Why Your Pricing Model Is Costing You Millions
Show Notes
Welcome to FP&A Tomorrow, where we discuss financial planning and analysis, examining its current state and future prospects, with your host Paul Barnhurst.
In today’s episode, Paul engages in an insightful roundtable discussion with Nathan Kaemingk & Karan Sood on LinkedIn. In this episode, we discuss the nuances of strategic pricing and its immense impact on business profitability.
Karan, a seasoned pricing professional, shares his extensive experience across various industries, emphasizing the importance of cross-functional alignment and value-based pricing.
Nathan, with a unique background in mechanical engineering and forecasting, highlights the critical role of understanding costs and leveraging pricing strategies to combat inflation and optimize profits.
Key takeaways from this week's episode include:
Here is a concise summary of the key points from the discussion:
Effective pricing requires collaboration between finance, FP&A, and pricing teams. Transparent communication and alignment on goals are essential to ensure cohesive strategies that drive profitability.
Value-based pricing is the gold standard, especially in service industries. By quantifying and communicating the value provided to customers, businesses can justify higher prices and enhance profitability..
Inflation significantly affects pricing strategies. Companies must adjust prices to keep up with rising costs and maintain profit margins, making strategic pricing more critical than ever.
Relying solely on cost-plus pricing can lead to missed opportunities. Understanding customer value and competitive positioning allows for more strategic price setting, rather than simply adding a margin to costs.
Constructively using promotions and discounts can drive volume without eroding profit margins. Measuring and optimizing these strategies ensures they contribute positively to overall profitability.
Rebates can be effective for maintaining uniform pricing across different channels and incentivizing performance. However, companies must measure and adjust rebate programs regularly to ensure they are beneficial.
Accurate forecasting and aligning sales with operational capacity are crucial. Effective sales inventory and operations planning [SIOP] can significantly increase net profit margins by optimizing resource utilization and pricing strategies.
Quotes:
Here are a few relevant quotes from the episode
"The art of pricing goes beyond just number crunching, it goes into cross-functional alignment on what the goals are."
“The 1% increase in price leads to an 11% increase in profit margins coming out of McKinsey years ago. It still holds true.”
“It's amazing how easy it is to increase profits by being good at pricing.”
“Pricing is going to become one of the most important things that we get good at over the next half-decade.”
Exciting Announcement
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Link to courses:
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Follow Karan:
LinkedIn - https://www.linkedin.com/in/soodkaran/
Website - https://www.kobo.com/
Follow Nathan:
LinkedIn - https://www.linkedin.com/in/nathankaemingk/
Website - https://www.betterforecasting.com/
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In today's episode:
[01:10] - Introduction
[02:00] - Guest Introduction
[03:00] - Misconceptions About Pricing
[04:20] - The importance of Value-Based Pricing
[07:00] - The Role of FP&A in Pricing
[11:40] - Leveraging Digital Courses for FP&A Professionals
[12:00] - Guest Backgrounds
[18:40] - Impact of Inflation on Pricing
[22:00] - Strategies for Competitive Markets
[26:30] - Effective Rebate Strategies
[31:00] - Collaboration Between Finance and Pricing Teams
[36:10] - Rapid-Fire Session
[58:30] - Conclusion
Full Show Transcript:
Host: Paul Barnhurst:: FP&A guy here, I want to let you in on a little secret. I don't know, I always have a sponsor for FP&A Tomorrow, but I always have costs. I work hard to produce the best FP&A show out there. Sometimes I need your help to help support the show. Today I'm sharing the new digital courses I've launched. FP&A, Business Partnering, and Modern Excel, these courses can help transform the way you work as an FP&A professional. I hope you'll consider signing up for these courses. Paying for these courses using my services helps me continue to provide you with world-class content. Thanks for considering signing up for my courses and use "Podcast" to save 20% on any of my courses. Welcome to our first LinkedIn live for FP&A Tomorrow. I've done several of these for FP&A Today, but this is the first one for FP&A Tomorrow is where a new podcast is. I'm thrilled to have with me two amazing guests, and we're going to talk about a subject that I think is underutilized across the business, often misunderstood, and something that finance and FP&A can make a bigger difference in than they do today.
Host: Paul Barnhurst:: So our subject is how pricing and FP&A can influence pricing, how we work together, and how we should be a part of that. I have two pricing experts here with me. I have Nate, and I have Karan here with me, and I'm super excited for you to get to hear from them because they know a lot more about pricing than I do. I've dealt with it for sure and am excited to jump into the subject. So please let us know where you're coming from as we jump into things, tell us where you're located. Any questions you may have or things you'd like to learn from today? We'd love to hear your thoughts. Tina, thanks for joining us from South Africa. Welcome. So where we're going to kick this session off is we're going to start by asking our guests to just tell us a little bit about themselves and their background, how they ended up where they're at today. So, Nate, why don't we start with you?
Guest: Nathan Kaemingk:: Hi, I'm Nate Kaemingk. I am calling from Atlanta, Georgia. So I started out as a mechanical engineer and as an engineer. I learned a whole bunch of inferential statistics, which is, like, super nerdy. Somebody in marketing got a hold of that, and said, that sounds terrible. Let's call it AI instead. That's probably better. So I started as a mechanical engineer, and then when I did my MBA a bunch of the commercial bankers said, hey, we've never seen anybody do this before. This is pretty cool. So I figured out, hey, I've got a shot. So I ended up working for Cummins. Cummins Diesel, who is a Fortune 500 company, and I got to do what's called product planning. That was at the intersection of forecasting, engineering, and pricing. So I got to do pricing with a lot of zeros behind what I was doing. So it was just a wonderful experience, and it was very useful. I've been able to apply it to a lot of businesses around the US since then. So that's me.
Host: Paul Barnhurst:: Well, thank you, Nate. Let's go ahead and turn it over to Karan if you want to go ahead and introduce yourself.
