On this week’s episode of Inside Outside Innovation, we sit down with Cactus Raazi, Author of the new book, Price: Maximizing Customer Loyalty Through Personal Pricing. We talk about the important, but often overlooked topic of price innovation, and how companies can use technology and experimentation to move from the traditional model of revenue maximization towards that of loyalty maximization. Let’s get started.
Inside Outside Innovation is the podcast to help new innovators navigate what’s next. Each week, we’ll give you a front row seat into what it takes to learn, grow, and thrive in today’s world of accelerating change and uncertainty. Join us as we explore, engage, and experiment with the best and the brightest innovators, entrepreneurs, and pioneering businesses. It’s time to get started.
Interview Transcript with Cactus Raazi, Author of Price: Maximizing Customer Loyalty Through Personal Pricing
Brian Ardinger: Welcome to another episode of Inside Outside Innovation. I’m your host, Brian Ardinger. And as always, we have another amazing guest. Today, we have Cactus Raazi. He is the founder and former CEO of Elephant. Now part of EXOS Financial, and author of the new book, Price: Maximizing Customer Loyalty Through Personal Pricing. Welcome Cactus.
Cactus Raazi: Thank you very much. Appreciate you having me.
Brian Ardinger: Cactus, I’m excited to have you on the show because this is a pretty important topic that doesn’t often get talked about in the innovation front. You know, if you think about pricing, a lot of the pricing models have probably been around for 50 years. And yet when I’m working with startups or people introducing new products, they’re always talking about how do I set my price and that. So, I’m really excited to hear your thoughts on that.
To get started, in the book you talk a lot about, and you encourage companies to look at price differently. So, we’ll dig into the details, but how did you get involved at researching and writing about the topic of price?
Cactus Raazi: You know, it’s interesting. My day job is in financial markets. And what we, myself, and the team have been working on for years are various algorithms to be able to automatically price different bonds at different times of the day for different customers under a wide variety of different conditions.
We started thinking about on the one hand data analytics and I had done a masters program at NYU in business analytics recently. And then on the other hand, I started thinking about the challenges of running a business in today, particularly in the B2C world. But a lot of what I had thinking about also has applications in B2B and really thinking about internet price transparency, and the destructive effects on pricing power for companies, large and small.
And so, I kind of put everything together and started really thinking about why do we think so simplistically around pricing? Why has my professional experience, as you mentioned, generally been a table of old wise men and women sort of guesstimating a price or using a sort of rudimentary cost-plus approach.
And most importantly, I think with everything that’s going on around us, so many of the pricing approaches fail to take into account the individual customer, or they made it an unspoken assumption of homogeneity of the customer base. Or sort of an indifference. I don’t care really who buys this good or service so long as they pay a certain price.
And I don’t think that that’s going to be a useful way of thinking about the world going forward. There’s a whole host of tools at our disposal. Referred to generally as data analytics. And there’s a whole host of new threats that one needs to be thoughtful about, particularly around internet-based price comparison. Browser-based automated discounting. And we could go on and on, we talk about it in the book.
Put these two things together and you think to yourself, look, am I in the business of maximizing the revenue of any potential transaction in the moment, or am I actually in the business of cultivating an increasingly loyal customer base. Such that my enterprise value starts to gravitate towards sort of that have recurring revenue streams.
And this conversation is applicable for businesses, large and small. And we use a lot of examples in the book, anything from a sole proprietorship, maybe a hairstylist, all the way up to multinational corporations, airlines, things like that.
Using a Loyalty Maximization Model
Brian Ardinger: And I love that thought of moving from revenue, maximization to loyalty maximization. And a lot of that probably again, hasn’t been really dealt with because of technology. And now we have some tools and data and that, that we didn’t have at our fingertips to make some of those leaps that we can now. What do you think is holding people back from taking advantage of some of these technologies and actually going towards a more loyalty maximization model?
Cactus Raazi: You know, in my survey of the landscape, I’m not necessarily aware of an impediment to use data in increasingly sophisticated ways. As we all know, there’s so many off the shelf products. There are so many courses, everything from sort of how to use Excel on Coursera, all the way to, you know, a PhD in artificial intelligence or something along those lines at the other extreme. I feel that, particularly when it comes to pricing, just to not give you too general and answer, when it comes to pricing, I feel the fundamental question has yet to be asked, are we doing this correctly?
And have we really unpacked the assumptions of our approach to be thoughtful around whether this is the right approach and whether we should be using a different set of tools. You know, even industries that are renowned for their ability to differentiate with price something. We could use airlines as an example.
