Pricing

Welcome to Service Design Principles.

I'm Guy Martin, joined by the author of the Service Design Principles series of books, founder of the Swiss Innovation Academy, and service design practitioner, the economic Daniele Catalanotto.

Hi, Daniele.

It's always a pleasure to see how you're very creative with the adjectives.

And so my adjective for you will be today, creative.

Oh, thank you very much.

Well, I chose the word economic because every episode we're looking at some of the principles from your book, the Service Design Principles 1-100.

And today we're talking about pricing.

So the book has three principles that relate specifically to pricing.

And the first is about interfaces.

What's the relationship between a user or customer interface and pricing?

Yeah, so the principle is called the problem is not the interface, it's the pricing.

And so basically, it builds on a story of me trying to get along with one of these machines where you have to take a ticket for the bus.

And you arrive on the machine and you just say, I want a ticket.

And then it asks you 200 questions.

For example, what's the zone you want to go in?

Do you have the pass over 55?

Is it a short ride or a long ride?

I don't know the answers to all these questions.

I just want to go to my friend's home, which I just know the address.

What should I do?

And then you're like, just, OK, give me the one day pass, because I assume that would be OK.

And if anything bad happens, I will always be able to say, I'm not from this place, I didn't understand your thing.

And so basically, that's where I'm going through that.

I was thinking about, oh, it must be very hard to create this interface, because they have this policy, so the pricing is very complex.

So obviously, the interface is very complex, too, because when I looked at the interface, it was a good interface.

It was well done, it was well structured.

It brought you to the right place.

But as the structure of the pricing is so complex, obviously, the structure of the interface was also very complex.

And so this brought me to reflect on and especially to compare how other countries and also how other cities do it.

For example, Reykjavik has a totally different way of thinking about it.

I lived there for a few months, and basically once I had to take a ticket there, I couldn't speak any Icelandic, but basically the idea was very simple.

You got in, you paid for your ride, and if the ride was short or long, it was the same price.

Basically, they said, we're going to bring you to the place you want to go.

And once you want to come back, you're going to pay for that.

Obviously, I imagine there was some type of subscription or package for the week and stuff, but this wasn't made available directly.

So for the guy like me, who just wanted to take the bus once or twice, I wasn't overwhelmed by the quantity of information and they didn't reveal the whole system to me.

So I think definitely here, when we get to a place where we think, oh, we're building a pricing page and it's very complex, maybe we should not think about how can we make it prettier, easier to understand, but how could we change the pricing itself?

Oh, yeah, that's a really intuitive leap, I think, because you're going back to the core reason for that interface to exist and saying, okay, well, we can't do much more with the interface.

Maybe there's something further upstream that could be simplified.

Indeed, and that's one of the very initial thing that you learn when you're doing service design, is always go back to the root cause of the problem.

And here, often with pricing, one of the root causes is more like the structure.

And being able to ask the question, why is it like this?

And then there is the other question, is it really needed?

Because often people have a very good answer to, yes, it's needed because blah, blah, blah, blah, blah.

And then you can then ask the question, yeah, but is it really useful to people who use it?

And then say, oh, wait a minute, maybe not as much as we thought.

Yeah, I read a post of yours not long ago about Switzerland having this countrywide ticket system on the trains.

So that really simplifies it, right?

Once you've got that ticket, you don't have to think about anything else.

Where are you going or how far are you going or for how long?

Absolutely.

And I think that's where they got really smart.

So for the people who like knowing the names of stuff to Google it, it's called in French Abonnement General, AG or GA, depending on the language you use.

And it's simplifying a lot because you come in and you don't ask yourself questions.

But, and here this is also interesting, in our digital age, you can do it, you can simplify your pricing structure also just with digital.

There's a very interesting app that does that in Switzerland, which is called Fair Tiq.

They do one thing, which is very smart, is they tell you, hey, put an app on your phone.

When you enter in the transportation thing, you'd say, I'm in, and when you go out, you say, I'm out.

And then the technology does all the calculation of, okay, at the end of the day, it does all the calculation saying, maybe knowing all the places you've been through, I'm going to buy for you a full day pass for that region because I know it's available.

So it's kind of the technology solving the policy problem of two complex pricing.

You don't have to think about pricing because the technology will do it for you.

As long as you know what the maximum is going to be, you're not going to be surprised.

Then you feel confident in the system.

And actually, in the London Underground, I had this similar thing.

I set up a payment card on my phone, and the way that it works, I could use my watch, so I didn't even have to get my phone out.

And I just go through a barrier, swipe my watch, and then just go to wherever I need to go, swipe out at the other end, and it calculates everything for me.

