The following is a conversation between Jean-Manuel Izaret, the Managing Director & Senior Partner at Boston Consulting Group, and author of Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society, and Denver Frederick, the Host of The Business of Giving.
Denver: Nonprofit organizations face a unique challenge of aligning pricing strategies with their social missions. To offer insights into this complex issue, we’re joined by Jean-Manuel Izaret, Managing Director and Senior Partner at Boston Consulting Group. He’s also the co-author of Game Changer: How Strategic Pricing Shapes Businesses, Markets and Society.
He’ll share his thoughts on crafting effective pricing strategies, which just might apply to your organization.
Jean-Manuel Izaret, the Managing Director & Senior Partner at Boston Consulting Group, and author of Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society
Welcome to The Business of Giving, Jean-Manuel, or may I call you JMI?
JMI: Absolutely. JMI is easier. I’ve been living in the U.S. for 25 years almost now, and JMI became the default way people name me.
But, thank you for having me. Really appreciate it.
Denver: Let’s start by having me ask you: How do organizations typically perceive pricing, and what approaches do they use to set prices?
JMI: Pricing is usually considered one of the last stages of going to markets. You define your product; you define your marketing, your strategy, your advertising, and then you say, “Ooop, what should the price be?” And then you think about, “Therefore, we’re just looking for the number.”
One of the arguments that we go into in the book is that your pricing strategy should probably come earlier, and that’s essentially why we wrote the book in order to help people see what decisions need to be made really early on, even when you define the product. But usually, people think about pricing as, “Well, I just need a number,” and there is more to that number.
Denver: Yeah, yeah. No, I’ve done it. You do it, you cross it out, you do it again. It doesn’t seem, at least in the nonprofit sector, quite as systemic as you might like it to be.
You know, I’m curious how you reimagine pricing. It seems like this is more than just the numbers, but it shapes everything from businesses to society itself. What sparked this broader view for you?
JMI: First, I’ve been in the field of pricing for more than 30 years. Essentially, since I started to work, I randomly got paired into an office with a guy who was doing pricing, and six months later, we were working together, and then it hasn’t stopped.
Denver: That was at Shell, right?
JMI: I was at Shell at the time, and we were pricing gas stations, and it seemed like the most uninteresting of prices you could ever think about. But then, the prices are different station by station; they have different elasticities, and we improved quite a bit the performance at that time, which then opened my eyes to doing that.
I became a consultant later on and have been focusing on the pricing topic for more than 25 years now as a consultant. And what I discovered is the importance of the pricing model, the pricing structure, in shaping markets, shaping your strategy, shaping your long-term growth is really fundamental.
And it was very apparent working in the Silicon Valley with technology companies where we’ve seen a number of new unicorns come out essentially based on a new pricing model. Think about salesforce.com says, “We’re not gonna sell software as million dollars per company; we’re gonna sell it per user per month.”
The essence of it is: the utility model is a change of pricing model, and that got to a business that is now a massive business and has been imitated.
Think about Uber and Lyft and Airbnb. All of these are different pricing models. Think about eBay. It’s another way to price with auctions and all that.
So, there’s a lot of new business models and new companies that sprang up over the past 20 years with new ways to price, and it continues today. Think about Gen AI and pricing per token. Who had heard about tokens a while ago? Nobody. And now, it’s in the market.
And there’s a new company who’s going to be a billion and more… and so on that everybody is really looking forward to seeing what’s going to happen, sometimes a bit scared…we can talk about that.
But anyways, pricing shapes markets. The pricing structure, the pricing model shapes markets as much as the individual prices that someone can set can shape the outcome of a company.
If you price too high, you won’t grow as much. If you price too low, you might be unprofitable. It’s very easy to make mistakes with pricing and so, both strategically long term and short term, lots of impacts, and that’s sort of how I got to, “All right, we need to tell people a bit more about these broader impacts.”