And I’m sure at maybe at one point in your career, you were probably some form of a frequent flyer. And I’m sure you would probably agree that while you were perfectly happy to pay different prices, based on various profiles and times of day. That that was not a price for you personally, it was a price meaning that if you were to log into a website, as a loyal customer and I were to log in to the same website you and I were to try and book the same thing, we wouldn’t see a difference in price.
We would see a difference in price on different days or, or, you know, you name it. There’s a variety of obviously supply and demand techniques. And so right there you say, well, that’s a sophisticated industry, but it hasn’t really moved forward with thinking about the customer, rather than thinking about any customer who’s willing to sit in the seat.
And that’s really at the core of the suggestions in the book is to say that step one, start collecting data about your customers. Obviously in an appropriate fashion and in a transparent fashion, such that you can start to identify behaviors, objectives, or any other elements of the customer, which you can then correlate to the types of behaviors you’d like to see from your customer base.
And the book really exists at the level of strategy. And frankly, this conversation exists at the level of strategy. How should we be thinking about some of these questions and are there a new set of tools to be able to answer some really interesting questions around what the right price is, and right is defined as in my case, as maximizing loyalty.
And also at the same time, there’s this elephant in the room, which is the internet, and mobile commerce, and browser extensions, and couponification. And how are we going to react to the impact of these sort of margin destroying developments?
Experimenting with Price
Brian Ardinger: Well, and you’ve seen examples where there have been companies that have been a little bit more in the forefront of changing algorithms and that, to look at pricing. Uber comes to mind with their surge pricing, and obviously that’s trying to maximize supply and demand and things along those lines, but then you have examples when the models go wrong, such that, you know, there’s something that occurs the price to scoot up and, and it caused a PR backlash, for example.
What are you seeing when it comes to companies and how they react to experimenting in this particular realm and the both the good in the bad around that?
Cactus Raazi: Yeah. So, we’ve seen a lot of experimentation with personalization in what I would refer to as the general marketing realm, such as sending people emails or potentially coupons, identifying products that you may or may not be more or less interested in.
And I think that that process is in relatively early stages that traditionally has not really dealt with price with one potential exception. Sometimes you send a premium or a coupon of some sort to say, you know, for you specifically it’s 20% off.
But I may say in my personal experience, this use specifically thing tends to be extremely wide net. So, everyone who has bought a pair of jeans from us in the last five years gets an email that says, great news, our jeans are 20% off. Although that’s a start, I don’t think that that’s nothing to be particularly proud of.
I think, you know, you’re implying a second question, which is if you provide a better experience to your better customer, does that imply you’re potentially providing a degraded experience to your not better customer? And the answer to that I think almost necessarily should be, yes.
At the core of thinking about generating loyalty, almost certainly must be this idea that we have to define who our customer really is or who do we want our customer to be. And we have to ensure that we’re treating that group appropriately. And it may come at the expense of people who have not demonstrated any loyalty.
When we think about loyalty, we don’t necessarily need to define it as someone who has patronized our business for a good or a service, for example, on a very regular basis for a very long time. In fact, I’d argue even a second visit is the beginnings of an attempt at loyalty. This is now a recurring customer is different than a first visit customer.
It’s easy to go from there to really thinking about, well, maybe we don’t define loyalty at second, but at the third visit or at the third purchase of a good or a service, we should start to really think of this customer in a differentiated manner. This person’s trying to do business with us, and we should be rewarding them.
I think, you know, also it’s interesting that you didn’t ask, but I’ll just bring up. There’s been so much time and energy put into recapturing customers whom you have lost. This is generally referred to as churn management in the industry. And so much time and energy into predicting and avoiding churn, which tends to be, you know, a small number is definitely single digit percentage of your customer base in any given time period. If you have numbers greater than that, you actually have a product problem.
But I would argue that the amount of time and energy you put into that portion of your customer base could potentially actually be better, spent ensuring the loyalty of your customers who have already demonstrated such loyalty. If this is the 72nd month in a row, you’ve simply paid your T-Mobile bill. Why are you not receiving some form of an indication that the company values you? And I believe that rather than giving me a coupon that tells me I’ll get $10 off at Chipotle, I would rather just receive a discounted bill.
Brian Ardinger: Yeah, absolutely. What are your thoughts from the perspective of how do you set pricing in the early days when you don’t have those first customers or the early data is, is a little looser or less relevant or available. And specifically like on the startup side versus existing business side.
Cactus Raazi: Yeah. You know, it’s interesting, you say that startup pricing is very challenging, and it is a topic that many VCs or I would say professional startup investors try to give startups help with. Sort of the heuristic approach, but obviously you need to contemplate what are the costs of various substitutes or alternative paths to solve, whatever problem it is that you’re solving.
Another perspective would be of course, to think about how much value you’re creating for the purchaser of your good or service. What is the value creation and how much of that do you think you can capture, particularly if you’re creating an entirely new category, then the pricing question is one that needs to be approached with a degree of sensitivity?
