The Anchor Price

Introduction:

This week, Shawn Busse, Paul Downs, and Liz Picarazzi talk pricing, specifically how they use an anchor price—the first number they offer prospective customers. Do they anchor low to avoid scaring anyone away? Or do they anchor high to disqualify unlikely buyers and to make the actual sale price feel more comfortable? Plus: Liz explains the remarkable, dream-come-true, my-product-in-Times Square PR gift she just received. Of course, this is entrepreneurship, so even when dreams come true, there tend to be complications. Liz’s business is getting a wave of publicity at a time when her fabricator in Shanghai has been locked down for almost four weeks. She’s talking to domestic fabricators as well, but they, too, will be dependent on raw materials that have to come from China. “It’s a problem,” she tells us.

— Loren Feldman

Guests:

Shawn Busse is co-founder and CEO of Kinesis.

Liz Picarazzi is founder and CEO of Citibin.

Paul Downs is founder of Paul Downs Cabinetmakers.

Producer:

Jess Thoubboron is founder of Blank Word Productions.

Full Episode Transcript:

Loren Feldman:
Welcome, Shawn, Paul, and Liz. Great to have all of you here. Liz, I’d like to start with you. The last time you were here, you told us about a lot of stuff you had going on: a contract with the Times Square business district, another potential government contract, a deal to white label your enclosures through another business. What’s going on? Anything happening?

Liz Picarazzi:
So the biggest news, which hit yesterday, was that the mayor of New York is launching a new initiative to keep trash off of the sidewalks. And Times Square is the first place where it’s happening. And he held a press conference to announce the new bins that will be deployed in Times Square and other places in the city. And guess whose bins those are… Citibins!

Paul Downs:
That’s fantastic.

Loren Feldman:
Just Citibins?

Liz Picarazzi:
Well, so far, yes. It’s just us.

Loren Feldman:
Nice.

Liz Picarazzi:
But this was the sort of media event—if I were to dream of what I wanted for PR, I would never have even imagined this, where the mayor is there with a lot of his commissioners with a lot of city council members, and he literally is standing right next to my product in Times Square. So that’s like the biggest news for me.

Loren Feldman:
Did that get picked up widely?

Liz Picarazzi:
It did. It got picked up very widely.

Loren Feldman:
TV? Publications?

Liz Picarazzi:
All of it, all of it.

Loren Feldman:
Is there any way to measure, Liz, the impact of all that? I mean, I know it’s too early, but how are you thinking about all of that attention that you got?

Liz Picarazzi:
Yes, so within the government and within business improvement districts, there’s a ton of interest because the mayor also announced a program where business improvement districts can apply for $20,000 grants to get bins. And really, the only player in town is Citibin, unless they were going to go on an exhaustive search. So I can look at the interest from bids. I’m also looking at clients that we had estimates out to that now really want to buy because they saw it. There are definitely more forms coming in through our website, which is often how we measure things—traffic to the website. So it’s really, really booming.

Paul Downs:
I think that a couple of weeks ago, we were talking about your plans to distribute nationally, and issues with that. And I’m pretty sure I said, “New York City is a huge market and maybe you should just concentrate on that.” So I just want to put down that marker that I was right. You’re gonna be able to sell one of your things to everybody in New York, and that’s a gigantic market. So, congratulations.

Liz Picarazzi:
Thank you. Thank you. You were definitely right on that. And Paul, I remember when you advised me a few years ago before I made my product prefab in a kit, whether or not I would sell nationwide. And you were very cautious, but I went ahead with selling nationally anyway. But I do agree with these sorts of municipal potential buyers.

If I only have the city of New York, and I don’t want to grow like crazy, I’m probably going to be gangbusters for the rest of my life. So that is a little bit of the challenge, is ramping up. But I think New York City, on all levels, is a great market. I’m in the government now. I’m already in residential, working with property managers and architects and developers. I really don’t want to spend any time going after Chicago or L.A. or Portland or any of the cities I thought of before, unless it’s total organic traffic coming our way. But I’m certainly not going to spend any time or money trying to get in other markets after this happened.

Shawn Busse:
What does this mean for your bear experiment?

Liz Picarazzi:
So the bear experiment is still happening. We don’t have it scheduled yet.

Loren Feldman:
Remind us what that is, Liz.

Liz Picarazzi:
Yes, so we’ve created a bear-proof version of our flagship trash enclosure, and it’s made out of steel. It has special handles on it, and it’s meant for all of the potential customers who have asked us for bear-proof over the years. That’s why we decided to prototype this.

Loren Feldman:
This would not be in New York City, I’m guessing.

Liz Picarazzi:
It would not. It would not. It would definitely be more Colorado, West Coast, anywhere where bears are an issue in trash, and bears are a safety issue as well. So there are a lot of cities or towns where there’s a requirement within the city or town that they have bear-proof trash enclosures, so residences. So bear-proof, it’s still moving ahead. It may move slower but also back to Paul’s point, the implementation of those enclosures in other states is a big undertaking for us. Even if the client pays for it, it’s still a very large undertaking. So I think with bear-proof, I probably would look to have more of a Mountain State representative who’s right there on the ground, who could do sales, servicing, and installation.

Shawn Busse:
I was at a seminar the other day, and the guy said something that was so powerful. He said, “Really great strategy requires that you be ruthless and that you focus exactly on the thing you’re working on. You say no to all these other things.” And I’m curious why you continue with the bear work?

