Anna Covert [00:00:04]:

Aloha. My name is Anna Covert, and I am coming to you from the beautiful island of Oahu.

This week on The Covert Code, the topic is why pricing is the most powerful growth strategy.

My very special guest is Per Sjöfors, founder of Sjöfors & Partners. He is known as The Price Whisperer and has a bestselling book, The Price Whisperer: A Holistic Approach to Pricing Power.

He is a Forbes Business Council thought leader and a member of the C-Suite Hero Club. He has also been recognized by Inc. Magazine as one of the top ten most visionary leaders of our time and by Thinkers360 as a top global thought leader in sales.

He knows his stuff, and today we will uncover why pricing is one of the most overlooked and powerful growth strategies in business.

Tack så mycket, which means thank you in Swedish, to Per for being my guest today.

Per Sjöfors [00:01:05]:

Thank you. It is a pleasure to be on the show. It is a little unusual that we both have this Swedish heritage.

Anna Covert [00:01:16]:

We will jump right into it. Give me the CliffsNotes version of your very interesting story. What is your background, and how did you get to where you are now?

Per Sjöfors [00:01:31]:

The story of why I got into pricing began when I had the opportunity to run a couple of companies in Europe, one in Switzerland and one in the United Kingdom. That was before I came to the United States.

I came here to found and develop a business unit for a fairly large public company. After that, I had another four CEO positions.

In all of these companies, we conducted experiments with pricing because it was an area that interested me. Some of those experiments were very successful. The following quarter, revenues might increase by 25 or 30 percent. Other experiments were complete disasters.

What I learned about pricing in business school was, first, very limited. Second, it was too academic and theoretical. It was not something you could practically use as a business leader.

When I decided to set out on my own, I took that interest in pricing and asked myself what I would have needed as the CEO of those companies to make pricing an engine for growth.

What was I missing? Why could we not determine why some pricing experiments worked while others failed?

What I eventually concluded was that, to use pricing as a growth lever, you must leverage behavioral science, particularly the subset of behavioral science known as behavioral economics.

Several Nobel Prize winners have developed a deep understanding of how buyers make purchasing decisions. When you understand how people make those decisions, you can influence them.

When you influence purchasing decisions in the right way, using behavioral science, you can increase sales volume, increase prices, and increase customer satisfaction at the same time.

That is the paradox of price.

Most companies do not approach pricing this way. They say, “My cost is X, and the standard profit margin in my industry is Y, so that becomes my price.” Alternatively, they look at a competitor that did the same thing.

Anna Covert [00:04:45]:

We see that all the time. Coke and Pepsi are the classic business school example. Every other week, one of them is on sale.

That brings the entire industry down.

Per Sjöfors [00:05:02]:

Definitely.

For an average company, although no company is truly average, a one percent increase in price leads to an approximately 11.3 percent increase in profit.

I jokingly call this the one percent challenge.

I ask the CEOs I speak with, “Have you ever failed to change something by one percent?”

Anna Covert [00:05:45]:

That seems so nominal.

Per Sjöfors [00:05:49]:

Exactly.

To entertain myself, I went online and selected four relatively small public companies so I could access their financial information.

I calculated what a one percent price increase would do for each company. One would experience a five percent increase in profitability. One would experience a sixteen percent increase. Two would experience approximately a twenty-one percent increase in profitability.

Anna Covert [00:06:34]:

Is that based on the average sales price of the product to the consumer? Does it matter whether it is a large-ticket item?

Per Sjöfors [00:06:42]:

It is based on the resulting EBITDA and profit margin.

This is a lever that many companies do not understand.

They also do not understand the paradox of price. As human beings, we are imperfect and malleable. When you know how to influence a purchasing decision, you can achieve higher prices, higher sales volume, and higher customer satisfaction at the same time.

Anna Covert [00:07:21]:

Let us dive into that. What is one behavioral science principle we can discuss?

Per Sjöfors [00:07:29]:

I will explain two of the most important principles.

The first is expectation bias.

When we are presented with a price, that price itself creates an expectation about the quality and benefit of the product or service we are considering.

When the price is too low, we might say, “I want to buy this, but at this price, it probably will not be good enough.”