Guest: Karan Sood:: Hi, everyone. Thanks, Paul, for having me. My name is Karan Sood. I'm joining from Toronto, Canada. I stumbled into pricing and I say stumbled because almost everyone in pricing stumbles into pricing because no one no one goes to price. People say, fine, I want to go into finance. I want to go into marketing. I want to go into strategy sales. No one says I want to go in pricing because it's such a small niche within marketing. When we were in school, they said, hey, here's the four pages on pricing. and that's pretty much it. So I stumbled into pricing. I started my career at GM in the automotive industry parts pricing there. So almost every GM car at one point had some version of my hands on it. Then I worked in print and digital advertising for a number of years. Almost $1 billion organization. Then I worked in CPG in retail, selling protein powder and health supplements. Then I switched on to electronics hardware. So I've worked across several different industries. What's unique is that almost every organization has sat on almost a different team. So I've sat in sales, I've sat in in marketing, I've sat inside supply chain and finance. So I have a bit of a perspective. On almost how everyone views pricing and hopefully we can bring it all out today with Paul and Nate.
Host: Paul Barnhurst:: Thank you so much for sharing. I agree with you. There's no specialization for pricing in school. Nobody goes to college and thinks I'm going to go get a pricing specialization. It's like nobody goes and gets an FP&A specialization. You say I want to do finance. Then you realize, oh, FP&A is part of finance. That sounds interesting. I'll try that. Or you get out in the real world and somebody's like, yeah, we got to figure out pricing. You understand numbers, understand a little bit of marketing, or whatever they want. Why don't you be our pricing person? And I'm going to guess it probably started something like that. You were given a project about pricing. Before you know it, you become the pricing person. So I think it's very common. Some organizations have dedicated pricing. We had a pricing team when I was at American Express, but often it's more of an oh, we need to figure that out type of thing in a lot of companies, especially smaller ones. So I want to start with something I found fascinating. I think both of you have heard this. So we'll start with you, Karan, on this question. I read a study. It was made available on LinkedIn where said SaaS companies were spending more time on average during a year focusing on janitorial services than pricing. So why don't we start with that? What are your thoughts on that? I know you've read the study and then we'll go to you, Nate.
Guest: Karan Sood:: I read the study and I think it came out of the house of Patrick Campbell and Price intelligently a number of years ago. When I saw that, I had two questions. I mean, one question and one comment, I think. But I still think. But one is like, who is spending that much amount of time on janitorial services? That's a lot of time with services. I'm not surprised. I'm not surprised because I've been through that entire journey. So I know how much time companies spend. I've been in companies where we spent barely any time at all at a company that was very robust. The second comment, I think, Paul, you just mentioned it a couple of moments ago, was this notion of what is a pricing analyst and a lot of companies, what they do is they misclassify pricing people into like business analysts, or they'll make them a sales analyst, or they'll make them a financial analyst and have them sit under finance sales analyst sits under sales and business analysts maybe, could be anywhere. What then happens is that and this is the reason, what happens is that none of those people end up being well-versed in the area of pricing.
Guest: Karan Sood:: They become great financial analysts and make great models. They become great sales guys to help sales guys sell more, and business analysts to put together good business cases. But the art of pricing goes beyond just number crunching, it goes into cross-functional alignment on what the goals are. With FP&A, for example, being a key stakeholder there. So I think it's the misclassification and that misclassification leading to people not going into the pricing career in a way, and they end up going into financial careers and marketing careers and sales careers, and not so much as pricing. What happens is finance is a key example like FP&A, and pricing needs to work closely from the start of the year almost when you're creating budgets and forecasts all the way down to your revenues and and margin, and no one is more well-versed with how and where revenue comes from as your pricing people. So I think it's where the cross-collaboration shines and why pricing people need. We need more cost collaborators than pricing than just spreadsheet junkies which anyone can be for the most part.
Host: Paul Barnhurst:: Nate, what are your thoughts on the study? I mean, do you think we spend more time on making sure we have toilet paper than we do pricing?
Guest: Nathan Kaemingk:: You have to have toilet paper, or some form of a wipe if I can do a shout-out to an Atlanta-based good wipes here, but I would it's interesting to me because I feel like one of the things I see happen a lot is because there's not a pricing person whose job it is to get all of the perspectives. You end up having finance and ops that arguing with sales, and it's more about who's better in an arm wrestle than it is about like, okay, well, what do we need to do to increase pricing? I do want to offer a little tidbit, and it's that it's amazing how easy it is to increase profits by being good at pricing. So I've spoken to CEOs and companies all around the country, and I've been adding up how much, hey, this is how much extra profit we identified. The number is over $100 million in the last nine months just from presenting a bunch of ideas in ways to increase pricing. So it's incredibly easy to do that. But like we've been talking about because there's not a specialization, you have to fall into it like, like Karan and I did and then you also have to do the math that says, oh, wow, like this investment is going to pay off. So we should spend some time on this. But it's not obvious, right? It's not obvious to the normal business person.
Guest: Nathan Kaemingk:: Honestly, what I see happen more often than anything else is people just do cost-plus pricing. They say, oh, well, I want a 20% margin. So I'm going to get good at adding up my cost and I'm going to add 20%. Well, the truth is nobody cares how much it costs you all they care about is, is this good enough? Am I going to get a return on investment for this thing that I'm buying? So cost-plus pricing is good enough to make a profitable company. Maybe it's not obvious that what you thought, 20% might be what you're used to doing. But if you do 2 or 3 things you can add 3% to your top line, which immediately falls all the way to the bottom. I'll say one more thing. I saw a study that says this, and I did the math and proved it. The average company will get an 11% increase in net margin, net profit, and actual dollars in the bank from a 1% increase in price. Now, for the spreadsheet nerds out here, how that works out is if you have 9% net profit as your percentage point, then a 1% increase in price on the top is going to end up. The math works out But that's shocking when people hear that. That's a surprising statistic. So I'll stop right there.
Host: Paul Barnhurst:: Thank you. I appreciate you sharing that. As I hear both of you talk and we talk about pricing, I definitely can relate to the conversations of hey, cost plus. I mean, I've been in meetings where the company okay finance, what is the price need to be like? Well, here's the margin we need to earn. What is the right price for the market? You guys tell me product marketing sells. It's not my job to finalize this price. I have to ensure we don't lose our shirts. Yes, and then I'll share my opinions on it. But, as long as you meet the requirements of the company from a financial perspective, that's something you need to weigh in on because you understand the market, the customer, and the sells a lot better than I do. Those led to good discussions when I framed it that way. But I had a few times like, Will you tell me the price? No, let's open it up to more of a discussion and kind of speak to that discussion before we jump into that part of it, I know we'll get there in a minute. A couple of other questions I want to go through. Before I do that, I just want to welcome all those who are telling me where they come from, including a couple of other people. So you're aware we have someone from Ottawa, Canada. We have London, Tennessee, and Sri Lanka. So thank you to everyone who's joining us. Karan, I want to ask you a question. You've spent your entire career in pricing, as you mentioned, it's not something anyone comes out of school saying, hey, I'm going to go into pricing. So tell a little more of that backstory and why you stayed in pricing. What is it you love about pricing?
