#3 Price Is Right?July 7, 2016
“I just went totally numb at that point. It was just like being dipped in Novocaine.” Terry Kniess, Price Is Right contestant
Setting your prices is harder than it sounds and making a mistake can be costly. We outline concrete steps to get to the right number, starting with one of the most incredible wins in game show history.
This episode features:
Terry Kniess, Price Is Right contestant and author of Cause and Effects
Zoher Karu, Chief Data Officer at eBay
Mickey Goodman, Professor of Business and Entrepreneurship at Savannah College of Art and Design and Co-Founder/Partner at e2Advisors
Jonathan Wirt, Head of Marketing at Pushd
Savio Clemente, beta tester
Ruth Bolton, Professor of Marketing at the W.P. Carey School of Business
You can find eBay’s pricing tools at datalabs.ebay.com.
For tools and information about how to start or grow a business on eBay, visit ebay.com/openforbusiness.
Check out this amazing fan-submitted sketchnote from Pushpin Visuals!
JOHN HENRY: I’m John Henry, and this is Open for Business, a branded podcast from eBay and Gimlet Creative about building your business from the ground up. Today’s episode is about pricing. How do you price your good or service? It’s one of those questions that you have to have an answer for on day one. And you really, really want to get the right answer. Where better to begin a show all about pricing than here? The Price Is Right is the longest-running game show on TV. And the story we’re about to tell gets at our first lesson about pricing. It all starts back in 2008 when a guy named Terry Kniess did something on The Price Is Right that hadn’t been done in four decades. He did something that every business owner can learn a valuable lesson from. And it all started when Terry and his wife Linda had to put down their beloved dog, a Maltese named Krystal.
TERRY KNIESS: When we had to put the dog down, the dog was only eight and a half years old. It was totally unexpected. It happened very suddenly. The dog developed cataracts, became diabetic. And the health was deteriorating very quickly. And after that happened, we sat around rather depressed. And after two weeks of moping around the house, I said to my wife, we both have some vacation time, let’s go somewhere and do something. We’ve got to get out of this funky mood we’re in. So my wife come home from work. She was all excited. And she said, ‘I know what I want to do. Let’s go over to California. I’d love to get on The Price Is Right.’
JOHN HENRY: The basic idea of the Price Is Right is that contestants are selected from the studio audience to guess the prices of everyday things, things like a stove or a recliner or a can of soup. And the contestant who gets closest to the exact price, without going over, wins. Now, Terry is what you’d call detail-oriented, and he’s got a knack for numbers. And when he takes on a project, he really goes for it.
TERRY KNIESS: After we decided that that was where we were going to go. I said if we’re going to The Price Is Right, let’s do it correctly. I said, let’s study the show, and we’ll go in the fall.
JOHN HENRY: Terry would record that day’s episode in the afternoon. And then, when Linda came home from work, they’d watch the recording.
TERRY KNIESS: It was just occupying the thoughts. It was keeping us from thinking about the dog that we had to put down. So we did, we’d sit down every night and watch the show and look at the prizes that were up for grabs that day, and we started making a little mental list, of ‘Oh, this has been on before. This has been on before.’ And the first thing we noticed, was that the prizes repeated.
JOHN HENRY: That’s right. The longest-running TV game show in America, a show wherein the entire premise is correctly guessing the cost of its prizes, was just using the same items, over and over and over again.
TERRY KNIESS: And the prices never changed.
JOHN HENRY: It’s like seeing the answer key before you even get the pop quiz — but you’d never know it, unless you studied the show the way Terry did. All they had to do was just watch every single episode that they could, write down the prices, and memorize them. This went on for four months. Until one morning, at three AM, Terry and Linda arrived in Hollywood and got in line outside The Price Is Right Studio.
RICH FIELDS: Here it comes! From the Bob Barker studio at CBS in Hollywood. Television’s most exciting hour of fantastic prizes, the fabulous 60 minute Price Is Right.
JOHN HENRY: What happened next made daytime TV history and gets at this episode’s first lesson. Ten hours after they first got in line Terry and Linda were seated in The Price Is Right studio audience. Linda wore a t-shirt with Krystal the Dog’s face on it. Terry opted for a less flashy “Las Vegas Loves The Price Is Right” t-shirt. And as usual, the crowd was going insane.
RICH FIELDS: Terry Kniess, come on down!
