If you’re anything like me, price probably isn’t something you think too much about, beyond maybe using Honey at checkout to see if there’s a little extra bargain to be had. Cactus Raazi, the author of the new book appropriately called Price, makes the argument that despite the fact that e-commerce has been a thing for 20 years now, the way in which companies price goods is still largely stuck in the analog days.

In our interview today, Cactus explains to me why what he calls personalized pricing is the way forward and I got to say, from both the consumer and business perspective, he makes a pretty compelling argument.

Nikki Van Noy: Cactus, you are writing about the concept of price, which is something that I feel like most of us sort of just take for granted as the static thing. Tell me about how you think of pricing?

Cactus Raazi: Sure, when I started to really think about price, I was really focused on what my experience personally was with pricing on the one hand, and on the other, the inability of retailers and people who provide goods and services to reflect the quality of me being a customer or my engagement with their good of service and how that was really not reflected in the pricing. Sometimes I was feeling aggrieved that despite my loyalty, despite my continued use of this good or service, that my pricing was exactly the same as anyone else’s. That was one element.

Of course, as part of my academic background as well, we did a lot of work on pricing and pricing theory. One of the things that occurred to me is that so much pricing theory is really stuck in the sort of pre-Internet, pre-ecommerce age. There are some articles we mention in the book around changing attitudes towards pricing and dynamic pricing, and to some degree, even individualized pricing. Even these articles and these suggestions tend to be somewhat limited in their scope.

At the same time, one of the things I’ve been experiencing is the march of additional competitive forces based on the Internet, that is to say, much more transparency around price and giving shoppers and customers, users of goods and services, a wide variety of tools to sneak out and figure out the best possible price.

Everyone’s familiar with the travel-related shopping sites that allow you to pick, for example, a flight based on the cheapest way of getting from point A to point B, but that’s just one of many illustrations that we’re currently experiencing that stack up your different options as a purchaser and then offer you the lowest price.

A lot of e-commerce sites and a lot of aggregator sites are doing that, but in addition, there’s now a lot of browsers that will give you a price history or browsers that seek out coupons and browser extensions that seek out coupons. There are a lot of different ways that pricing power is being eroded through e-commerce and also through mobile commerce.

Pricing Theory

Nikki Van Noy: I’m going to stop you here for just one second because I’m curious about what the common concepts about pricing theory are that still hold but are not necessarily still applicable. What are people working off of at this point?

Cactus Raazi: Well, generally speaking, the general approach to pricing is to come up with some form of a revenue maximization price–so that is to say, you’re pricing the good or the service and you’re trying to come up with a price that’s going to make the most economic sense.

This could be, for example, in the retail business it’s oftentimes a multiple of your production cost. That would be an example of coming up with a price. Another example would be to think about what the marginal consumer is willing to pay. For example, if you had a concert venue with a thousand seats available, you’re saying, “What will we charge to sell out the venue?” Obviously, the higher the price you charge, the fewer people will purchase tickets, but you’ll make more money per ticket.

So, you have this idea of maximizing your revenue while filling the venue and there’s a lot of different examples of pricing, and applications of pricing theory depending on what specific context or the specific domain.

One of the things that I think has been heavily underexplored and one of the focuses of our book is thinking about pricing the customer rather than the product or the good or service. This is to say, in today’s world of hyper-competition in almost every domain, whether we’re talking about blue jeans or dinner or almost any other good or service that a person purchases, you have an abundance of choice.

In that regard, a provider of a good or a service is not going to have the option to win 100% of customers. What you’re really going to want to think about is what portion of the total potential customer base is really my customer, and conducts themselves in a manner that I find acceptable for my business and how am I going to give my customer, not only a differentiated experience but really, how am I going to ensure that I take my customer and maximize their loyalty?

There are a lot of attempts to do this through loyalty programs, punch cards, or all sorts of different efforts that providers of goods and services make to retain customer loyalty, but we think that the best way of affecting a commercial transaction and increasing your customer loyalty and your relationship with your customers is to provide them a differentiated price.

That’s one of the key messages of the book is to think about pricing your customer in a manner that maintains their loyalty.

Nikki Van Noy: Fascinating. Can you tether this down in a real-world example of what that would look like for me?

Cactus Raazi: Sure, let’s use Levi Strauss as an example. Levi has a great brand name as we all know, one of the topmost recognizable brand names in the world, and Levi’s has a variety of people that are going to buy their jeans in any given time period. Some of those people are going to be their most loyal customers that happen to like Levi’s fit and the marketing message and the price point and a lot of other elements.