Guest: Karan Sood:: I think Nate mentioned it a little bit, which is the fastest way. I say pricing is the smartest and the fastest way to increase revenue and margin. It's so under-focused in almost every company. You see that you see it coming through the pandemic and after the pandemic where companies are cutting, cutting jobs and cutting headcount, etc. But you see on the other spectrum, there are companies who are raising prices. At the same time, you don't hear any job losses coming out from those companies, because, at the same time, it's a lucrative and fast way to get to higher margins and revenue and to the study that he pointed out, the 1% increase in price leads to 11% increase in profit margins coming out of McKinsey years ago. It still holds true. I do the math every single day where people say, hey, let me cut the price by 20%. My immediate answer is at a 60% margin. For example, you would have to rate, you would have to sell 50% more. Are you willing to do that? So there's simple math. So when you flip it the other way and say hey let's increase the price by 3%, your sales would only have to drop about 20% before it makes, before you start losing money.
Guest: Karan Sood:: So it's very lucrative from making margin and think about like, think about the cable companies and telecom companies. They were making money in their sleep, increasing prices year after year after year. How did you think cable got to a point where it made no sense for them to be at that price compared to Netflix? Because over the years they kept on raising prices and they relied on consumers not caring enough about 3% inflation of 4% or 5% price increase over time. That's where most of their margin was. Coming from. So it's where a good chunk of a profit margin can come from. As long as you know in your smart about when to increase the price, how to increase the price, and how to communicate that price increase in the market because you can fall flat. You have seen cases this year of people rolling back their price increases because customers complain. But that's where the magic happens, where you make sure you have the cross-functional know-how and alignment on when, how, and you know how much of a price increase you can, you can, you can put through and be smart about it. So that's where I think the magic happens now.
Host: Paul Barnhurst:: Thank you for sharing that. I like what you said about being strategic and smart about it. I worked at a company where every new product, every contract we did. We always had to put a value prop to help justify what was the value we were giving the customer versus what we were charging. It was a little extreme in that they always wanted a range around. It had to be 4 to 1 to 8 to 1, otherwise you had to justify why. But it was a really good exercise when it was done right to force you to think about, okay, what's the actual value the end customer is getting, and am I pricing appropriately? Are they getting more value than makes sense for what I'm doing or less value in some cases, which the CEO would always be like, all right, well then you need to add more to the product, software type based products. So that was an eye-opener for me, as it was just kind of a whole different way to think about price and how much of a focus it was at that company. So I appreciate you sharing that. Nate, I have one more question for you. Then we're going to jump into a number of pricing questions I have. But I think you alluded to it earlier, when you went to MBA school, they saw some things you hadn't done, but how did you go kind of from engineering to MBA to now being kind of an expert around forecasting and inflation and pricing? Maybe tell a little bit more of kind of that story and what's interested you and what you're doing today.
Guest: Nathan Kaemingk:: Definitely. Good question. It's interesting because I got to do a whole bunch of forecasting for my own business. Then when I was at Cummins, I didn't and I enjoyed it because my brain is naturally wired to be a futurist. So. But what ended up happening is, after I left Cummins, my wife and I took a little bit of a sabbatical, we bought an RV and drove around the country.
Host: Paul Barnhurst:: This is your RV journey? I've heard about this.
Guest: Nathan Kaemingk:: But we're not going to talk about that because that would take about an hour or 12. But when I was on the road, I started freelancing and found out that there's like forecasting is an area that's really difficult. I joke about it now it's like, man, forecasting sucks, but that's my job. It can be fun for the right person. So I ended up freelancing and then that is what turned into the company I have today. Now, the reason that I have refreshed and gone back to all the different pricing, I think I looked up the number of different pricing methodologies that I've worked with different companies on, and it's like 15, 16 different ways of increasing prices in forecasting. I have a lot of companies that are, when inflation started happening, it was like, well, what's that going to do to my business? And the number one thing that inflation has done to businesses is it's turned into a margin squeeze for most. So your costs are increasing. So since inflation started if I just pick a point in time of say December of 2020. That's kind of when things started going up.
Guest: Nathan Kaemingk:: We've had over 20% increase in just in consumer price index overall. In some specific areas, it's more like a 40% increase in overall price. So the money you're getting today is worth 20 to 40% less than the money that you were getting at that time. So the net result of inflation is, is that there will be a future margin squeeze associated with it. If you're not able to increase prices and keep them in line with what's going on. Inflation is not, it's still at 3.4%, which sounds okay, but that's still not great. We're looking at more than a year and maybe two years. The best case before we get back to the 2% year over year. That's the target for the Federal Reserve., and there's a whole lot of stuff that has to happen. I'm not going to get too far into that today. But what that tells us is that over the next two years, at minimum, and potentially the next 6 to 7 years, depending on whether are we going to have another wave of inflation? Could that happen? Pricing is going to become one of the most important things that we get good at over the next half-decade. Because for 40 years we didn't have inflation, we didn't have that much of an issue.
Guest: Nathan Kaemingk:: And now all of a sudden it's become an issue again. So we can't just do our normal, add a 3% price rise or into your contracts and it'll increase by 3% year over year. We have to get better at increasing prices now during the pandemic, you could just say like, oh, well, hey, we're the only ones that have this stuff, so you just got to pay the price. But when supply catches up, you don't have that luxury anymore of saying, yeah, I just have to pass my costs on to you because it's starting to become more competitive again. So if we get better at the value side of what we're offering, like, hey, I'm offering. Yes, my my stuff is whatever price, but I can get you a 10 to 1 return on investment if you'll, for every dollar you invest in this technology or this capability, you're going to get at least $10 in profit in the future. Tell me if I answered all your questions, Paul, but I'll stop there.
