How to get more expensive and not lose customers - 3 steps to higher margins: Dima Melnik (#198)
- Martin Hurych
- před 21 hodinami
- Minut čtení: 30
Increasing prices is the fastest way to higher profits. And yet most companies fear it like the devil. Maybe you are too. You have a great product, reasonable costs, loyal customers... But when it comes to pricing, you'd rather put your head in your shell. That's where the untapped potential lies.
My guest Dima Melnik is not a theorist. He helps companies that have long cycles, complex products and face determined buyers - just like yours. And he knows how not to get cheaper, but to make more money, even in a cooling market.
In the interview we discussed the most pressing issues:
"Don't price the product. Price according to the customer. And simplify the offer. You'll sell for many times as much."
Dima Melnik | pricing consultant
How to get more expensive and not lose customers - 3 steps to higher margins
(transcript)
What is Dim's superpower that is not known?
Martin Hurych
Before we get started, what's your secret superpower that few people know about?
Dima Melnik
I think it's an obsession with customers. I used to be terrified of it, but a colleague once taught me years ago that I had to get out of my bubble, go to customers and interview them. I'm a foreigner, I've been in the Czech Republic for 17 years, so it was really challenging for me to go and talk to people. Eventually I learned how to do it and now I see that I have that superpower because every time I talk to any company and when I start talking about talking to customers, they're silent. So what I ended up doing is I don't talk about it at all during the training, I just give them the instructions and whoever is interested can go through it. People are scared of it, nobody wants to do it, get out of that comfort zone, they're all obsessed with their product, they love it, they love their company, they're excited, but then they can't see out of that bubble. That's where I see the biggest impact, when I go to those customers and then I text my former colleague and thank him for teaching me all those years ago.
Why did he leave Rohlík.cz and go out on his own?
Martin Hurych
Before we get to customers and pricing, how does it happen that you decide to leave an adored company like Rohlik and stand on your own two feet?
Dima Melnik
I was managing a team of developers, thinking about premium subscription and loyalty strategies, but I also got into that bubble of not seeing the customer anymore. I was in that daily routine and I wanted to step out and at the same time I wanted to help more companies because I knew that in one year I was able to help dozens of companies. Then when I was on vacation
in Egypt and we took a long bus ride to see the sights, so I had time to think, I took a piece of paper, put together some pros and cons of freelancing, and I decided to go for it.
What is pricing really?
Martin Hurych
Can we simply explain to my bubble what real pricing actually is? Because we were talking here before the shoot that a lot of people think of pricing as playing with Excel, with costs, with sticking some margin on and printing a price list. What do you think pricing is?
Dima Melnik
I see it too, because the word price is in pricing, so everybody thinks it's about the number and the most common question is what is the optimal price, which for me the optimal price doesn't exist. There's always an opportunity to offer more options, more products to different customers and make more money on that. I see how companies approach pricing, the most common example is I have a great product that I love, I look at the cost, I look at the competition, I stick a price tag on it and we sell it.
Marketing is about finding the right target group, reaching them and doing some advertising.
But I learned years ago that there is a slightly different approach and that is to first look at the customer, find out who I want to sell to, then tailor the product to them and then stick a price tag on the end. A nice example is the Garmin watch, everybody knows the Garmin watch and there's a big difference from the Apple watch because Apple has one product for everybody. Garmin looked at what customer groups there are and said here we have a golfer and the golfer wants slightly different features, while it's still a watch. The basis of Garmin is GPS navigation, it's the same technology, they just wrapped it up in a little bit different package, added extra graphics, and they're already selling the watch at multiples of the price.
Why are companies afraid of price increases?
Martin Hurych
What do you think is behind the fact that when a business owner or director wants to increase turnover or profit, the primary thing everyone thinks about is more meetings, more sales, more advertising, but such a simple thing as price increases are feared like hell?
Dima Melnik
I used to think that most people were afraid of spiders or the dark or public appearances, but then I found out that absolutely every company is afraid of getting more expensive. I hear the same arguments over and over, those customers will be upset, they'll leave, we'll lose them. I heard from a friend of mine that in Japan, what happened was that a supplier called and said they should finally raise the price because in Japan companies are also afraid to raise the price. Here the supplier won't call and say that, so we have to do it.