Denver: Yeah, you know, when you think about creativity, very rarely do you think about pricing, but that would be a mistake because there’s an awful lot of creativity in determining pricing and pricing models.
Well, the heart of your book is the strategic pricing hexagon. What is that, and how does it help make sense of all the complexities in pricing?
JMI: I think you got it. When you get into the field of pricing, you get in book after book and article, and all of them start to talk about, “Well, you need to calculate the elasticity.”
But think about what your competitors are doing… that’s really game theory.
But you need to understand customers and what they will do if you do this and if you do that, and that’s behavioral science.
And then of course, your teachers in high school talk to you about supply and demand.
And so you have all these frameworks that you need to think through. It is like, “Which one is relevant? When? How does that apply? What do I do?”
And then the more you click down, the more you have things about, “Well, will I have some promos or have some discounts or have some rebates? Which of these?”
So, you have all sorts of these concepts that come to mind that can be quite overwhelming for people. And this concept of the games, seven of them, basically says when you understand what game you are in, and you are in one game, the play is clearer.
So, it’s a little bit like, think about pricing, thinking about pricing as a ball sport . Like, “Oh, I’m good at pricing, I’m good at playing ball.” Well, are you good at basketball? Are you good at football? Are you good at baseball?
All these sports are very different. They have their strategies, they have their ways to win. The type of players that win one way is different from the other ways. And you see that, and so the game is a way to simplify that.
And we saw very often that CEOs that come from an industry that go to the next industry and apply the pricing strategy of the industry where they come from suddenly flops completely, and we saw that at JCPenney, for instance, right?
Denver: That’s right.
JMI: And so that was essentially someone misunderstanding the game they were playing because they thought pricing was just, “Well, I’m good at ball playing. I have a good hand-eye coordination. I was good at baseball; let me go play basketball.” Well, you know, are you tall enough?
Denver: Absolutely. Well, I mean, we found out Michael Jordan couldn’t play golf. I mean, who would’ve thought that would happen.
Yeah, I do remember JCPenney, I think it was the Apple pricing model in JCPenney,…it just didn’t work.
JMI: That is not going to work. And that basically JCPenney, in the games, we’re going to maybe talk about that we have seven games, but JCPenney, the retailers typically play an elasticity game or dynamic game, Apple plays a value game. Apple doesn’t look about competition. Apple price is high and tries to get the best product without really considering competition too much. Think about the Vision Pro where people are like, “It’s $3,500, too expensive,” and Apple’s like, “I don’t care how you compare it to the others. I have a fantastic product and that’s what I’m trying to sell to you.”
Denver: Absolutely, and everybody’s writing about it. It’s a little bit like the pricing for the Super Bowl. I mean $7 million or whatever it is for 30 seconds is a lot, but all you do is hear about those ads all the time. And the Vision Pro, I don’t even know how much promotion we’re getting about that, but everybody is curious.
Well, let’s pick up on Apple because there’s a good story you tell about the value game and the iPod. Share that with listeners.
JMI: So, it’s a bit dated now, but it’s good to go back into history. We all remember there’s been revolution in the music industry about the content and the way the product was formatted for a long time: It was vinyl discs, and then it was CDs, and then it was MP3s.
And when MP3s came out with Napster, it turned out that it would be free, but you need to know how to download and to do peer-to-peer and so on, so mostly, students did that. But it became free, and these little devices called MP3 players sprang out.
A number of companies came into them, and they were all priced around $100. The cheapest one was $79.99, and the most expensive by Sony was $129.99 because it was the high end of the music device you could think about that Sony had.
Apple comes in, and the main difference between Apple’s, what’s going to be called an iPod, and the MP3 player is instead of having a memory stick in it, it has a hard disk drive.
Denver: Yeah.
JMI: That hard disk drive is spinning and has a lot more memory than a memory stick. So, practically, on the value side, you’re going to have more songs on your device. And on the cost side, you’re going to have to pay $35 bucks more, which is the cost of the hard disk drive versus the memory sticks. The electronics and the plugging in things are exactly the same, but there’s a $35 difference.