Host: Paul Barnhurst:: FP&A Guy here. Today, I want to talk about the tool for professionals to use more than any of, Microsoft Excel. If you're not learning modern Excel, you're missing out. Modern Excel includes dynamic arrays, Power Query, and so much more. That is why I'm excited to share my new Microsoft Excel course. In this course, talk about Excel tables and how they're the gateway to modern Excel. You need them for Power Query, you need them for co-pilot. Talk to you about copilot. I also talk about dynamic arrays. There are 50-plus videos in this course. Register today and go to the FP&A Guy. Click on my course, Microsoft Excel and it will take you to the course. Use the code "Podcast" to save 20%. Sign up today. Sounds good. Thank you. I appreciate that one. I want to get your thoughts here. What would you say about the kind of inflation and what we've seen in the last few years in pricing? Kind of just addressing what Nate mentioned there a little bit.
Guest: Karan Sood:: I think Nate had it right. A lot happened in the last 3 or 4 years. Fluff, stuff was flying off the wall. Even if it was a digital product or a physical product, it didn't matter. Companies couldn't just build fast enough and the supply chain wasn't catching enough fast enough. But now, as much as the inflation is at that 3% level, which is still high, some industries are getting caught up faster than others. So for companies that are coming out of the pandemic, there are two ways to go around this. You have companies that PNG, for example, that raised prices during the pandemic to the Delta, like 6%, 7% year, quarter after quarter, year after year, they increase prices. Now they're at a point where they're like, okay, the prices are high. But can they sustain it? Companies that are innovating and which are very good at innovation, will be able to stick with that price point, perhaps for a little bit longer, and maybe ride it through the entire wave. They will, and those companies will be cashing it in at some point. PNG does that all the time. They do that all the time when they increase prices, add more value to the product, make sure it penetrates the market well, and then they, cash in. On the flip side, there are companies. You just saw Target. Target came out with this whole inflation fatigue strategy right now where they have taken massive price drops from 4% to 16% across the board.
Guest: Karan Sood:: And now that's a major price drop, a 4% price drop or 10% price drop on something that's like a 30% margin item would mean the sales would have to jump up quite significantly. Now, can Target do it? Maybe, maybe not. That time will tell. on the flip side, companies have made that reducing prices is a strategy. Ikea made this huge investment and said, hey, we are going back to where we were three years ago, almost because our costs have come down. So we want to pass it on to you. So they've made this a strategy. They didn't say we're cutting prices because they said, hey, here's a commitment to lower prices. Here are $600 million commitment to lower prices by doing all these things and, rationalizing your pricing and reducing prices to the pre-pandemic level. They're banking on the footfall. So I think there are two ways you can hide the price changes or, the price reductions, or you can be more open about it and make a strategy out of it. I think if you are able to make a strategy out of it, then you might be in better shape than just passing a price increase and just a price decrease and just letting it rip in the market, because no one will notice. Some people may not know this target decreased the price by 10%. just so and that just lost margin at that point. So I think, that's where that's where I think.
Host: Paul Barnhurst:: I appreciate that. I love you got into the strategic side of things. I want to get a little more into that. But before we do I have a practical question I want to ask. But before I ask this, I'm just going to let the audience know if you have any questions, put them in the comments. We'll take them throughout the podcast here. We'll be happy to address as many questions as we can. So please go ahead and add your questions as we're discussing this or let us know your thoughts. We'd love to make this interactive. Well, what I want to ask before we jump into a little more strategy is, in your guys's view, what role FP&A and finance should play in pricing. Like how should they be involved? Why is it so important that they play a role? Because I think often FP&A doesn't play a role, or finance doesn't play a role outside of maybe just looking at it and being like, all right, margins are good and moving on. So why don't we start with you, Karan? What are your thoughts there? Then we'll go to you, Nate, on that.
Guest: Karan Sood:: FP&A holds the keys to strategic financial decision-making in the company. So there's no escaping from that. pricing holds the keys to how those targets translate into sales goals, pricing goals, and product goals in a way. So I think for them to work together, my biggest issue throughout my career with FP&A has been sometimes the lack of communication on what exactly is the strategy, and where exactly are we. Remember, pricing requires a very clear North Star. In almost every organization, you either are pricing your product to increase revenue, you're pricing your product to increase margin, or you're pricing your product to increase adoption and just sales and market. units in the market digital or non-digital and both on all those strategies require different different different pricing strategies. If FP&A and pricing are not aligned on January 1st when or December or October the year before, about next year, then it's just going to be you know what they say the dog's breakfast in the end because they won't be aligned. There's finance is going to have one view of how financial and revenue metrics are, what financial revenue metrics are, and pricing is going to have another. So I think the clear communication key is where I think they need to work and cross-collaborate. The second one is transparency, I think and I think that's on both sides price. The finance people are always finance sense. They know what they're doing. They feel they know what they're doing.
Guest: Karan Sood:: They know what the numbers are. They know where, what price. Everyone in finance will have an opinion on price. That's a given regardless of where, where in where in finance you are and the transparency between the work or where we are or what FP&A has for a budget or a forecast or whatever for a year, and having it open to. Rising people and rising people opening up their models and how they price open to FP&A is where I think a lot of work needs to be done. Right now. They both work in a very siloed world of like, here's my model and my work, why don't you submit your work? And the other side is pricing. People are also saying the same thing. Why don't you tell me what you want and what you have? So I think it's a bit off, there's a little bit of collaboration and getting to the same sort of level and that is what's required between that and pricing because they're both very strong. They both are very in a strong pricing team and a strong team. You can do each other's job in a way like, you can you can be a very prudent pricing analyst in finance if you master a few concepts. The same goes for pricing. I feel pricing people need to know more and they need to know more accounting. They need to know more about accruals. You know you know NPV, the sector. So I think it's a little bit of transparency and opening up to each other that's required.
Host: Paul Barnhurst:: I like how you said there's some transparency and opening up to each other and making it more collaborative. That's required. I think sometimes, like you said, we're in our own silos. Nate, your thoughts on that question?
Guest: Nathan Kaemingk:: Yeah, that's a great question. I think I want to I want to acknowledge the one foundational piece that you said first before, I'll move into what I would say is more of an advanced approach. I think it's incredibly important for the FP&A team to be the ones that say, are we going to make or are we going to make money, or are we going to lose money at that price point? So that's that's like, hey, one on one basic level, you've got to be there and be a part of that conversation. Because if it's just oh, well, we're making margin, but you're not covering your variable costs and your overheads. You're a good example that I've seen happen it's surprising now that the cost of capital is higher. It's surprising how often, just having working capital laying out there how much that costs. That's not something we've had to think about for probably 15 years now. All of a sudden it costs it. Working capital was expensive.
