To remain competitive in the current volatile environment many organizations are trying to figure out what the right value-based pricing strategies for their businesses are. To achieve desired results, pricing leaders are wondering how to step beyond their pricing management operations and uncover what customers’ true perception of value is. Now more than ever before, by connecting the dots between product, value, and customers’ willingness-to-pay, pricing teams are empowered to optimize their pricing strategies, to drive maximum success for the company. Join John Dillon, Marketing and Pricing Director at Cargill, to learn how close collaboration of customer insights, marketing, and strategic pricing allow you to breakthrough previous perceptions of what your customers are willing to pay for your products and services, and to ultimately build a new vision for your business and its future omnichannel expansion!
About the Speaker
John Dillon serves as Marketing and Pricing Director at Cargill. In his 22 year career at Cargill, Dillon has gained expertise in finance, pricing and marketing across various specialized industries including Feed & Nutrition and Global Edible Oils Solutions.
John Dillon: Hi, I'm John Dillon, a strategic pricing director at Cargill. At Cargill our team of 155,000 professionals in 70 countries bring food, agricultural, financial and industrial products and services to people that need them. We've been committed to helping the world thrive for over 155 years. Today, I'm going to share the story about a very common journey that I'm certain you've all been on, value based pricing. The first obvious step in value based pricing is uncovering the economic value of your products. Most of the time, that's easier said than done. We started out on a familiar path using familiar tools, but we quickly had to change course when we realized we had far too many unanswered questions. Now we have a much better understanding about what our customers need to thrive. And we've added some new tools to our toolbox. Spoiler alert we haven't, we've made major strides, but we have not completely solved the problem. Even though we have a better understanding of our value proposition and have made significant price improvements, hopefully the story will help you on your journey to value based pricing....
John Dillon: So what we'll talk about is the situation. I'll give you some background on the product. The demand will go into some of the tools that we used and the approach that we took and our findings and a little bit about the future, where we're headed. One of a kind. So diamond crystal kosher salt, if you take anything away, just understand this is one of a kind product truly differentiated. There's really two ways to make kosher salt. One of them is a compaction process where you essentially compact flakes together and it makes a bigger flake. We use a proprietary process, which is called the Alberger process invented in the late 1800s, which creates an inverted pyramid that's hollow. It actually has superior dissolve ability because it's actually a bit fragile and it sticks really well to food. So there are other products similar to that in the marketplace, and we make both types. The method impacts time, but also really the quality so that we knew. Getting into the specific situation on our value based pricing. We knew about those unique characteristics. We knew that science. We knew how it performed in the kitchen. We also had what's called a lot of earned recognition. So these are celebrity chefs, celebrities and lots of endorsements on magazines and everything saying this product is great without us actually being involved or engaged in the process. We also had a really strong social media presence among foodies, loyal, loyal foodies. And if you look at of a Google search thing, we had a continually growing trend of Google searches looking for diamond crystal kosher. So that's what we knew.
