Episode #0103 - The Concept of Building a Pricing Ecosystem

So in today's episode, we want to talk about, the concept of building an ecosystem, thinking about how it can benefit your business, and if you can sell it that way. 

 

Notes on the time-stamped show:

[00:00] Introduction

[01:24] How pricing can be utilised to build new and stickier business models that customers find difficult to leave.

[04:53] Business models, such as espresso and Apple, emphasising how they created an ecosystem wherein everything the customers need is offered, boosting profitability.

[08:18] How different it is to build ecosystems in B2B settings, and how can they do it.

[12:20] How to build an ecosystem and create barriers against competitors without your customers realising it.

[15:44] Joanna highlights the need of striking a balance between customer value, manufacturing, and product innovation, for a successful business transformation.

Hello and welcome to another edition of Pricing College, with your hosts, Aodhan Campbell and Joanna Wells

 

Someone told me last week that I'm known as the cool teacher of Pricing College, so thank you very much for that. I actually made that up. So in today's episode, we want to talk about, the concept of building an ecosystem, thinking about how it can benefit your business, and if you can sell it that way. So what is an ecosystem? In theory, it's building a system that basically increases the chances that you will sell things to people. Whether that is the classic selling of a printing machine, and then printing, you know cartridges or an espresso machine. Then locking in, that you have to sell them on espresso pods. So that's a concept that we will discuss today. 

 

When I think about this concept, I describe it as a sale system, something we can sell more of to customers. But actually, beneath that, an ecosystem is a whole business model change. But before we get on to that, what I'm particularly interested in was how pricing can be used to make a new business model and sales model stickier, not more difficult for customers to get out of but also more valuable to customers so they wouldn't want to get out of this new system that you've built. And thinking about that, you've mentioned espresso... these people love espresso. It's a great business model and it's a new one. When you think about where espresso came from, so Nescafe and all that was built on the dry roasted coffee empire. But obviously, the business model was declining for years. People wanted fresher coffee, but they also wanted the convenience of that coffee at home but they didn't want to compromise on taste. So, espresso was launched. It really did disrupt the market in a good way and gave customers what they wanted. The key about the pricing: the actual machine itself was priced considerably below the alternative. Now the alternative was those, remember all those fancy, we have to grind down coffee beans, etcetera. 

Now, they were priced considerably higher on a per unit basis compared to the espresso. But the thing that really locked customers into espresso wasn't the machine. This was the genius behind the idea of the time. It was the pods that at a unit level were priced comparatively high. So as a customer, "Wow what a great business model. It's new, it's great. Attractive pods, interesting. Actually, the machine is pretty cheap. Yeah, get that." Not really thinking of the total cost of getting that machine when you think of all those pods that you use over a year. Some people in Australia drink two or three mega coffees, double or triple espressos a day. And you know, that's a highly profitable part of the business. So, the less profitable part of the business was the machine. They disrupted that market. They thought that compromised on profit on that. Because people will buy more of the pod. And obviously, they have to provide the value with the taste. Anyway, that's a concept where you can reinforce a new business model change with pricing, and use pricing as a way to make that business model sticky so customers will find it difficult to leave.

 

What I really like about it, you’ll also see it another example, which is Apple. In espresso, it doesn't integrate with other pods or other systems. In reality, it's quite limited which can be seen as a problem. In reality, that problem is the real design genius whereby, in your kitchen, you got one system, you're probably unlikely to change, and you're probably unlike to invest in a second system. It's some sort of aspect whereby you're designing it, you're thinking about the long-term. 

The only thing I like about the ecosystem of espresso, and this could be applied to all the businesses, Apple's another example is that it really tries to build this higher value community, versus other coffees. They have this sort of image of George Clooney, the actor, this glamorous individual that promotes espresso and gives it an aspirational aspect. You have them in espresso stores, and shopping centres, whereby you can only buy this one brand, which is very unusual when you think about it. We're used to supermarkets where you can buy everything. So it's an unusual approach but it builds the atmosphere. 

The other example I'll give is Apple, whereby they almost built a system that prevents other things from getting into it; whereby even the plugs are different, their operating systems are different. It builds a real community feeling. It builds a really close system that massively boosted the profits over time because they sell everything to you. Once you get on the door, once you got your MacBook, iMac or whatever you call it, they own you. And even small things, when they share a text message with an apple phone, it comes in a different way, and you can see when it's read, and stuff like that. And the people who have Apple phones didn't like receiving texts from Samsung or Android users. So it's almost strange peripheral things that reinforced that ecosystem. 