TERRY KNIESS: So they hold up the name on a cue card and so my wife nudged me and said, ‘That’s you!’ And I looked up and saw it, and of course you high five everybody, and you run up on stage. You’re ready to go.
JOHN HENRY: Terry was more than ready. First up: an outdoor grill.
RICH FIELDS: Here comes now turning around on the turntable it’s a new ceramic cooker. The Big Green Egg is a grill smoker and oven offering unmatched cooking flexibility. Space age ceramics make it durable and fuel efficient.
JOHN HENRY: Terry recognized it immediately.
DREW CAREY: Terry.
TERRY KNIESS: 1175, Drew.
DREW CAREY: 1175. Julie?
TERRY KNIESS: It was on just two weeks prior to the time we went to tape. And my wife and I had said the night we had watched that tape of that show, I said, ‘That would be kind of fun for us to have in the backyard.’ And of course the 1175 price stuck right in my mind at that point.
JOHN HENRY: Did you have any doubt in your mind that you were right?
TERRY KNIESS: No, I knew 1175 was it.
JOHN HENRY: Terry won the grill. And after that, he kept qualifying for more rounds. All the way until the very end of the show: the Showcase. Terry had to bid on the combined price of a pool table, a karaoke machine, and a camper, without going a single dollar over its retail value. Sounds really hard, right? Not for Terry.
TERRY KNIESS: Well, the pool tables had been on before. They were using Golden West pool tables at the time. They were running between twenty-eight and thirty-two. So in my mind, I figured three thousand dollars for the pool table. The karaoke machine had been used several times prior, and I knew it was 1000. So, I’m up to 4000 dollars. I thought Rich Fields said it was a nineteen foot camper. And usually with campers and boats, it’s 1000 dollars a running foot. So, at nineteen feet, that would have been nineteen. So, 1000 for the karaoke machine, 3000 for the pool table. I’m up to twenty-three.
DREW CAREY: Passing it on Terry, what do you bid for all that? If it had been an eighteen-foot trailer she might’ve bid on it but it’s only seventeen-footer.
TERRY KNIESS: 23,743.
DREW CAREY: 23,743 dollars. Wow. That’s a very exact bid. Good luck. Sharon, here’s your showcase.
TERRY KNIESS: The 743 is where it really gets bizarre. My wife and I were married on the seventh of April. Seven. Four. She was born in March. Three. 743.
DREW: Terry, you’ve got the trailer. Jukebox. You bid $23,743 dollars. Actual retail price: $23,743 dollars. You got it right on the nose. You win both showcases. Hasn’t happened since ‘72 or ‘73. Right on the nose.
TERRY KNIESS: I still get chills down my spine when I hear that.
JOHN HENRY: Bring back good memories?
TERRY KNIESS: It does. I just went totally numb at that point. It was just like being dipped in Novocaine. The numbness stayed with me for about a day and a half. I was almost beginning to wonder if I was physically having some kind of episode or something.
JOHN HENRY: What Terry did is so unlikely, that he’s only the second person in the history of The Price Is Right to guess the exact dollar value of a Showcase. And he did it by doing one simple thing: studying the show. Naturally, lots of people were skeptical. There were internet message boards filled with hateful comments accusing Terry of being involved in some type of conspiracy to rig The Price Is Right. But he wasn’t. And he didn’t cheat. He just followed lesson one.
TERRY KNIESS: Do your homework. Do your homework. Do your homework.
JOHN HENRY: Do your homework. It sounds really simple. But it can feel daunting when you’re first starting out. How do you go about taking all the work and expense, the blood, the sweat, and the tears you’ve put into your business, and distilling all of that into a single number? The price of your product. Many businesses have gone under, or close to it, by picking the wrong price. So, do your homework. That’s lesson one. Everything starts there. The thing is, doing your homework used to take a lot of time. In the past, companies had to send people to actual physical stores all over the country, in order to get information about their competitors’ prices and set a baseline number. Now there are tons of e-commerce sites that can help you find the right price. You still have to do your homework, but it’s much, much faster than before. And one of those sites is eBay.
ZOHER KARU: I like to think of eBay as sort of like the Kelley Blue Book of everything.
JOHN HENRY: Zoher Karu is the Chief Data Officer at eBay. And what Zoher is saying here is that you can use eBay as a resource to give you a sense of how much your product, almost any product, should cost. That’s because of the massive scale and velocity of eBay, the sheer quantity of stuff that people buy and sell on the site. That’s why he’s comparing it to the Kelley Blue Book, which serves that same purpose for cars.