This fear arises because companies do not have a strategy for this. I was just dealing with a big company that said it wasn't going to make it more expensive for its current customers, that it had already done it once and it was a big mistake because customers started leaving. When I started to untangle what happened there all those years ago, I found that there was first one wave of price increases that was successful because it was by something like 10, 15%. Then there was another wave that came quickly, which was already significant and across the board. The company in general
she didn't see that somebody's price went up, maybe double or triple, and then there was this problem. So one thing is strategy, not to be afraid of it, if it's a software company, maybe they can make it more expensive for the new customers first and leave the current ones where they are, but it's already more expensive. They've already started testing new price points and getting higher profits from new customers.
The second thing, with those existing customers, you can also prepare, look at those customers, what the new pricing will do to them. One goal may be to simplify the pricing, to convert everybody to the new pricing, but give them some discounts, benefits, so that the price increase doesn't hurt so much.
The third thing is communication. The worst thing that can happen is you send an email to your customers, a message, we're going to go up 10% on November 1st, cheers. That happened to Netflix once, customers were freaked out, so when Netflix did the second price increase, they announced it and said they're not going to raise the price until 6 months later, which then 6 months later nobody addressed it. So I help companies build migration communications and that's email and instructions to the sales team on what to tell customers. There's a few points why we're getting more expensive, I have to reassure customers that we're the best in the market, reassure them not to even think about the competition, there's no point in leaving, say we're going to do some new things, we're not standing still. The product is evolving, again reassure them that we are delivering that value, ideally say that something has improved in that product or service, add something extra and then say the negative message and at the end maybe give some more reward, bonus, discount. Then the communication is completely different and customers see more positive messages than negative ones and that goes through perfectly fine. Now in one company we had customer churn after a price increase of less than half a percent.
How to price in a cooling market?
Martin Hurych
Now my listeners and viewers will think that we have fallen from the cherry tree to the sign, because especially on LinkedIn there is a big storm, for example engineering is typically cooling down, the IT people are in a similar situation, the big leverage is now with the buyers, prices are going down and they have to get cheaper. In such a situation, how do you get cheaper in a cooling market?
Dima Melnik
You have to be careful with discounting, for example, I often see one mistake with manufacturing companies. They get an order and the order is big enough, they calculate some discount internally because they have to give a volume discount, they give the customer a price, but they don't say anything about the discount. The extreme that I've experienced, customers were getting up to 82% off without knowing anything about it. On the other side sits a buyer who has a business objective to negotiate a discount, that's the extreme Czech because quite often they have for example a volume discount and an individual discount and they put that in their KPIs at the end of the year. When that buyer sees that the discount is 0 and they don't know anything about it, then of course they negotiate and they push. One thing that can help before you send that sales offer is to show what discount you already give and tell the reason.
This is a volume discount, when you buy a thousand machines or more here we give a 30% discount. For example, we even quite often do a discount table where we know how far we can go, because the moment the sales team doesn't have it in their hands, the buyer can push the discount we didn't want to go. He may say he wants 50% off or 60% off. When we prepare that spreadsheet, we know that that customer has to order that many units first. Sometimes we even put that spreadsheet in the quote so he can see that he doesn't have a chance to push the 50% discount because he would have to order 100,000 units. Or we do things like slowing down the discount, it's 35%, 38, 39, 39.5, so they can see that the train doesn't go over 40%.
Martin Hurych
That's on the cheapening side, I understand that. But here we are on the offensive side and we want to raise prices, so how do we raise prices properly in a cooling market so that the customer ideally understands, accepts and is still excited to buy at a lower price?
Dima Melnik
Ideally, as the price increases to increase the value, it goes hand in hand.
Martin Hurych
But what if all the buyers tell you that value doesn't exist, that they only care about price, that value is a standard that we have to deliver anyway?
