The Pricing Continuum: Where Do You Land?

In this first episode of Pricefx's new podcast series, Pricing Matters, regular host and Pricefx chief evangelist, Gabriel Smith, speaks with pricing influencer, Dr. Ian Tidswell, about the very burning issues of ethical pricing and mission-driven pricing.

Transcript

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Gabe Smith:   0:07
Hello everyone and welcome to Pricing Matters. This is the first in a series of discussions we plan to work on during 2020 around various topics that we think are under-discussed and interesting around pricing and how it’s changing with the use of technology. Every few weeks, we plan to have a discussion around an important topic in pricing. Some are more practical, others, more big picture. Someone will be more one-off discussions, and some topics will probably have series. I’ll have some guests on the show and some will be one time and some will be more regular. And today, I have a regular guest that will be joining us for at least a few of these, and he is a pricing expert named Dr. Ian Tidswell. Hi Ian!

Ian Tidswell:   1:22
Hi, Gabe! Thanks for having me. I’m excited to be part of this initiative. I’m kinda hoping we can have pricing discussions around topics that I know you and I both find interesting and maybe get away from the purely sort of pragmatic stuff that we spend our day jobs doing and get into topics of policies, sustainability strategies and things that don’t tend to get covered quite as much in the regular podcast world or even in the conferences.

Gabe Smith:   1:50
Yeah. And I think the first topic that we have is a great one and one that we’ll come back to a few times. So, today, we want to talk about ethical pricing overall and mission-driven pricing specifically today.

Ian Tidswell:   2:04
Yeah. And I know you’re as excited about this one as I am. Right. It’s a pretty interesting topic.

Gabe Smith:   2:09
Indeed. So, let’s jump into it. What’s your understanding of the definition of mission-driven pricing or what we mean when we talk about mission-driven or ethical pricing?

Ian Tidswell:   2:23
Well, it’s interesting. I guess we’ve got this continuum up on the screen here showing you going from on one side mercenary – bad illegal, unethical stuff. We could argue about what’s bad, what’s unethical. But, we’ll get into that. I think up to on the far right, mission-driven, which is around who are the companies who are trying to do good in the world. But maybe we need to start off by having a quick look at where does pricing even fit overall? Right? So I pop into Wikipedia there. It says the definition of a market economy is an economic system in which decisions regarding investment production to distribution are guided by price signals created by the forces of supply and demand. So, this is really getting to, I think, that pricing is really central to how market economies work, how markets work. And it’s about trying to emphasize where and how can we maximize profits, right? It’s about how can we maximize the profitable outcome by using price signals as part of that. That’s sort of where pricing starts, at least.

Gabe Smith:   3:30
Yeah. And obviously it’s a complex topic, right? There are various techniques and tools around pricing and we’re not going to get into all of those today, but just to give the listeners some background they might not have. A lot of companies will start by looking at the cost of goods and their cost of sales and apply some sort of margin percent on top of that. That’s called cost-plus pricing. It’s kind of the most basic form and what a lot of companies have done for many years. It’s not one that we necessarily support as pricing professionals, but it does warrant being mentioned because it is widely used in many industries. And then, you know, moving on into more market–based pricing where you’re trying to understand what are the alternative offers that are out there, competition, et cetera, and really pricing aligned with those changing market conditions.

Gabe Smith:   0:00
And that’s where dynamic pricing comes in and these kinds of things that you hear about in the news a lot. And then kind of moving towards value-based pricing is really trying to understand the value that your customers are getting from your products and services and the whole transaction or the sale of your product or service is really. You can think about it in the context of an exchange of value, right? So you’re providing some value, you’re trying to price it according to that value that’s being provided and you’re taking a share of that as compensation for providing that value.

Ian Tidswell:   4:49
Yeah, that’s right. That’s right. And, and I think when mission-driven pricing really kicks in is when an organization is trying to do something other than maximize profits, or maybe that’s part of the goal, but there’s some other mission. So, in its pure form, mission-driven pricing would be when a not–for–profit organization or a government entity is using pricing to try to fulfill its mission.

Gabe Smith:   5:13
Indeed. So I agree with that definition: forgoing some or all profit for the sake of the mission. And so, let’s talk about some examples.

Ian Tidswell:   5:23
Well, let’s start with a very prosaic one, right? So, governments have to issue drivers’ licenses, and they charge money for that. So how much should they charge? You could think of it first as just a cost recovery. Maybe a lot of people would think a cost-plus model was the right way to do it. You could think of it as “do we want to use this as a revenue source“? That might get a little tricky if you try to maximize the revenue you could get given that most people will need a driver’s license, how much revenue you’re trying to raise – what’s the story there? I could also make an argument that you could go for a lower price to encourage more people to drive or encourage everyone who drives to drive, making sure they have a driver’s license. So really, the price the government should charge for getting a driver’s license is going to depend on what their mandate is and what their mission is. What are they actually trying to do?