Host: Paul Barnhurst:: Money's not free anymore.
Guest: Nathan Kaemingk:: Money's not free anymore. I'm not going to go down that road, but that's probably a good thing overall long term. But anyway, I want to focus on one other piece of this. It's going to be what's called psyops. So sales inventory and operations planning, that's a very classic process that I often have seen some really good psyops processes that are run by finance because of how important the forecast is in the most profitable companies are going to be the ones that have exactly the right amount of sales to match 100% capacity of operations. What I mean by that is that, first of all, you're either 100% utilizing your assets or you're going to be fully utilizing your labor. If your demand is higher, So let's say you could hit 120% of your capacity. Well, that's good, but if you have a really good forecast and you have a really good psyops process, it's going to let you know early enough that you can increase the price in order to reduce your win rate to the point where you're still at 100%. So for that, let's say it's for that last ten, 15, 20% of the volume that you do, you get an extra 5% on that entire volume. That's it. That's all straight to the bottom line. Right? So it's amazing how much additional profit opportunity you have if we do a really good job if FP&A can do a really good job of forecasting and be able to align operations and sales so that demand and fulfillment are as close together as possible, I've seen that be somewhere between 10 and 30% increase in net profit margin when done well for real companies that exist today that we've done work with. Who wouldn't love to have an extra 20%. let's say you're, for every million dollars in profit, I'll give you an extra 200,000. I mean, that's wild, but it's incredibly effective when it works out and FP&A plays a critical role in being able to pull all those pieces together.
Host: Paul Barnhurst:: So you're saying the reason the airline oversells things is so they can get as close to 100% as possible?
Guest: Nathan Kaemingk:: Airlines have been doing surge pricing and capacity-based pricing since the 80s. I saw a study that said it's somewhere between 30 and 50. something like 40% of their overall profit is because of that activity. Because of that last 3 to 4% of their revenue is a massive part of their overall profit.
Host: Paul Barnhurst:: It doesn't surprise me. The airline industry is probably one of those examples we can all go to that has made pricing a key part of a strategy. First-class business class, the way they've stratified pricing, everything they've done is to try to maximize that curve, If it's if this person will pay $100, I want to get $100 from them. If this person will pay 500, I want to get 500, right? They try not to leave anything on the table. That's why they charge for bags. Now if you want to use the bathroom, I think some of them charge right? Not quite yet, but you wonder sometimes. It's really interesting and I can see you're about to say something. Curtains like this. This subject gets you going, right?
Guest: Karan Sood:: Right. Right there. Almost got there for charging, for using the washroom. But also remember Ryanair, one of the most profitable airlines in the world. They made a strategy out of low-cost airlines. They pioneered it and then they did it and they did it well. So it's I mean overall strategy matter. But the whole point of being the lowest in the market and then getting share to a point where they're one of the top three most profitable airlines, probably globally, you gotta give them credit. and I think I want to point to what Nate said earlier about the PsyOps. I think it's such an important and underrated concept in a way, especially for people who are selling physical goods for people who are selling physical goods, knowing how much to produce, and how much the sales are going to be, and not having access can be the difference between profitability and no profits, almost, or even bankruptcy. You have seen companies that went bankrupt because they couldn't control the number of returns they ever got from their product because they couldn't forecast it properly or had too much access, and why? Companies like, like HomeSense. TJ and Marshall are thriving right now because there's so much overabundance of goods in other channels that it's getting down to their into their, into their channel. So I think it's quite amazing how effectively works. So either that finance, either that supply chain working with finance or either it's a it's a mixture of both plus sales in it. But I think sales need to be because you need to have a very clear forecast. Not from the rosy glasses. Sometimes the sales were because sales are bound to be optimistic, they're paid to be optimistic. But that's where that optimism sometimes could be, could be quite, quite damaging. Sometimes when it's not rooted in routine, rooted in analytics and knowing what the demand is. I think that's where Nate's work shines how can you better get to that equilibrium?
Host: Paul Barnhurst:: FP&A Guy here, one thing I hear again and again as I interview and talk with FP&A professionals is that learning business partnering is key to being a good FP&A professional. That's why I'm excited to share my new course material developed by Ron Monteiro and myself to teach us about business partnering. We talk about building relationships, managing tough conversations, and holding the business accountable. This material is the same material that's used in the new Harvard Online FP&A certificate. Go ahead, go to the FP&A guy. Click on my digital FP&A Business Partnering course and use the code "Podcast" to save 20%. Your career will thank you. We got a couple of great questions coming in from the audience. I'm going to throw those up on the screen here. But when you said sells and optimistic, it reminded me many of you will know who Steve Young was. If you're in the US and grew up watching football like I did, you'll recognize that name as one of the best quarterbacks ever. He was comparing cells and the whole business to football. He referred to salespeople as your wide receivers like you need them, but they're your divas. They're high maintenance. You got to take care of them. It's like financing your offensive line. They don't get any appreciation. They just kind of take care of the quarterback. So it's kind of funny when you were mentioning cells or reminded me of that. Yes, they definitely can be optimistic. Sometimes we have to be there to validate and ensure that it's realistic. The first question I want to throw up and we'll send this one to you, Karan. So from a high-level perspective, how do products versus services differ in pricing strategy?
Guest: Karan Sood:: That's a great question. So and I think that's where services there's so much optimization that can happen in service pricing. Not that they can't happen in product but service. When you say people talk about value-based pricing, value-based pricing thrives in services because that's where you can talk about how are you creating value, and how are you increasing revenue for your customer. How are you reducing costs for your customers? How are you reducing the risk for your customer or time spent on something? So that's where value when people misunderstand value-based pricing, value-based pricing is not a product in a CPG. I mean, it has applicability there, but it shines in service-based and, software-based models because that's where you can quantify versus product. Products can be all over the place or can have some version of value-based pricing. When you're talking about high-tech gadgets and you know how tech gadgets can have some emotional value of pricing, but the product can also be selling cookies at Costco, which Costco wants to be at 1099 day in and day out for the entire year and sell 5000 cases a week or you're out. So your your product pricing there is very I wouldn't say it's cost, but it's also cost plus some little bit of flavor of competitiveness in there. So I think product strategy then service strategy is very very very so the product you can have a notion of the competitive environment in there. It will happen. You may not want to price based on competition, but you do want to take that into account. You want to and you want to make sure that you are adding more value to your product compared to the competition.