Dima Melnik
I hear that all the time. I'm also working on a project right now that says 99% of the reasons for bid rejection is price. I absolutely don't believe that because there are always some factors and when I start talking to these end customers, I discover that speed of response, warranty, service, being able to store some products in stock so they don't have to pay up front is important. Then we discover a few things like that, that if we package them up, suddenly we can increase the perceived value. There's a difference between the value of that product, which may be a commodity, but then you can package some other services and benefits on top of that.
What is the most common pricing mistake?
Martin Hurych
Let's go through it step by step, so that this part is partly a guide on how to build prices. In the bubble of engineering, technology and manufacturing companies, what do you think is the most common pricing mistake?
Dima Melnik
I think that technology companies in particular are quite often obsessed with their product, they are too much in love with the product and they don't see the customer. Whenever I talk to any company manager or CEO, they're able to talk for an hour about the product, but when I ask about the customer, there are already some gaps and the information is very limited. The biggest impact can be made when we turn that pricing around and forget about the product for a while and go to the customers to find out what they want. There are all sorts of beautiful situations where, for example, we discover that there are different groups of customers and each group wants something different. One group is able to pay a lot more, like some real estate agents and investors, and then we find that investors are able to pay an order of magnitude more for some software service and we throw in something extra that they want and we're charging four times more.
Martin Hurych
Isn't the segment then upset when it discovers that another segment is selling the same service at prices that are many times lower?
Dima Melnik
It must not look like price discrimination, I don't like that and never recommend it. It's not right what some comparison sites do, for example airline comparison sites, where you set up a VPN and find out that if you are in Iran or Russia you can buy a ticket from the Czech Republic to Italy much cheaper. There has to be that difference in value. That's the magic of it, going to those customers and seeing how they perceive it. For example, I dealt with a company that was in a situation where they were discounting because they saw competitive pressure. Then I went to those customers and found out that the pressure to make it cheaper is there because it's created by a lot of small customers who are audible, complaining, and there are a lot of them, but they make maybe 10% of the profit.
Then there's another segment of customers who are middle-of-the-road, and they have a dream, they want to automate their processes, they're already more advanced, they want to save money, they're very rational. Then there's a third segment, which is the big international companies that just don't respond with feedback. It was necessary to have an appointment with them, a personal contact, a conversation, and they said that they want to be the most innovative, they want to innovate, they want to show off their product, they want customers to try a machine when they come to them, and so on. Suddenly we noticed that there were these three directions and we started repackaging the same product in a different way to satisfy those three segments. We had already created those price differences, multiple price differences, and we were already able to sell the product at three times the price that the company was ever selling.
How to do customer segment research?
Martin Hurych
How should I help myself in this step as quickly as possible, should I get an outsourced person to do it or should I go to the customers myself? For me honestly this is a function of a standard salesperson or internal marketer plus the owner who should know their customers from top to bottom. But I see that these companies don't really go into the market and ask questions. So how do I get started as quickly as possible to find these segments that may be a little different?
Dima Melnik
Salespeople can do it, I think they're capable of doing it, but the important thing is to set a goal of what we want to find out, arrange to have a conversation with that customer and say it's not going to be a sale, we just want to find out what's important to them and it's an open discussion. There's really no need to pay attention to any methodology of questions and quite often it's the case that I have maybe 20 questions pre prepared but with one customer I'll only ask 5 because one sentence in an hour long conversation can make all the difference. That one sentence can change the whole thing and suddenly we get ideas on how to improve our product, what they're willing to pay more for because it adds value to them. Certainly those breakdowns shouldn't be done by someone in the finance department, which most often that pricing falls under the finance department, but rather it's somewhere at the intersection of marketing and sales. When I work with companies, I work with marketing, I work with sales, I work with finance, or I work with product managers if they're technology companies.
Which segments are specific?
Martin Hurych
What do you say to the objection, at least in my practice, which is very often raised or ventilated, this will not work for us, we are a specific business?