Anna Covert [00:08:14]:

Why is it so cheap?

Per Sjöfors [00:08:18]:

Exactly. Why is it so cheap?

I explain this to CEOs, and then they return to their companies and reduce prices by another fifteen percent.

One side of expectation bias is that when a price is too low, we assume the product is not very good. When the price is high, we tend to assume it is good.

A university study in Chicago placed participants in functional MRI machines and gave them wine. Participants were presented with a six-dollar wine and a one-hundred-dollar wine.

When researchers gave them the inexpensive wine but told them it was expensive, the pleasure centers in their brains lit up. When they gave them the inexpensive wine and said it was cheap, the pleasure centers did not respond in the same way.

The same expectation applied to the expensive wine. The participants’ perceived enjoyment was influenced by the price they believed they were paying.

Purchasing decisions are emotional.

Because we are supposed to be rational beings, we use our prefrontal cortex to add rational explanations to an emotional decision already made by the limbic system.

Sellers can leverage this in ways that are good for both the seller and the buyer.

Anna Covert [00:10:34]:

It reminds me of another one of my favorite behavioral science strategies, the magnetic middle.

When you have three options, one higher, one lower, and one in the middle, most people gravitate toward the middle. They do not want the most expensive or the cheapest option.

The middle should be the product you most want people to buy, and the other options should be priced so that the middle becomes their natural choice.

Per Sjöfors [00:11:01]:

I can tell you more about that.

If you have a good, better, and best structure, the middle option should be approximately two-thirds of the distance between the cheapest and most expensive options.

That structure means very few people purchase the cheapest option, while quite a few say, “For just a little more, I can purchase the most expensive one.”

This connects to another important principle in behavioral science, the anchoring effect.

Consider this example: If you have been in a Prada store looking at four-thousand-dollar handbags, a six-hundred-dollar wallet near the checkout appears to be a bargain.

The four-thousand-dollar price becomes the anchor in your mind, making six hundred dollars seem inexpensive by comparison.

One of the most successful or extreme examples I have seen occurred when Apple introduced the Apple Watch.

Apple had a $349 watch that it wanted to sell in volume, but it also offered a $17,000 version. The primary difference was that the more expensive watch had a gold case.

Every journalist covering the product launch wrote about the audacity of Apple selling similar electronics for either $349 or $17,000.

The point was not necessarily to sell a large number of $17,000 watches. The point was to make the $349 watch appear more affordable.

That is price anchoring.

If you have good, better, and best options, the anchor should be the most expensive option. Since people in Western markets generally read from top to bottom and left to right, the most expensive option should be the first price they see.

It should be presented as best, better, and good, rather than good, better, and best.

You can see this strategy on some websites.

For example, a platform might present a premium service for approximately $300 and then show a lower option for around $15. The premium option may not be intended to sell in large quantities. Its role may be to drive significant sales of the lower-priced service.

Anna Covert [00:14:40]:

That is a great tip.

Per Sjöfors [00:14:43]:

This applies to almost everything.

If you sell business-to-business through proposals, you should also have good, better, and best options. Those options should be presented in reverse order so the most expensive option is the first price the potential customer sees.

Likewise, a restaurant can place an extremely expensive special in the upper-left area of the menu. That makes everything else appear more affordable.

Anna Covert [00:15:27]:

You choose that location because it is one of the first things people see.

I now realize that in many high-end restaurants, the prix fixe menu, which is often the most expensive option, is presented first. The à la carte options appear afterward.

Per Sjöfors [00:16:19]:

Exactly.

Another common mistake occurs when businesses present a price before they communicate value.

Whenever you present a price, you must ensure the buyer understands the value before seeing that price.

Many consumer websites put the price at the top and the value description underneath it.

That is backward.

It encourages people to make decisions primarily based on price because they may never read the value description.

Anna Covert [00:17:23]:

That is important to consider with clothing and other products. On an overview page, perhaps you should not show only the product title and price. You may want the customer to click into the product, understand it, and then see the price.

Per Sjöfors [00:17:39]:

Definitely.

When selling business-to-business through proposals, you should present the proposal. You should never simply send it.