Liz Picarazzi:
Okay, so let me get this. Are you, Shawn—and Paul, probably—both saying I should put down the bear work? Because I anticipate that Paul is going to tell me that, too.

Paul Downs:
No, I’m not going to tell you that.

Shawn Busse:
I’m not advising. I want to understand your reasoning, and I am asking a bit of a leading question.

Paul Downs:
Here’s my thought on it, which is: You’ve come this far, and being able to say your thing is bear-proof is actually just kind of impressive in itself. So it may be that whatever you learn about keeping bears out of the trash is actually extremely useful in Times Square.

Shawn Busse:
What are you saying about New Yorkers, Paul?

Paul Downs:
I don’t think I have to say anything about New Yorkers. Just understanding what is the most extreme kind of use case for your product is going to be useful when you’re deploying it in heavily trafficked space that nobody really owns. When you put the bin out in front of somebody’s house, that house owner has some incentive to keep it good. Plus, the amount of traffic in your average house is way less than Times Square.

I wouldn’t go back on the bear thing. I think that you might not want to rush to establish all that distribution, because that’s a whole different issue. But just the idea of making a really strong, durable product is what you’re going to need to do if you’re in public spaces.

Liz Picarazzi:
Absolutely. So our normal enclosures, which are primarily residential, are made of sheet aluminum, and the bear-proof are made out of steel. So for the upcoming work with the city—and there’s actually another thing I haven’t shared yet, but I won a very big contract that hasn’t been announced yet with DSNY.

Loren Feldman:
What’s DSNY?

Liz Picarazzi:
Departments of Sanitation of New York. So with DSNY, they are getting steel, because it is public use. They’re actually going to be put in parking spots, so those absolutely need to be steel and not aluminum. And that’s a component of bear-proof, is we did make those steel, rather than aluminum for that. And if you think about: Okay, sanitation workers are going to be using this. You see how they throw things around, shall I say. We’re definitely gonna be making it more durable for both the bears and for sanitation workers.

Loren Feldman:
You just told us that you’ve won another contract that hasn’t even been announced, and you got all this attention. Last time we spoke, you were having supply chain concerns. Are you at all worried that you’re not going to be able to meet the sudden demand that you might be facing?

Liz Picarazzi:
So I am worried. I went back and I contacted two of the U.S.-based factories that I had great interactions with when I RFPed this out in the fall, and let them know this is happening. So there’s one in New Jersey, one in Long Island. And my idea is to really activate and ready all three factories to be able to produce. And that is one way that I would be able to handle it.

I did also check with my factory in China to check their capacity, and they say that they have it. I mean, I know that I need to absolutely check on that. But the thing that I like about the U.S. option is that’s something I really, really want to do. And if by getting government contracts where they may require U.S.-made—and therefore a higher price tag—they have to understand it. That’s my way to produce in the U.S., and so I’m seeing this capacity constraint as a force to get some of my production back in the U.S.

Loren Feldman:
You were concerned that you were not going to be able to find a domestic producer that would produce your bins at a price that worked for you. Are you now thinking that you’re going to find a way around that?

Liz Picarazzi:
Yes. It’s actually pretty simple. It’s pretty simple. I’m going to tell the city, “If you want me to produce in Long Island, it’s going to cost 76 percent more. And I know that because I RFPed this product out to 10 factories in the U.S. And I found that this is how much more it’s going to cost.”

If they don’t want to do it, then not. But I think that in a lot of these situations where they’re requiring U.S.-made, they know that they’re going to pay more. So this is actually kind of an opportunity for me to switch it over, because there’s an understanding that the cost is going to come up. And that might be something they really want to do.

Shawn Busse:
You know, with the mayor of New York photo, you’re entering the realm of politics. And so essentially, you’re bringing a political value to them. So they can then get on stage and say, “And this is made entirely in the United States by local artisans here, right in the New York Metro.” And that’s worth maybe a lot more than 76 percent.

Liz Picarazzi:
I think it is. I really do, Shawn. I think it is, because that can become part of their story: “We helped this local woman-owned business move production, or some of it, to here, to our state of New York.” I think that would be huge. Another thing I do look at is that I know that bin companies that contract with the government are definitely charging a premium to produce in the U.S. And this is my way to jump over to that, at least for municipal stuff.

Paul Downs:
Yeah, I mean, my experience with government is that if they want to do it, they find the money.

Loren Feldman:
Where do things stand with your plant in China? Is it back up?

Liz Picarazzi:
No, it’s not. It’s been shut down for almost four weeks.

Loren Feldman:
Is that a problem yet?

Liz Picarazzi:
It definitely is a problem—not only on orders that we’ve already placed, but on this upcoming order. And that’s another thing that’s a worry for me, because the city isn’t going to necessarily understand the long lead time. But I did have a meeting with them today, and I really flat out said, “I already know that this is going to take longer and be more expensive to produce in the U.S., even given the shutdown in China and in Shanghai, because we’re still getting the timelines from them. They know all this stuff is happening.”

If it goes on much longer, yes, it’s going to be a gigantic problem. But we do need to remember that even if I produced in the U.S., all of my materials are coming from China—all of my sheet aluminum, all of my bamboo boards, all of my hardware. So those supply chain problems are hitting all of my materials, regardless of where I produce.

Shawn Busse:
Are the Times Square ones aluminum, Liz?

Liz Picarazzi:
They are.

Shawn Busse:
And are you concerned about the durability piece with that?