Gabe Smith:   6:09
And if they’re trying to discourage driving, then they would charge quite a high price. To encourage people. And so kind of an example along those lines is speeding fines and what some countries are doing there, right? So most places have a fixed fine for speeding regardless of who you are. But you’re hearing in the news over the last, say, decade, that some countries like Switzerland, where you live, or the Nordic countries are actually doing these day fines, right? And the idea of a day fine is they’re taking the income of the driver and dividing that by 365 days and trying to equalize it to say two days or something along those lines, right? And, so, if you’re making millions of dollars, you can walk home with a $1 million speeding penalty – as this Swedish guy did in his Mercedes for going about 170 kilometers over the limit. So having a heavy foot was pretty expensive in that case.

Ian Tidswell:   6:57
Yeah. And, and he was being charged 300 days cause he was so far over the speed limit. So, they’re basically saying, a year’s income to pay this fine. Right, and, arguably that’s a very sensible scheme. Yes, it’s a lot of money, but it treats everyone equally on some basis – depending on how you want to call it.

Gabe Smith:   7:14
It does. Although, I wasn’t referring to this specific one in terms of the number of days and whether or not that 300 days is fair. I think that’s where I think the idea of trying to make this hurt as much for people at different incomes make sense. But should you be paying almost a year of your income because you’re going over the speed limit? That’s where I’d say there’s some debate to be had. And I think, in this case, they’ve dialed back. It is pretty old article, right. And I think they’ve dialled back some of this due to the pushback.

Ian Tidswell:   7:34
The guy was doing a hundred miles an hour over the speed limit. I don’t have a lot of sympathy, but anyway, they didn’t ask me. So that’s okay.

Gabe Smith:   7:44
I think there are some other examples that are interesting around traffic and congestion pricing, things like that.

Ian Tidswell:   7:52
Yeah. I mean the classic is, you know, where I’m from, the UK, London was one of the first cities to introduce congestion pricing. So it’s, I think it’s 11 pounds 50 pence a day now to drive in central London, weekdays from 7:00 AM to 6:00 PM. That’s been quite successful at reducing pollution, increasing travel times and just discouraging driving in general, which I think is what they were trying to do.

Gabe Smith:   8:17
And the Bay Bridge has some variable pricing, although, I don’t think flexes quite as much as the congestion pricing in London. One example that we do have in the States is in Virginia on the I66 where they introduced variable pricing depending on the traffic conditions or HOV lanes or these fast track lanes. And, as you’re pointing out here, for those that are following on the web, have actually gone up to almost $40 in some cases. Which again, is that ethical? It kind of depends on what the alternatives are for people, right?

Ian Tidswell:   8:54
Yeah, that’s right. There was a lot of pushback in Virginia. It went up to, I think, 40 bucks was the highest price to drive like a 10-mile stretch of road. So, that’s pretty expensive. I think they may have put some caps on it now. But you know, arguably, if you have no choice, then it’s a problem. I think the point is lots of people do have choices in the medium term, at least. But any of these schemes where you do something like this, you create winners and losers. Even though it’s good in general, it’s the winners and losers debate that gets difficult. And in our polarized societies, I think that gets a little challenging. But you know, this has speeded up traffic on that road and it has raised money, and reduced congestion. So it achieved its mission. So, in that way, it’s mission-driven, but there’s still a question around kind the ethical dilemma – there are the winners and losers, as you mentioned. So that’s an interesting one. You’ve got to always look at the side effects of what you’re doing. A lot of these things may make economic sense, but they can hurt the least advantaged of society the biggest. Let me raise one of the funny one, right? I know you and I had a chuckle about this earlier. St Kitts and Nevis has a scheme where you can pay for citizenship. So that’s I think an interesting value-based pricing challenge. I plugged in your numbers here, Gabe. So for $150,000, you can get citizenship, even have a sort of a good–better–best scheme. You can even do fast track approval if you want to pay a bit more as well.

Gabe Smith:   10:30
Or if you invest in real estate, which they’re obviously trying to encourage, then it comes down some.

