Lisa Ryan: Hey, it's Lisa Ryan. Welcome to the Manufacturers Network podcast. I'm here today with Per Sjofors. Per is the founder of Sjofors Partners. Pricing has always been an interest area for Per. As a serial entrepreneur running companies in Europe and the U.S., he did pricing experiences. Now some of these experiences worked spectacularly well, and others not so much. As a result, Per founded his company out of his frustration that his business schools taught him that pricing is too abstract, too academic for a business executive to act on. Per, welcome to the show today.
Per Sjofors: Thank you very much, Lisa, and thank you for having me.
Lisa Ryan: Absolutely. Share with us a little bit about your background. What brought you here, and with this whole focus on pricing and the craziness that goes along with that?
Per Sjofors: Well, it's a little bit of what you just mentioned. I had been able to run a few companies here in the U.S. and in Europe before I moved here. And these experiments we did with pricing - some were spectacular. I mean, we could see revenues are up 25 percent the next quarter, and others were complete duds. And business school learnings were so academic and so theoretical that it was useless. So, 13 years ago, I decided I was too old and too opinionated to report to anybody.
So I decided to take that interest in pricing and develop a process that would make every pricing experiment a success. That is the process that we've been using ever since. And the core of the process is to understand how you can predict sales volume at different prices. Now, once you can predict sales volume at different prices, and when you can predict revenue at different prices, you can set the price that is the best for you if that prediction is correct.
Lisa Ryan: Right. When it comes to manufacturing, you and I have talked about this a couple of times, but we think that there's just one way to do pricing in cost-plus. But this is one of the biggest mistakes that manufacturers are making. And there are two others. What do you see about these mistakes, and how can we start to turn that around and be more profitable?
Per Sjofors: Cost-plus is a big one. I've been there myself in some of these companies. We use a rule of thumb because different industries have different rules of thumb - some are 35 percent, some is 50 percent, some double the price. In some industries, you go up as high as ten times the cost. But, it's all irrelevant because your cost as a manufacturer has very little to do with the value you deliver to customers.
There's another very logical thing, but a lot of manufacturers don't think about it. And this is if you manage to reduce your cost, your price goes down in dollars. If you manage to reduce your cost and have your prices the way they are, there's no reason to make a little more money. The other another mistake, of course, is to look at a competitor.
If you have competitors that have prices online, it's quote-unquote, easy. And many times, in manufacturing, you don't have that ability. You try to get somebody at last year's price list or maybe an international price list or something like that. And they'll give you some hints somewhere where competition or pricing sets their prices. But it doesn't tell you the story. It doesn't tell you what deals they're making, doesn't tell you about bundles they're making. It doesn't work. That tells you what kickbacks they may offer to their clients and special incentives, and so forth. So trying to set a price based on a competitor leads to using the wrong price. And by the way, that competitor may well have guessed in getting to set their price in the first place.
Lisa Ryan: When you think about it, you're trying to differentiate yourself from your competitor anyway, as far as in terms of product, in terms of service, and in favor of something else that you're doing. And if you're going to price yourself the same, then what differentiating factor do you have?
Per Sjofors: Well, you used a very keyword here, differentiators. When I did these experiments, the key was to figure out from the process I developed how you can differentiate yourself in meaningful ways to your customers so that you can command higher prices so that you gain a little bit of pricing power.
Let me give you an example. We're currently working with a company that provides steel plates that you run over when there's a trench in the street. Can you think about something that is more commoditized than a piece of metal?
Lisa Ryan: And it doesn't have to look pretty. You're driving over it for.
Per Sjofors: Exactly. This company naming no names here, has managed to become the high price leader in their market. They charge between 20 to 25 percent higher fees than the competition. They also charge delivery fees - the competition doesn't do that. Now, how do they do that?
Well, by adding services to a commodity product. They have managed to position themselves to be the thought leader by providing educational services on safety. They have consultants that advise on what kind of steel plates you should use. They have managed to differentiate themselves in a way that is meaningful to their clients.
Lisa Ryan: That's probably what happens when you're selling that to a purchasing agent. They're thinking that they're just calling and buying pieces of metal to put on a road. But when this manufacturer comes and says, and we can do this, and we can share this, these safety tips and everything, it's just really looking at your business differently.
Per Sjofors: Exactly. Yeah. This is a trend that's been going on for a while. We know that more and more commodity manufacturers are becoming service organizations that also sell the commodity. By doing so, you almost always increase that pricing power.
Lisa Ryan: You mentioned in our conversation a couple of weeks ago that maybe you have a little less flexibility in the price if you have a commodity product. You talked about bundling, making it difficult for people to compare those apples and oranges of the bundles. But then you're looking if you're doing a strictly a cost-plus, then you have some of these higher-margin things that maybe you're letting leaving money on the table. So tell us about both ends of those of that spectrum.
Per Sjofors: It's fascinating because companies that use cost-plus typically have the same uplift or margin for every product. But every company has specific products that are a complete commodity and certain products that have a level of uniqueness. One of the recommendations that we discuss is how to segment the product on a scale from unique to commodity. You want to categorize these anywhere you want to call them A, B, and C, meaning A are unique products. C is complete commodities, and B products are somewhere in between.