Liz Picarazzi:
I am. Basically, we made them put big cement barriers on each side of them. But that is a little bit of a test, and we did tell them that. I think, ultimately, it’s going to have to be in steel, but that is to be seen. And this is a pilot. I mean, this isn’t it.

Shawn Busse:
How many are you going to put into Times Square?

Liz Picarazzi:
So we have two four-modules—the extra large size—that are in two different locations in Times Square, so 43rd and Eighth Avenue and 41st and Seventh Avenue.

Shawn Busse:
Would they be open to A/B testing it and say, “Hey, can we build one out of steel with local fabrication and one the traditional way and then just run the test?” Have them pay the premium for it, and say, “Hey, we’re thinking about the value”—you know, sell the political angle?

Liz Picarazzi:
Definitely, and I have thought of that. I haven’t said it yet, because we’re just kind of getting into discussions. But that’s actually another issue. It’s that Frank, who’s my COO—

Loren Feldman:
And?

Liz Picarazzi:
He’s my husband as well. [Laughter]

Paul Downs:
Let’s keep it professional.

Liz Picarazzi:
Yes, thank you, Paul. He’s still really set on aluminum. And I have to say, we’ve been having a lot of fights about it. Like even at the celebratory dinner with our team last night, we were arguing about aluminum versus steel, and we had to stop. I know and I really believe that they have to be in steel. I mean, they’re going to be in New York City parking spots. They absolutely have to be in steel. So that’s a separate issue, and every time it comes up, I just say, “You know what? Let’s take some time next week to talk about it.”

Loren Feldman:
What’s Frank’s argument?

Liz Picarazzi:
I think he’s looking at lead time and price. I think he’s looking at how our volume is with aluminum and not with steel right now. And what I say is, “We need to take the long view. We need to do what is absolutely best for the city. And we can’t take a chance of a bus or a car hitting an aluminum closure, when we know that it’s a lot weaker than steel.” I’m not going to take a chance on that in a pilot with the city of New York, where the literal mayor is looking for this to be successful.

Paul Downs:
We sort of went through a version of this issue over the last decade, which is we used to only make our tables out of wood, which is beautiful, but a little bit on the delicate side. And then we gradually introduced tables made with plastic laminates like Formica, and those are about 70 percent of our work now. People really value the durability. And we don’t sell it as cheaper. It’s just more durable.

Shawn Busse:
That’s such a good example of the tension in a business where, once you start to get operational around something, that the forces within the business—who happen to be your husband—want to optimize and continue on. And then the entrepreneur is always kind of looking for the new way. And how do you know when it’s worth changing? That’s the question.

Liz Picarazzi:
Well, and it’s also a perspective of, I have a background in product development, so I know that the stakeholder input on these installations is going to inform not just aluminum versus steel, but any of the moving parts, any of the hardware. And I’m really open to listening to that and integrating that. And that’s also something with Frank. He’s very focused on, “What’s the timeline the city gave us? Can we meet it or not?”

Loren Feldman:
That’s a reasonable concern.

Liz Picarazzi:
It is, but what I say is that, in the RFP, we very clearly said that this is based on our current product, but done in steel. So if they want to change the requirements, that’s fine. It’s just like software development. There’s going to be a change in the timeline and the price if you want to change it.

So I would say, I’m a little bit more receptive to incorporating that feedback faster than Frank is comfortable with. And I’m probably gonna have to send out a Google Meet to sit down with him early next week, because we’re just both too fried from the last few days.

Loren Feldman:
We could do that as part of the podcast if you want to.

Shawn Busse:
Instead of arguing in front of your employees, you can argue in front of everybody listening to this podcast.

Loren Feldman:
I like the way you’re thinking, Shawn.

Liz Picarazzi:
Let’s broaden the audience. You know what? Because I’m gonna win the argument.

Shawn Busse:
Okay. We definitely have to do it now.

Paul Downs:
Are you guys doing the installation?

Liz Picarazzi:
We are, yes. That’s one thing I’ve looked at.

Paul Downs:
So is there any issue with non-union labor or union labor? Because that’s something we run into when we operate in New York.

Liz Picarazzi:
I mean, I don’t. I’m using my current team, and I’m going to be growing that team. But I’ve never heard anything about a union requirement. I don’t think we’re big enough for that.

Paul Downs:
Ha, ha, ha, ha, ha. [Laughter] I would default assume that anything that’s being done in association with the city of New York is going to have a union labor requirement somewhere. But you should definitely find out, because that’s not something you want a surprise about.

Loren Feldman:
Is there a way to prepare for that, Paul?

Paul Downs:
Yeah, start collecting large amounts of money.

Liz Picarazzi:
You know what, either that or include it in the bid. Because I know that any of my competitors that had to pay for union labor would have the same expense.

Paul Downs:
It’s just the way it goes. And we’ve done a bunch of installations, and there are plenty of companies that will do it. It’s not hard to find union labor. It just costs more, that’s all. So as I said, I would be extremely surprised if there wasn’t a requirement somewhere to do the installation with union labor.

Loren Feldman:
Maybe not initially, when it’s a pilot, but once it’s a real thing?

Paul Downs:
[Laughter] No, no, that doesn’t make any difference. When the union guys are out there preventing your truck from being unloaded or whatever, they don’t give a damn who you are, how big or small you are. They just want to make sure.

They enforce these things. So we get around it by working with our clients very carefully. If it’s a construction site, there’s no way around it. And if you’re just like sneaking in months after everybody else has gone home, that’s a little bit different. But you’re always taking a risk.