Then, there are maybe some customers who, for example, have bought their first pair of Levi’s or have demonstrated very little loyalty. In this example, Levi’s is supposed to strive to identify their customer through a variety of mechanisms. One obvious one is through e-commerce with a customer login to Levi’s website.

Slightly less obvious but pretty effective one would be an app to engage their customer on their smartphone if they want to move into mobile. One way or the other, the point is that Levi’s needs to put effort and energy into establishing a direct relationship with their customer, providing them some form of a differentiated experience, and then using the information that they have about that customer’s behavior to provide them specific and differentiated prices.

As an example, Levi’s has one of their cuts that fits me really well, it’s their athletic cut. The point there is that I have bought several pairs of these Levi’s through their website. They have that information in there in their databases obviously. They ship me the goods but I have yet to receive a single communication from Levi’s that’s not a mass-market communication and generally, all it says is that, for example, everything is 30% off. In no way does it point me to the jeans that I actually buy. I’ve bought the same cut of jeans now six or seven times.

Nor does it say, “Hey Cactus,” for example, “In the next week, buy a pair of 541’s at $49,” just to pick an example, and these jeans normally retail for about $65. That $49 should be a function of my behavior to Levi’s and effectively, their analytics around what they feel they can offer me as a price, and that I would perceive is a differentiated experience.

Direct Client Engagement

Nikki Van Noy: That makes so much sense. I am no businessperson but even to me, that strikes me as such a missed opportunity in a scenario like that.

Cactus Raazi: Especially in the modern day and age where more and more business is being done either through ecommerce or through mobile. That creates a lot of opportunities for direct client engagement, direct customer engagement, and it creates a lot of opportunities to try and enhance your customer loyalty through some sort of a personalized experience.

We think, in the book, that as part of thinking about providing your customer with a unique or somehow differentiated experience, one of the areas that are going to be most effective is price.

There are other areas that are effective. For example, you’ve probably heard of pre-sale where an item that has some form of scarcity value is released to the key customers first before it’s sent out more broadly. Luxury goods tend to do that sort of a thing.

It’s not clear to me that firms currently are giving sufficient thought specifically to the idea of price and this goes both ways. On the one hand, providing your customer with a better experience via price is a smart thing to be talking about and thinking about. I would call that on the offensive side, meaning, we want to be proactive in retaining our loyal customers.

And on the other side is the defensive side. Because some of the things that we’ve seen with e-commerce is a lot more transparency around pricing and really, an erosion of your pricing power with regards to your standard price or your general price.

I’ll give you some illustrations. Blue jeans we can stay with the same idea because actually, people have their favorite brands generally, they also have the brands that fit them the best and they also have budget constraints, not everybody can spend $250, for example, on a pair of jeans.

Jeans tend to be a pretty personalized item, it’s not a commodity good, and even there though, if you can imagine a website that really focuses on jeans, and allows you to input your preferred cuts or your preferred styles, your preferred colors, and then gives you an assortment of options that suit your preferences.

Of course, it’s going to rank them by price. It’s almost always the way options are presented to consumers in the e-commerce space. Of course, you’ve shopped on Amazon, you’re immediately given the cheapest option for whatever it is that you’re looking for and we could go on and on.

Not thinking about giving your best customers an individual price is also the same thing as acquiescing to a future, in which the good or service that you’re marketing or trying to sell, is constantly being pitted against its competitors in aggregation form with effectively the best price, or the lowest price as something that’s offered to your customer first.

That’s a future that we think is much more likely to happen. As we think about e-commerce, as we think about the various technology products that exist, going after price is one very common thing that technology tends to do. Most people call technology deflationary. Or that’s one of the reasons why they mention it’s deflationary, it creates transparency and erodes pricing power.

As part of this conversation then, be thoughtful about creating individualized prices for your customers to reflect their value to your organization, and also at the same time, be aware that if you do not do so, you run the risk of having your pricing power constantly ground down by effectively a bunch of technology features.

Nikki Van Noy: Yeah, as the consumer, from what you’re saying it strikes me that this is really one of the only ways to remain competitive against Amazon because I am always going to go to Amazon because I’ve got my Prime, so I have free shipping and they’re the lowest price.

Cactus Raazi: That’s a great example. I mean Amazon, I harbor no grudge, we mention Amazon repeatedly in the book as one of many examples. We also use examples of concerts as an example, and concert tickets to particularly festivals, Coachella, things like that. There’s a lot of different examples in the book and different domains but fundamentally, one needs to be thoughtful around how to engage your customer, understanding that your customer can always get either the same good or service or a comparable good or service elsewhere and that they are probably going to get greater and greater transparency around what that pricing looks like away from you.