Ian Tidswell:   10:35
No, the minimum required by law is $400,000 right. Then there’s some fees. I think when you invest in getting citizenship, I think you’re paying. Because I don’t think you get a return on your investment other than a passport, but you know…

Gabe Smith:   10:49
Yeah. So, I mean, that’s something where obviously they have a mission that they’re trying to achieve there with that. And it’s to encourage foreign investment probably of wealthy individuals that would probably also get some potential tax benefits if they do become actual citizens and probably also provide the lower-income people on the island with additional government services as a result of the tax revenue that they would be generating.

Ian Tidswell:   11:15
Yeah, that’s right. But you can imagine it’s tricky if they could have too few applicants – so it doesn’t make sense. And you could have too many. So you’re overwhelmed. One would hope there was a healthy debate about where to get the balance right there.

Gabe Smith:   11:28
Yeah. It would have been an interesting project to work on right now. I would love to do that.

Ian Tidswell:   11:33
But we’re pricing geeks, so maybe that’s why we think it’s super interesting. Well, that’s why we’re having a pricing podcast.

Gabe Smith:   11:43
That’s right. So you did some work for a Dutch red cross, right? 

Ian Tidswell:   11:47
Yeah, that’s right. I did a project for an organization called 510, which is part of the Dutch Red Cross and 510 refers to the fact that there’s 510 million square kilometers of the Earth’s surface. And what they’re trying to use is big data and analytics to direct resources when there’s some kind of crisis or disaster – like a hurricane or a tsunami or flooding – this kind of thing – or even a drought. And so the idea was to try and figure out how they could do something where it wasn’t just based on cost recovery, but it was more based on an ability to pay. So perhaps the Norwegian Red Cross should pay more than the Congolese Red Cross for some support because of their willingness to pay. In fact, it turns out a lot of these organizations work on a very much cost-plus basis. So, this is a tricky problem to solve in the context of how nonprofits work. But you could argue, they’re missing a trick there with that.

Gabe Smith:   12:43
When you’re a nonprofit, the idea even of maximizing profitability can be a challenging one for some people to even wrap their heads around. So, let’s get into some examples that are more on the business side of things that are companies that might be for profit but are mission driven.

Ian Tidswell:   13:00
I know you and I have gone back and forth a bit on this, right? There are several companies now I think that are doing this that are for profit, but mission is a very strong component of what they’re doing. So let’s cycle through two or three of these. The first one I bring up is a company called Life Bank. So I came across the CEO of this company a couple of years ago at an accelerator in Darmstadt, Germany. And what they’re doing is trying to help hospitals get medical products delivered to them in good quality and at the time they need it. So this is a big issue in Africa where the infrastructure is so poor. So they use what is very straightforward technology – men on motorbikes and then also doing things with drones and doing things in a different way. So, there are some stats here on the screen, right? They’ve credited themselves with saving 6,700 people’s lives because they were able to have a very focused mission of what they were trying to do. So, while they’re for profit, I don’t think they’re trying to maximize the profit they make either. If they were, I’m not sure that Nigeria would be the place to start.

Gabe Smith:   14:07
Indeed. That kind of reminds me of one of our clients, which is a company called AlloSource. So, AlloSource makes both artificial skin grafts and some of the technology that goes around that and some other medical products. But what they looking for, they are a nonprofit, but they were looking to maximize transaction profitability by understanding willingness to pay and coming up with a way to negotiate deals and then use some of that profit in order to really further their mission and help more people that are in need. So I thought this was an interesting use of pricing or a nonprofit in order to further their mission.

Ian Tidswell:   14:46
It raises some interesting questions there. Right? So do you treat certain injuries such as sports medicine in a different way than you would burns victims? So how are they thinking about segmenting their pricing? Because segmentation is always a big thing. One does it for for-profit pricing and it’s not obvious to me how to do that, which means it’s interesting.

Gabe Smith:   15:06
Yeah, it’s a complex challenge for sure. We were able to give them some special pricing as a nonprofit. And that’s something that we’ve actually now turned into a program for nonprofits and mission-driven companies. So, looking forward to hopefully helping more of these types of companies with their challenges. And I know that that’s a big area that you’d like to get involved in as well.

Ian Tidswell:   15:28
Yeah, that’s right. Another outfit I did a little bit of work with is called Noul. So they’re a Korean company and that has a malaria detection. And that’s an interesting example too, because basically the longer you study, the sample you take, the more accurate you can be. So you can detect it sooner. But the last cases you can do and the more it costs. So there’s an interesting case. They’re trying to get the balance right. So if you’re in Africa, maybe it makes sense to tune the device. So you capture the maximum number of malaria cases with the minimum number of false positives. But uh, do it, but not just be super accurate and then be super accurate when you have it in, when you stick it in Zurich hospital. The travelers can come back. Then maybe you have it set at a different level and you can charge different prices for that. So that’s super interesting how they should do that and how they want to do the segmentation as well.