Loren Feldman:
Well, luckily, you haven’t had any publicity about this. So they probably don’t know about it.

Paul Downs:
No, they’ll know. In particular, your contract with the sanitation department, you want to make sure you understand what the terms are of that.

Liz Picarazzi:
I actually have one more thing to say about the servicing and the installation. So I’m actually seeing that as a really strong revenue source over time, because it’s not just the actual installation of it, when you’re talking about municipal. It’s also the servicing, so having a servicing contract.

So currently, about 15 percent of our revenue is actually from installations. So that’s huge. So if this was rolled out further, and we were doing all the installations, and I get them on a service contract, that’s essentially almost like a recurring revenue subscription, which if you listen to—and Loren, I don’t mean to offend you—Built to Sell, they say, “Always build your business so that an acquirer sees that you have a guaranteed revenue stream, whether it be subscriptions or government contracts,” which do tend to be kind of evergreen. So that’s one thing where I look at this expense of the installation as, “Let me get this right, because this is going to become a source of recurring revenue if I roll this out to the city.”

Loren Feldman:
I’m gonna ignore that comment, Liz.

Shawn Busse:
You can edit it out. No problem.

Liz Picarazzi:
Why?

Loren Feldman:
No, I’m kidding. That’s John Warrillow, right? Built to Sell?

Liz Picarazzi:
Yeah, yeah.

Loren Feldman:
It’s a great program. People should know about it.

Liz Picarazzi:
I love that one. It’s probably far off for me. We’ll see, but I’m trying to think of it that way.

Shawn Busse:
I am super curious, because you are going hard at a B2B play, as opposed to B2C. Are you thinking about just really shifting your resources and just kind of downshifting the B2C stuff?

Liz Picarazzi:
I don’t know yet.

Paul Downs:
I don’t think there’s a trade-off, actually. I mean, we do a ton of what I would call B2G work. I mean, dealing with government as a client is just a different issue. But there’s no reason why you can’t mix them. We do it every day.

Shawn Busse:
Yeah, but your business is more mature and has more revenue. It seems like you’re in that stage of your business where you have to make decisions and trade-offs. But maybe I’m wrong. I don’t know.

Liz Picarazzi:
No, you’re right. No, you actually are right. And I’ve been thinking a lot about that, because the customer acquisition costs with residential are a lot higher than with B2B and government, and I am resource-constrained. I do need to figure it out. I do need to hire more people.

Shawn Busse:
Would you take investment?

Liz Picarazzi:
I don’t think so. I don’t want to.

Loren Feldman:
Well, speaking of money, you told us at the beginning of the year that your goal was to double revenues this year. How does all of this affect that goal?

Liz Picarazzi:
It definitely helps us. It helps us a lot. It’s definitely gonna get me to 2X this year.

Loren Feldman:
And will that require—as Shawn was suggesting—some kind of financing? Are you going to have to figure out a way to buy all these raw materials that you’re worried about whether you’re going to be able to get through the supply chain or not?

Liz Picarazzi:
So I’ve done a couple of things to try to move ahead on that. One, I have a line of credit from my bank. It’s very wimpy. It’s about $200,000. It’s barely going to cover anything. But I do have that. And then I also contacted the Brooklyn Chamber of Commerce, because I know that they can help MWBE contract winners with financing to be able to find—

Loren Feldman:
MWBE?

Liz Picarazzi:
Yeah, Minority Women Business Enterprise. So I’m certified as a woman-owned business in New York City, and that certification gives me access to certain financing tools that I don’t think that men—sorry, you guys—don’t have. And that includes some loans and lines of credit that will help finance a contract that a woman or a minority otherwise would not be able to afford.

Shawn Busse:
So maybe Paul can answer this question, since you’ve done more work with government: How much flexibility is there with those types of clients, in terms of getting deposits upfront? Because if Liz moves out of the consumer space where she has more control and can say, “I’ll put this on a credit card, and then I’ll ship it.” Does the government kind of say, “Hey, we’ll pay you 30 days upon delivery”? Or what’s been your experience with that, Paul?

Paul Downs:
It’s all over the map. It’s very unusual to get a deposit. It does happen sometimes. You’re entering a world where each government agency you deal with may have different rules, and sitting over all of that may be another set of rules from the state of New York, and there are definitely pitfalls to it. But a lot of it is just sitting down and working your way through what they want you to do. And don’t go in with the attitude that you’re going to be able to get the state of New York to change course on anything. It’s unlikely.

I mean, I can remember my first time running into this issue. We got a call—this is a long time ago—from a Navy buyer. And we talked through the job and came to an agreement on price and all that. And then he said, “What are your terms?” And I said, “Well, I want 50 percent up front.” Boom, the phone goes down. The Navy doesn’t do that. And so that was that. And I had to get my head around the idea that you’re just not going to negotiate with certain people.

Now, we’ve had other government entities, where I would say that the higher up the person you’re dealing with [is], the better chance you have of seeing some flexibility. But it’s not guaranteed. All these government entities have very strict contracting rules, which are designed to prevent corruption and fraud, and you just get your head around it. You’ve just got to do what they want you to do. And that often means financing the job.

Now, we’ve done a couple of things for New York entities, and I’d have to go back and think about the details of it. But with the federal government, you don’t get any money up front. But if you do learn the system, you will get paid. And so we’re willing to finance federal jobs, because I know at the end of the day, they’re gonna pay me.

