I list eight reasons why businesses have discounts and talk about the benefits and pitfalls of each.

What’s the common thread between that acquaintance who likes to tell you about how he got a huge payment from the developers who wanted to cut down the trees at the edge of his property and the AI scientists that Meta is offering $100 million pay packages?

It’s that being the last piece of the puzzle, which allows a larger project to get done, creates a unique pricing power.

In this episode of the Pricing Evolution podcast, I go through examples ranging from real estate and programmers to rivets, discussing when small components in big projects have outsize pricing power, and when they don’t.

Links:

Pricing Evolution: The Power of Low Dollar Pricing

WSJ article on Meta offering AI scientists on “the list” of top talent up to $100M to join their AI development group.

Doug sells LED lighting to larger commercial buildings like warehouses and factories. His typical customer is lighting an indoor space larger than a football field.

He’s not a trained pricer, he’s an entrepreneur running his own business, but I was struck by how he talked about pricing in his posts on LinkedIn. And after we’d talked, he agreed to come on and talk about his business and how he prices and sells his products.

There are several key lessons I’d highlight from Doug’s business which would apply to other businesses:

1. He’s clear on what types of customers are willing to let him compete on value rather than price, and he simply does not deal with customers who are only interested in price. (He doesn’t answer RFPs.)

2. He recognizes that customers want to hear about the savings he can deliver and the price for his products first, so rather than a long proposal with the price on the last page, he starts with the money saved and the price it will cost, and then provides the background.

3. He focuses on the key value he can deliver customers: Saving energy if they are converting from incandescent to LED, and providing greater brightness if they are upgrading old LEDs. He focuses on those customer-centric value measures rather than other metrics that people have more trouble understanding.

I always think it’s interesting to get a look into a type of business I haven’t thought about before, and I hope you’ll enjoy this conversation as much as I did.

And if you need to light a large commercial space, give Doug a call.

That means that in terms of the years an average person would have to work to buy a car, the cars of 1905 (which had about the power of a modern lawn mower and a top speed of perhaps 30 miles per hour) took as long to save up for as a modern Corvette Z06 Supercar or Porshe 911 Turbo.

This all changed with the Ford Motor Company as with development of the Model T Ford.

The Model T was the first truly mass produced car, and after launching in 1909 at a price of $850 (about $30,000 in today’s dollars) Ford developed efficiencies which allowed it to drop the price of a Model T to $260 by 1925.

Given that by 1925 the average US worker make $1,200 per year, that means that a Model T was equivalent to less than three months of wages for the average American. And a result, sales went from thousands of cars a year to millions.

In this week’s episode we look at how passing on the savings from manufacturing efficiency can turn a tech product enjoyed by the few most fanatical fans into a mass market phenomenon.

And after looking at this trend in the early days of automobiles, we examine it in personal computers and smart phones.

This pricer has seen too many pundits pontificating that the economy had adjusted to tariffs and we can see that because the stock market is back to where it was on April 2nd before President Trump announced his reciprocal tariffs on countries across the world.

I discuss the speed at which companies are actually adjusting to tariffs and how it will be 3-6 months before you can really expect to see the effect of tariffs on what’s on store shelves and price tags.

I also describe how companies are still in the process of figuring out what the full impact of tariffs is on their costs because there are many layers of suppliers many of whom have not yet responded to the tariffs.

This is a little closer to opinion journalism than most of the podcast episodes, and I’ll try to be back at the end of the week with another episode that has fun and interesting insights into pricing dynamics, but in the meantime, this is a pretty real view into the things that pricers and other people at the center of the tariff maelstrom are seeing.

With tariffs and other market changes going on, a lot of companies are trying to decide whether they need to take a price increase.

In this week’s episode, I dive into how you should evaluate whether you need to take a price increase, and — it you do need to take one — how to segment your product and customers rather than simply taking the same price increase on all products and customers.

I address:

Four questions you should ask yourself when deciding whether you need to increase prices.

Two fears that often prevent companies from taking a price increase.

And then I break down how to think about segmenting your products and your customers when determining how to take your price increase.

As always, if you enjoy the podcast, I’d appreciate it if you’d give it a rating and review on Apple Podcast or Spotify.

It’s been a week since I last posted, and I didn’t want to let it stretch to longer. That’s because things have been really busy, both at work (tariffs being a huge part of the issue there) and in life otherwise.

However, I didn’t want to leave things entirely empty here, so I sat down after a long weekend of running the annual mulch sale fundraiser for my sons’ Boy Scout troop to talk about “last mile pricing” and why mulch delivered to your door is a lot more expensive than mulch you pick up down at the local big box home center.\

This is a slightly more informal episode than most, but I hope it provide a few interesting insights into the world of mulch (who knew there was so much to know!) and the idea of delivered vs pick-up pricing.

Also, a quick link: You can hear the episode of the Kahnversations podcast on which I was a guest here, we talked about tariffs (of course) and other elements of the current political moment.