And I don't have to say, am I in zone 11?

I'm going to zone 3, and I'm crossing through zone 4, so do I need to think about that?

So that was a really interesting way of simplifying it.

And I didn't really know how much it would cost, but I knew that's probably going to be under 10 pounds as I finished the day.

So yeah, it's a really interesting way of doing it.

Are there other examples of this outside of public transport?

So outside of public transport, there is a good example, which are for SaaS, so software as a service.

One really good example I can give is Basecamp.

So Basecamp is one of the examples that I cite a lot because they do a lot of stuff very well.

So if you're interested in people who do service design without calling it service design, just watch their stuff because they're really good at it.

That's 37 signals, I think, is the people who follow that.

Exactly.

For example, the Basecamp pricing is quite interesting, how they do it differently than many other services.

So I'm going to open the Basecamp pricing page so that I say it exactly as it is today, because obviously these kind of things change.

Yeah, they do experiment with this as well.

I noticed recently they'd make a change, and they said, well, we're going to try this other thing now.

And so for a long time, they just had one pricing tier, now they have two, which is very interesting.

They have one which they call just ideral for freelancers, and they say it's $15 a month per user.

And then they have the pro unlimited thing, where they say you can have as many people in it as you want, and we're going to bill you about $300 per month.

But when you compare this to many other things like, I have the habit of not naming things that I don't like, so I will not say the names.

But when you look at other software giants, it gets into, okay, we have the free package, we have the personal package, we have the medium personal package, we have the professional package, the professional plus package, and then we have enterprise.

And then enterprise is a...

Doesn't have a price at all...

.

all other black hole where you don't know anything.

And basically here, I think the Basecamp guys really tell us, hey, we have a service, it's quite easy.

If you and a few friends working, just take the one which is below 300 bucks, and if you are a big organization, 300 bucks, and then you don't have to think about, oh, we hired just a guy, do we really want to give him access to the tool or not?

And that's very smart because it removes a lot of questions.

I've seen that in a few of the big organizations I've worked with, where because of license problem, people don't get access.

So employees don't get access to key information because they say, you know, local branches say, we don't want to pay for an extra license of this software.

So he will not have access to it, which is very bad.

You're cutting off your employees from information they need to do their job.

I mean, okay, it's like taking a hammer away from a carpenter.

Silly.

Exactly.

And which then in the end, so what we see here is that the software as a service companies that think about that in a very simple way where they say, hey, obviously every pricing is kind of a tradeoff.

So when you do this kind of pricing, what you always try to do is you want to make it work for one specific group.

And obviously there is a group for whom it will not work.

And that's okay.

There is always this tradeoff.

But I think having a tradeoff where you say, we want to thrive for a certain type of simplicity, I think it's going to serve a lot of people well.

And it's going to remove a lot of, again, of bad questions like, oh, it's so complex that we have to speak to a sales guy to just understand how it works.

It creates a weird relationship.

I think a lot of software giants go through that.

For example, I've been using a software lately, which I'm very fond of, but their pricing structure is crazy.

It's just crazy.

They really want you to go to a place where you enter in, and then it's add-on on add-on on add-on, and then it's like some magic thing where, okay, you are you, so you're using it.

But if you have so many instances of articles that you have in it, then it's going to be so much more multiplied by this.

And then you're like, hey, I just want to know how much am I going to pay?

Or this is a sales call, so you need to jump in a sales call.

No, okay, I don't want to jump in a sales call.

I just want to know how much will I pay?

So this links back really well with another principle that we have in the book, which is show me your damn pricing.

And I think that's one that I really love and where I have to say one thing, which is when I'm speaking of pricing, I'm always speaking not from the view of making the most money, but creating a relationship that feels fair, where you feel respected, where you feel you're giving something and you're getting in return what you expect, which is not the same as trying to make the most money with people.

And with recurring revenue and subscription services, that's super important because every time the renewal comes up or every time you get that invoice to say, okay, we're going to charge you again, subconsciously or sometimes consciously you're making a decision.

Am I still getting value from this?

Am I still getting what I'm paying for?

And if you're not, then that's when people start to churn and they start to look at alternatives.

So if you're not always providing that value, then it's a risk there for people to leave you.

And that happens every month with recurring services.

Yeah, a good framework to think about recurring services is that recurring services are a relationship where buying a product, it's a one thing, it's a one night stand.

It's like, okay, we're going to have, it's a date.

It's one date, you're going to have fun, you paid your drinks, it's fun, but it's done.

But a subscription, it's a marriage where every day you see the person and you have to decide to still be together.