And so all I could say is, you’re about to enter a whole world that you never suspected existed. And once you master it, it’s actually a very good thing to know how to do. My ability to deal with the Department of Defense is actually a huge plus for every additional job we get, because we just know how to do it. And a lot of people don’t.

Loren Feldman:
Paul, have you tried to take a government invoice to a bank to get financing?

Paul Downs:
No.

Loren Feldman:
Have you thought about it? It is possible to do, right?

Paul Downs:
I suppose.

Liz Picarazzi:
No, I haven’t found that to be true.

Loren Feldman:
You’ve looked into that, Liz?

Liz Picarazzi:
In anticipation of this contract coming up, when I signed this little wimpy $200,000 line of credit, I said, “I think this contract’s coming down the pike, and I’m going to need to finance it. Can you raise my line if and when that happens if I bring you a P.O.?” “No, we need your 2023 tax returns to consider any increase in that $200,000 line.”

Shawn Busse:
You’re talking to the wrong industry, Liz. There’s a whole ecosystem—

Paul Downs:
Factors.

Shawn Busse:
Yeah, factoring is kind of the worst of it, in terms of cost. But there is a whole ecosystem. Your bank is not it. I mean, honestly, a good bank, I think, would look at that and go, “Okay, we trust you.” But you’re so early in the business cycle that you probably don’t have that level of credibility yet. Or you might be at the wrong bank. That’s another possibility.

Paul Downs:
In my experience, I have a $200,000 line of credit, and that’s not enough for the bank to actually be interested in me. And I think that they’re looking for bigger loans, bigger companies, and the banks I’ve dealt with just are not that interested in a small business customer trying to deal with what you’re about to deal with. There are other ways to raise money, but not from banks, would be my take. I mean. what are we talking about, Liz? How much do you have to finance? Half a million bucks, or what?

Liz Picarazzi:
Yeah, it’s about that.

Paul Downs:
And you can’t scrape that up.

Liz Picarazzi:
I would need a big deposit.

Paul Downs:
I mean, they may give it to you. We got a significant deposit from a federal buyer who, the way they ran their agency, apparently, was they had the authority to do it. But a lot of it was, this was a senior leadership room. And so when the bureaucrats realized that the head of the agency is going to be sitting at our table, there’s a little bit more flexibility. And I just don’t know how it would play out.

Liz Picarazzi:
You know what? I think that I have a really good shot at that sort of a leader moving this ahead, because of how high exposure it is.

Paul Downs:
Possible, but the flip side is that person imagining the headlines in the New York Post a year from now like, “Slippery deal! And look at these things!” And so there are always a lot more CYA concerns than you might think.

Loren Feldman:
Liz, did we cover all of your news?

Liz Picarazzi:
There’s only one little thing that I will say, is that when I was talking on the show a few weeks ago about this other trash enclosure company that wanted to be a distributor—an online distributor—for Citibin—

Loren Feldman:
Your products but with—

Liz Picarazzi:
—with their label on it, their branding, I got a phone call from Paul that same day, and he had been listening to the podcast and me. He pushed pause and called me. He was like, “Don’t do it!”

Shawn Busse:
Yes!

Liz Picarazzi:
“Don’t do it!”

Shawn Busse:
Oh my God. Paul is a good human being. I don’t care what anybody says.

Liz Picarazzi:
Paul, I’m so glad you pushed pause. I met with my IP attorney the very next day on the suggestion also of Jay, and he basically said, “Don’t do it. That’s brand dilution. There are other ways that it could be co-branded, particularly if it’s the bear-proof, but that you don’t give away any of your leverage on this.” So I wrote back to that guy and just canceled.

We didn’t have any sort of written agreement. But he definitely poo-pooed my concern, and that made me even more glad that I rejected it. And then I found a different online retailer of trash enclosures and cans, and now I’m listed with them, and they’re not messing with my branding at all. It’s gonna stay Citibin, and we’ll see how that goes.

Shawn Busse:
So good. Oh my God. When I was listening to that episode, all I could think of was Kirkland, Kirkland, Kirkland—like Costco does with brands. And that’s not who you are.

Liz Picarazzi:
No.

Loren Feldman:
Let’s move on to another topic. Paul, maybe the last time you were on, you told us that you had taken your prices off your website for complex reasons that we didn’t really have time to get into at that point. I’ve been wondering about it ever since. Can you tell us why you took your prices off your website?

Paul Downs:
Yes, and the context—we were talking about your conversation with the pool guy [Marcus Sheridan] and his big success with telling people what pools cost—and I made the remark that the pool guy and me are similar, in that our buyers don’t really know what our products should cost. So I first put pricing on my website back in 1999, when nobody was doing that. And it was pretty successful for a long time when we were selling residential furniture. And then when we started selling more conference tables, more B2B and B2G, we actually put all the pricing up for those tables as well. And I even built into one of the versions of my website a little quote generator where people could just put the parameters of the table, and then a number would pop out.

Loren Feldman:
Were you willing to stick to that number?

Paul Downs:
Well, it turned out to be a problem, because the coding of the algorithm was buried deep into the website, and it was really hard to adjust any of those numbers. So my sales staff started to complain that when people did do the thing, that then they were kind of stuck with the number. But it also turned out that a very, very small number of people even wanted to do that. They just didn’t do it.