Reward Your Best Customers

Nikki Van Noy: As the founder of Elefant Inc., which builds smarter marketplaces through AI powered pricing, I am going to guess that this technology to do individual pricing is available already. Is that correct?

Cactus Raazi: It is available. In the book, we don’t really get into the specifics of implementation because that varies from domain to domain but it certainly exists. What we do at Elefant is we use pricing technology to price thousands of securities in real-time all day long in the competitive marketplace–specifically, bonds are what we price.

We mentioned in the book actually that a lot of the ideas in the book are outgrowths of our experience in the bond market, which operates very similarly to how the general consumer marketplace works. Unlike the stock market, which is an exchange-based marketplace and exchanges have unique characteristics that we mention in the book, but the bond market is still what they call an over-the-counter marketplace. When someone needs to buy or sell a bond, they go around to a bunch of different bond dealers to ask for prices and they usually select the best price.

That is not that different from how you might shop for a car, for example, traditionally, where you would go to two or three dealers or make some phone calls and try to get the best price on the car. It is quite similar.

So, in our company at Elefant, we have developed a whole host of analytics to come up with prices on bonds that are consistent with a variety of characteristics that we’re looking for. Essentially the same approach can be used with your client base.

To use the example of Levi Strauss, you’ve got millions of people who have bought your jeans over the years but how many of your customers have bought, for example, an average of four pairs of Levi’s a year over the last three years? I’m sure quite a small number. I don’t have the exact number but it is probably less than 10%, but that is your core customer. Those are going to be your best customers. Why are they not receiving a differentiated experience and can you create a custom price for them? The answer is yes. Should you be talking about such things? Absolutely.

That’s the premise of the book. We use another example of Coachella, the large music festival. I happen to be friendly with some of the founders of that music festival and regardless of how many times you’ve been to Coachella and how many years in a row you’ve purchased your ticket, you end up with the same price.

We mention in the book that the determination of that price is in it itself somewhat of an educated guess but just as interestingly, it’s not clear to me that someone who comes to the concert or to the festival for the first time should receive the same price as someone who is there for the 10th time in a row, as an example.

This exactly strikes to the heart of what we’re suggesting in the book, which is, be thoughtful around how you reward your best customers and improve their loyalty through the pricing mechanism first and foremost.

Nikki Van Noy: It makes so much sense. Is there anyone out there at this point that is doing this or that in your estimation is coming close to doing this and doing a really exemplary job?

Cactus Raazi: Exemplary might be hard but I definitely think these questions are starting to be asked more and more, particularly in the hospitality industry. I’ve certainly read a number of articles where restaurateurs are asking themselves, “Why is it that we charge the same regardless of whether this person is a regular?” Now, you’re going to tell me that regulars get a free dessert or something and while that is somewhat true, it’s missing the point of the discussion.

Why do we charge a regular the same amount as we charge a first-timer? Why do we charge the same amount on Friday night at 7:30 as we do on Tuesday at 5:30? These are all interesting questions that are being wrestled with by certain people in the hospitality industry.

I think that some of these discussions, as firms start to really embrace e-commerce if you will, and I know that we’ve had e-commerce for over 20 years, you mentioned Amazon. It is remarkable to me how many household names still have a very poor e-commerce experience and essentially a lack of strategy–that includes Levi Strauss, that includes J.Crew, it includes Gap Inc. It includes a lot of companies that have done an awfully poor job in thinking about this new way of doing business and how to exploit technology to their advantage.

Price the Customer

Nikki Van Noy: We’re living in such an interesting time where all of these things that we’ve never even called into question, it’s just the way things are done, all of a sudden, there are these new ways at looking at them and price strikes me as one of those things. As I said, at the top of this interview, price to me seems to be largely a static thing as a consumer. I’ve never really thought this through.

Cactus Raazi: I mean you’re familiar with ways in which people have tried to affect the price by proxy. For example, I know we’re all familiar with the old coffee shop punch card where your 10th coffee is free, and that’s essentially a 10% discount for a regular customer.

There are the loyalty clubs we mentioned in the book. We mention the airline loyalty programs, which are a way of giving additional value for the same price, which is sort of a backdoor way of giving a discount if you will.