Dima Melnik
I'm very happy to hear that because every company says that. We came to Egypt once on a project and it was a company that made and sold jewelry. The marketing director asked us how many jewelry sales projects we had done in the Middle East. Of course we had 0, but that's what it's all about, coming to that company, looking at the industry and in a few weeks finding those opportunities. I've been doing this for years, working for a lot of companies in absolutely different industries and trying to bring that know-how, that which has been tried elsewhere, to other industries.
For example, software companies have an excellent track record of sometimes having price lists posted on the web, which can be tested. They do A/B tests, surveys, and we see that the most important finding is that the price lists are terribly complicated. The moment customers are complex, they don't buy, our conversion rate drops, and having learned this years ago in the online business, I then transfer it to the offline business, to B2B. I say, the price list is complicated, we have to simplify it, if customers don't understand it, they won't buy or they will buy the cheapest. So I think you should go into it with an open mind and look at different examples from around the world and choose for yourself what is applicable. I recently did a training in a company and at the end of the training I saw that some of the managers thought it wouldn't work. I told them to let it go through their heads, don't jump to any conclusions and see the next day. Two days later, the head of one department called me and said he had turned things around and already saw the opportunity there.
How to build a winning bid for a tender?
Martin Hurych
At this point, we should probably note that Dima has put together a great bonus with a bunch of tips on what to use in pricing and pricing and its communication. Let's pick out a few things here, let's say we're going to be dealing with custom manufacturing, whether it's software or some custom engineering. Should I put a bid out to tender, what should it look like to stand out from the crowd and have a much better chance of coming through as the winning bid?
Dima Melnik
I'll give a real example, because we dealt with this a few weeks ago. A company went out to tender, bid tens of millions, they had already prepared a proposal and they called me in to see it. I looked at it and I see it's very technical and the number one question for me was who was going to read the bid. We found out that Ms. Catherine, who is from the business department, is going to read the bid.
I told us to look at the requirements she had specified and when we went through it we found that she required business stuff. She wanted to see some assurance that the company could maybe deliver some development quickly, she wanted to see that the company could maintain the service for 3, 5 years, she wanted to see some guarantees and those were all business things. When I looked at the bid, it was purely technical, so we had to turn that ship around and start punching out the business stuff, literally what they had written in the RFP, and the bid changed. We even edited the references because we saw what she wanted in that RFP, we even punched out the key points there, that here we launched it in 3 months, here we maintained it for 10 years and that helped tremendously.
Martin Hurych
So the offer is written to the person who will read it. What if there's more than one? Because then I see that the offer, before you get to the most important thing, is actually a long argumentative battle. It's a bunch of definitely important stuff, but by the time you get to the end, you've forgotten what's at the beginning. So what would an ideal offer look like for a company where that offer goes through the hands of 5 to 9 people and everyone has some kind of say in it?
Dima Melnik
The menu may well be long, I have 2 recommendations tried, one thing to start with is why your business at all. That's often forgotten, we go straight into some technical details and that's the first page and that's where we try to write the big why and the 3 important things because that's where we have the focus on that first page. The next thing maybe the customer doesn't read and what the person on the second page is going to do, he's going to go through all those pages, he's going to come to page 36 where the price is and he's going to research it there. We know that's going to happen, so we have another trick there, when he comes to that price list, we're going to write out in huge print in one sentence why choose us or what dream we're going to fulfill for that customer. Message in one sentence because we know we have their attention there and before they look at the price, we communicate the value as well.
Does it make sense to give variant offers?
Martin Hurych
So that assumes that you've done a good job before and that you really know what the customer wants, that they don't want software, but that the software solves something for them. Whenever I open the internet, because the e-commerce and SaaS scene is great at this, I always see not one price, but I see a variant price. Does it make sense even here in B2B when you go to tender to give a variant price?
Dima Melnik
It depends, sometimes it happens that a company asks for a specific number of manday and there is no way to dodge, there is a real requirement. But sometimes we do those variations because when the customer sees one price, our brain works in such a way that we are not able to evaluate it. We always need to compare that price to something, so we'll compare it to competitors and spend more time comparing it to competitors. The moment we put some simple options out there, the customer can spend more time comparing those options and paying more attention to what we have to offer.