So we rolled out a version of the website in 2009 that was sort of addressing all of that. It took that self-quoting feature off and put prices on the website. And what we found was that we have a pretty wide range of different tables that we make, and some are really big and complex and expensive, and some aren’t. But we put numbers up on all of them when we launched this new version in 2009, and what happened was traffic just stopped dead. And it took me a little while to figure out what was going on, but what it was is that people would come to the site and they would look at all the things we were showing and they would inevitably click on sort of the biggest, fanciest thing—the coolest table—and then there would be a number associated with that that would be jaw-dropping for a lot of people who just didn’t have any idea what a table could cost. And then they would just go away.

Loren Feldman:
How did you figure that out? How did you know that was what was happening?

Paul Downs:
Well, we took all the pricing off after about a month, and lo and behold, people started calling again. So it was a guess as to what was happening. We could see which tables were most clicked upon, and it would be a table we made for the World Bank or a table we made for some giant, crazy thing. And those are expensive. Those cost hundreds of thousands of dollars.

So we were losing the opportunity to have a conversation about pricing with our clients. They were just scurrying away. And when we took the pricing off, then people didn’t know what any of this cost, and they would call us. The number one question we get from people today is, “What does this table cost?” And so we can at least have a conversation where we tell people what that particular table costs, but then put it in the context of what they need.

And we have since put language up on our website that talks about costs in a way that’s vague but useful. And we have a couple of formulas like, “Okay, the cheapest tables we make are 500 bucks a foot.” That’s not the actual number. I’m just pulling it out of the air. Like a 10-foot table would be 5,000 bucks. And the most expensive—a 10-foot table—would be $50,000. And that’s the range. And so people have some idea of where they’re heading. But then we work with them, once they call, to figure out what they actually need and give them better budget numbers.

So one of the things that we’ve tried to be very careful about is introducing what we call “the anchor number” into any sales conversation, which is the first number that a potential buyer hears sticks in their mind. And so what you want to make sure is that the first number is not one that scares people away. So that’s why we talk about table costs as dollars per foot. Because the actual numbers that are associated with those are not threatening. It’s a couple of hundred bucks to a couple of thousand bucks, whereas the table itself may end up costing a lot of money. It’s just a way to start talking about pricing without a scary anchor number, because the first number never goes away. And that’s just a reality of sales.

Loren Feldman:
We recently highlighted a story in the Morning Report about how Steve Jobs used an anchor number when he introduced the iPad—I think it was the very first version of the iPad. And they flashed the number $999 on a screen behind him as he was talking about the product for the first time, describing what it could do. And then I think the price he actually introduced was like half that. So the idea was the opposite of what you’re saying—to anchor a really large number and then surprise and delight people with a much smaller number that might have been scary if that had come first.

Paul Downs:
Well, that’s very interesting. But there’s really no transferring Steve Jobs’ experience and Paul Downs’ experience. [Laughter] We’re just in different worlds.

Loren Feldman:
Well, it’s a different product at a very different price level.

Paul Downs:
Yeah, when I get to the Apple level of success, believe me, I’ll be dropping big numbers on everybody.

Shawn Busse:
Well, I mean, actually, it’s interesting, because I’ve found—at least in my world—the anchoring strategy, if I anchor on the low side, that’s a problem for me. Invariably, the client keeps wanting to return to that number, even if we’ve had lots of conversations around, “Well, what you want to do is really complex, and here’s the thing. And this is why it’s more money.” They will often return to that low number. So I actually use the Jobs approach. I just go at it and say, “Hey, it’s probably this. But it might be less.” And I’ve had much better luck with that. But maybe it’s different. I don’t know. We’re selling a service and not a product.

Paul Downs:
I think it is different. Every single product has a different approach that works for them. And you’re also dealing with a client. I mean, I presume that people who are writing checks to you are fairly sophisticated. They’re business owners. And we deal with a lot of business owners ourselves, because a lot of bosses buy tables. And so we’ve had these conversations so many times we kind of know how to do it, but it’s going to be different for every single business. But that concept of the anchor number, I think it’s real. Whatever the first number is, you’ve got to be very cognizant of what you throw out there, and be aware of how you have to live with it as the conversation continues.

Loren Feldman:
Shawn, when you talk about a project with a client, and you give that anchor price that you’re talking about, are you talking about a price per hour or a price for the whole job?

Shawn Busse:
Usually, I use anchor in a slightly different way, in that I’m trying to anchor against the alternatives. So I might talk in terms of, “Generally, at Kinesis, it costs to hire us about what you would pay for a senior level executive in your company.” And so they know immediately, “Okay, that’s a six-figure investment over the course of a year.” And then I can talk about the depth of work that we’re going to do and the complexity and the number and the different skill-sets that are required. So I’m essentially showing them, “Yeah, you could hire a person who could do kind of one focused thing, or you could get a team of people.”

So I’m really kind of comparing my team against the alternatives of solving their problem. Because, fundamentally, that’s usually how people are thinking, if they’re a business owner. They’re thinking, “Should I buy it, or build it, or lease it?” Those are their choices. And so that’s usually where I’m going. I don’t talk hourly rates. I don’t even talk project costs anymore.

These days, when I talk to folks, I really want to talk to an owner at a high level and say, “What is your challenge? Is it important? And if it’s important, is it worth this kind of investment?” And then if it is, then we can keep talking about what that involves and the different aspects of it. But that’s where I’m at in my sales process after 20 plus years.

Loren Feldman:
How do you calculate the actual price that you charge?

Shawn Busse:
We, like a lot of service providers, don’t know the depth of the problem when you’re first meeting somebody. And often, their idea of what the problem actually is, isn’t the problem. So you have to kind of do this dance of recognizing their struggle and pain, but also leaving the door open to finding new things in the process to help them understand what maybe are the real forces.

