See show notes for this episode: S 02 | Ep 26 The Productivity Paradox: Why AI Hasn't Saved the Economy (Yet).
Alex: Welcome to Experience-focused Leaders. I am delighted to host a very special episode with our guest, Professor Hermann Simon, founder and honorary chairman of Simon-Kucher, one of the world's leading strategy, marketing, and pricing consultancies. In addition to being the founder of a thriving organization, Mr. Simon is also a renowned thought leader who has written 35 books. In the German-speaking world, the only thought leader rated higher than him is the man who defined the management thinker genre, Peter Drucker. Welcome to the podcast, Hermann. We're excited to have you on board.
Hermann Simon: Thanks for inviting me; I look forward to our discussion.
Alex: I’ve been a long-time fan of the firm you built. Early in my career, I was a consultant, and at one point, we even competed. Later, when I was at SuccessFactors and SAP, we used Simon-Kucher’s approach to pricing. We essentially only used two consulting firms: McKinsey for certain tasks, and yours for the rest. I have deep respect for the sophistication you’ve developed. While you’ve expanded into all areas of profitable growth, I’d love to know: why start with pricing? What did you see that the rest of the industry missed when you moved from academia into consulting?
Hermann Simon: You can start from two sides: the knowledge-driven side or the market-opportunity side. I clearly started from knowledge. The decisive crossroad was my 1973 doctoral dissertation on pricing strategies for new products. It was very theoretical then, far from practical application.
However, I had two "aha" experiences. In 1979, I visited the famous marketing guru, Professor Philip Kotler. I told him I was doing pricing research with the ambition to impact real-world practice. He told me, "I know one guy in Chicago who calls himself a 'price consultant'." That was a lightbulb moment. I realized one could actually make a living as a price consultant.
The second influence was Peter Drucker, who was a friend for many years. I visited him in Los Angeles, and he told me, "Focus on pricing in your consulting. Nobody covers this." That is how we started in 1985 with my first doctoral student, Eckhard Kucher. We never expected to reach this global scale—we now have 2,200 people and reached $678 million in revenue last year. We aren't as big as McKinsey, but in our niche, we are the global market leader.
Alex: Absolutely. While researching for our own business—specifically regarding pricing and market access in the pharma vertical—I spent time on your website and grew much smarter on the topic. Your thought leadership isn't just a horizontal concept; you have incredible depth across various industries.
Taking a step back, what is the one thing most people don't appreciate about pricing? If someone listens to nothing else, what is the "nugget" of insight they should carry for the rest of their lives?
Hermann Simon: Most pricing today is still cost-driven—the "cost-plus" mentality where you simply apply a margin to your expenses. The second most common factor is competitive pricing, where you simply adjust based on what others are doing. Both approaches miss the decisive point.
The decisive factor is value, or more precisely, the value perceived by the customer. The Romans were smart; in Latin, they used the same word for value and price: pretium. The fundamental equation of pricing is: Value = Price.
I must understand the value my customers perceive because that defines their willingness to pay. For example, as Mercedes introduces a new S-Class, they must understand its value relative to a BMW, an Audi, or a new Chinese model. If the Mercedes is 20% higher in perceived value, they can afford a higher price. If the value is equal, they must match the competition.
The core of our competence at Simon-Kucher is quantifying that value. It isn’t enough to know you are "better" than the competition; you need to know if you are 5%, 10%, or 15% better. Approaching pricing from a value standpoint is a fundamental shift from standard practice.
Alex: To build on that, you used a phrase that is easily lost but vital: perceived value. Let’s double down on that. There is the communication of value, and then there is the fundamental psychological attribution of value. What constitutes the "perception" of value as distinct from the value itself?
Hermann Simon: It starts with understanding the customer's value system before you even begin R&D. You must identify which attributes are highly valued and which are not. The second step is creating that value through R&D and delivering it at a competitive cost.
Then comes the big challenge: communicating that value. This can be complicated, especially for software, which people cannot fully experience before purchasing. Finally, there is a fourth step: retaining value. For instance, the secondhand value of a car strongly affects the initial willingness to pay. If you know a car remains valuable after five years, you are more willing to pay a premium today.