That leads to a different pricing strategy for all of these with the unique products; all discounting should stop, prices should increase. For C products, it's all about strict cost control. True commodity products are being sold on price. And for those B products, those are sort of in-between; you should find out if you can add something to make a product a B product, so you gain that pricing power.
Lisa Ryan: There are three mistakes that manufacturers make in their pricing. What else are they doing wrong?
Per Sjofors: Cost-plus is a mistake because the cost has little to do with the benefit that your competitor does. It's the benefit and the value that the customer sees. The sort of costs among various manufacturers are similar, so you end up having a near-identical product with near-identical prices. But that is also an opportunity because that means that the savvy manufacturer can differentiate themselves and, once they do, see a doubling of sales growth and three to five times higher valuation, which is enormous.
We touched upon this already; the third major mistake is to guess. I remember speaking to a CEO a couple of years ago. He had this product, and he said, we priced this one hundred sixty dollars. I don't know; he said maybe he should have been ninety-nine. Perhaps it should have been three-fifty. I don't know, but one hundred and sixty just felt right.
Lisa Ryan: It's so funny. We talk about this, and immediately my mind goes to Shark Tank. You have people coming out of Shark Tank, and they want a ten million dollar valuation. And the product hasn't even come to market yet. But then they say the sentence that the sharks hate, "but this is a three billion-dollar business." Oh, yeah. Well, I think, and if we just got .02 of the market, we can make tons of money. That drives the sharks wild.
Per Sjofors: Another there's another term for that, which is the Chinese sneaker syndrome. You know, I'm going to sell sneakers to only half a percent of the Chinese population, and I'll have a million-dollar company. Yeah, exactly. Exactly. It's also interesting that you mention Shark Tank because they talk about pricing there sometimes, but the sharks make the same mistakes. They're saying your price is like your competitor or price a little lower. Or, your product is not as good as a competitor, so price a little lower. And how much is a little lower? Well, it's gotta be lower, or your product is a little bit better; it's gut-feels higher. That's not the way to do it. That's guessing. Right.
And it's so funny because companies generally go from, you know, everything should be driven by data, and then you guessed the price.
Lisa Ryan: Well, it's kind of like asking your friends or asking people, hey, I'm about to develop this product. Is it something of interest to you? Oh, yeah. That sounds like a great idea. That's the best idea I've ever heard. But a follow-up, would you buy it and what would you pay for it and try to get that real sense of. Yeah, that's a great idea, because again, we go back to Shark Tank. How many of those people are all my friends told me this was a great idea.
Per Sjofors: Whenever you do some as a startup, you never want to talk to your friends about this. They will never tell you the truth. You come up with a dud of a product or a product idea, and they will say, oh, yes, this is great. There are statistics that roughly 40 percent of all startup fails because they say there's no product to market fit. Why? Because they haven't done the research. They haven't understood what potential customers truly are willing to pay for that product. So they're guessing their price, which means that they're either too high and won't sell anything or are too low, and they're not making enough money.
And so they fail. It's about that ability to understand sales volume at different prices. And that will always lead to the right price. And sometimes, if you do this as a startup, you may end up saying, I will never make money on this product, so get it right now.
Lisa Ryan: And when it comes to pricing, again, a lot of people are thinking, well, it's got to be the low price. If I can just come out with the lowest price, I can make it up in volume. So, what's the error of that thinking?
Per Sjofors: This is a very well-known example, but look at Apple versus Samsung. Samsung has telephones or smartphones that are technically superior to Apple in virtually all aspects, yet a Samsung phone is three hundred bucks, and an Apple phone is twelve hundred. How do they get there? Well, they got there by superior marketing, by having differentiators that make sense to the client. And yes, Apple has a small market share, but they have superior valuation. And they generate 70, 80 percent of the whole cell phone industry's profits.
Lisa Ryan: If somebody's listening to this podcast today, decides that they need to start looking at their pricing, what's a good place for them to start?
Per Sjofors: Well, obviously, I want to put myself forward. There are very few people that work with pricing in the way that we do. It's a unique way, and it's a practical way because it came from that very practical need I had in the companies I've been running. So obviously, my website is sjofors.com, and my email is at firstname.lastname@example.org.
Lisa Ryan: And so what does that process look like? Where do you start with your clients?
Per Sjofors: We work specifically with manufacturers. We start with an impact analysis, which is relatively short. We have our own A.I. software. It's a fairly short term and not a very expensive analysis of a company's transactional sales data. From that, we can assess how much more would they make if they price right. A typical 20 small 25, 50, 100 million dollar manufacturer, the results of that, is almost always several million dollars in in in in in revenue that is pure profit.
Lisa Ryan: Wow, so that's a big difference. So if you could wrap it up in a nice bow and share your best idea or biggest aha, somebody's watching this today can use it right away.
Per Sjofors: Pricing is much more important than most companies believe it is. And pricing is also something that you can work with proactively. Pricing is part of the four quadrants of marketing for a reason because those four pieces are connected. And when you start working with pricing proactively, the company will earn superior profits, crush the competition, and lead to unexpected shareholder values.
Lisa Ryan: It has been an absolute pleasure having you on the show today. Thanks for hanging out with me here.
Per Sjofors: Thank you very much, Lisa. And thank you for having me.
Lisa Ryan: You're welcome. I'm Lisa Ryan, and this is the Manufacturers Network podcast. See you next time.