So think about yourself as a product manager for that product, and your boss, Steve Jobs, says, “I want to take over the entire market, which is 2 to 3 years from now, I want to be the dominant MP3 player.”
And you’re like, “Well, I can’t price it too high. I have $35 more of cost added to $100 is $135, but I need to have some margins.” So, you’re going to go, “Well, maybe add some margins, like go to $150, $200 if I don’t have to, you know, 6% margins.” So, that’s the range you’re thinking about.
Denver: Yep.
JMI: $150 to $200. I want to ask the listeners: Do you remember what the price was of the iPods?
It didn’t come at $200 bucks. It came out at $499.
Denver: Yeah. I bought one.
JMI: $500 bucks.
Denver: Yeah. Yeah.
JMI: Far above the others. But three years later, there were hardly any MP3 players left. It had 70% of the market, and then it took 90% of the market, and then it was over.
So, how did that happen? Well, that happened by, first, Apple invested enormously in marketing, more than anybody else. Sony should have done this; they didn’t. But Apple came out with a really massive campaign– $200 million of advertising investments. In addition, they didn’t just give you an MP3 player with hard disk drives. They called it differently, and they structured the ecosystem completely differently so that it was easy; not only students could, but anybody could essentially download songs.
Denver: Even me.
JMI: Even you, right? And then, Steve Jobs went to the music industry and says, “You guys are not making any money with the free downloads, are you? So, this is what we’re gonna do. We are gonna unbundle the album because not all songs are all good, and you’re gonna sell all songs at $1, and I’m not gonna take any money on the songs, but they need to be simple; it’s 99 cents for everybody.”
In some ways, he fixed the price for the other guys while giving himself degrees of freedom for pricing.
Denver: Yeah, yeah.
JMI: But the outcome was the experience about music was much easier. It was the first way for people to go into digital music. Adding songs to your library was really easy because it was just $1, everybody has $1, it was less than the 10 to 20 bucks for CDs and so on, and basically solving all the ecosystem problem, adding tons of value in the system got him to have the right to extract a big chunk of that value.
Denver: That is an oldie, but it is a goodie story because we can look back on it and really appreciate it. And my memory may not be that good on this, but I remember how the music industry fought for 10 years with their lawyers to stop the piracy, and they just went really for a decade until one day, maybe with the help of Steve Jobs, they realized that they could almost give this away or sell it at such an inexpensive price that it wasn’t worth the hassle to pirate the stuff and get a virus in your computer, and it changed everything.
JMI: That’s right. And by the way, while we’re talking about pricing and new pricing models, 10 years later, the new pricing models of paying for music was a subscription and getting access to all libraries came out. And that’s suddenly allowed the music industry to make a little more money again and drive more innovation and so on.
Denver: You know, there are seven of these games, and maybe you can sort of summarize them quickly, if you will, through the automobile industry story.
JMI: Sure. So, we just talked about the value story, and the value story is when you have a product and an offer that is very unique, and you don’t need to think too much about competition, that’s what Steve Jobs did, and so you think about the high end of the offer, and you price to value; you price to, “How much value am I creating for my customers?”
On the opposite side of value is the cost game. And the cost game– essentially you were referring to is: Ford plays the cost game.
So, in 1910, Ford was producing a few cars, but by, I think, 1911, he started producing the Model T Ford.
Denver: Yep.
JMI: And the Model T Ford is the first car where, I would say, the pricing strategy drives everything about it. And first, in order to make the car affordable for its workers, Ford did two things: raise the wage of his workers in order to have them stay in the manufacturing plants much more because people were churning every six months and so on. He wanted to have the people stay and have a more efficient way to produce the cars. And, of course, he invented the production line that made it possible, and he designed the car to be really simple. That’s something not everybody knows, but the Model T Ford is much simpler than any other car, and the simple design, simple way to repair, was driving lower cost of maintenance and lower cost of manufacturing. And then it went all the way to the color, basically saying, “You could have any color you want as long as it’s black.” We all remember that.