Hermann Simon: In the first year, 40% of a new car's value is often lost. Your willingness to pay is strongly affected by this retained value. So, it comes down to understanding the customer's value system, then creating, communicating, and retaining that value.
Alex: We have those four brackets. Let’s set aside the consumer world for a moment—or perhaps use it as a point of comparison—and focus on B2B enterprise. Much research suggests that, especially in software, we should treat B2B buyers like consumers. After all, they are consumers in their personal lives and expect the same clarity and communication from B2B vendors. What do you see as the biggest divide between the consumer world and the B2B enterprise universe?
Hermann Simon: The biggest divide is that in B2B, economic indicators are paramount. When you buy a machine or a system, factors like energy consumption and maintenance costs play a huge role. In most cases, you can calculate these costs precisely.
On the consumer side, psychological factors are much more important. In the extreme case of luxury goods, the brand is supported almost entirely by a high price or specific design. If you are buying furniture for your home, you want it to look a certain way; psychological factors outweigh pure economics.
This relates directly to communication. In B2B, most sales happen through personal selling. Salespeople must convince the customer that a purchase delivers an economic advantage in terms of reliability, lifetime value, or cost. On the consumer side, communication often ignores technical features. For electric cars, range and recharging time matter, but for a luxury product, technical features are secondary to the prestige the brand conveys.
Alex: Let’s "double-click" on that. There is the famous saying: "Nobody ever got fired for buying IBM." In B2B, there is often a narrative that "customers who bought our platform got promoted" or "we invited them to speak at a conference." As a founder of a relatively young company, I genuinely value the people who trust us. We are enabling their personal success alongside their organization’s success.
Ironically, there is a much deeper one-on-one human connection in B2B than there is with, say, an abstract consumer buying a Gucci bag. We do business with people we like. How do we combine that deeply human connection with the "quantitative hat" of corporate economics?
Hermann Simon: You’ve addressed a very important point. These relationships are more critical today than they were 50 years ago because we now deal with products and services where information is limited. If you adopt a new software or AI system, you don’t have complete data. You cannot test it for five years before deciding; the world moves too fast.
Alex: Right. There isn't enough data on the actual outcomes yet.
Hermann Simon: Exactly. You have to decide quickly. When we decided to adopt a specific AI system a year ago, we did so with limited information. In this situation, two aspects become essential:
References: As a vendor, you use references to prove your track record. For example, at Simon-Kucher, we have worked with more than 40 "unicorns" in Silicon Valley. That is a powerful communication tool for other customers.
Trust: Can the customer trust the vendor’s representative? Are the consultants competent? It is a direct build-up of interpersonal goodwill and reputation.
The less information available about a product, the more important references and personal trust become. This is also psychological to a degree; if Google or Apple accepted a service, you perceive it as high-value.
We also saw an interesting effect during COVID-19. Our business thrived with existing customers because the trust was already there—we could interact digitally. However, to build new relationships, you have to meet in person. We have learned that digital cannot replace the personal encounter required for trust-based decisions.
Alex: It’s interesting because Simon-Kucher almost has two businesses: the primary consulting business and a specialty business where you create pricing engines or ROI calculation tools. Congratulations, by the way, on your latest top ranking from IDC.
Hermann Simon: Thank you; we were very pleased with that ranking.
Alex: Do you see a big difference between these two sides of the business?
Alex: It seems you have two distinct businesses now. One is a structured, product-based business—likely still involving consultative selling—but built around a core IP element that remains consistent from client to client. Then, there is the traditional consultative relationship, where you dive deep into an organization’s strategy to support large-scale shifts. How do you balance those two?
Hermann Simon: The knowledge required for these two phases—developing a concept and then implementing that concept into a customer's IT system—is different, but it is part of an integrated value chain. By creating the "Simon-Kucher Engine," we moved downstream in that value chain.
Today, that move is necessary. If you only provide a concept and leave the client to implement it alone, you are in a weak position, especially with large companies that expect you to do both. We are very pleased to have extended our reach. Our total revenue is over $678 million, and the Simon-Kucher Engine already contributes over $20 million after just two years. That is recurring revenue. We support clients over time as they run these systems, integrating our pricing modules into their broader IT infrastructure—a frequent requirement in banking, retail, and financial services.