Gabe Smith:   16:18
Indeed. So, and they have a clear mission as well. So most companies do have a mission. Does that mean that all companies are doing mission-driven pricing?

Ian Tidswell:   16:28
I tend to think not. Let’s take one that seems “yes“ and one that seems “no“. Right. So frost methane, I think that you’ve worked with them a little bit, right?

Gabe Smith:   16:34
That’s a startup in the Bay area. Started up by a friend of mine that came from Google actually. And, what she’s trying to do is have a startup company that is profit-driven that’s really moving the needle with regards to global warming and climate change. And so what’s happening as the permafrost is thawing is that you get these huge vents of methane that are coming up. And what she’s trying to do is develop technology and have a mechanism to detect those and then convert those actually into CO2 or capture the methane. Because, as you know, methane is much more harmful to climate change or has much a bigger impact on climate change than does carbon dioxide. But what they’re doing is they’re selling carbon credits both to companies that are subject to the cap and trade system, which is in certain geographic regions but also selling to companies that are just voluntarily looking to reduce their carbon footprint. As you probably heard recently, Microsoft had found that they want to actually erase their entire carbon footprint. And I think, hopefully, that’s going to be a trend – with more and more companies looking to get to a carbon-neutral and maybe even a negative–carbon footprint on an ongoing basis – to erase their overall carbon footprint as a company. And so this is an interesting problem because it has a technology aspect to it and how to use the technology in order to detect and contain and destroy the methane. But then there’s also the kind of government market angle of things in terms of how they’re pricing. So, there’s a set price on the cap and trade system for a ton of carbon, but then there’s a variable willingness to pay on the voluntary side of things as well. So it’s kind of a multifaceted pricing challenge that we’ve been talking about, as she’s getting the company up, to help her put together her pricing strategy and tactics.

Ian Tidswell:   18:24
Yeah, I mean it’s super interesting, right? Again, not obvious what the right pricing strategy should be.

Gabe Smith:   18:29
So what about some of the things that you hear like Gilead donating Truvada, the AIDS transmission prevention drugs. Is that an example of a mission-driven company or mission-driven pricing?

Ian Tidswell:   18:41
Lots of companies have missions, and they’d like to talk about how they’re mission-driven. But if you’re using your mission purely to maximize your profits in the long run in your industry or market because you’re basically using it as a PR stunt, then I think, that’s not mission-driven pricing. That’s marketing. So Gilead is interesting in that they gave several hundred thousand treatments of HIV prevention in the US, but, in fact, if you look at the press on this, there’s a very interesting podcast – we’ll put all of the links in the notes as well, for those who are not online. The developers of this drug, the researchers who developed this drug, wanted it to be free and wanted it to cure. I didn’t look at it as making money. It’s very mission-driven, but Gilead now, who runs this thing, seems to be using it to lock in the market share in the US in the future. So, it’s interesting how what can seem like a charitable donation, in fact, has a dark side to it that it is not so benign, and not so giving and charitable as you might think.

Gabe Smith:   19:48
Yeah, indeed. I think you have to be a bit wary. There’s a lot of this kind of PR window–dressing type of mission-based activity. Companies kind of bragging about how much they donate or what kind of climate impact they’ve made or things like that – when it’s a very small percentage of their profit. It’s really more for being able to create a commercial than anything else. But, I have noticed an increase, especially over the last decade, really of conscious capitalism and responsible investing and really people being interested in social impact. I love this and I think especially, you know, millennials oftentimes catch a lot of flack, but I think this is an area where millennials really are driving a lot of this change and companies are realizing that not only do people want to work for companies that have a positive social impact and are responsible and conscious, but also people are looking to invest in companies that are responsible, right? Both of these trends are making it easier for companies to do more and to think about more of a mission rather than just maximizing profitability. It is heartening. It’s good to see it as rubbing off some of the rough edges of capitalism perhaps.

Ian Tidswell:   20:49
It’s interesting though, I think as we’ve been talking about this and doing a little bit of research on it, there doesn’t seem to be a very strong basis on what is mission-driven. So, I’m hoping some big brains at universities are going to start figuring that out and how you can tell.

Gabe Smith:   21:11
It’s all rather fuzzy, right? But let’s turn it to pricing. So regardless of how you define it, how is pricing different when it’s mission driven?