Denver: I remember that.
JMI: So, basically you think about all these things– they’re all designed to have the lowest cost possible, and he sold the car just above that cost to make the car as available as possible to everybody; and before the Beetles, I think it’s the most sold car. It took 60 years to get to a car that was sold as much as the Model T Ford. So, that was the strategy.
But as markets evolve, and you could produce cars very effectively but still having a little more complexity, GM started to have a variety of cars, and you could choose your colors, and you could choose your shape. And that got to a more custom model where customers can have a lot of options; it may take six months to get the car to come to you, but you could really have the car you want.
And so the custom game is a type of pricing where going through dealers, for instance, every customer can both negotiate what car they want and what price they want to pay.
So, of course the negotiation is a negotiation. You can’t go as far down as you want, but you have large variations. Think about the prices of cars in the U.S.; between the good negotiator and the bad negotiator, you might have $5,000-difference for a $25,000 car, even a cheap one.
So, that is the custom negotiation model. That’s a custom pricing model. Not everybody pays the same price. The product is custom, the price is custom.
You fast forward a couple of decades, and you get into Toyota, who says, “Look, customizing everything all the time creates quality problems. Let’s simplify. We are gonna offer a set of models. We’re gonna offer a clear choice in these models,” and you simplify the choices for customers.
And so, that choice model is one where typically you have a good, better, best offer, something easy, something in the middle, something more expensive. Most people pick the middle. That’s the behavioral science of things. If you’ve offered three choices to people, people go for the middle.
So, in the election, if there was someone in between Trump and Biden, that might get a lot of votes, but I won’t go there. So, let’s go back.
So, you have essentially three games already played by the car industry. Now clearly, Tesla came in with the same model as Apple.
Denver: Yep, the value.
JMI: “I am selling you a car, it’s more than $100,000. I know not everybody can afford it, but by the way, it’s not a car, it’s an electric vehicle, and it drives itself and it has all these features and it’s very different.”
And now, if you think about what Tesla is 10 years later, Tesla is moving the price of its car, not with the “model year thing” which the car companies have done for 80 years, but can move it every month and every day if they want to because of how to manage the inventory.
They’re already starting to play the dynamic game in ways that the traditional car manufacturers cannot because they have the dealer networks that they have to go through and you can’t mandate the price through dealers while Tesla can.
And so, we already got to the cost game, the custom game, the choice game, we went back to the value game, and the dynamic game.
Games that are left is a game that I call the “power game,” which is when you have very few buyers and very few sellers and so really big negotiations. Think about Intel negotiating with HP or Apple, how to price chips.
And then the uniform game is the game everybody knows about, it’s the retail game where everybody pays the same price. You walk in the store, pick something on the shelf, it’s your price. It doesn’t vary very much.
Denver: That is a great explanation. You know, one thing I always loved about the Model T story too is he really created ambassadors for the cars because it was early adoption, and the best way to do it is to pay your guys and gals enough that they can buy a car and you see it on the street, and you say, “Ooh, I want one of those.”
JMI: Exactly. No, he was a very smart marketer and production, like he was one of the entrepreneurs that shaped the industry. And in that sense I’m saying, your pricing can shape your industry, and as much as the industry shapes the pricing strategy you should have.
“One of the fundamental things about defining your pricing models is you need to align what you get paid with the value you create.”
Denver: You know, JMI, you mentioned a, a few moments ago about subscription-based pricing, Netflix might be an example of that; they revolutionize the way we access movies and shows. I was just wondering whether that could be applied, let’s say, to healthcare maybe in something like for treatment for Hepatitis C.
JMI: Absolutely. So, one of the fundamental things about defining your pricing models is you need to align what you get paid with the value you create.