I’d been looking at a few different fun topics for this episode, but in the end, there’s one topic which is dominating price discussions at the moment, and I couldn’t ignore it. So, this week’s podcast is about tariffs.

In the first half of the episode, I look at the more general questions: How to tariffs work? How were these particular tariff rates calculated? Will these tariffs cause companies to bring manufacturing jobs back to the US?

In the process, I talk about the key role of uncertainty: Companies are hesitant to make major changes and investments in response to conditions which seem temporary. And these tariffs seem like they may be very termporary. The Canada and Mexico tariffs have been announced and delayed and modified several times, and this newest “Liberation Day” round of tariffs announced on April 2nd already appear to be the subject of further negotiations. This generally makes companies less likely to make major investments (such as moving factories) as a result.

Then, in the second half, I talk about the specific things that companies should consider doing from a pricing perspective as they deal with tariffs:

• Don’t panic, and don’t predict. It’s a rapidly changing situation so give yourself the time to see what is happening and respond to the things that have actually happened to you cost thus far. Don’t try to guess what may be happening next in a fluid situation.

• Base your prices on what your current cost to replace inventory is: the price to buy or build new product. Your current inventory was built up at older prices, but you’ll want to base your prices on what it will cost you to refill your inventory, not those old costs.

• Focus on communicating clearly to your customers. Good pricing requires good communication. This means that if you are changing prices due to tariff-driven costs, you need to communicate that clealry to your customers. And if you’ve decided it’s important for you to absorb some or all of those costs, communicate that decision to absorb the costs to your customers as well. If you stay silent, they won’t see the value your sacrifice is giving them.

• And as the tariffs disrupt your industry (which, after all, is what they are designed to do) be ready to talk to your own customers about lower cost substitute products you can help them trade down to if they are no longer willing to buy the same produce you’ve been selling them. And also, be ready to address possible opportunities as a result of previously lower-priced competitors suffering a bigger tariff impact than you have.

All together, this is the longest Pricing Evolution episode we’ve had yet, but it’s tackling an important issue and I hope you find it interesting and useful.

If you do, please share it with others who may also find it interesting. A recommendation from a friend is the best way for a podcast to find new listeners!

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Especially in the online world, you see a lot of companies that offer products for free. How do they make money doing that?

In this episode, we dive into the economics of free products and examine three different business models where companies make money while offering a product for free. We look a the following:

You Are The Product

For services such as Facebook, Google, or LinkedIn, the user is the product, and advertisers are the actual customers.

Freemium: Free Product with Paid Upgrades

From games to Candy Crush and FortNite to services like DropBox and software like Slack, Zoom, and GitHub, many companies by make money by offering a free version of their software and then offering additional features that you have to pay for.

Land and Expand: Free Entry to a Paid Ecosystem

Hubspot offers a fully featured free CRM system to its users, but if they want to expand into the other products which integrate with it (MarkingHub, ServiceHub, OperationsHub, etc.) the cost can increase rapidly.

It’s a lengthy investigation of the economics of free. And, as always, I hope that if you enjoy the episode you’ll share it with your friends. It’s the best way for us to find new users.

Spotify launched its premium plan in 2009 for $9.99/mo and thirteen years later in 2022 they had 205 million premium subscribers at that same price, but had never turned a profit.

Then, over the course of 18 months in 2023 and 2024 they took two price increases, taking their standard premium plan from $9.99 to $11.99. And in the process, they went from losing €500 million in 2023 to making €1.1 billion in 2024.

Not only did they not lose customers, but they continued to increase their number of premium customers despite the price increases.

In this episode, I look at Spotify’s pricing history, the way in which they went from following Apple’s pricing to being a pricing leader in their category, and I examine how much of their move to profitability came from price changes versus cost cutting.

More broadly, I look at the power of low dollar pricing, and the way that on a small ticket item it’s sometimes possible to take a large percentage increase which customers barely notice.

Subway was in the news last week with the announcement that they have a $6.99 Footlong promotion through their app.

I took the opportunity to discuss one of the most well known fast food promotions of all time, the $5 Footlong campaign, which became an everyday price for almost nine years. And yet, the price promotion which Subway described as driving $4 billion in incremental annual sales when it launched in 2008, became so unpopular with franchisees that by 2018 when Subway briefly brought back the price point some franchise owners threatening legal action.

What happens when you make a promotional price point permanent? How do you manage moving beyond a well known “threshold price”? And what were the cost dynamics that turned this famous promotion sour?

Listen in to the latest Pricing Evolution Podcast. And if you enoy it, please do share with others, subscribe, and give the show a five star rating on Apple Podcasts.

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If you’re thinking about making a major change in your pricing, products, merchandising, or store operations in a retail chain, it makes sense that you would want to find out first if customers would like it.

One obvious approach would be to do focus groups and surveys to find out what customers say they want. The problem is: often what customers say they want does not predict well what they will do in real life when faced with a change in the prices or products they see in front of them. For instance, customers often say they would like more healthy options on the restaurant menu, but then when they’re actually making a purchase decision, they go for the bacon cheeseburger over the salad.