Alex: I’d like to explore the idea of using technology to help customers experience value faster. There is a perception that large consultative projects take a long time to build trust and deliver results. But what if you could have the best of both worlds? What if you could provide a "luxury" experience—presenting a high-end pricing solution faster—so the organization experiences value with less risk?
Many AI businesses are attempting this, but many are failing. They run pilots that never translate into real deployments. Meanwhile, emerging companies without established brands are trying to roll out B2B products in a "consumer-like" fashion, targeting individual needs and working their way up to the C-suite. How should emerging companies deal with this when they don’t yet have those trusted relationships?
Hermann Simon: That covers a lot of ground. I would emphasize again that the foundation of success is understanding the customer's value attributes and expectations, then meeting them. The challenge of innovation is not simply to develop a "technical super-product."
Alex: Exactly.
Hermann Simon: It is about integrating customer needs with technology. Every day, I am annoyed by the complexity of IT systems. They often require experts just to navigate them.
Alex: It sounds like you're saying many companies are too "me-centric" rather than "customer-centric."
Hermann Simon: Precisely. A tech expert might develop a "Swiss Army knife" with 50 features, but the client only needs five. Those extra 45 features just increase complexity. My first recommendation for a startup is to align your offering with the customer's ability to handle complexity. This is just as true in B2B as it is for consumers.
In my own car, I counted 150 buttons. I probably don't know the function of 30 of them, and I likely don't need them. On a smartphone or computer, if one thing changes, you suddenly need an expert. So, step one: integrate customer needs with technology.
Step two is the challenge of the current era: How do you apply Artificial Intelligence? As the IDC study shows, we are at the forefront, but most of our applications are still relatively simple yet highly useful. Let me give you two examples:
Fast Food Promotions: We conducted a study for a fast-food chain in Germany to determine when sales promotions were most effective. we fed all imaginable data—population, weather, sports—into the system. AI discovered that the most effective time for promotions was when there was a Bundesliga (soccer) game in that specific city. No human would have predicted that correlation, but the AI found it.
Retail Dynamic Pricing: A US retailer used dynamic pricing for perishable goods in the evening. They noticed results varied wildly by city. After processing the data, the AI found that if there were many road construction sites in a city, dynamic pricing didn't work.
Hermann Simon: ...And no human would have ever guessed that manually. These are just two simple examples; we are still in the data collection phase, not yet in a truly autonomous analytical or decision-making phase. But this shows how powerful artificial intelligence can be in detecting effects.
The next step will, of course, be adjusting prices to consumer preferences, segmentation, and multidimensional pricing structures. I would say that while we are leading the charge, we are still in a very early stage.
Alex: It’s very interesting. From our perspective, many organizations are still far behind in even obtaining basic analytics regarding what people are paying attention to. Outside of digital channels—where it’s accepted that you’ll track who visits a pricing page—the B2B world lags. Most proposals and sales presentations are delivered in a way where there is almost no feedback loop.
Hermann Simon: Exactly.
Alex: You might catch someone’s body language if you’re meeting in person, but the most important decision-makers often aren't even in the room. We have roughly zero "digital body language" to tell us what they care about.
Alex: You mentioned the importance of finding where the customer perceives value. In B2B, there are many stakeholders by definition. Imagine a world where you could see where the attention of various stakeholders is focused; you could finally understand where you are succeeding in communicating value.
Do people even get to the pricing page in your proposal, or do they skip straight through and miss the important value components? Without that data, it just becomes a competitive price war rather than a way to capture the business value you've created. The standard way of communicating hasn't changed in decades—people still show up with untrackable, static materials. What are you seeing from the most innovative organizations? How are they changing their approach to capturing attention and reflecting that in better proposals?
Hermann Simon: I don’t fully agree that we are in the dark, because we are getting much better information on the habits of our customers. However, I will say that B2B is so complex that we need artificial intelligence to interpret it.
Let me give you an example. Mercedes is currently introducing the new S-Class. If I read a newspaper article about it in a German daily, there is no feedback loop; neither the paper nor Mercedes knows I read it. But if I go to the Mercedes homepage and look at specific features—the length of the car, the engine, or energy consumption—and they capture that information across many customers, they gain a foundation to segment the market and address customers more effectively.