At the same time, it's a great exercise when a company has one option, so they don't think about those additional services. The moment they set the goal that they have to do 3 variants and do that mental exercise, they suddenly discover that there are a lot of other important things. They can add a guarantee, they can add a faster payoff, or if the customer wants us to jump on their project right away, it's going to be some more expensive option. If he doesn't want to pay 100% up front and only 50, that's going to be an even more expensive option. Suddenly there's some room for creativity. You still have to think about the fact that customers don't have anything to compare that price to.
Apart from these variants, there is another thing where we try to find an anchor for the customer to compare the price with. To give you an example, we have sold technology solutions to hospitals in the tens of millions. It was software, so we found a way to go with some sort of monthly payment, which would be somewhere in the hundreds of thousands of kroner per month, so that amount was high. We sat in a workshop with the management and I told them that the customer had nothing to compare it to. So we came up with that maybe they will compare it to a doctor's salary, but when they compare it to a doctor's salary, they suddenly think it's too expensive and they'd rather pay for a live person than a gadget.
So we turned it around and started looking for something to compare it to, we needed to find something tiny to show that the price was low. We did the math, we discovered some number of visits, number of exams, we came to the conclusion that our machine would only cost five hundred per exam. That sold the whole commercial proposition, because when the CFO saw that it was five hundred per examination, he knew immediately that that was a small enough amount and that they would clearly cover it. He was no longer looking at the fact that it was hundreds of thousands a month and it was tens of millions that he was going to have to pay for a year in advance or 2 years in advance.
How does the (in)price anchor work?
Martin Hurych
When you say anchor, you usually mean a price anchor, you're talking about money. So you're saying it's okay to relate it to something non-price?
Dima Melnik
No problem. There are two types of anchors for me, one is some big number. We shoot for a big number first, we have 100,000 customers, and then we show a price that's an order of magnitude lower. One great example is a company called Basecamp. I'm going through the history of their website 20 years ago, they've replaced the pricing, they've replaced every marketing claim, every sticker, everything on the site looks completely different. Just one thing that they A/B tested, they tried, they gave away and they put back, in front of that pricing it says in huge letters, this week another 1,700 companies joined Basecamp. That's in bold huge print and then they go and that $1,900 price doesn't look like a big price anymore. So that's one example where we're looking for a big number to put.
The other way, compare that price to something smaller. The best example from life is Prague Integrated Transport, years ago they increased the price of the annual coupon, which cost CZK 1,700, and went up to CZK 3,500. I think it was a brilliant trick to sell it, because they said it was only CZK 10 a day, and they showed a picture of a ten crowns, so customers thought it was no big deal. They also compared it to the 90-minute ticket, which is more expensive, and suddenly people accepted the increase. So sometimes we try to find that low number to compare it to, even if it's the price of coffee. In the case of the museum, where we were also giving a big offer for a big amount, we looked at how many visitors those museums have roughly per year from publicly available data and we told them it was 0.5 euros per visitor.
What is the "4 beers and enough" method?
Martin Hurych
It occurs to me how poorly communicated the increase in TV fees was, which is 15 CZK a month and everyone is making it a political issue. So, speaking of variant offers, I'm intrigued by what you call the 4 beers maximum and that's enough. Can you explain that?
Dima Melnik
When I run training sessions, people ask how many variants they have to put on the menu. I have examples where one is not optimal, 2 is fine, but in every training I show 2 variants, like coffee, and most people choose the smallest one. In my experience if a company has 2 offers, 80-90% will choose the cheapest one. The moment a company offers 3 options, most often those customers will slide to the middle one because it's safe, it's not the most expensive, it's not the cheapest. Smart companies know this and build the commercial offer that way, Costa Coffee, Starbucks deliberately set the price points so that the middle option is the most attractive. Even the coffee content in the middle cup and the biggest cup is exactly the same, there's just a little extra milk.
Then the question naturally arises how many variants is the maximum and I say 4 beers and enough. I discovered one research that compared 4 versus 5 variants, if you put 4 cups next to each other you can see at a glance that there are 4, the brain doesn't take a second to calculate anything. But when you show 5 cups, it takes a while and the brain really has to do the math.