It’s very common, for example, for somebody to come to us and say, “Hey, I need a new website.” And then in the process of working with them, we discover, “Wow, you have 50-percent turnover with your employees. Will building a new website solve that problem?”

And then it’s actually a much better conversation, because now you’re talking overall business issues. And in many cases, we’ll not build the website, because we need to fix the turnover problem first, because that ROI is much higher than the new website.

And so we do kind of an evaluation phase in the beginning that has a fixed cost so clients know exactly what they’re going to pay, and they know exactly what we’re going to do. But through that process, you discover things that are the real problems, not maybe what are thought of as the problem. And I think really good service providers focus on getting to the root problem, as opposed to just giving people what they asked for.

Loren Feldman:
So you do that initial assessment for a fixed cost, and then you figure out what the problems are, and then you put a price on solving those problems?

Shawn Busse:
Right, yes.

Loren Feldman:
Going through this, from your perspective as a service provider, has that helped you deal with vendors that you work with, like hiring a lawyer who charges by the hour? Has it given you any perspective on that that has helped you figure out how to handle those situations?

Shawn Busse:
Yeah, it’s actually interesting. I was talking to a lawyer recently, and it’s kind of a real estate need, and he came highly recommended from somebody. And at the end, he’s like, “So we charge $500 an hour.” And I kind of fell out of my chair. And then he later said, “This project will probably take between $3,000 to $5,000.”

And so he kind of made a mistake. I don’t know, maybe that was intentional. Maybe he was anchoring on this high number so then he could do the Steve Jobs thing. But effectively, what he was saying to me in the $3,000 to $5,000 number is, “I am an expert in this. I am efficient. I have done it before.” And so I was like, “Oh, that’s reasonable.” But when you hear $500 an hour, I’m like, “Whoa, that’s crazy.”

Paul Downs:
But it isn’t.

Shawn Busse:
But it’s not. Yeah, it’s not.

Paul Downs:
I mean, he was placing himself in the pantheon of lawyers. Because after you’ve dealt with a few of them, the $500 an hour guy is probably a pretty decent lawyer. And the really fancy ones are a lot more than that. So he’s telling you where he lives. He’s telling you whether he’s a Chevrolet or a Lexus or a Lamborghini.

Shawn Busse:
Yeah, what I’ve tried to do as a service provider is move away from hourly rates. Because, you know, fundamentally, buyers don’t know. Like, I didn’t know. I’ve never bought real estate legal services before. And so I was like, “Wow, that sounds like a lot of money.” But it actually isn’t.

And so, fundamentally, I want to get to a place of, “What is the problem? Here’s what it’s going to cost to work through that problem together. Is that reasonable for you? Will the value of that exceed what we’re charging?” Because hourly rates are just an abstraction. Other than what Paul was saying, which is, you sort of assume somebody that’s $1,000-an-hour is better than somebody that’s $500-an-hour is better than $250-an-hour. But that may or may not be true.

Liz Picarazzi:
I have a question, Shawn. Given that you’re in services, how often do you need to do change orders on engagements when the scope expands?

Shawn Busse:
Yeah, that’s a great question. So we’ve gone from, over the years, highly descriptive scopes of work that tried to cover for every single contingency, so that if the client came back and said, “Well, we want to change things,” then we could say, “Well, this is going to cost more money, and we’re going to issue a change order.” I’ve never met anybody in my life who likes change orders.

So what we’ve done to eliminate that issue is, we no longer have these really tight scopes. We actually have much more of an agile process where we say, “We’re going to work on these four initiatives. Do you agree these are going to help you? Yes? Great.” We break down those initiatives and component parts. And then we say, “This is what we think is going to happen as we work on these things.” But then as we work together, we change along the way.

Somebody once said—it was just so brilliant, he was sort of a proponent of agile working—“Your stupidest moment is the beginning.” And so most people are building proposals when they have the least amount of information. And so what we’ve done is, we’ve addressed that and said, “Look, like an employee, you’re going to hire us, and you’re not going to know everything we’re going to do. You have a general idea, right? If you hire a marketer, you know they’re going to do marketing. But we’re going to shape what we’re going to do together into large buckets. And then, as we get further and further along, we’re gonna get tighter and tighter and tighter on what the outcome is.” And that does require a level of trust with the client. But it’s a way better client to work with, honestly. So that’s how we’ve gotten out of the change order paradox.

Liz Picarazzi:
That’s good. Thank you.

Loren Feldman:
Liz, with all that you have going on, are you at all rethinking your pricing strategy? Or are you happy with where you’re at?

Liz Picarazzi:
I’m pretty happy where I’m at. We’ve been communicating price, at least in direct mail, more than we used to. So if we’ve got a postcard with a nice photo configuration on the front and the back, we didn’t ever put a price on that. And now we put, “Starting from $4,500,” let’s say. And we are doing that a bit as a filter, because we’re sending this primarily to a targeted list of affluent people where those price tags are really not going to hurt them. If anything, maybe they find it attractive. So that’s one thing I’ve shifted recently.

On my homepage, I don’t have pricing anywhere. And I have to say, that’s not even really a deliberate decision. But if they get to any of the product pages, all of the prices are right there, and it’s a configurator. So if they have three cans, it’s one price. If they have six, it’s different. If they want a package locker to be added, it’s different. So we make it really easy for them to get the price and to configure the product to what they want.