Guest: Karan Sood:: So when you say competition-based pricing doesn't mean match your competitor, it's saying, hey, add more value to your product so that you can be above and beyond that, competitor's price. So how much, how much premium, and how much how much of a negative you want to be compared to your, to your competitors? Then there are flavors of some, cost-based pricing. I mean as Nate pointed out, cost-based pricing has a role somewhere in most companies. Almost every company's cost pricing has a role because it sort of sets the benchmark of what is the lowest you have to be for you to maintain your profitability and to be a viable, thriving business. Because if you don't have that or you don't know what your costs are, you're going to be in deep trouble in a lot of companies, don't allocate the cost properly. They don't know what the cost structure is because something is a fixed cost that's not allocated properly. So it just sits in a bucket somewhere else. It shows up six months later when an auditor calls up and says, hey, we're supposed this cost. Then you start allocating its cost-based pricing has low competition, and has a role, so and then value-based pricing has a role in the product. But services thrive on value. So if you're in service you need to ask yourself a question. What is the value I'm providing and how am I quantifying that value?
Host: Paul Barnhurst:: Good point. I need to do that exercise for my business. I can tell Nate's dying to say something. He raised his hand on a podcast.
Guest: Nathan Kaemingk:: I'm trying to be polite. I want to say one other thing. I think Karan did a really good job of talking about the pricing side of it. But I do think if I go back to PsyOps, what's the difference between product and service? Okay, so how do you define your ideal capacity? What's the ideal capacity that I want to sell for airlines? It's easy. There are 192 seats on an Airbus A321 and it leaves on May 23rd at nine at 7 a.m. So that's very easy to say. Here's our capacity with labor in services. So you have to get to okay. How many hours? Let's say I'm going to pick an HVAC repair company as an example. Their labor utilization rate is, for 40 hours a week, I can sell 35 hours worth of valuable time, and then I get parts plus labor costs. I get it, so it's like it ends up being you're going to forecast your total capacity very differently for a service-based business when you go into a meeting than if you have a product-based business. They're one of the reasons I do talk about this a little bit is it's surprising how often people will say they can't forecast their overall capacity in a service business, and I think that's incorrect. It's pretty quite easy to forecast your capacity. That should if you can forecast your capacity, that will help you understand whether or not you can go up or down in pricing. Do you have an opportunity to increase the price because you're over selling? Do you have an opportunity? maybe if I lower the price a little bit, do I have an opportunity to utilize additional capacity?
Host: Paul Barnhurst:: Thank you. Appreciate that. So I need to do that so I can determine if I should be raising my prices. Got it I'll come to you for that. All We have another question from uh Dave. I'm going to send this one to you first, Nate. So he asks, I think you've had some experience with activity-based costing. So he's asking, do you have experience? Thoughts on the effectiveness of ABC models' influence on pricing?
Guest: Nathan Kaemingk:: Is this one thinking about it for a little bit because it's a really good question? I think activity-based costing is a very good process to follow in terms of giving you an idea of what it could end up costing. Now, what I would probably do, is the issue I have with activity-based costing is it doesn't do a good job of splitting out fixed cost versus variable. The fact that and so I would want to get into, if you're going to go deep on a topic, I think activity-based cost is, and meeting that margin is probably your baseline. But I think we need to dive into an analysis of, okay, well, here's my true fixed cost, and here's my true variable cost. In order to identify whether or not we have the opportunity to go lower or higher, I think, as I said, I think activity-based costing is a good place to start. But if I'm going to build a forecast sheet and I'm going to look at all of that stuff, I am going to understand the difference between those two. Because if you have a very high fixed. So it's very expensive to be a cost leader is what I'm going to say. So it's very you have to have a lot of capital investment in order to have low unit costs. Well, if all you're doing is activity-based costing and you have to cover your allocations, you're going to miss out on the opportunity that you have, that your variable costs are very low. So you have more opportunity to go in at a lower price.
Host: Paul Barnhurst:: Got it. That makes sense. What I'm hearing there is if you're doing ABC, you need to make sure you understand that fixed bucket, how it impacts things, and how you think about that so that you're making intelligent decisions, so to speak. All Great. Any thoughts you want to add? Anything you wanted to add to that one, Karan, before I go on to the next question?
Guest: Karan Sood:: Nate had a pretty good perspective. The only thing I would say is that activity-based costing and rising based off, that should be it should only work, and it should only work in a very small subset of industries. I'm looking at manufacturing there and manufacturing generic products, not even manufacturing complicated stuff, because then you can go into value-based pricing. But if you're just basically, manufacturing widgets out of a factory that's very competitive, maybe that's where you can really. But if you're manufacturing robots, that's where you can shine with more value-based pricing and, or any other complicated piece of equipment, because there are several ways to add value in the manufacturing process, from service to warranty to, quality of the product or, usage, etc. There's just a lot there. So I hope that's for a very sliver of companies that are really using activity-based costing and then making pricing decisions off it, because dangerous question.
Host: Paul Barnhurst:: From the audience, I want to cover. Then we'll get back to a couple of questions I have and we'll wrap up. Samir asked, how can we effectively balance competitive pricing with maintaining profit margins, especially in highly saturated markets where there's a lot of competition or, as we often think of economics, perfect competition, even though there's no such thing? But what are your thoughts there on that question? We'll start with you, Karan. What's your take?
Guest: Karan Sood:: If you look at CPG, for example, and you look at companies like Unilever, and P&G, you know Kimberly-Clark, is highly competitive. They're selling, they're selling, things that are highly replaceable with other brands, highly replaceable with store brands. But look at their results coming out of the pandemic and even right now. I think what matters, people focus too much on the price, where they really should be focusing. Even the pricing folks should be focusing is working with the product, trying to figure out where can they create value. I think the way to differentiate yourself in highly competitive and saturated markets. Is to differentiate yourself based on value. You could be any product. It doesn't matter if a physical product, a service product, or a wholesale product distribution company. You could be any of these as long as you're focusing on value. I think when you focus on value, you take price out of the discussion, at least not to and it's not a driving factor. To an extent, it is without value. Add value in there. So I think that's where you're going to find the healthy balance. I don't necessarily condone the decreasing pricing because it's a competitive marketplace. I would say it's more of if you are coming out of the pandemic, you had a high price. This is the time to add value to your price and not discount it. the other thing is, I would say use a use. One thing that gets overlooked is using promotions and discounts constructively. That's a great way of maintaining profit margins and increasing volume, without making any substantial improvements or changes to your pricing strategy. Sometimes just optimizing your discount by 1% is the same as increasing your revenue by 1% or prices by 1%. So go there as well. So that's probably the other place to look for more margin.