Our argument is that rather than go through all of these various machinations, we use an example of a Starbucks app. Starbucks gives you reward points every time you buy a coffee and then every X number of coffees you can end up using these rewards for something like a free coffee or a free pastry or whatever you’d like. My point is, if your customer has their mobile app out already, is it not a cleaner experience to have them scan and they simply receive a lower price at the time of transaction?

I think that is a far better customer experience than ending up amassing a bunch of points that you may or may not remember to use in some context. I think it creates the perception that you are being treated differently by Starbucks specifically because you are a regular customer. It is a dumb example, but it illustrates the point really well.

I am trying to give you a sense through all sorts of different domains, whether it is in clothing, food and hospitality, concerts, that this is an open question that needs to be discussed. Each domain has its constraints and specifics, but this topic is one that tends to be under considered by companies who simply price the way that they always have, usually through an educated guess and they price all of their customers exactly the same. They essentially price the good rather than the customer.

Nikki Van Noy: I just want to back up a little bit and say there is nothing dumb about the Starbucks example. For me, that is one of my most important daily purchases.

Cactus Raazi: Yeah, I actually pick a hotel room if I am in a new town, the first thing I do is search a maps program to look for where the Starbucks are, and then I pick a hotel that’s as close as possible to Starbucks.

Nikki Van Noy: I get that. I understand that. We all need our little comforts no matter where we are. And then my last question for you is, I am curious how this would translate to brick-and-mortar stores and that shopping experience. I’m assuming that that would happen via an app?

Cactus Raazi: Yes, in fact, you know again, the precedent has already been set. Many brick-and-mortar stores are in fact complaining that the modern shopper, particularly the younger shopper, comes through the store, finds a bunch of items that may have been of interest, and literally, in the store, do searches to see where they can get this item and what the lowest price that’s out there. Again, checking all sorts of options including Amazon as you point out but including other retailers of the item.

Right off the bat then, you have to say that is a known problem that needs to be addressed and so again, we think that this is not going to be a solution for every single person that walks through your doors, but you can’t run a business trying to come up with a policy that works for every single person that walks through your door. You have to be thoughtful about which of these customers are your core customers.

For example, your regulars. That’s a term that is commonly used in many different domains, your regular customers, and those are the customers that should receive some form of a differentiated experience and a better experience. I’m sure we can all agree on that. Our argument here is that rather than using proxies, give your better customers a better price.

Nikki Van Noy: You know, this reminds me of a conversation I was having with another author recently and he was talking about a conversation he had with the CEO of Costco right after the recession, when everyone was in recovery, and asking how Costco had weathered it so well and the response was, “Well, we concentrated on the customers that we already had and who we knew were loyal to us and remained stable that way,” which reminds me a lot of what you’re saying.

Cactus Raazi: Yes. You know again, each domain has its specifics. Of the very large retailers who operate at effectively zero margin, from what I have read in many different places Costco makes actually no money on its operations, the sum total of their revenue is the membership fee. There’s some similar corollary there to Amazon with regards to Prime, and it goes on and on. There are some domain specific questions that one needs to ask.

Again, it does boil down and even Amazon is a great example. I’m not a particularly huge fan of the company per se but certainly, there are some people that are utterly devoted to Amazon and buy as much as possible from Amazon. That exists. Is it true that that customer should get the same experience as me? I go to Amazon maybe once every six months and under duress. My answer would be no. I think the answer is no. There should be a differentiated and better experience for their best customers.

How a firm defines best is up to them, meaning, that’s a decision made at the management level. Some people define best as people who pay full price or others may define best as people who spend the most amount of money irrespective of whether it’s all on sale or full price. You know, we could go on and on, people who are more regular, people who shop less regularly but they make larger purchases. Fundamentally though, once you’ve defined the portion of your customer base that’s most important to your business, that next question becomes, “How are we going to price them appropriately?”

Nikki Van Noy: Excellent. Cactus, I think that’s all I have for you. Do you have anything else you want to add?

Cactus Raazi: Not necessarily, the only thing I’d like to say is I feel that this topic of being thoughtful around how you come up with a price on your good or service is one that’s going to continue to be more important as we move forward in time, as e-commerce becomes a bigger part of national retail and as mobile starts to become a big part of the overall e-commerce pie. I mean e-commerce is still relatively nascent relative to brick-and-mortar, and mobile is obviously only a small part of e-commerce, but as these become bigger and bigger, companies need to really start thinking about how to use these not so new but increasingly important commercial paths to their customers, how to use them to their advantage and we think price is going to need to be an important part of that dialogue.

Nikki Van Noy: Perfect.