I first found this out about 10 years ago when we did our first survey and A/B test on price lists, we were testing it in banking at the time. There were 2 options and in the second option we added an extra benefit, it was a fifth benefit that was strong and it made us want to sell the middle and most expensive option.
Then we looked at the results and found out that the B version was a failure, and when we looked back to see why, we found out that it was more challenging. By the fifth benefit, customers were already finding it challenging to compare and were buying nothing rather than buying a variant. So beware, most price lists are terribly complex, they're demanding, and that's why they don't sell as much.
Do we behave differently at home than we do at work?
Martin Hurych
It's probably worth taking a little detour here. When I shop for something on Rohlik, then go to buy some clothes somewhere or go to look at a ticket, then go to pick up some corporate solution at the company, I very likely still behave the same way. I would be wrong, do you see different buying behaviours within say B2B and B2C?
Dima Melnik
I see that quite often we think that the buying behaviour is completely different, but then I find out that it is very similar. I've had conversations with HR managers at various companies that allocate a budget in the hundreds of thousands a year to purchase a particular service. When I talked to them, I found that there is absolute blindness. Half of them didn't see the cheapest option in our offer just because we hid it down a bit and they didn't spend hours or even tens of minutes on it, they really spent seconds on it. So it must be simple for them, and at the same time, the moment there are some complex technical or marketing concepts, those HR managers knew absolutely nothing about it.
Why should the most expensive option be the first?
Martin Hurych
The other thing that surprised me a lot in the bonus, I'm going to go back to the e-commerce we all use on a daily basis or when you're buying some SaaS service. In all things, the first free or cheapest option and enterprise is on the right, so you go from cheapest to most expensive option. You have it backwards, what makes you do that? You always say the most expensive option should be first, what's behind that?
Dima Melnik
Let me tell you a story first. I walk into my favorite coffee shop and see that the waitress has discovered the instructions on the terminal on page 268 on how to turn on tipping. It lit up 10, 15, and 20% and I asked if she would really get it if I paid with my card and she said yes. There's an anchor principle where the first option a customer sees is what all the others derive from. I told her, let's flip the variants, let's put 20 first, then 15, then 10. I get there in 2 weeks, she's laughing and says I can't believe what happened. Before that of course everyone clicked on the 10 because it was the leftmost option, it was the cheapest option, if someone was leaving a tip they chose the 10%. The moment we flipped it around, because we read from left to right, I assume people saw the 20 first, they thought it was expensive, they were probably a little embarrassed about the 10, so they left the middle 15. They all started leaving a 15% tip instead of the 10, which is 50% more by the way.
We think that the first option is always the standard one, that's the main offer and then the others are more expensive, better in some ways and the last one is a complete waste. When we turn it around, suddenly we are showing the most expensive product, but at the same time we are showing the best product. We show the best service, the best option and then we say, this is a little bit worse, this is even more limited and this is the very basic. Just simply flipping those variants can increase the revenue, but there's a limitation, if those prices are an order of magnitude different, it's not going to work. The moment you have a variant for tens of thousands and then you have something for millions, it can mess up the price image, the perception of price. So it's better to start with the classic approach from cheapest to most expensive, but when the prices are in the same order of magnitude, you can start with the most expensive option.
Martin Hurych
Actually, I've realized that, paradoxically, I behave the same way. I start reading, from left to right, I'm already starting to slow down, and when you push the most expensive stuff on me, I actually feel bad for going for the cheap stuff.
Dima Melnik
It's a great principle and it works everywhere. My experience with the pizza place, if we come in and we don't like the first pizza, we don't go back. My wife and I had an experience where we went to a little pizzeria somewhere in Portugal and we tried some pizza and it was divine, the best pizza we've ever tried. Then the second and the third and the fourth were not good at all, but that first experience left us with the impression that all the other products would be great too. So beware of the cheapest option, you put it first, but if it's bad and the customer doesn't like it, they won't want to try the other options.
When is an offer manipulative?