ZOHER KARU: We have such a vast number of items for sale. I think it’s around 900 million now, and eBay, of course, has brand new inventory, but it also has, for example, last season’s model. Or it has maybe a refurbished version. The used version. So it’s that breadth and depth of inventory and sales histories that allows us to think of the Kelley Blue Book of everything.
JOHN HENRY: Zoher takes all that information from those nearly 1 billion items across the site and creates tools for people to explore pricing. What’s the average price of something? What if it’s used? Has that price been going up or down? And by how much? It’s a wealth of pricing data that you can access instantaneously on eBay. So, big data has made it easier than ever to get the information that you need in order to set your prices, but what comes after you do your homework? How do you zero in on that specific price you’ll charge for your product?
MICKEY GOODMAN: If you do it right, you can bear fruit for a long time, and if you do it wrong, which is what happens in most cases, you’re digging out of a hole for a long time.
JOHN HENRY: That’s Mickey Goodman.He’s worked for Kraft and Unilever and has taught classes on pricing strategy at NYU Stern. He’s now a Professor of Business & Entrepreneurship at Savannah College of Art and Design. First, let’s explain what Mickey means by “doing it wrong.” He means, essentially, doing exactly what I did. Let’s take it back to when I was setting prices for dry cleaning at my first company, Mobile City. I called all the dry cleaners in the area, and pretended to be an interested customer. I asked how much for a shirt, how much for a blazer. Eventually, they’d get suspicious and stop giving prices to me over the phone, so I’d get my girlfriend at the time to call. And then, once I knew the price range I was working with, I decided to charge just a little bit more for the service than what it cost me to provide it. In business speak, this is called “cost-based pricing.” And in my case, and lots of other cases, it’s a mistake.
MICKEY GOODMAN: That’s what people intuitively do because it kind of makes common sense, which is you take your costs and you say ‘I’d like to make a 20% profit,’ you know, whatever it is. And you add 20% to your costs and you say here’s my price.”
JOHN HENRY: If you go the cost-based route, you risk underselling yourself and leaving a lot of money on the table. It can cost you your business. It nearly cost me mine. I remember sitting in the living room with my pops. I was crunching the numbers. I usually did it every Sunday and I realized I was gaining customers, but actually losing money. And that’s because I simply was not charging enough. I called a mentor of mine, and I’ll never forget what he told me. He said, ‘John, you’re delivering five star quality at McDonald’s prices.’ That conversation saved my company. The very next day, I immediately raised my prices. And while I lost a bunch of my customers at first, I ultimately found a new clientele that weren’t as price sensitive. They were happy to pay a premium for the service I provided. This brings us to lesson two: don’t set a price based on what it costs you to make something. Instead, set the price based on what your customers think that thing is worth. This is what Mickey calls “value-based pricing.”
MICKEY GOODMAN: It’s based around the concept of you know when people are buying a good or service it’s ‘cause it’s fulfilling some need for them. Now at the most basic level if they’re, if they’re thirsty and they buy a bottle of water the need is that they were thirsty.
JOHN HENRY: Right.
MICKEY GOODMAN: On the other hand, if they’re buying a house or picking a school for their kids or selecting a surgeon to have surgery, the need that’s being fulfilled is at a much higher level. So the way to think about it is, the more important need that’s being fulfilled, the greater the value to the consumer.
JOHN HENRY: Okay, so lesson number two: value-based pricing. Price your product based on how much it’s worth to your potential customers. But how do you actually go about determining that value? What if you’ve invented something new? We wanted to follow a small business through this process of trying to set the right price. And so, we asked one of our producers, Frances, to find one. Hey Frances!
FRANCES HARLOW: Hey, John.
JOHN HENRY: Welcome to the other side of the mic.
FRANCES HARLOW: Thanks. It’s great to be here.
JOHN HENRY: So, what’d you find?
FRANCES HARLOW: Well, I found a business trying to set their prices right now. They’re called Pushd, like the word push with a letter d at the end, and they have this really interesting pricing problem. And they let me spend a day with them while they try to solve it. Pushd was founded a few years ago by two of Twitter’s early employees. As in, their Twitter handles are just their first names: @abdur and @ej.
JOHN HENRY: What do they do?
FRANCES HARLOW: Well, they used to develop apps, but they decided to take a risk and venture into hardware. They’ve invented an actual physical object. It’s called the Aura, and it’s an overhaul of something a lot of people really hate.