The solution is to conduct a controlled experiment. In this week’s episode I dive into how we conducted controlled experiments in the Quick Service Restaurant industry, and what sort of considerations you might take into account if you’re trying to figure out testing in a retail environment.

In today’s episode, I talk about the challenge faced by retailers — from fledgling startups to large Consumer Packaged Goods brands — trying to sell through Amazon when Amazon simultaneously wants to match the lowest price available through brick and mortar retailers and also receive a low enough wholesale price to compensate them for their shipping costs to consumers.

The issue that that the consumer actually does some very valuable work in picking up the shelf from the store shelf and driving it home. You can see this if you look at the cost of having a gig economy driver go pick up that product at the store for you and drive it to your porch.

Amazon is trying to recoup the cost of taking your product off the warehouse shelf, putting it in a box, and sending it out with a delivery drive to be dropped at your door. For a consumer packaged goods type item, that can easily cost 30% to 40% of the retail price of the item. And yet, the customary prices in retail stores are not designed to cover such heavy delivery costs.

The solution is to differentiate the product you sell on Amazon from the one you sell to retailers, such as having a larger multi-pack size you sell on Amazon.

Tune in to hear all about it.

Companies often claim that they are disrupting some particular market, however in his classic book The Innovator’s Dilemma, Clayton Christensen talks about market disruption in a very specific way that has a lot to do with pricing.

Market disruption is when a new player enters a market with a new product which is lower quality than the dominant products, but still good enough to meet the needs of some current or potential customers. However, it’s also much cheaper than the existing products.

At first it seems to the dominant players in the market like this entrant is no threat because their product is much lower quality and they are only picking off the least profitably business in the market. But as their technology improves, the take over the whole market.

I discuss some of the classic examples from Christensen’s book, talk about personal computers disrupting the market for mainframes and minicomputers, and then branch off into something Christensen doesn’t talk about: the disruptive effect of Chinese manufacturers on the US manufacturing market.

Here the disruption is cost based, not technology based, and I talk about some ways the US manufacturers might fight back against that threat with their pricing and value positioning.

All this was in part inspired by all the discussion of tariffs the last couple weeks. If you’d like to read my recent article on tariff pricing, you can see it here.

A listener asked why video game makers sometimes discount as much as 50% to 75%. Are they making money? Why don’t they just lower the everyday price?

I’m not a video game player myself, but I enjoyed diving into the research about how games are priced.

In this episode I talk briefly about the “freemium” model that many mobile games use, where the game itself is free but the user is then encouraged to make in-app purchases.

I chart out the lifecycle pricing which major video games follow, and how that lifecycle varies for successful games like Elden Ring vs less successful ones like Battlefield 2042.

Then we discuss lifecycle pricing (and discounting) is different for a product like a video game which has no or low margin cost as compared to other product that have lifecycle pricing such as fashion, home goods, and electronics, but where there is still a significant cost to manufacturing more units to sell, even as the product moves into the lower priced later stages of the lifecycle.

How did we reach a point where the #1 selling book on the Amazon kindle store was not published through a publisher?

The travails of the modern book industry have a lot to do with pricing. In this episode, I look at the multiple pricing driven disruptions of the bookselling and publishing world.

OpenAI’s pricing was in the news last week, after CEO Sam Altman admitted on X that he had personally set the price for the company’s Chat GPT Pro package at $200/mo, and that he was surprised to discover that they were losing money on it.

Many professional pricers questioned both why the CEO was personally setting prices and also why the company was not using a pricing model which billed more directly for usage rather than offering a virtually unlimited top tier for the relatively modest price of $200/month.

But OpenAI is not just pricing a product, they’re trying to nurture a whole new industry. The viability of AI will be determined not by what OpenAI charges for the top product tier right now, but rather how quickly other businesses using the OpenAI platform develop new products that produce huge amounts of value. Once there are thriving industries making money from OpenAI’s products, it will be easy for them to charge those customers based on the value they are getting. But until customers spend enough time with OpenAI’s products to figure out how to make lots of money using it, OpenAI will have limited ability to truly monetize their products.

In Episode 2, I expand on my explanation of the three layers of pricing: Macro, Strategic, and Transactional

These were the topic of a recent text post: Three Levels of Pricing

However, I expand the the discussion in the podcast and use additional examples. If you haven’t had a chance to read the post, this a great chance to catch up on it. But if you have, I don’t think you’ll find it’s just a repeat.

In the first episode of the Pricing Evolution Podcast, I tell the story of how I went from a Classics major studying Greek and Latin to a VP of Global Pricing.

I also talk about why I’ve come to love pricing and you should too: because in order to do pricing well you need to understand both how your own company creates its products and also how much value those products truly deliver to customers.

Posts you may find useful in reading more about these topics:

From Classics Major to VP of Global Pricing

Why I Love Pricing

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