made is that it is better for the customer to see what that final price is before they purchase the trip.
This made me think about commercial policy and how customers may delay a purchase if they know too much about how you are pricing your services. This highlights the importance of strategic commercial policy or price variance policy. You want to teach your customers how to buy from you in ways that make you profitable, and if you make more money then you can afford to share some of that back with your customers, in the form of a discount or rebate.
You want the customer to know whether you have free shipping at a certain price and size. You gain useful information as a company that you can feedback into your price variance policy. It’s transparent and you’re not forcing the customer one way or the other, you’re providing them an option and seeing what they choose.
Ibbaka: Regarding the transparency and strategy, GitLab has become more transparent. Can you say a few words about the strategic dimension of the decision?
Xiaohe: Transparency is one core value at GitLab. I’m fortunate that my own belief in the benefits of transparency in pricing aligns with that of GitLab’s, which is a company built on transparency and includes it as one of its key values. Pricing strategy is an essential part of the business strategy. If the overall business strategy is to be transparent, it is then self evident to adopt a transparent pricing strategy.
Ibbaka: If you were speaking to an organization that was considering a more transparent price or pricing approach, what advice would you would give them, in terms of the change management that is needed, both internally and customer-facing?
Kyle: Pricing strategy is part of business strategy. If it is part of your business strategy to be transparent, pricing strategy should reflect that. Going back to Southwest, it’s part of Southwest’s business strategy to be transparent and customer centric. That type of pricing transparency makes sense for them. Thier competitor Spirit Airlines isn’t wrong to charge extra for checked bags or carry-on bags. In some ways that can provide better customer segmentation. If I don’t need to check a bag, maybe I don’t want that baked into the price that I’m paying. Maybe it’s better for me to save that money and go with an airline that gives me the choice.
Getting your pricing strategy to follow or at least be hand-in-hand with your business strategy is critical. Where do you want to be as a company and what types of customers do you want to attract? It is pricing strategy’s job to support that larger mission.
Stella: The first thing I would say is that more transparency is not always better. They really need to decide the right level of transparency for the service they are providing. The right level of transparency that is appropriate for their customer base. The level of transparency that is in tune with their brand. There is no right or wrong here.
With transparency, it’s typically equated to being truthful, but I don’t believe in that translation. Transparency is about style – you can be not so transparent and still reveal enough and be useful to your customers.
Companies really need to feel confidence in how much they’re charging and why they’re charging it and then exude that confidence in their communication with the customer through the value and service of the product. Not to obsess about justifying how they’re pricing it, what they’re pricing, and why.
Ibbaka: Xiaohe, you mentioned that transparency does not just refer to external transparency, it also refers to internal transparency. Can you unfold the notion of internal pricing transparency?
Xiaohe: Sure! Happy to elaborate further on internal transparency. Before we apply the pricing transparency externally, to both your customers and the public, we must implement internal transparency. Pricing is such a cross-functional effort of collaboration with all the internal functional teams, for example, product, sales, marketing and finance.
Transparency builds trust. I bring everyone along the journey from the beginning, so they are a part of it, before making a final decision. They understand very well the benefits and risks of a pricing change, and work side by side with me to consolidate the benefits and mitigate risks. The team members from cross-functional teams are well situated to answer customers’ questions when they reach out either before or after a pricing change.
It’s also critical to prepare your pricing team to be open-minded and embrace different voices when applying pricing transparency internally.
Stella: A lot of my time as a pricing leader has really been spent getting that internal alignment, getting transparency, getting people on board. It’s not just a strategic process, but also a psychological process. One needs to explain why we are choosing this particular pricing approach and particular pricing position.
Sometimes it becomes an exercise in pricing therapy. It’s getting that internal psychological unity -- because if you don’t have that, the external voice crumbles. The strength and coherence of that internal voice reflects on the brand.
Kyle: Pricing is an interstitial function - it needs inputs from everyone because its outputs affect everyone. Having that type of alignment is critical.
Ibbaka: When should we have price pages and what should this page include?
Kyle: It depends. A lot of the work that we do is with B2B companies and there is often a little less transparency. The offerings tend to be complex solutions. Price and pricing transparency, without any understanding of the problem the customer is trying to solve, could just be completely overwhelming.
Amazon Web Services’ pricing page is terrifying. It’s very hard to understand what is going on and very hard for a customer to understand what they’re getting into. If your company structure allows you to talk to a human being and get a better sense of how to serve that customer, it can be the best and most truthful way to address the pricing question. B2C tends to favor a little bit more transparency because the customer has a better sense of what they want, whether they want to buy it. These tend to be faster and less complex sales.
Xiaohe: My core pricing principle is simplicity. For the pricing page, my belief is to make it as simple as possible and not to give too many options crowded with information. Be very clear and concise, have the information easy to find. Provide straightforward descriptions of the offers, the value, and functionality in a language that the customer can easily digest.
Stella: It must be simple and streamlined. What does the customer really have to know? For them to make an easier and more enjoyable purchasing decision and experience, that to me comes first.
Any complexity should completely serve the purpose of familiarizing the customer with the content and service’s value. The variety in pricing should be completely in tune with the richness of the offering and always be subservient to the richness of the service / product.
Pricing should be more of a follower or a supporter, rather than a leader, of what the company is doing or promoting to the customers.
Ibbaka: Thank you. There is some good advice and clarity in what you have said. If I may summarize …
Price and pricing transparency are different things, in some cases price transparency is what matters, in others pricing (process or algorithm) transparency is more relevant.
There are internal and external dimensions to transparency. Begin with internal. If you lack internal transparency you will probably end up confusing your customers.
Pricing should be kept simple and it should support the customer’s buying decision and not get in the way. Too much transparency can sometimes get in the way and confuse the customer.
Value creation and communication come before pricing. Pricing, and transparency, need to support the value proposition and positioning
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