What happens when someone receives a proposal? They often immediately turn to the last page and ask, “Is this price reasonable?”

The entire point of developing the proposal is to explain your uniqueness, features, benefits, and value. When the buyer jumps directly to the price, their decision becomes driven by that number rather than the value you created.

Anna Covert [00:18:28]:

The price sets their expectation.

We have discussed expectation bias, anchoring, and the magnetic middle. What else is critical?

Per Sjöfors [00:18:47]:

A high price can create an expectation of value, quality, and exclusivity.

For a technical example, I have spent some time around the high-end audio industry.

You can buy a small USB cable online for approximately five dollars. You can also purchase an audiophile-grade cable for three thousand dollars.

There may be very little technical difference in the digital signal. However, someone who pays three thousand dollars for a three-foot USB cable may genuinely believe they hear a difference because they expect one.

As a result, they may be happy and satisfied customers.

That is another example of the paradox of price. You can increase price, customer satisfaction, and sales volume at the same time, but you must understand what matters to the customer.

You cannot rely only on directly asking customers because customers do not always accurately describe what drives their decisions.

Anna Covert [00:20:32]:

Absolutely.

Per Sjöfors [00:20:35]:

I speak with CEOs who agree that customers do not always tell the full truth. Then, in the next sentence, they say, “We talk to our customers all the time,” and they believe everything those customers say.

Another critically important factor in pricing is differentiation.

Differentiation is what gives companies pricing power.

Pricing power is a term Warren Buffett has used to describe a company’s ability to increase prices without losing sales volume.

Anna Covert [00:22:01]:

That connects to the elasticity of demand.

Per Sjöfors [00:22:04]:

Yes, although the straight-line demand curves taught in many economics classes do not accurately reflect reality.

We have already established that when a price is too low, sales volume can decrease because the low price creates an expectation of inferior quality or benefit.

Traditional straight-line demand curves assume that as the price falls, sales volume continually increases. That does not always happen.

Elasticity also changes at different price points.

There are psychological price points where a small pricing change can create a significant change in sales volume. Between those price points, demand may remain relatively flat.

I call these psychological thresholds price walls.

Suppose one price wall is at one hundred dollars and the next price wall is at one hundred and fifty dollars. If demand is relatively stable between those points, you would want to price as close to one hundred and fifty dollars as possible without crossing the next wall.

Anna Covert [00:24:37]:

That makes sense.

Per Sjöfors [00:24:46]:

We conducted work for a coffee chain in Sweden that sold takeaway coffee.

The company promoted its organic and sustainably grown coffee. That was its primary marketing message.

We found that changing the message to “This coffee tastes better than the coffee I make at home” doubled sales volume.

By moving away from a message chosen through intuition and instead measuring what increased willingness to buy and willingness to pay, the chain doubled in size.

From the company’s perspective, that message was counterintuitive.

From the customer’s perspective, however, coffee that tastes better than what they can make themselves is extremely valuable.

At the moment someone wants coffee, they may not care as much about whether it is organic. They care that it tastes better than the coffee they could make at home.

That can be measured.

This is not merely testing. It is measurement.

Online willingness-to-pay studies can measure what people are willing to pay, what motivates them to pay more, and what increases satisfaction.

Anna Covert [00:26:49]:

Returning to pricing power, how can listeners apply this? How can they determine whether they have pricing power?

Per Sjöfors [00:27:17]:

You cannot know without conducting the proper measurements.

If you test price alone, you are testing pricing in a vacuum.

Everything a company does affects customers’ willingness to buy and willingness to pay. That includes marketing, customer targeting, product variations, sales channels, payment options, and messaging.

Suppose you wanted to test six price points, three marketing channels, six marketing messages, three product variations, four payment structures, and three sales channels.

You could quickly end up with tens of thousands of possible combinations. You cannot realistically test every combination in the marketplace.

However, you can measure those variables through structured research in a couple of weeks.

In the coffee example, the company differentiated itself through marketing. It did not change the product or the location. It changed the message and doubled sales volume.

Anna Covert [00:29:01]:

They connected with what the customer expected to receive and what that outcome was worth.