One of the issues 12 years ago when Sovaldi came as a product that cures Hep C is that the way you price normal medications, which is “I’m giving you a medication, you pay me for the medication.” The issue is the value that health systems get about people being cured of Hep C. For some people, they’re really sick, and it cures them and avoids costs right away, but some people can have Hep C for 20 or 30 years without any symptoms, and the costs come 20 years down the road. And it’s hard to get paid; while the initial price was around $40,000 for something that’s not gonna cost anything for the next 10 years. It might cost $300,000 thirty years from now, but maybe the person might die of other reasons in between. So the value is very ambiguous.
For the healthcare system, they want to cure as many people as possible. If instead of paying per patient where you have a lot of variations, you pay for the population, and you pay over time. That essentially can lower the cost overall and give access to the drugs to everybody. Australia and New Zealand did that and they have cured the largest part of the population here.
You could say, “Well, but Hep C is a very specific disease. It’s infectious. Can that apply to other things?” Think about these drugs, like Ozempic in the U.S. that allow people to lose weight. Same thing. The value is over time. Even if you lose weight now, the diabetes might develop 5 years, 10 years from now and so the value is not really immediate.
And right now, we have a pricing model that is going to really focus the drug because it is very expensive to the people that are the most sick. These drugs, if you made them available with a more subscription model across the population, a little bit like you do for vaccines, would make it available to many more people and because of the volume, might make as much money for the pharmaceutical company, but because many more people could benefit from them, who wants to benefit from them, then you have a broader outcome.
And so that is essentially a connection to the impact of pricing in society. If you restructure your pricing model, which is what any nonprofit usually wants to do, you could give access to many more people, as many people as possible, while still making enough money to sort of feed innovations and be profitable and so on.
That’s a delicate balance to strike but the Netflix model for healthcare is an example of going in that direction.
“That’s one of the essences of this book that you say we should not be afraid to charge different prices for different people.”
Denver: Well, needless to say, that was the most fascinating part of the book for me. I loved it.
Let me ask you a little bit more about nonprofits since we’re getting into those waters, and I’ve always been perplexed at how you price where the donor is not the service recipient. They’re giving, and then some other person will be the beneficiary. What pricing strategies or games become relevant in that case?
JMI: So, a few things to think about here. First, you have the donor side, and the donor side… let’s recognize that the donors are giving what they can. And so everybody’s giving different things, different amounts.
What’s really interesting is that what they give, you can consider that as a price. Well, you get them to pay different prices for the right of being part of your nonprofit organization, if you wish. That’s different prices for different people.
That’s one of the essences of this book that you say we should not be afraid to charge different prices for different people, so I just gave the example for the owners, but you can get that to the people that are going to be the recipients of your services and the users.
And so, in the industry, you already have plenty of models. We talked about the custom game where everybody pays slightly different prices. So, nonprofit owners and organizations tend to be afraid of giving different prices to different people.
First, don’t be afraid. You have a few rules about how to do that, but you can do that. So then, once you get a lot of your funding coming from the donors, you have choices. Not all of the recipients are in the same position. Some of them might not be able to afford anything, and you might need to give things away for free.
But giving things away for free tends to incite behaviors where people won’t respect as much the product or the service and so on. You have plenty of examples where you make buses for free, and people go and degrade them and paint on them and so on, but if they pay even $1 for the bus ride or 50 cents, suddenly there’s more respect for the service, and you can actually also pay for the maintenance and the cleaning up and so on when that happens.
Denver: That is a great point. People can complain. No matter how little they pay, they’re a customer and they can say, “I don’t like the shock absorbers on this bus.”
JMI: That’s right. And so there are lots of examples in the nonprofit world where the modicum of a price sometimes aligns the incentives, and that’s the behavioral science part of it. You feel more invested in a pump that gets water out if you pay just a little bit every month or every year to get the maintenance done and so on.