John Dillon: We also, from an analytic perspective, had more demand than supply over a long period of time. So that's a price demand curve. And no matter what we did, we were short of product. So lots of information that we knew. We started doing some internal interviews and we uncovered some surprising gaps in our knowledge. One of them was how much product does an average restaurant use in a given year? What is the percent of food costs that diamond crystal represents or revenue? How do restaurants, what do they focus on? What are they measuring for success? Is the diamond crystal kosher performance uniform across all cuisines, across all applications, does it really outperform in everything that it does? Who makes the buying decision? Who ultimately makes the buying decision, and what's their criteria? And then ultimately just trying to better understand how the features connect to the benefits in the restaurant? And then what's the ultimate economic value for restaurant operators for diamond crystal kosher? So in Cargill, we've been doing a lot of innovation, and some of the tools that our innovation partners shared with us. We came across the Business Model Canvas and we found that to be really insightful. If you haven't heard seen it or played with it a little bit. A quick Google search and you can get a 10 minute explanation, but we found it really valuable. The Business Model Canvas is really a tool to allow you to analyze any business, whether it's a startup or an existing business. The nice part of it, it organizes it in ways that talks about the customer segment specifically, the value proposition tied to a specific customer segment. You then analyze your channel the type of customer relationship you want to have, and ultimately that ends up building out the revenue stream. On the left side you can see there's resources, activities, key partners, which ultimately builds your cost structure and then you've got a P&L. We like to call the right hand side of it desirability and the left hand side feasibility. We want to really focus on the right hand side, and you can see sections 1 and two really highlighted there. Oftentimes, when we talked about the customer, it was Cisco, US foods, dot foods. These are the food distributors that take our product and deliver it to our end customers, which are restaurants, and they're the ones that pay us. So technically, yes, they are distributors. A big part of their value proposition was having enough product. I mentioned that with a lot of times we were out of products and of course, profitability. They were very concerned about their profitability. We decided to do was to reframe the Business Model Canvas and put the end restaurant and the consumer into the customer segment, which forced us to put our partners for food service distribution in the channel and then really deep dive the value proposition for these customers. And it really profoundly changed the way we looked at the business. We did some ad hoc interviews, we'll say to a few restaurants, and we quickly came up with a hypothesis. And essentially the hypothesis was that there's significant upside and willingness to pay for diamond crystal kosher salt in restaurants. If these three assumptions were true, the product truly was superior. It outperformed and it was differentiated from our competition. The second one was we heard a lot about. It's the industry standard. This is what I learned when I was at the Culinary Institute. It's what I was trained on. We heard the term, the perfect pinch that they were used to using our product. And if they had to use another product, it was actually difficult to change. And the last one, some quick back of the napkin math, the average spend on diamond crystal, kosher or kosher salt in general was really low relative to food costs in total spend. So we thought if those three hypotheses were proven true that we had an upside in willingness to pay.
John Dillon: So what do we do? We decided to take our ad hoc interviews, let's call them and get formal about them. We have some insights professionals on our teams. And they actually helped us develop semi-structured interviews to make sure that we weren't leading the restaurants to answers that we wanted to hear. And we essentially were trying to disprove the hypotheses to make sure that we felt confident where we were going forward. And so we developed some teams. We develop some interviews. We started in Minneapolis, where Cargill is based. We branched out to New York, Chicago, Atlanta, Texas, California and fairly quickly started to learn really about what we called Chef. Juan was our first persona as a restaurant, and we said, you know, in the independent type restaurants, Chef Juan is the decision maker, especially for ingredients in the restaurant. And that's whether he owned the restaurant or whether or not his drivers number one number one, probably two and three were the consistency and the quality of the food. So they really emphasize that their job is to make sure that food taste great, but consistently every time taste great. The other thing they focused on was rotation, which is really covers per day, which is really another way to think about revenue. So any time you walk into a restaurant and you pay a bill, you're a cover. And so they were very keen on how many covers they did that day, which essentially meant customers. The other really surprising thing was that they were very astute to the financials, and so we learned quickly that restaurants operate on a third, a third, a third principle. And so if you take the revenue of a restaurant, a third of the revenue should be food costs. A third should be operating costs, which would leave a third for profitability. We had chefs that could tell us on Thursday, we're at 27% we're on target. You know, it looks like by Saturday we're going to be at 29% and we're going to make some changes in the menu to make sure that they hit the right ratio. So really astute on the food cost. We could not uncover any understanding of the price that they pay for salt, but they could tell us what they paid for protein or asparagus, for example. The other big learning from our insights professionals was and I thought this was silly at first. But they said, take a picture every time, take a picture of someone holding the box of salt. And so we took the pictures and really, it took us, you know, a few weeks later when we were preparing some of these presentations, what popped up was the feeling that we got in these interviews was that, chefs were very passionate about their work, but they were also passionate about our product and our brand. And you know, it may be a little bit hard to see, but if you go in the back of a restaurant, you look in the back, you don't see a lot of branded products, you generally see pepper. And so, you know, our brand team at Cargill is saying, hey, you've got something strong here. When there's a strong emotional connection, there's something deeper that you need to understand. What are you doing to help them fall in love and why they're so loyal to your product? And so that passion came through really clearly.