 

I just want to go back to that point you made. It's really a good point about this particular model. The union of systems seems like an instant hit. But obviously, you're taking smaller chunks or you have to transform your business model to become that new model. Because espresso... you know why they had to use a brand to sort of make some noise in a busy market, and it worked well for them... but I'm thinking for B2B, it quite a difficult play. It doesn't happen overnight. I think a lot of B2B businesses are making the sale now to hit the target because there are so many margin pressures at the moment, especially with inflation, and supply issues. 

This sort of conversation is nice to have. "Do we have time to change our business?" But that's short-time thinking. Too many CEOs have thought that in the past leading to the problems that we have now. I think mining, manufacturing, and a lot of industrial companies have a lot of untapped profit potential and aftermarket and afterparts servicing that they didn't explore. Because it didn't look, it didn't have the most revenue. It wasn't analysed in terms of growth rate, so it didn't seem the most profitable. But it's always been there as something that should have been nurtured over time. Some companies have grasped that and invested in it to make the wholesale business model transformation to this type of market. 

Even in B2B, I'm thinking of Kaeser who does like air compressor engines. They were, "We can sell engines because that's what our customers are used to or we can try to sell them in an ecosystem, the after-service parts, the ongoing services, the machine learning and data so we can optimise the machine." It worked very well for them. But it didn't happen overnight because obviously customers were used to buying the whole engine themselves. They had to disrupt the buying process as well and that took time, took marketing effort, new pricing model. In terms of pricing, they had to show their customers what the total cost of buying that engine was, not just the unit cost which was very expensive. But over time, if they buy the whole engine, they'd have to service it themselves, the maintenance, the downtime, etcetera. The biggest cost is energy to the customer. 300-400% more expensive than the maintenance cost, 5-10 years after the purchase, that's the average a compressor engine lasted. Here we've got two difficult challenges. 

How do you change your business model? And how do you change your market, your customer's perception about your products and make them buy differently, so it becomes more profitable? It requires investment and people to think strategically. People consider this the long play. Often it's the thing that's gonna save your business now. Thinking about profitable opportunities and how you can balance them with your BAU processes, which could be on the decline. 

 

I think there's probably a bigger topic that we'll come back to and dig into more specific examples. But I suppose in any business, the first thing to think is, "What are you really selling? What is the best way of charging for it? Are you selling the printer or are you selling the cartridges?" It's that sort of mentality. And then you start looking at potential buyers from the competition and trying to increase those really—trying to make sure that those barriers are as high as possible potentially without the customer knowing. That could be getting something into their hand, getting a capital asset bot. It could be a cost leader, it could be selling below cost, or it could be providing a capital asset to them. Once you have one, you get it there. It could be providing an app to them, an example is Uber. Once get that app, get used to using it, and you're probably gonna stay on that app. You're probably not going to go back to booking a taxi. I think it's really trying to work out how you can increase those barriers to a third party, to someone shopping and using other stuff without them being aware. I think warranties and guarantees are very useful. 

The classic car manufacturing is, you get the car, it's got warranty, as long as it uses official Toyota, or whoever it is, parts. Which really locks you into that ecosystem. It locks you to go back to the dealership. Once you're back, you're more likely to buy a car, I assume when you've seen new models. If you can get your hands on those barriers without them [customers] being aware of it... this could be as simple as free delivery. No set-up costs, no onboarding costs. Make those aspects as easy as possible. Get your foot on the door and potentially, it's hard to get you out of the door. I think this topic is very large. We can dig into it business by business in the future if people are interested. 

I know our clients are talking more about this, we need to cash flows now in light of the considerable margin pressures, and inflation that we're facing but at the same time we know we need to be different. But how? What are the steps to take in terms of business strategy? How do I think differently about customers? Cause remember, a lot of B2B, and naturally, operations on manufacturing focused, it's very hard to get out of that mindset if your whole legacy has been built around day to day operations making a product. As opposed to generating value for your customers, it's a very different mindset. And often the very people that are in those positions are struggling. The good ones recognise that and want to change. But that's not disregarding the manufacturing, absolutely not. But there's a balance between customer value, manufacturing, and product innovation. They should always be that competing force. From there, that's how you gradually transform your business—weighing up those three competing pressures in line with your business. As Aodhan said, it's a huge topic, something a lot of our clients are talking about. It's on their mind but making money is also on their mind. To cover the bills, to keep going. So feel free to get in touch with us if any of these has struck a chord, very happy to speak with you more about it. Thanks for listening.