The last point is: very often nonprofits also serve some people/recipients that can actually afford, not necessarily a huge amount, but a significant amount. And so thinking about what are the pricing models where you’re going to charge different prices, you may have something free for many, but not for everybody, is usually an unlock about essentially allowing you to grow more because otherwise you’re limited by the amount of money you get from donors. Your growth is limited by donors.
Any kind of service has some variable cost. If you can get the variable cost paid by the mix of recipients, then suddenly you can unlock a lot of growth that otherwise would be impossible.
Denver: Yeah, yeah. That’s a little bit, I think, of what a few of them started to do, the sliding-scale pricing that you see with some organizations, and also you’re seeing a lot of these restaurants “Pay what you can.” and they’re actually getting more, from what I understand, than they would be if they had actually charged a price because some people may pay nothing or pay a dollar, but other people are putting in a hundred bucks.
JMI: That’s right, and that’s a really good model. I mean, you’ve seen a lot of people fundraising, the evolution of NPR, for instance, over the years to get people into subscriptions where they would pay on a monthly basis to anchor people in terms of, “Well, if you can afford, this is what will get you if you can pay $40 a month. But we understand not everybody can pay $30 a month or $40 a month, but if you could pay $5 a month, it’s great. And by the way, if you could pay $1 a month, we are very grateful. If you can only pay $1 for the year for now, we’re also grateful,” right?
So, the model is, by codifying a little bit what the choices that people make, and that’s sort of the choice game applied to nonprofits…
Denver: Oh, I love the choice game.
JMI: …people can self-select and say, “What’s right for me?” and some people feel good, they want to be generous, and the most expensive might be right for them, but for many, they will pick the middle.
Denver: Would the choice game be at work when you get a direct mail letter, and they have the different boxes about what you want to give. Would that be choice game? $10, $25, 50? Because I’m telling you, JMI, organizations agonize over that, “What box are we going to put in there, and how much should we have?”
JMI: Well, so first, the choice game is exactly at play. When you offer three choices, the point I was making earlier, you will get more people in the middle than not.
Three choices, there’s an interesting dynamic about the three choices. The most expensive choice, you have many people saying, “Ah, I’m not the kind of guy who spends the most for the most expensive thing, but also, I’m not the cheapest person. I can afford…” so, Boom! People go to “I’m just going to put in the middle.” So…
Denver: That I want to vote.
JMI: Yeah, put the middle option as the one you think is the most affordable for the population you’re trying to serve or to target, and then give choices around that, I would say, and many nonprofits already know that really well. Think about what kind of letters or reach out material you have to different types of donors. If you are reaching out to people that are in New York, in the most expensive, high-priced… you could find the Billionaire’s Row, well, maybe you could offer… you will reach out to them in a very different way. And you will organize the dinner, and the dinner, they can buy a table or they can sponsor the whole dinner, and now it’s a lot more expensive, but the same choices appear all the time in whatever context you’re in.
Denver: Yeah, yeah. Well, as I read through this, I thought about the nonprofit sector, and I would tell listeners out there, there are applications everywhere.
You know we have scarce resources in the nonprofit sector, so you want to read about the cost game and the dynamic pricing for galas and all those different things. There is absolutely direct correlation.
You know, we talked a little bit about healthcare before, but your book suggests that understanding and altering pricing games can really reshape society, and I want you to talk a little bit more about that, particularly around global warming.
JMI: Yes. So, global warming, there’s two aspects to this that we’re going to talk about. I’m going to start talking about the course of global warming; for most people, it’s not controversial. We’ve burned a lot of fuels that put CO2 in the atmosphere. CO2 creates a greenhouse effect and warms the atmosphere more than before. So, we need to limit CO2 emissions and potentially reduce them. The traditional answer to this is, “Well, let’s put a price to that.” That worked really well with Ozone and HFCs and so on 20, 30 years ago.