And therefore there are expectations that are a bit different.

And as you say, the expectation is always to remind people that hey, we are in this together for a good reason.

Yeah, at a previous role I was in, we introduced a subscription service and I had some responsibility to train our salespeople on how to sell it because they're so used to selling commodities or projects and hardware and things like this.

So the difference with the mindset for the salesperson is ordinarily they're trying to maximize the first purchase order because that's what their commission is based on.

So they want to get as much out of the customer as possible and sell them on as much different features and bells and whistles as possible from the start.

But it's completely the opposite with recurring revenue because it's this land and expand concept.

You want to get the customer on board and then show value from the very smallest amount, and then you can expand on that afterwards.

And the only way that works is if it's a relationship, if it's something that continues to give.

Maybe I'm going off on a tangent here, but we're talking about things that are happening upstream, so pricing upstream of interfaces.

In this case, for the salespeople, the upstream incentive had to change as well because if you're incentivizing that first purchase order and you're only giving commission on that first sale, then they're going to always push for the maximum on the first sale.

But if you change your commission structure so that it works over a period of time or over the lifetime of the client even, as they continue to renew, then suddenly the equation changes for the salespeople and they're more interested in creating longer-term relationships.

I think this idea of lifetime value is definitely the game changer.

And as you say, changing the pricing often means that it's kind of like this domino effect.

If you change the pricing, you will have to change the interface.

You will have to change the way people do sales.

You will have to change also a lot of your marketing stuff because the way the price is set also means that maybe you're targeting a new audience.

So pricing is a very deep thing.

Definitely.

So maybe that also leads into a third principle.

The price changes the quality without any other change.

How does it do that?

So there is this funny story.

It's one that you hear often from people.

It's kind of a myth from people who are expensive in pricing.

So the story goes like that.

There is a guy who has a jewelry and he has an assistant.

There are some pearls that didn't sell well.

And so before going to holiday, he says to his assistant, make them 50%.

And he says, that's the order that they gave, and then says, bye bye, I'll be back in a week.

Comes back after the holiday and sees all the pearls are sold.

So he's very happy.

He said, ah, thank you so much.

I see that the price reduction of 50% worked really well.

And now the assistant is blushing.

You know, she's red.

She said, I'm so sorry.

I made them 50% more expensive.

You said, make them 50%.

And so the story here shows that sometimes it's not so much about reducing the price that sometimes you just have to increase the price.

Because increasing the price can change the relationship you create with the product or the service.

And so based on that, I did the math.

I used the same medicine that I gave to people.

When I started out, I sold my books at $9.

Very cheap.

And if you look at now, my books, basically an e-book for me is $60.

So I didn't do the $51.

I did it like crazy.

But basically what happens for me is to say that the people that I want to get in relationship with my books are the people who say, OK, this is an investment for me.

And if I'm going to pay $60 for a book, I'm going to read it.

But if I pay $9 for a book, I might put it on the shelf, especially if it's $60 for an e-book.

Then I'm definitely going to read it because I'm saying this is a crazy amount for an e-book.

And it works quite well.

So basically I'm not making more money than before, but the relationship that I get with the people who read it is a deeper relationship, which for me is more important because that's kind of what I wanted with these books.

And I think there we have to think also about that, which is this idea that pricing also defines the type of relationship that we are creating.

In the last podcast episode, we spoke about the idea that waiting can be a brand experience.

And here we come up again on this idea that all of these elements aren't just afterthoughts, but they are really elements where you can say this is our brand image, this is our strategy.

And therefore, if we want to create this kind of relationship, then our price should be structured in that way.

I guess if Louis Vuitton started pricing their bags at $20 a pop, then they would lose money, not just because of the margins, but because no one would buy them because that perceived quality value or that perceived value from the high price disappears.

And for me, coming from a background, so you might know that I'm a son of two pastors working in social work stuff.

So for me, it was very strange to say first that I asked people to buy the books because, as you also might know, creating books is something that never makes money.

Even if you sell them in an extensive price, at the end, you spend so much time and money on it that you will never get it back.

But you do it for passion.

But so for me, it was kind of weird to say if I want people to take it seriously, if I want people to experience the true value of the book, I need to make them pay a lot for it because then they will read it.

If I give it for free, if I give it for nine bucks, they will not read it.

So they will not get the value out of it.

Which is a very weird thing for me to do.

To say, I'm going to make you pay not because I want the money or because I think I deserve the money, but because I want you to learn from it.

Which is a very weird thing to do.

Yeah, you have to pay with your time and you'll spend the time because you want to get value out of the money that you spent.