Ian Tidswell:   21:22
As you know, there’s a ton of tools for doing mission-driven pricing, but they’re all typically around trying to maximize the profit. One classic one is the value map, right? It’s basically, a value map, and it is about trying to see perceived value versus perceived performance. You get a map and then you can work it out. It can help you think about where you want to set your price. But if your mission is not to increase to maximize profits, but to maximize something else, you know, we need to basically change these axes. So perceived involvements now may not be quite the right axes. It may be "how much does this help us fulfill the mission that we want to do?" Yeah, mission impact or something like that. So in that malaria case, you know, maybe the pricing should be tuned to when you detect the most malaria cases that can’t be detected by traditional means. If you have a drug treatment or something, then maybe we’re you’re trying to figure out how you could increase the quality adjusted years of life that’s used in healthcare to assess how good a treatment is. It’s not without its own challenges itself, but you know, part of the problem you have if you’ve invented a new vaccine or antibiotic, both areas that are not really favored in the medical space because you can’t make a lot of money. But if you have a mission-driven mindset, then maybe it helps you. The pricing would be different.

Gabe Smith:   22:47
And I think another interesting area here if you look think about this value map is, and you think for some of these mission-driven or more conscious–capitalism type of companies like TOMS, the value perception is actually influenced by the mission, right? So when I go buy a pair of TOMS, I’m not just judging it based on the characteristics and performance of the shoe, of the actual product, I’m also judging it based on the psychological impact that it has on me and the kind of warm fuzzies that I get by knowing that by buying this pair of shoes, I’m giving someone else a pair of shoes. That’s a need. So the question is, to your point though, is one pair of shoes the right thing or would it be better to give one pair of shoes for every two bought and then that way you would maximize the amount of people that you could reach that way? So that’s kind of what you’re talking about. I think it requires a little bit more depth for digging in. And maybe some more research.

Ian Tidswell:   23:42
EasyJet just recently announced that they were going to be a carbon-neutral airline. So, they are basically paying a bunch of money to do offsets for carbon emissions? Is that a PR thing? Does that allow them to charge more to people who fly or is it because there’ll be a preferred airline or is it really a mission-driven thing and it’s super important? I suspect you could find people inside EasyJet who have different opinions about that.

Gabe Smith:   24:05
I’m sure you know, Lyft has been doing that for a while. And Lyft has definitely been my preferred rideshare company for a while, even before they were doing that. But that just really solidified them as my preferred vendor when they started buying carbon offsets and it became carbon neutral.

Ian Tidswell:   24:22
Aren’t you supposed to cycle?

Gabe Smith:   24:24
Well, you can cycle sometimes and other times, you know, it’s snowing here in Chicago. But, I’ll tell you that I definitely am willing to pay a bit more – although, there is a limit to that in order to know that my carbon is offset.

Ian Tidswell:   24:42
Yeah, that’s right. But that gets into the value of the thing you’re buying and you know, I guess the question is: is the mission value fulfilled offset by the price you can charge? So, sometimes doing the right thing lines up with being able to maximize your profits and you know those cases. I think that’s less interesting to me than the notion of "we’re not going to try to maximize our profits because our mission is more important". 

Gabe Smith:   25:06
That’s right. It makes sense. In the beginning, we kind of showed that ethical pricing continuum starting from the kind of illegal and unethical that moving into a more muddled middle and then on the right side – the mission base that we’ve been focusing on the mission-based aspect of this episode. But, I think we want to explore some of those other areas and it’d be great to actually, I think, go moreover to the dark side and talk about some of those unethical and illegal pricing stories that you hear in the headlines a lot for the next one.

Ian Tidswell:   25:36
I think mission-driven is about proactively trying to do good. Ethical is about trying to avoid doing harm in some way. So they’re related but not quite the same thing.

Gabe Smith:   25:47
Indeed, the mission-driven is about trying to fulfill like a nonfinancial mission and foregoing some or all profit in order to do so. That kind of general definition, although obviously there are some question marks in terms of how much. And, you know, if you’re a full nonprofit, then okay, most likely mission-driven. Although, one could argue that some nonprofits are, therefore, for big founders. But at the same time, for the most part, they’re foregoing profit along those lines. So, I think this is a good thing to talk about a little bit more about the content in the context of that, the other side of the spectrum of pricing. So, let’s do that next time.

Ian Tidswell:   26:34
Perfect.

Gabe Smith:   0:00
  

:   25:36
So, uh, I think that wraps us up for now. Thank you so much for joining me Ian, we’ll look forward to continuing this conversation on the next episode of “Pricing Matters”. 

Ian Tidswell:   25:47
Great. Thanks, Gabe. Thanks, everyone.

Gabe Smith:   26:37
Thank you.