Host: Paul Barnhurst:: I think great recommendations there is, looking at value. How can you add value to the product? It was a conversation we regularly had because at the end of the day, if you sell on value and you're not selling on price, you have so much more opportunity. We had a huge problem when the companies I worked with, my head of sales or she was the CRO, she would always be like, if I see heavy discounting, I know they're not selling on value. There's a training issue there. If they're regularly discounting a one-off deal, we get salespeople to do it. But we had a situation where we had the sales team just constantly doing that, and we ended up letting go of that sales team and re-starting over in a different location with a methodology of, look, it needs to be about value because we were just giving away way too many margins. It was fun as the finance guy to be like, no, I can't approve that deal. No, I can't approve that deal. I think they came to hate me, but that's another story. But it was the right thing to do. You have to make those decisions so we don't have a lot of time left. So what I want to do is I want to ask a question here for both Nate and Karan, and then we'll go to one more, 1 or 2 more questions, and then we're gonna have a little fun section if we only have about ten minutes left. First question, is there a favorite kind of framework you like to use that helps you analyze pricing? When you go into a pricing situation where you need to understand the company's pricing, is there a framework or method you use to work through that and understand it better? And Nate, we'll start with you.
Guest: Nathan Kaemingk:: I think there are two answers to that. But I'm going to I'm going to step out of the FP&A role, and I'm going to go to the overall business strategy. One of the questions I always like to ask is if I go to the CEO and ask the CEO, okay, what makes you special in the market? What makes you different? What's your I'll call it the strategic differentiation. The CEO might give me an answer and say, we're a value leader, and if I go to the CRO or to a salesperson and they don't give me the same answer, that company is losing money all the time. Because it is really important that there's agreement across the entire organization are we a price leader? Are we a value leader? Are we a product leader? Are we, service leaders? What is it that what is our position in the market? So whenever I'm I could answer honestly my favorite is value-based pricing. That's the way I think about it. To me, value-based pricing means that I'm adding the most value to my customer. That's my job. I'm here to make my customers millions of dollars, and if I do that and I get a slice of it, awesome. But at the end of the day, I want them to be successful. So value-based pricing is my favorite, but I think it's really important to make sure that the company is aligned on what is our strategy in the marketplace. Are we a value leader? Are we a what is that? And it's not just that the CEO knows. It's that you get the same answer from everybody in the organization.
Host: Paul Barnhurst:: Thank you. Karan, what are your thoughts on that?
Guest: Karan Sood:: I think very similar. Value-based pricing is probably the gold standard of how pricing needs to be done. But obviously, it doesn't work everywhere. It works in most cases, but not all. So he already mentioned what we're value-based pricing works. You should know what value you are creating. Do you and then you also can you quantify it? Also, you have to be able to quantify it because otherwise, it's just a statement. It's a lot of people will say, oh our company is strategic. Every company is strategic. How can you quantify that? How strategic. What do you mean by strategic? Or they say, oh, we provide great customer service. Okay, great. How do you quantify it? Do you have a reduced response time? Do you have 24/7 support, things like that? Those are the kinds of things that go into value-based pricing. My advice is when you are starting something, pricing something new, then you need to do the work, from the ground up. Do your research, know who your competitors are, and know what value you're creating. Know what the clear, what your clear goals and KPIs are. As long as you do all of those things and when you price the product, then you can just optimize over time. You don't. People worry too much about their initial price, that you're going to launch a product. You're going to have it perfect. There is no perfect price. There was never a perfect price. If there was a perfect price someone would have been a millionaire or billionaire by now. But there is no perfect price. It's an optimization process. As long as you have a framework for what to change. When you figure out the value that you're delivering, you will. You know that's where you have mastered value-based pricing or pricing in general.
Host: Paul Barnhurst:: The way we've managed data is perfect for a world that no longer exists. Over half your team's time is spent cleaning data. Imagine a notebook that does the work for you. Turn dirty data into a powerful asset with analyst intelligence. Join modern FP&A teams at Analyst intelligence.com today. I love something you said about Every company that says they're strategic. If you ask a company and they tell you they're not strategic, you probably want to run. But what I've said, I think this is something for finance professionals to remember. I think you can see this in pricing as well. If a company is strategic, what I mean is they have a competitive advantage. They're being strategic in what they're doing. You're going to see it in their bottom line. They should have above-average returns. If they're implementing a strategy that the market is perceiving value in. Right, because you can have a great strategy. But if the market doesn't perceive it as valuable, it's the wrong strategy. There's something to that to be said for pricing as well. Not to say that you're always getting more than your competitors. A low price can be the right price for your strategy. A medium price can be the right price. Something along the entire spectrum where you have something for low, for medium, for high. There's not a right strategy here. There are frameworks to use. Value pricing is the gold standard, as everybody said. So you need to think about that. So that's just something I'd say if you're doing pricing right, you're going to see it in the bottom line in one way or another. It could be in volume that comes through to the EBITDA could be in your margins. Now it's not always the same way, but you will see it. So I want to ask one more question that came through. Then I have a couple of fun questions for you guys. So someone asked if it was Damian and Karan I'll throw this one to you. Any thoughts on rebate strategies? I know you probably saw that in the automotive industry. A fair amount I have.
Guest: Karan Sood:: So I've managed pricing and I've managed discounting throughout my career, probably at this point gone through 8 to 10 million or $10 billion in discount over my lifetime. and they're all very different. They're all very different, like, because the rebates could mean different things. So in the retail industry, you could be a high, or low product. So for example, when you're in the US, you go to stores like Walgreens or in Canada, stores like Shoppers Drug Mart. They have a high, low pricing that, has a high price on day one. day seven is low price. The difference is a part of a rebate strategy. Or you could be more of a rebate where you're giving people rebates based on hitting certain KPIs. So it's very common in B2B or service industry or B2B industries or wholesaling where you give a price upfront, which is very common. People want to protect their prices in the market. They don't want everyone to have different price points. So for example, if I was selling something to Walmart and Target and, Whole Foods or whichever retail chain, I would want everyone to have the same sort of list price that, hey, here's the price everyone pays. But because everyone will have different requirements for margins, then we then you get into the world of rebates and how much rebate everyone gets. Someone gets five bucks off for a unit. Someone gets two bucks off a unit, or three bucks off a unit. So there are constructive ways and it's a great way to structure your pricing when you want uniformity in pricing in the market.