Did you A-B test this?

Did you sort of see a difference when you had it at a lower price?

And then when you raised it, then you saw, okay, there were more people buying it?

Or was it just a gut feeling that you had?

So it's kind of hard to do A-B testing on this kind of stuff because the amount of sales is kind of too low to be statistically relevant.

So you have to be more on the intuition level.

But what I can say is that there is one side, which is the emotional level, that I felt better doing it because I had a good reason for the price that I was setting.

And I think that's sometimes also just a good thing to do.

And the other thing is, for me, there was this element of saying, either it's free and it's a completely other relationship, or it's paid, but then it needs to create a very specific relationship.

And that was kind of more the design decision behind it.

That's really interesting.

I suppose as well, when you have a higher retail price or a higher sticker price, when it comes to doing some special deals or special offers, you've got more to play with at that point as well.

If your prices are already really low, there's nowhere else to go, right?

But if they are high, and I guess some retailers might use this in a sort of a dark way where they will increase the retail or the sticker price just before a sale so that you have that perception of getting value.

But in this case, we're talking about, okay, it's a static price all year long, but then you can do something special for special days.

Yeah, and some people might say, but if your goal, so for example, in my specific case, my goal is definitely that people get into service design through these books.

And some people might say, yeah, but Daniele, this is a price that is okay for someone living in Switzerland, 60 bucks.

But if you're in another country, 60 bucks, that's a fucking lot of money.

And then I would say, yeah, but, you know, I have one thing that I always say on my website, which is that's the price of the book.

If you want another price, chat with me.

And that happens.

And then we have conversation.

I had a conversation with people telling me, you know, 60 bucks in my country with dollars to my country money.

It's crazy.

And then I said, OK, no worries, what's a fair amount that you feel this will be a good price translated in dollars that you say this is a fair amount that I can spend doesn't put me in financial risk.

And then people said, oh, I can buy five bucks.

I said, OK, cool.

I made you a discount.

Now you have the book for for five bucks.

But then the relationship is really interesting because then people tell me, oh, Daniele, thank you so much.

What can I do in return?

And then it's that's where the magic happens.

I can say, so don't do anything for me in return, but do something nice for someone else.

So the magic price of having it at 60 bucks in the end made it that the guy could have access to it.

And now he's doing something nice for someone else because he got a lovely prize out of it.

Right.

I think actually Sam Harris does something similar with Headspace.

It's this app to help you with meditation and mindfulness and things like this.

But it comes with a price.

It's a subscription price.

But what he says is, if you can't afford this or you don't feel that you want to pay for it, but still want to take advantage of it, talk to me.

Reach out to me.

So similar principle.

And I guess if someone is willing to do that, then they have to overcome, maybe there's a sense of pride or something, or they have to have a reason to reach out and make that decision to say, look, yeah, it is a bit too expensive for me.

And if they're willing to go that far, then maybe, okay, yeah, he's willing to provide a lower price or provide for free or whatever he decides to do.

But then it creates that discussion and that opportunity for relationships and paying it forward, as you say.

So definitely, I think pricing is an element that we can be very, not just business-wise intentional about, but also from a relationship aspect very intentional about.

But I'm curious, I'd like to know what's the, in your life, pricing elements where you said, oh, this created a lovely relationship, or this broke totally the relationship I had, and what did you learn out of it?

I mean, I've always seen pricing as tricky when it comes to pricing my own value or my own service.

I don't want to put too high a price on what I provide, but at the same time, I don't want to devalue what I'm providing as well.

So going too cheap means, okay, I could win a job on price, but maybe I wouldn't win it at all because the perception is, well, they mustn't be very good.

So then it sort of takes away that value.

But if I price myself too high, then I might lose the work based on price.

But at the same time, there may be someone else that's willing to go, well, actually, if I'm paying this much, then I better listen to what he has to say, or I know I'm going to get value out of this because he wouldn't be charging that much if he wasn't any good.

So it's always this sort of paradox, and there's like a tug of war between value or saying too expensive or too cheap and finding that sweet spot, which I guess going back to the interface part and a little bit of the behavioral economics is why we see so many SaaS pricing and online pricing and subscription pricing that has three tiers.

So it's like you've got the cheap price, you've got the super expensive price, and all this Goldilocks price right in the middle.

That seems about right here, right?

Yeah, indeed.

And there is a lot of research on that, and I think it's also fair as long as you're providing value.

There's always the ethical question, how far do you go with these behavioral economic acts?