Martin Hurych
I'm in an environment of very analytical people who go after hard data rather than soft behavior. A lot of people may tell you that it's unfair to mislead the customer where they don't want to go completely. When is it over the line and when is it still taken as self-interest?
Dima Melnik
I don't like to hear that it's some kind of manipulation, I'm trying to help a company pitch and sell their best service because quite often those companies are embarrassed or scared and start with the worst. Quite often they don't even realize they have that value. I help them find those opportunities and those spaces to highlight those benefits, communicate that and start with the best. So I think it's perfectly fine, to me the only discrimination is if we give different customers different prices. At the same time, data-wise, that's the problem I'm facing because then we have a two-year history, we have a lot of customers and we sold to one for 8 million, to another for 15 million and now nobody knows why. This is a problem, anyway, the things we've been talking about here are perfectly fine.
How to stratify the prices on offer?
Martin Hurych
One more thing I can think of, I read some recommendations a long time ago and I would like to know your opinion on the ideal price stratification between those options, between the most expensive and the cheapest. Do you have a tip on that?
Dima Melnik
I don't have a tip on the ideal split, I've also read various tips that it needs to be a multiple of 2, multiple of 3, but it depends on the offer. Every company is different and there are 2 options. Firstly, I always start with customer segments, if they are completely different, the prices there can be an order of magnitude different. For example, we have 3 offers and one is targeting one segment, one is targeting another and the third is targeting some of the largest segment and those prices will be orders of magnitude different. But we may have one segment that will not pay triple the price, but will only pay at most 10, 20% more, so we are playing with the fact that the prices are somewhere in between.
We use psychological boundaries and these are such that, for example, 2 options are very close together in price but differ a lot in value. It's a tip I use occasionally and it's meant to simplify the customer's decision. I don't want the customer to spend a lot of time with the offer, I want them to discover a great offer at a good price. So when they see that one option has a lot more value and just a little bit more price, they're more likely to choose that option.
Martin Hurych
There, it's fair to say you have to watch your margin internally. Is that right?
Dima Melnik
Of course, and it's good that you're talking about it, because I also once had an experience in project banking where a huge team was pushing a particular variant into sales. The company was convinced that it was more profitable and when we did a data analysis, we found out that it wasn't and that a completely different variant was more profitable because they were getting the costs wrong. The more expensive option must be more profitable for the company.
Martin Hurych
Paradoxically, it's not really a no-brainer, because what I see is that often all you have to do is add something that has tremendous value in the customer's eyes, but almost zero cost on your end.
Dima Melnik
I have a great example, I didn't believe it would turn out so positive either, but we discovered one thing, a company that sells legal services, and that is priority processing of the application. I thought that would be kind of the icing on the cake, and if we add that to the most expensive option, about 5% of the customers will drop there because the price difference is significant. But in the end, it turned out that tens of percent of customers were choosing that option and wanted that priority processing of the application, which meant nothing to us in terms of cost.
Martin Hurych
Just a little bit back to the tip, what do you think would happen if it wasn't 20, 15, 10, but it was 20, 17, 10?
Dima Melnik
I think customers would click on the middle option anyway, but we can try it out.
What are some other tips for winning bids?
Martin Hurych
So we say hello to the lady. So we're doing custom development, custom manufacturing, we're going out to tender, we've covered everything, or would you like to pick out a trick that we should start using?
Dima Melnik
The biggest recommendation from me, don't sell a product, sell dreams to customers. A simple thing to do is wording, names, because names also sell. The most common names of the different variants of the product that you see are standard, basic and some premium, you see that everywhere. I have a nice comparison, if you walk into a pizza place and you see a pizza called standard and premium, you won't be able to choose and you'll have to read all the ingredients. But when you see that the pizza is called Margherita or Quattro formaggi, you know what's inside. So I'm trying to find the right names to match the dreams of those customers.
For example, in one company we called variants Manage, for those who just want to manage the machines and nothing more, Automate, for those who want to automate the tools, and Innovate, for those who want to innovate. Suddenly, just from that name alone, we could sell the solution without describing all the benefits and advantages. You can also call it by segments, for example. This is for developers, this is for investors and this is for some real estate agents. By the way, Decathlon does this very well. When you go to buy running shoes, you will see that there are shoes for beginners, intermediate and then for sports runners.