Guest: Karan Sood:: Because what happens in a lot of companies that don't look at this stuff is they'll launch a product across eight different retailers at eight different prices and then realize, oh, they're all buying off each other now at some point, or people are buying off cross-shopping across different retailers because they're not they didn't control it. So rebates are a good way to control it. Also, rebates can be used all the way between the manufacturer to what we manufacture and the seller sometimes based on, based on production targets, etc. So I think it's a very it's a very loaded question, I would say. But what I would say is to start measuring people. The biggest issue I find with rebates is people don't measure, they just anniversary, a promotion anniversary, or a rebate movie year after year because that's how every sales guy just did it or signed up for it, or the budget was made. But when you don't question it, a lot of bad promotions and bad rebates go through. I think the same study that showed the 1 to 11% also showed, I think, the amount of off-invoice rebates that are there. So if you're not, there are all sorts of rebates on invoice rebates, off-invoice rebates, volume rebates, kickbacks, etc., etc.. So if you're not controlling the entire spectrum of rebates, you are losing out to someone who is. So I think that's great and that's one way I've always optimized. Our pricing is before we optimize price, we optimize discounts. It's always been very, very beneficial for us.
Host: Paul Barnhurst:: Great answer there. We only have about four minutes left. So I'm going to go into a kind of rapid-fire, get-to-know-you fun section. I'm going to throw the question of who should I go with first. Any volunteers. We'll go to Corinne here first. We're going to do two well, call kind of work-related and two kind of fun. The idea is you get about 15 to 20s to answer these. So trying to be quick. First, in your opinion, what's the number one technical skill pricing professional?
Guest: Karan Sood:: Need modeling statistics and probability. I would say the probability is probably a good one to learn because over time your models will get complicated and it's something to something that you should probably learn and and game theory.
Host: Paul Barnhurst:: We'll throw that all in modeling statistics, and game theory. We'll call it one thing. What's the number one soft skill pricing people need?
Guest: Karan Sood:: The art of persuasion.
Host: Paul Barnhurst:: There we are.
Guest: Karan Sood:: Creating a team full of people, from execs down to senior managers to whoever you're working on the other side who will have conflicts. Who goals as you and getting them in alignment is in or that's what separates the people who are doing just pricing to people who are strategic about pricing and able to create it to a standard where the organization cares about it. So I would say that's a soft skill and highly recommend the book. Yeah, highly recommend the book by Robert Cialdini as well.
Host: Paul Barnhurst:: So I don't need to ask the book you'd recommend. So we'll skip that one. The next one is if you're going on a trip tomorrow and you can go anywhere in the world, where are you going?
Guest: Karan Sood:: Paris.
Host: Paul Barnhurst:: Paris? Nice. Then the last thing, if I told you you could have dinner with anyone in the world tonight and that's alive, who are you taking to dinner?
Guest: Karan Sood:: Wow. That one. But I don't know. It'd be hard to be to Jeff Bezos. I think someone who started who's transformed the entire world and how we operate and why is probably. I mean, you probably want to this would.
Host: Paul Barnhurst:: Be a great one.
Guest: Karan Sood:: You have to be a great one. Just I think that's probably it's very cliche, but probably interesting.
Host: Paul Barnhurst:: I like it. Nate, I'm going to mix them up a little bit for you. So you're going to get a different set of questions. The first one is if you could take anyone to dinner not alive, who are you taking?
Guest: Nathan Kaemingk:: Oh man, I had an answer. Well, my answer for somebody alive was, Paul Barnhurst.
Host: Paul Barnhurst:: Well. Of course. So serious.
Guest: Nathan Kaemingk:: Anyone not alive? I'm going to have to go back to, like, I would love to take some of the people that were involved in the setup of the Federal Reserve, I don't know who they are, but I would love to go back and understand some monetary policy theory. That's just me being a nerd. I love that stuff.
Host: Paul Barnhurst:: So Alexander Hamilton would be a good place to start.
Guest: Nathan Kaemingk:: For sure.
Host: Paul Barnhurst:: I'll join you for that dinner.
Guest: Nathan Kaemingk:: Okay. Sounds great. Well, then all three, then we get to get both of those. You, me and Alex.
Host: Paul Barnhurst:: There you go. You get a life in debt. We covered them both. Fantastic. We got about a minute left, so we're gonna go quick here. The next one is, what's your favorite Excel shortcut?
Guest: Nathan Kaemingk:: Ctrl+1.
Host: Paul Barnhurst:: Ctrl+1? All right. Next question. What are the technical skills of FP&A professionals, not pricing?
Guest: Nathan Kaemingk:: For FP&A, it's going to be forecasting. I mean that's accounting.
Host: Paul Barnhurst:: What's the number one soft skill for FP&A professionals?
Guest: Nathan Kaemingk:: I'm going to agree with Karan and say persuasion. Influence and persuasion, 100%.
Host: Paul Barnhurst:: Great. Well, thank you guys for joining us. I appreciate you spending an hour with us to talk about pricing. This will be released as a podcast, so if you enjoyed this, please share it with your friends and neighbors. Let them know. Thank you everyone for joining us. Apologies that we didn't get to every question that was out there. We tried to cover as many as we could, but thanks everyone.
Guest: Nathan Kaemingk:: Thank you.
Guest: Karan Sood:: Thanks, Paul. This is amazing. Thanks guys.
Host: Paul Barnhurst:: Thanks for listening to FP&A tomorrow. If you enjoyed the show, please leave us a five-star rating and a review on your podcast platform of choice. This allows us to continue to bring you great guests from around the globe. As a reminder, you can earn CPE credit by going to earmarkcpe.com, downloading the app, taking a short quiz, and getting your CPE certificate to earn continuing education credits for the FPAC certification. Take the quiz on earmark and contact me, the show host for further details.