JOHN HENRY: Door chimes!
FRANCES HARLOW: It is not door chimes. It’s a very high-end digital picture frame.
JOHN HENRY: I do hate those.
FRANCES HARLOW: But at least you remember them. Those digital picture frames from the early 2000s?
JOHN HENRY: Yeah. The really, really tacky ones?
FRANCES HARLOW: Yeah. Jonathan Wirt is head of marketing at Pushd. And he has a theory about why you, and lots of other people, hear the words “digital picture frame” and immediately think “tacky.”
JONATHAN WIRT: They were really ugly. They were really cheap. They were really hard to use. And so we’re essentially trying to solve all three of those problems and apply 2016 innovation to it, so it’s really useful.
FRANCES HARLOW: Pushd saw an opportunity here. Digital picture frames used to suck, but they don’t have to anymore. Pushd hired an industrial designer to come up with the aesthetics of the frame, the Aura, to make sure that it looked tasteful. They also told that me they created an app to go with it to make sure it’s really easy to use. You just set up the app once and it uses these really sophisticated algorithms and facial recognition software to sort all of the photos on your phone into albums of the people you photograph most often. And then it filters through all those albums so it takes out photos where there’s red eye or they’re too blurry or they’re just sort of technically bad compositions, like too light or too dark. It can even filter out naked photos
JOHN HENRY: Well, that’s useful!
FRANCES HARLOW: So, right now, Pushd is trying figure out, both the value, going back to Mickey, and the price of the Aura.
JONATHAN WIRT: Do you have any picture frames in your house now?
SAVIO CLEMENTE: Yeah, I have quite a few.
FRANCES HARLOW: This is what Pushd does several times a week. They invite people to come into their office and they beta test this new product that they’ve created. The beta tester today is named Savio Clemente, and he’s in the Pushd office to test out the Aura and then answer a couple key questions. Jonathan Wirt, head of marketing at Pushd, wants to know:
JONATHAN WIRT: Part 1 is, how much do you think this costs to buy? And how much would you — what is the max you personally would pay for it?
FRANCES HARLOW: In many ways, Savio is an ideal customer for Pushd. He mentioned that he is into feng shui, which means his obviously cares about his home decor, and he has over 26,000 photos on his phone. Savio appreciated all the handiwork Pushd put into the Aura, like the woven, herringbone-printed cord that they had specially designed. And yet, when it came down to how much he’d be willing to pay:
SAVIO CLEMENTE: I think something like this probably worth 150. I would not pay more than more than 225.
FRANCES HARLOW: That was a tense moment, at least for me. Savio landed at close to half of what Pushd wants to charge. So I asked Jonathan if I could tell Savio how much Pushd is going to charge for the Aura.
FRANCES HARLOW: Can I tell him what the price is?
JONATHAN WIRT: Sure.
FRANCES HARLOW: The going rate for this is $399.
SAVIO CLEMENTE: Yeah, that’s expensive for the size. I could see if it bled all the way up to the end, I would kind of pay, I would consider paying it, 399, but as-is I wouldn’t pay 399.
FRANCES HARLOW: After Savio left, I asked Jonathan if he was freaked out that their price was so off target, with this one potential customer.
JONATHAN WIRT: It’s a weird experience to come in and do that. Like, you came into a beta test, you’re getting paid, you’re using something that’s half finished, um, in a room where I’m videotaping you and writing down notes. It’s like an awkward experience. And then you’re like guessing this number. I don’t expect them to get it right. Um.
FRANCES HARLOW: I have to ask, like, you’re framing it like they’re getting the answer wrong. But what if you guys are getting the answer wrong? How do you know that you’re not getting the answer wrong?
JONATHAN WIRT: Right, you don’t. Until you launch, you don’t really know.
FRANCES HARLOW: Obviously, this is a concern for them. It’s a concern for all entrepreneurs. What Pushd is facing is a problem that lots of business owners face. When we consumers are presented with a product, we naturally and immediately make mental comparisons. We ask ourselves, ‘What is this thing like?’ And then we form our opinion about what the price should be. And in Savio’s case, I got a clue about how this works when Jonathan brought up the iPad, and Savio described his mental comparisons.