But when you think practically about how to set prices for emitting a ton of CO2 or a kilo of CO2 in the atmosphere, if you set the same price for people in India and people in the U.S., you’re going to have a situation where even the minimum price for people in India to burn the woods and so on is people need to burn woods in order to cook, and they might not afford that much.
And I’m picking India, but you could pick many other countries like poor countries, you have a set of other populations that can’t afford very much to pay for a ton of CO2. If you put that same price to people in the U.S., that will not discourage anybody to go on the highway with their big SUVs and to put a lot of CO2 in the atmosphere, and certainly would not discourage our billionaires to go and fly in their private jets.
But, if you have a different price for everybody that is roughly proportional to incentivize them to put less CO2, that would be much better.
Now, you could have different regulations by country; you could therefore have different prices in different countries, but you need to be more custom than this. But then, in order to regulate or have CO2 emissions, you also have different product, different means of doing this.
One way to avoid CO2 is to plant a tree. That’s pretty accessible to many people. It costs between $5 and $15.
And I’m going to go to the extreme. You could go to a technology that’s called Direct Air Capture that everybody says it’s far too expensive. It’s at today, $400 to $800 a ton, and might go down in 10 years to $200 a ton. But, you have a bunch of companies in the Silicon Valley that say, “We can afford that.” And one of the reasons they can afford that, they’re going to go out all around the world and say, “See how good we are? We are spending $400 a ton.” And more customers are going to come to them by that. Therefore, there will be value for them to say they’re spending that much. And Microsoft is doing that and so on.
So, there is an economic logic on both sides. And so therefore, you could sell the rights to emit CO2 for $400 a ton, and because for Microsoft, they emit CO2, you could say that Direct Air Capture will take the CO2 out of the atmosphere and will bury it. And for some other people it is just, “Well, you know, I had to go drive to my work today, what can I do?” Well, you can plant some trees?
And so, it’s like you could plant in your backyard, and you take care of your trees, you water them and so on. I’m simplifying, of course, but that’s something more accessible that doesn’t cost as much and that more people can do.
So you have different prices. So having different prices for different people can discourage them in the same way, and if Microsoft– I’m taking the example of Microsoft because I think they committed to doing that– but essentially, if a company spends a lot for every ton of CO2 they put in the atmosphere, they will think more at $800 than $400 a ton about having people travel too much.
And if it costs $5 a ton versus going to sign a big contract on the East Coast when you are on the West Coast, it’s like people like $5 a ton, like, “I’m gonna put one ton, like $5. Of course, if I send $1 million contract, I’m going to do that.” Well, multiply that price by $400 and it’s like $400 done.
Suddenly, you think more, and then you’re going to have less travel if you have different price points. If you discourage that and on top of this, more people subsidize different types of technologies, then the costs go down, and then you could offer that to more people, and Direct Air Capture can eventually be a contribution to help solve global warming by taking some CO2 out.
I know it’s not going to be the only solution. First, we need to stop emitting, but it also helps to stop emitting, having the right pricing.
“You get the people who can afford the most to start to pay the highest prices; give them good justification for that, and then you make the technology more affordable, and more people can have it”
Denver: Yeah, and it’s really a continuum what you’re describing. You really need to think along that continuum, and maybe at the top of that continuum, it’s not a premium, it’s a greenium, but it’s the same type of idea that you begin to think about and get people where they’re at. And again, as you say, even if you pay that amount, it becomes cheaper as more people do it. More people become aware of it, and it just gets inoculated into the society, and people begin to strive for it as they move up– just what they did with the cars. You know, you went from the Chevy to the Olds, to the Cadillac, eventually you can do more.
JMI: It’s exactly the same idea. You get the people who can afford the most to start to pay the highest prices; give them good justification for that, and then you make the technology more affordable, and more people can have it.
You saw Tesla prices go down, you saw the iPods prices go down, you saw a lot of drug prices go down over time. That differentiation is a strategy that we should think about.