And as long as you feel that the three pricing tiers make sense, that they are not just made for people to select the middle one, but that they are really made that people get a different value, an additional value, and that you feel you're happy that people buy any of these, then definitely very good to play with that.

But if it's made that you have one where, which is totally crazy, and where you feel nobody will buy it, but it's okay, and we don't even want them to buy it, then it's a bit more gray if we can say it like that.

But before we had this call, you said something interesting to me, which you said, in the book, there are only three elements, three principles about pricing, but there is a whole expertise on that.

There are pricing experts and stuff.

So I'm definitely not one of them.

I'm looking through the service design lens.

But speaking with a friend of mine, he told me there are also frameworks to think about that.

And he mentioned one, which I didn't know.

So I will just give it back for people who might be interested in this kind of stuff.

So it's the Bant framework, which is short for Budget Authority Need and Timing, where when it comes to pricing, thinking not just about how much it is, but to whom are you selling that?

Who's the person who has the authority, the final authority?

What's the need, the real need that you're solving?

And also what's the timing that you provide?

So it's thinking a bit more deeply about that.

That's one framework that can help.

There are obviously, as always, dozens of frameworks, but I think sometimes it's a good pointer to have one keyword that you can put in Google and say Bant framework alternatives, and then you have opened a new world of knowledge.

Absolutely.

And we'll put that in the show notes just for those that want to reference that.

I guess pricing in some ways, there's a lot of research and there's a lot of solid frameworks around it because it's quantitative, because you can measure it, you can see, you can change, make adjustments, and it is like a dial, and you just change it, make an adjustment, and then see how that impacts things, which is different from a lot of other themes around service design, where things can be a little intangible and they're not as measurable in some ways.

Yeah, definitely.

There is a lot of research and it's kind of easier when there is a number attached to it.

This is kind of like the blessing and curse of quantitative stuff.

If it's easier to measure, if it's easy to measure, there is a lot of research on it, there is a lot of understanding, and it's quite easy to say it works, it doesn't work.

But then, even when we can turn the dial and say, oh, it worked, we sold more, there is still, I think, interest into having the conversations with the customers about how they feel about the new pricing.

Not just did they buy, but also did they feel tricked, did they feel that it was worth it in the end?

Because buying is one thing, but then once you use it and you say, oh, okay, yes, I bought it, but now that I have to use it, it's definitely not worth the money.

That's also things that you have to double check or that you can double check if we want to say it more like that.

And so it's not just about seeing did people buy, but we have then to come back to one of the principles that is also in the book, which is it doesn't stop at selling.

That's only the start.

Once you sold it, now the real stuff happens.

Exactly.

And that's where it's more in the complex zone, where you have to ask the questions and then you have to listen, and then you have also to interpret, because one person is saying A, one other person is saying B, and what do you make out of these answers?

It's not just a number that you can put on a spreadsheet.

So it's a bit more difficult, but I think the call to action that I'd like to give on this topic is just why did we do this kind of pricing?

I think this is a very good question.

Does it have to be like that?

Could it be simpler?

And what if it was simpler?

I think this is one element, I think that is very important when it comes to pricing.

The second aspect is what's the relationship that you want to create with your price?

Again, this is something we talked in the previous episode, but are you this high-end concierge?

Or are you the easy jet service?

Cheap, it works, but everything will be on top, and you better redefine print.

It's also a relationship, it's a very clear one.

But being clear on that will definitely help.

And then just also realizing that there is a whole world about that, where you can go very deep, and then to remember before you enter the world to set the kind of ethical barriers that you want.

Before you go into the pricing strategies and all of that, saying, okay, how far do I want to go?

And that's where the reflection on the relationship you want to create can be a very good guide.

Because then you know, okay, I've read this hack from behavioral economics of having threes, and oh, that's quite interesting.

Makes sense for our relationship, because we want to give choice to people, then it makes sense.

But if we are in a relationship where it's more simplicity, absolute simplicity, then even if it's a good hack, you will say, no, it's not worse, the impact on the relationship.

Well, I've got to say that information is priceless.

I'm so sorry.

I'm so sorry.

I have a curse.

It's an affliction where I try and find puns and everything, so I apologize for that to everyone.

But thanks for this really interesting discussion about pricing, which is it's a whole world with its own depth like an iceberg, where we only see a little bit above the surface when we think about pricing, and there's a whole lot more that can happen underneath the surface that goes into it.

And I think, yeah, we're all a little wiser on pricing after this episode.

So thank you very much.

Service Design Principle podcast is hosted by me, Guy Martin, with Daniele Catalanotto.

Music by Mikhail Smusev.

This is a production of Neolux Consulting.