But the other thing that I have done is we’ve visually shown the difference between a Citibin trash enclosure and our competitors’ in a couple of downloadable PDFs that are through a web form where they have to give their email address. Almost like a Marcus Sheridan where he’s certainly advocating for providing a buyer’s guide to someone who’s buying a trash enclosure where you show our product next to the competitors’, and you lay out what the differences are—not only in price, but in all of the different features.

So that’s something where people who are really uncomfortable with price, I’m basically saying, “Well, here are two options: You can go to Home Depot and get a Rubbermaid, or you can go on Wayfair and get this cedar shed. Or you can have someone locally fabricate an iron enclosure.” And I put the pricing and the features for each of them side to side, just like you see on any sort of online purchase of software services or anything. And that helps get over the price objection, because then I’m putting my product next to a Rubbermaid plastic shed, and that’s what makes the point.

Shawn Busse:
I remember seeing something years ago, it was a study on conversion rates and whether companies put their pricing online. And it was crazy how much more effective it was when pricing was transparent. And I think the challenge is that you could read a book that tells you, “Do it this way.” But it’s probably specific to that business. And so I think every owner has to kind of figure out the right path.

And I think Paul’s method of ranges of prices is really cool. I think your strategy of anchoring against other options is really cool. I’m actually thinking about it for us, too. We’ve never put it on our site, but I just want to engage with owners who kind of understand the value of investing in something meaningful. And if they see that, great. And they’re excited by it. If not, then they move on. I don’t know. We’ll see.

Paul Downs:
I think that’s probably least appropriate for you, Shawn. Who is it that you imagine is going to look at your website and either leave or stay because there’s a number on there?

Shawn Busse:
Yeah, it’s a tough one. In the past, where we’ve really focused on getting lots of leads through the website, the amount of energy I have to spend on disqualifying leads is really high. And then, kind of currently, it’s just not performing at the same level I’d want it to, and we need to do just a major overhaul on it.

But I have found, it’s been my experience when I talk to owners, and I say to them, “These are the things we’re doing: We’re working across marketing, culture, brand, value, and generally, the magnifier of the work together is exponential. It is way more powerful than hiring one person. If you’re interested, I could totally talk to you about it. And I can give you case studies,” and like 80 percent of them are probably like, “Oh, that’s kind of scary.” But then 20 percent are like, “That’s really interesting.” And then those are really great customers.

And because our model is a recurring revenue model, we keep customers for 3, 4, 5, 10 years. Even if it’s just 20 percent, those are fantastic clients, versus the highly transactional nature of most service providers where they’re kind of always looking for new customers. I’ve been all about recurring revenue for the last 10 years, and right-fit customers. I just don’t want to go back. So part of me thinks the pricing piece is a way to attract the right customer, not the shopper who’s looking to build a new website. But I could be wrong.

Paul Downs:
So you personally have these conversations with people who contact you?

Shawn Busse:
Yeah, yeah.

Paul Downs:
Well, that’s one thing you might want to think about. So I’ve tried to grow the number of leads we have, and we’re currently on track to have about 1,200 this year. So I hired someone to have that conversation. He’s worked for me for six years now, and his only job is to take the initial contact from whoever, and then get in touch with them and have a conversation with them and see whether they’re suitable. And when you’re not doing it yourself, it’s a lot easier to do. So then you can concentrate on growing the amount of traffic and A/B test. Do whatever you want to do. But then there’s somebody else whose job is just to execute that one thing. Because I think that the response to an inquiry is the most critical part of the sales process, and it’s really under-invested by a lot of business owners. They think, “Okay, I’ve gotta put a ton of money into my website,” and they try to do the whole sale on the website. Or they’re like you.

Because I used to do that too. I used to be the guy to answer the phone. And it wasn’t until I stopped doing it and had to explain it to somebody that I really started thinking about what I actually wanted to have happened in that conversation. And then the other thing is, we started recording this guy, and hearing what comes out of his mouth, and that was pretty eye-opening, too.

Because people go off-message all the time, and so you’ve got to keep extremely disciplined about these intake moments, and making sure that you’re identifying who you’re talking with and whether they’re a good fit and then just telling the other people, “Sorry, go away.” But it’s better for you to be rejecting them than for them to be rejecting you. And when you put the number up on the website, you’re giving people a reason to reject you. And that’s sort of the conclusion we came to with the product pricing. But there you’ve got my two cents now.

Shawn Busse:
That’s a whole ‘nother show—especially, honestly, I think the most valuable thing in that whole thing that totally aligns with my experience is how leads are managed, especially in the initial phase. Because there’s all this correlation between the speed with which you handle a lead and the likelihood of closing. And the vast majority of businesses fail on that front. And many of them don’t even respond to forms that are submitted to their site. It’s crazy.

Loren Feldman:
All right, we are out of time. But you guys have given me ideas for at least three more shows, including next week’s debate between Liz and Frank about whether it’s more important to hit your clients’ timeline or to give them a product they actually are happy with. We’re all looking forward to that, Liz. [Laughter]

Paul Downs:
But when you put it that way, Loren…

Shawn Busse:
You’re lining up with Liz already.

Paul Downs:
I can see where this is gonna go.

Liz Picarazzi:
Why don’t I not tell him until an hour before the taping so he doesn’t have any time to prepare?

Shawn Busse:
Exactly.

Loren Feldman:
My thanks to Shawn Busse, Paul Downs, and Liz Picarazzi. As always, thanks for sharing, guys.