One of the things I would say, so I don’t know that there’s a one size fits all answer, but I’m trying to give you a few parameters of the conversation. I oftentimes get the implication that pricing is a obviously a sensitive or touchy topic. And I like to suggest to startups, the companies or the customers that you choose to do business with initially, you should feel comfortable in your pricing conversations, because if they’re not interested in being a, let’s just say for lack of a more descriptive word, a good customer. Initially, they might not be your best place to start your commercial journey.
Startup Pricing Strategy
Brian Ardinger: Well, and the fact that I think a lot of startups are afraid to experiment early on for fear of losing that first customer when it comes to price and that. But. At the early days, you don’t know what you don’t know. And I’ve heard Eric Reese tell a story of going in and working with a company, and he basically just said, double the price, let’s run an experiment. It turns out more people bought it and let’s double it again. And it turns out more people bought it. But without that experimentation, your assumptions really can’t play out.
Cactus Raazi: So interesting. You asked the question I was asked about a week ago. What is your one piece of advice to companies that are starting out? It was a more of a sales conversation, than specifically sort of startup, but I said, don’t be afraid to ask for more in terms of prices. That you know, again as salespeople, we all tend to be a little bit more focused on getting to yes, then perhaps we need to be. And I think there’s a lot that you can learn from a customer saying no, so long as they described the know or want to be your partner in getting to S, starting from a place of no is not a problem.
It’s very difficult to propose a price, have the customer say yes, you can say, well, in that case, maybe I should raise it. Right. That’s a very awkward conversation. But to propose a price that you’d be really thrilled with, and that would really put your business on a very sound footing, and to have your potential for first customer push back, and to understand why there’s pushback, I think can be obviously very illuminating as to what you should do on a going forward basis.
And you’ll always have the option of saying, look for a first customer or for the following reasons, or since you’ve been so transparent, alternatively, as well, you can say, we’ll go with your lower price, but let’s create some conditions for success that allow us to raise prices, you know, so long as we meet certain conditions. You can kind of create a structure to get you to where you want to be, but in a manner that the customer feels is aligned with their interests.
Companies doing Pricing Right
Brian Ardinger: Absolutely. So, in the book you give a lot of great examples. Well, actually good and bad examples of how companies have taken on this topic of price. Talk about Apple and Nordstrom’s and the airlines. What are some companies that are doing it better than others?
Cactus Raazi: I haven’t seen particularly great examples specifically around price, but I have seen some companies do a great job of customer engagement with their digital platforms. I think a pretty good example of that most people would agree with is Starbucks.
They have a really user-friendly app. Funny enough when you get this thing to recharge automatically, I’ve noticed that instead of recharging the app at about a dollar, it recharges it about 20 bucks. And if you multiply that by billions of people, if interest rates weren’t at zero, that would be a lucrative business unto itself. That’s a side note.
They do a great job of encouraging the use of the app. My criticism of course, is rather than giving me stars, which I can eventually cash in for one of your goods. It would be actually an even bigger thrill, if when I zapped my app, I just get a different price, as a basis of my behavior with Starbucks, sort of how I’m engaging your organization.
That would be my assertion. So, I think they do a great job of collecting the information. I think they provide an excellent experience. They’ve had widespread adoption of this platform of theirs, and I believe that the next step would be to try to further increase their customization down to the customer level.
Industries Ripe for Price Innovation
Brian Ardinger: You’ve mentioned some examples in the B2C realm, and that. Are there particular industries that are more ripe for some of these pricing innovations?
Cactus Raazi: So long as you define your businesses, one where you encourage repeat customer type activity. If you’re in the business of building nuclear reactors, I don’t think I have a lot to offer because that’s such a, one-off kind of a thing.
On the other hand, there are a lot of businesses that have repeat customers in some way, shape or form. And I think those are the businesses for whom this approach is most applicable. And I think in the context of startups, so often we think about SaaS businesses or sort of subscription style businesses.
I mean, that’s all the rage with many, not all startups, but many startups obviously. And some of these ideas also apply. I believe even when you have a subscription business and you propose that there is a price, it’s not necessarily the case that that needs to be offered to all customers at all times under all conditions.
So even there, I would think, you know, look, we can always advertise an initial price and then start to really think about our customer base. Why are they using their product? How are they using our product? What can we be doing to improve the channel and increase the loyalty to every one of our customers?
It could be anything along the lines of, we came out with Product A. It seems to have been achieving some success. We’re now launching Product B with regards to pricing. What could we do on Product B to take advantage of the loyalty we have already generated with Product A? That’s the question that very few companies would ask themselves.