John Dillon: The other thing they asked us to do is take quotes like take verbatim quotes down because those would be valuable later and they were absolutely right. I won't read all these quotes to you. Feel free to scan them. But the one in the upper left hand corner. We love. This was an executive chef of about a three restaurant chain mid to high end. And again, we did not prompt or discuss price at all. But he said, “Hey, don't you ever take this product away from me? I know you raised it from 26 to 30 to a case last year, I don't care. Heck, I pay 50. Don't take the product away. I gladly pay more.” The bottom right hand corner. This was a high end Mexican restaurant. It also in the Twin Cities. He said, you guys don't understand. Diamond crystal kosher falls in the same category as our specialty pork. No matter what happens to the price, we can't change it. We're going to change the menu price before we change the ingredient out. And so, you know, much deeper level of understanding of how they thought about our product, and it was really, really surprising. Chefs Juan's finances. So we talked before average restaurant in the United States about a million and a half of revenue. There's a wide range. We had one in Manhattan that was about 17 million, but the average really true to bear it out to be a million and a half, which means their food costs were about a half a million. Operating costs are about a half million, which would leave you with a half million profit if things are going well. So how much does Chef Juan spend on salt? $400 a year. We still have an ongoing challenge to try to find something that they spend less money on per year. We think straws are about $1,000. So this was really surprising that you had a branded product that was already priced as a premium to all their other choices, but the cost was really de minimis. Very surprising.
John Dillon: Back to the summary, so if you go back to those assumptions that we were trying to prove. Was the product differentiated check, we absolutely prove that one. We heard that from chefs, from bartenders, restaurant tours, culinary professionals, et cetera. We learned that the users were loyal and passionate about the product as well, and that the cost was de minimis to our cost and use so we couldn't get to a penny a plate. Even though we tried. Back to that range of restaurants again, we had one restaurant that was 17 million a year in revenue in Manhattan. The of food cost was exactly the same. It was really fascinating. And so, I want to maybe stop here and just clarify a few key takeaway learnings that we had just to reiterate.
John Dillon: So one of them was be thoughtful about the customer segments, and tie the value propositions to the specific segments. And you can have more than one. So in our case, the food service distributors are a very important customer segment and we have to understand the value proposition for them. But the operators, the end restaurants ultimately are the ones that are paying the final bill, and we really need to understand that value proposition much better. You know, understanding again, what are the benefits of your differentiating features so where you do something that's special or different? Understand the benefit, how it helps the customer and wherever you can try to put a value to them. Oftentimes, we use the phrase the question's more important than the answer. And so really it's important to identify those questions and then figure out ways to solve that question first. Value based pricing is a team sport that probably goes without saying, but we partnered with pretty much every function along the value chain; sales, commercial culinary people, supply chain, that kind of thing really, really important. The other one is get out of the office, so you have to get out of the office and talk to your customers, but don't wing it. Our first few interviews, we literally winged it right, went to a happy hour, started talking to some folks, and what we learned was getting structured about your questions and how you interpret those answers can be really, really important. Like I said, if you have insights professionals, this is where you use them. And then the last one there is start with a hypothesis and then go test the critical assumptions really, really important to do. So a little bit on the results. And so this work finished and we actually had an opportunity this fall of 2019 to really do some price experimentations with this information. And we had some supply concerns. Our supply and demand was imbalanced. We actually needed to actually schedule a bit of volume. And so we went out with a significant price increase with the hope of actually dampening demand down a little bit and then seeing which customers deselected us made that choice. Good news, bad news. Shortly after the price increase, COVID happened, and so all of our volume went down, but it went down in the industry and our share actually didn't change. And so we actually call it a failed experiment. Even though we've made quite a bit more money, we didn't actually find out which restaurants wouldn't pay the higher price because we maintain share. But ultimately, we walked away with a deeper understanding of our value proposition. And like I said at the beginning, the work continues.
John Dillon: The path forward. Really, this has led to us really thinking about repositioning diamond crystal kosher to truly be a premium salt brand, and that's both in food service and in retail, which we look to grow. And what we learned was there's actually a white space that no one's playing in, so we believe we can be the first Premier premium salt kosher brand that's versatile, that can be used across a wide range of applications. And we've done work to begin that. That's our story. I hope you learned a little bit from this and encourage you to get out and get in front of your customers and learn a lot more. Thanks.