Another challenge I frequently see across different industries is that companies do not fully understand what it costs to produce and deliver their product throughout the entire chain.

They do not account for contingencies, supply changes, or sudden shifts in demand.

During COVID, for example, the demand for toilet paper suddenly increased. Companies throughout the supply chain increased production, but by the time additional products reached the market, that unusual demand had disappeared.

Do you discuss how companies can monitor global supply and the factors that affect their ability to price correctly?

Per Sjöfors [00:30:11]:

That is not the primary focus of my book.

The book focuses on understanding customers and influencing their willingness to pay and willingness to buy.

We are living in a turbulent world. Tariffs change, energy markets shift, and people debate whether a recession or market decline is coming.

During turbulent periods, people do not necessarily stop purchasing, but their decisions take longer.

Anna Covert [00:31:20]:

That makes sense.

Per Sjöfors [00:31:21]:

Companies can respond by reducing sales friction.

According to behavioral economics, fear of making the wrong purchasing decision can be significantly more influential than the expected benefit of making the right one.

Anna Covert [00:32:01]:

That connects to loss aversion.

Per Sjöfors [00:32:03]:

Absolutely.

During turbulent periods, companies must consider how they can limit risk or the perception of risk.

That might include better warranties, trial periods, payment plans, improved customer service, guarantees, or free trials.

Not every company offers these protections.

Anna Covert [00:32:36]:

Some companies do the exact opposite. They make products difficult to return.

Everything now seems to have a subscribe-and-save feature. That can be useful, but some companies make subscriptions very difficult to cancel.

I believe that is a mistake.

A customer may simply want to pause a subscription or cancel before another charge. Making the process difficult can make that customer unwilling to purchase again.

Per Sjöfors [00:33:30]:

Many companies move toward subscriptions because predictable recurring revenue can increase shareholder value.

Investors generally appreciate subscription businesses because the revenue is predictable.

Anna Covert [00:33:48]:

Subscriptions can also be good for the customer when they are easy to control.

I like using Amazon subscriptions because I can easily pause, modify, or cancel them. I may want the discount and convenience, but if I am traveling for a month, I do not want more products arriving and being wasted.

I am a strong proponent of privacy and consumer protection. It should be as easy for people to withdraw their interest as it was for them to provide it.

If someone no longer wants texts, emails, or calls, or wants to change their preferences, companies should not make that difficult.

Per Sjöfors [00:34:43]:

For all its faults, Amazon does place the customer at the center.

It tries to make purchasing, returning products, and canceling subscriptions as easy as possible.

That intense customer focus helped Amazon become what it is today. It was not even the first company in the space, but it now dominates online sales.

Anna Covert [00:35:24]:

Let us talk about the illusion of Amazon Prime Day and discounting.

Many companies do not understand the power of discounts or how frequent discounting trains customers to value products less.

If a business runs an offer every week, customers learn not to purchase at full price. They know another discount is coming.

During events such as Prime Day, prices may be adjusted beforehand so that the later discount appears larger. There is an entire orchestration occurring behind the scenes.

What are your thoughts on discounting? When should companies use it, and when should they avoid it?

Per Sjöfors [00:36:16]:

When I give presentations to CEOs, I sometimes ask whether they know that prices often rise before Black Friday so they can later appear to fall.

Many people are surprised.

Let us return to the one percent price increase.

If a one percent increase can create a substantial increase in profitability, consider what a five percent discount can do.

For an average company, a five percent discount can eliminate approximately fifty-seven percent of profit.

To generate the same total margin after that discount, the company may need to increase sales volume by approximately 120 percent.

Is a five percent discount likely to double sales? Probably not.

Discounting should be used strategically, such as encouraging customers to move toward a more expensive product. It should not simply be applied across the board.

Companies should also avoid predictable end-of-quarter or end-of-year discounting.

In my previous career, I spoke with customers in April who told me, “I am going to buy from you, but I will wait until the final week of June because you will give me a better price.”

Buyers learn company discounting patterns and wait.

The company then leaves money on the table because of a purchasing delay it created itself.

Discounting can be a powerful tool, but it must be used with great care.