They would say we come out with a second product and it’s priced at X with no differentiation between a customer, who’s never done business with them before, and this large base of customers that they have on Product A.
What does Price Mean
Brian Ardinger: Or thinking more broadly about what does price mean? It’s not necessarily just the actual price that you pay for that good or service, but it’s the services wrapping around that which can augment or change the value creation or the loyalty around it.
Cactus Raazi: 100%. That’s exactly correct. And I think that the statement you just made is something that so often slips through the cracks in our fundamental approach to coming up with a price. You know, you think a lot about what your input costs may have been or various other elements, and you forget to think about well if a customer has done a lot of business with us in the past, shouldn’t we treat them differently.
And the other thing I would say by the way as part and parcel of this conversation is also the broader customer experience. I argue that price is a really important sort of a fulcrum of the customer experience. But in today’s day and age, the scarcity is all the rage and limited additions and one-offs, and all of these things are also, you know, very much becoming fashionable.
So, it’s not always the case that you need to necessarily discount. We’re really saying price to the customer, but it may be something along the lines of, we have a limited-edition item and you’re getting access to it, even though it’s actually at a premium.
Brian Ardinger: So, what else in the book have we maybe not covered that you want to make sure our audience understands they can get some value out of it.
Cactus Raazi: We’ve covered a lot of the approaches. We haven’t spent a lot of time on the threats, and we talk a little bit about in the book about not only is e-commerce sort of gravitating towards generally towards price displayed user interfaces.
And of course, with mobile, that starts to be happening in real time, even in the brick-and-mortar environment. But really, we talk also about, it’s not likely that we’ll be doing traditional website based commerce, forever voice assistance, and other further automation is creeping slowly but surely into our lives.
And if you think about that, it becomes even scarier because it’s not likely that these paradigms with the voice assistance and with other additional levels of automation would offer anything other than the lowest price. Why would your voice assistant tell you that the same good are services available at three different prices?
Right. That’s sort of annoying. And you’d say, just give me the cheapest one, right? That we all gravitate to that. So, we mentioned that only because even if you feel that you can handle the current levels of competition and price transparency that are being generated by the internet and by the browser extensions, and by the coupon crawlers and all the things that already exist.
It’s important to recognize that there are additional levels of threat that are only going to further erode your pricing power, unless you’re starting to price to the customer, which is no longer widely available. We are seeing very early signs of such a thing, such as you go to a website and you need to input your email address prior to being allowed access to the experience. So, we’re seeing early signs and I think that thinking a lot about the threats of technology and the deflationary impact of technologies is another important part of what we bring up in the book
Covid and Pricing
Brian Ardinger: The last topic I want to talk about is COVID-19 and how that may have affected and made the changing landscape of pricing and that. What kind of examples are things have you seen from this acceleration of this disrupted world?
Cactus Raazi: It’s funny, I’m glad you used the word acceleration because that’s exactly the word that I think is the appropriate word. They call it the great accelerant and I’ve seen all of that. So yeah. What we’ve seen, I’m sure as you’ve seen is we’ve seen significant changes in behavior.
And I think that we’ve seen as so much more of our activity has gone from analog to digital, we’ve seen a lot more opportunities to capture information about with whom we’re doing business and various elements of our customer base and start to use those things. I have not necessarily seen tangible impact of such, but clearly, most companies at this point have gotten the wakeup call that the shift to electronic commerce, which was always obviously underway, has now only accelerated.
And I think what you’re going to start to see in my humble opinion Is providers of platforms such as Shopify or big commerce, really start to think about how can we give our users additional tools to help them do more business and do better business with their customers. And I think so between the CRMs and the sort of e-commerce platforms, I think we will likely see a fair amount of innovation.
For More Information
Brian Ardinger: Well, Cactus, thank you very much for coming on Inside Outside Innovation, to tell us a little bit more about this. It’s a fascinating topic. And like I said, so important and often overlooked topic when it comes to innovation and that. If people want to find out more about yourself or the book, what’s the best way to do that?
Cactus Raazi: Probably LinkedIn I’m on LinkedIn Cactus, like the plant, Raazi is R A A Z I. Easy to find me and I love to hear from people and I’m happy to be helpful. I’m not in the business of consulting. I have no agenda. I’m just trying to be helpful for its own sake.
Brian Ardinger: Excellent. Well, we appreciate you sharing your knowledge here today, and thanks very much for coming on the show. Look forward to continuing the conversation as the world evolves.
Cactus Raazi: Absolute pleasure. Good luck.
Brian Ardinger: That’s it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.
FREE INNOVATION NEWSLETTER & TOOLS
Get the latest episodes of the Inside Outside Innovation podcast, in addition to thought leadership in the form of blogs, innovation resources, videos, and invitations to exclusive events. SUBSCRIBE HERE