SAVIO CLEMENTE: Well, I just felt like with the iPad, there’s a multipurpose to it. I can actually do many things with the iPad. I can actually — it’s portable, I can take it with me. And it can load videos, show me websites, do all sorts of different things on it. This one seems like it’s one-dimensional, so I just feel like the price point doesn’t seem like it justifies 399 for it. Because that was only, what? 200, 150 dollars more and and it could do multitudinous things, as opposed to this.
FRANCES HARLOW: Instead of thinking of the Aura as a high-end home decor item, like a piece of art, where $399 might seem like the steal, Savio is mentally putting it in the consumer electronics category.
JOHN HENRY: And this challenge that Pushd is facing gets to our third lesson. As a business owner, you have to manipulate your comparisons.
RUTH BOLTON: What you want to do is differentiate your offering so much that there is no straightforward comparison. You have something that’s somewhat unique.
JOHN HENRY: That’s Ruth Bolton. She worked in R&D at Verizon for years helping them with their pricing, and now she’s a professor at Arizona State University’s business school. In plain English, what Ruth is saying is to position your product in the marketplace so when people inevitably compare it to similar products out there, they’ll feel like they’re getting a good deal.
RUTH BOLTON: There’s always, in a sense, a competitive offering in that there’s some substitute that the customer will make if they can’t buy the service or the product that you’re offering. So it really comes down to kind of benefits per dollar.
FRANCES HARLOW: One other point about manipulating comparisons — or the kinder, gentler way of saying it: creating favorable comparisons. One way to position your product in the marketplace is to literally position it, in the right environment. So with Pushd, they want you to think “fancy home decor” when you see the Aura.
JOHN HENRY: Well if they want to do that, it might just be helpful to put them in a “fancy, home decor” showroom with the Aura, not a startup’s temporary office space. And there’s one more thing Ruth would do differently. She doesn’t ask open-ended questions about prices, the way that Jonathan does at Pushd. What she would do is ask each customer a single yes or no question:
RUTH BOLTON: Would you buy it or not? And then you do it with somebody else, would you buy it or not?
FRANCES HARLOW: That’s it?
JOHN HENRY: Yeah, that’s it. You don’t push back. You don’t ask how they arrived at that number. And that’s because it’s more realistic. With pricing, it’s almost always a yes or no question. Would you buy it or not?
RUTH BOLTON: And you start varying the price and so you can kind of sort of start to figure out, what the shape of that demand curve is.
JOHN HENRY: The shape of the demand curve is what we’ve been talking about this whole time: how to set a price.
FRANCES HARLOW: And fairly soon, Pushd is going to find out about the specific shape of their demand curve. Because they’re going to launch the Aura sometime this fall.
JOHN HENRY: Cool. I’ll keep an eye out.
FRANCES HARLOW: Yeah. We’ll see how it goes.
JOHN HENRY: So, to recap. There is no guaranteed way to pick the perfect price, but there are concrete steps you can take to get close. First: Do your homework. The good news? It’s now easier than ever with all the data we’re gathering from e-commerce sites, like eBay. That will give you a range of prices. Second: Once you’ve found that range, be bold. Pick a number that reflects the value you bring to your customers, not just your own production costs. Third: Create favorable comparisons. Position your product so that customers feel like they’re getting a fair deal, and one way to position your product is to pay close to attention to how you’re physically positioning it. Finally, be prepared to repeat steps one through three. Prices change. They’re dynamic. That’s part of why they’re so hard to set in the first place. Even on The Price Is Right. After Terry’s spectacular win,, the show’s producers switched it up. The show now features all-new prizes, and guess what? Their prices change.
JOHN HENRY: That’s it for the show this week. We’ll be back next week with an episode on the much maligned, much misunderstood art of marketing. Running a business while figuring out how to tell the right story about your business? That’s next week on Open for Business. Open For Business is branded podcast from eBay and Gimlet Creative. Our theme song is by Vulfpeck. If you want to hear more from Open For Business, visit ebay.com/openforbusiness, where you can find more episodes of this podcast, as well as tools and information on how to start or grow a business on eBay. And to learn more about the tools that Zoher Karu from eBay was talking about, the tools the tools that can help you research pricing by mining eBay’s vast data, go to datalabs.ebay.com. And congratulations to Jonathan Wirt from Pushd. He’s getting married this weekend! Subscribe to us and if you like show leave a review! It really does help! Open for Business on iTunes and Google Play. I’m John Henry. Thanks for listening.
Subscribe to Open For Business
RSS for your podcatcher