Anna Covert [00:39:26]:

Scarcity matters too. A promotion should feel meaningful and legitimate.

Many companies offer fifteen percent off a first order. Customers then begin to expect ten or fifteen percent off every order.

If they do not receive it, they may unsubscribe and resubscribe or use a different email address.

That creates additional costs for email marketing, text messaging, call centers, and data storage.

Per Sjöfors [00:40:19]:

There are alternatives to discounting, including bundling.

When you bundle products, you can add value for the customer.

You may take a small margin reduction, but it is often much smaller than the loss caused by directly discounting the primary product.

The cost of providing two complementary products can be significantly lower than the revenue loss created by a broad discount.

Many businesses do not understand how much additional volume they need to compensate for even a small discount.

Anna Covert [00:41:12]:

When you discuss the one percent challenge, are you recommending an increase of one percent each year or each quarter?

Per Sjöfors [00:41:21]:

The one percent challenge is primarily intended to wake people up to the power of pricing.

If a one percent increase makes such a significant difference in profitability, why not investigate whether the business could increase prices by three or five percent?

Anna Covert [00:41:54]:

That reminds me of a case study from business school about couponing.

Suppose I have one million bags of chips in a warehouse. I know what I paid for them and what my margin is. I distribute a buy-one-get-one coupon in magazines.

The promotion may be profitable while I am clearing existing inventory. However, once that inventory is gone, I must purchase more products while coupons are still circulating and being redeemed.

At that point, every redemption may begin reducing profitability.

Businesses frequently overlook the full financial implications.

What other pricing recommendations would you give business owners?

Per Sjöfors [00:43:01]:

There are many additional recommendations in my book.

Fundamentally, it returns to differentiation.

Differentiation gives companies pricing power.

If you sell something that is a commodity or appears to be one, you can differentiate a physical product by adding services. If you sell a service, you can add products.

One example I use is Hilti, a company that makes professional hand tools.

Hilti is based in Liechtenstein, a small country between Switzerland and Austria. It is not a low-cost place to operate.

Hilti makes very good tools, but the company also offers a wide range of services, including fleet management, calibration, certifications, and other forms of support.

Those services help justify higher prices compared with lower-cost tools that may include little or no customer support.

Hilti differentiates itself through quality and services that competitors may not offer.

Understanding meaningful differentiation is extremely important.

We also worked with a company that sold truck tires, which can appear to be a commodity.

The company operated service vehicles along major roads. When a truck driver had a flat tire or another tire problem, a service vehicle could often arrive within approximately fifteen minutes.

The company made money from that service, but the service also differentiated its tire business.

Another company rented steel road plates used to cover trenches.

Steel plates are highly commoditized. However, this company differentiated itself by sending two people in each delivery truck.

One person drove. The other stood outside and directed the driver to place the heavy steel plates in the exact location where the customer needed them.

Competitors sent one driver who might leave the plates wherever that person thought was appropriate.

Because the plates are extremely heavy, placing them incorrectly can create a significant problem.

The company also provided safety training for workers digging trenches, positioning itself as a thought leader in the industry.

As a result, the company achieved approximately sixty-five to seventy percent market share while charging prices approximately twenty-five percent higher than competitors.

That is the power of differentiation.

Anna Covert [00:48:09]:

That is really interesting. Where can people find your book?

Per Sjöfors [00:48:12]:

Because I have an unusual Swedish name, the easiest way is to search for “The Price Whisperer.”

I write frequently, and I also have a YouTube channel and other resources available online.

Anna Covert [00:48:43]:

We will have to do a book swap. I will send you mine, and you can send me yours.

Per Sjöfors [00:48:46]:

Absolutely.

I love talking about pricing. With your marketing background, you understand this better than most.

Anna Covert [00:49:01]:

Thank you.

I will include links to Per’s information in the episode description.

Thank you to everyone listening. If you have not already done so, please subscribe to this channel.

We recently reached 200,000 subscribers, and it is because of you and your support. Thank you for sharing this content with your friends and family so I can continue attracting brilliant guests like Per to share their wisdom with us.

I will see you next week in the pixels. Aloha.

Per Sjöfors:

Thank you so much, Anna. It was a pleasure.