Denver: Yeah, the democratization really being a good corporate and individual citizen.
Let me close with this, JMI, looking into the future, how do you see pricing strategies evolving? I mean, with technology and consumer behavior and digital products? What should businesses and nonprofits be thinking about to stay ahead?
JMI: So, I would say, I’m going to have two directions. One of them is there’s a tendency, with new technologies that allow you to do calculations faster and have computers do the work for you, to change and adapt your prices to the market forces faster on a more regular basis. That’s a move to the dynamic pricing games.
Today, airlines play the dynamic pricing games. E-commerce players play the dynamic pricing games, but being able to move your price– so everybody should think about instead of moving, of choosing my prices once a year and be done with it. Can they evolve every month, by the way, that helps you when inflation shows up, but that might help you adapt more and so on.
So, more dynamic way to do pricing is a tendency we are going to see in many industries, and we saw there is a prep chain in the UK that decided to do some dynamic pricing depending on the time of the day, for instance. So, that’s an example.
So, think about how to change pricing in a more frequent way and a better way. Another direction that I see coming up, we’ll hear about AI and Gen AI, and you could use Gen AI to enhance your services, enhance what you do, and thinking about how to price AI is really something that I think many businesses and nonprofits will need to think about.
AI has more marginal costs than a normal software. That’s why they’re priced per token because if you use so many tokens, suddenly it costs you, and by the way, it costs in energy, computing power and so on.
So, you can’t afford to offer a chat bot that answers everybody’s question as a nonprofit forever; you’re going to have some cost to that, so you’re going to need to think about how you price it.
And I would leave people with one simple idea that may soothe their thinking about and the fear about AI. You know, many people are concerned… we’re talking about, “Will AI replace us?” Well, one way to look at whether or not AIs are going to replace us is to look at how we price. How so?
Well, when AI is priced per user, they essentially price per human. That means the AI service, products–think about the copilot for Microsoft or for developing code– if it’s priced per user, it’s going to enhance the value that users get. It’s going to make them more efficient.
It’s not designed to replace users, because if you have no users, then you have no revenues. So, everybody who charges per user wants users to still be out there and to use their product.
So, AI priced per user, they are nowhere near replacing us. AIs priced per task, they are designed to replace us.
So, if you priced per outcome, if you say, “You know, this AI will do this for you, you pay each time they do it for you.” Aha! That is… right?
So, an AI engine that writes articles for journalists and is priced per article, it’s not designed to help the journalist. It is designed to replace journalists.
So, with that in mind, look at the pricing models in place today for AI. They are not priced per task and per outcome. They’re all either priced per token, which is a way to calculate costs, or priced per user as subscriptions. So, we are not close to– it may come– to the time when AI is going to replace all of us, and let’s think about how to use it for the best and to add more value to all the people we’re trying to serve. There’s a lot of way to go to do that, and I will stay away from talking about what will happen if at some point the pricing models change and they price per task and per outcome.
Denver: No, I’m going to leave it with that uplifting note that I still will be hosting this podcast five years from now.
JMI: Yes, I mean, the other uplifting note is, look at, you know, computers have been better at chess for now 25 years. You have never had as big a boom in people playing chess since the Queen’s Gambit came out, and there’s more people playing chess and having fun with it.
So, there is a life even when AIs are better than us at doing things.
Denver: That’s a great note. Well, the name of the book is Game Changer: How Strategic Pricing Shapes Businesses, Markets, and Society, a must read for nonprofits seeking innovative strategies.
I want to thank you, JMI, for being here today and sharing these insights.
It was a real pleasure to have you on the program.
JMI: Thank you, Denver, I really appreciate it.
Denver Frederick, Host of The Business of Giving serves as a Trusted Advisor and Executive Coach to Nonprofit Leaders. His Book, The Business of Giving: New Best Practices for Nonprofit and Philanthropic Leaders in an Uncertain World, is available now on Amazon and Barnes & Noble.