What if you have a price list of thousands of items?
Martin Hurych
I think we've got that covered. Still to come into their own in a few minutes even those who have, for example, price list production, just yesterday I was in a company where the price list is about tens of thousands of items. How do you treat such things?
Dima Melnik
I've had one collaboration where it was a massacre, Excel spreadsheet, a huge amount of items, a lot of fees and even there we may have found a way to combine it into some packages. There were for example some 3 price lists for 3 different products, then there's some add-on, a price list with additional services and that's completely next to it. We had some main offer that we bundled a bunch of items into those packages at one time. Because the problem with the itemized price list is that when the customer sees that there are 20 some charges, they're looking for what to cross out. But when we give him a choice of options, it's a whole different deal because we're talking about what option he's going to choose.
You have to be careful with the description, because when it comes to itemised price lists, there is usually a lot of text and usually the text is very complicated, technical and uses various abbreviations. In one company we dealt with a service called Middleware server license sales service ordering. It was a massacre, nobody knew what it was and we had to sit down with someone from sales who spoke a bit of human language or marketing and find a simple term to explain it. You have to edit those texts, nowadays you just need a copywriter or even ChatGPT to help you simplify it because there might be a completely different person sitting on the other side who doesn't understand it at all.
Martin Hurych
I've heard somewhere that it's not a good idea to completely give these names too layman's terms, because it can make the other side look like a fool. That is, almost like everything in marketing, you're supposed to speak the language of that tribe, you're supposed to understand how they speak and fit that pricing to their language. Is that right?
Dima Melnik
Definitely.
Summary
Martin Hurych
If we were to sum up this episode in a few final recommendations, what would they be?
Dima Melnik
Don't price the product, price the customers. Try to think back on recent deals, appointments that went well and appointments that didn't go well, and you might find that the one that didn't go well, the customer was small and had no budget and maybe drove cheap cars. Where it did go well, it was a big successful company and they had luxury cars, so it wasn't your product at all, it was the customers.
Be careful about it, think about it, sometimes we even try to estimate what those customers budget, what they're going to get out of it. You can price through the customer and find that way, find that extra value there and sell to those customers at a higher price. A nice example, one company created a product that they were selling for tens of thousands of euros, but when I went to find out who their customers were, I found out that they were selling it to small businesses. Of course they were not successful and had to turn the ship around, the way to go was clearly to go after a different customer segment. It wasn't about the product, they didn't change the product, but the minute they got some smart guys on the sales team and went to the big companies, they started to do well and started to sell it.
Second recommendation, simplify the commercial offer, simplify the pricing. Quite often customers only have a second to do that and nobody wants to read a 30-page file and then the same thing from 10 other companies. Try to get the important information out there in one sentence, try to find a way to simplify it and describe why your company, why your solution and what dreams you're going to fulfill for that customer.
Martin Hurych
Value the customer and simplify the offer, I don't think I could have done a better job today. Thank you so much for the insights into psychology and pricing, I wish you well and may your customers price like crazy.
Dima Melnik
Thank you.
Martin Hurych
So you see, one of the least used levers to increase profitability in business, in my opinion, has been discussed here today in detail from the top, from the bottom, from the right, from the left. If Dima and I got you excited, poked you somewhere, maybe even hurt you a little, we did our job well. In that case, give me a lick, give a subscription, or forward this piece to a friend, a buddy, a colleague, where it can be useful. Don't forget the newsletter offer, if you want to join the more than 1,500 owners and directors of businesses like yours, check out thewww.martinhurych.com/ newsletter page and sign up. Last but not least I can't forget a really great bonus, it's a complete e-book on how to approach pricing. So if you've got any ideas in your head about what to do with your pricing going forward, definitely feel free to run over towww.martinhurych.com/zazeh , where that bonus is already hanging by this piece at the moment. I'll just keep my fingers crossed and wish you success with more than just the pricing, thanks.