I’m currently working on the American edition of my book, Simon Says, which covers my most valuable experiences from the last 50 years. I’ll write a chapter on competition or leadership and then ask an AI: "Did I miss any aspects?" I tell it I want something original, unusual, or surprising. I don’t know exactly how the system does it, but it consistently provides two or three interesting points I missed.
I use AI as a tool to be more efficient and improve my quality. For a company like Mercedes, if they find 1,000 customers who behave like me on their site, they can address us with very specific content. For instance, I saw a photo of the new S-Class painted in gold. I wrote to the CEO asking, "How can you present the S-Class in gold? It contradicts the typical preference of an S-Class buyer." He told me it was just a test model that happened to get photographed. If they used AI to analyze these interactions intelligently, they would have much better data points on what content to communicate to which people.
Alex: We don't actually disagree. What you’re highlighting with the Mercedes example is still closer to B2C—it’s a high-ticket item, but there is enough volume to capture that data. And the authoring experience you described is great, but it’s still one step removed from getting feedback from actual readers.
Hermann Simon: That is true, but it is only one step before. What is the AI doing? When I give it a keyword like "leadership," the system looks across the internet and finds topical reflections of the zeitgeist.
It actually goes even further. There is a somewhat strange experiment being done by researchers at Harvard. Since asking customers about price reactions is costly and time-consuming, they asked ChatGPT how it would react to price changes for toothpaste. They kept competitive prices stable and moved the target price, and the AI generated a demand function. Whether it’s fully valid remains to be determined, but it costs practically nothing compared to surveying 1,000 human customers. This could be a new approach: drawing from the "collective" internet to predict customer reactions.
Alex: At a minimum, you could certainly use that to extrapolate from a small sample size to a much larger one.
Hermann Simon: Exactly. We need comparisons between real-world studies with actual customers and what we see in these simulated internet environments. It may turn out to be nonsense, or it may be remarkably close to reality—I have no idea what the outcome will be yet.
Alex: I love that. You’re highlighting this brave new world where AI is an obvious asset. However, our customers still see a massive divide between scaling content creation—like the Mercedes website experience—and generating true one-to-one insights.
We see a huge opportunity to bridge that gap by combining your pricing tools with the more personal nature of B2B communication. Imagine a presentation that allows a stakeholder to interact with it: there are video explainers, clickable buttons, and interactive modules. You can deploy this at a one-to-one or "one-to-few" scale. Historically, that level of data insight was reserved for the consumer marketing world, but our most innovative customers are bringing it into high-stakes B2B environments.
By pairing a price calculator with a presentation that explains the context, you create a comprehensive system. You can see how the audience—both external customers and internal "champions" or influencers—engages with the material. We’re moving from purely intuitive "trust-based" factors to using data to understand if our value is being communicated clearly. We call this "Regenerative AI," where you feed that engagement data back into the system to build even better proposals or onboarding hubs. Have you seen great examples of this happening in the high-stakes B2B world?
Hermann Simon: It is absolutely true that we have more data now, but data as such has no value.
Alex: It has no value on its own.
Hermann Simon: You have to analyze and understand it; that is where AI comes in. We have the data and now we have the tools to disaggregate it and translate it into real understanding. But a fundamental question remains: the so-called "IT Productivity Paradox." Despite the massive investments in information technology over the last 30 to 40 years, overall productivity has hardly increased.
Alex: How can that be?
Hermann Simon: No one has a fully convincing explanation. One hypothesis is that we’ve shifted from highly productive industrial jobs to less productive service jobs. In some sectors, like banking, productivity has increased, but in the broader labor market, it has stagnated.
In Germany, for instance, labor productivity has only increased by about 0.5% per year since 1990. That is practically nothing, even if it adds up over time. Will AI finally change that? Right now, many AI companies are disappointed because they cannot yet monetize the value they offer. Their perceived value to the customer isn't high enough yet, otherwise, customers would be willing to pay more.
We will see the truth in ten years. For data-driven sectors—journalists, researchers, etc.—we will see a productivity boost. In manufacturing, it will depend on robots and automation. Can we transfer data into physical action? Will we have autonomous trucks in ten years or still human drivers? I used to be a skeptic, but after testing an autonomous vehicle in San Francisco a few months ago, I’ve become a believer.
Alex: On that note, many of our customers are in highly regulated industries: insurance, pharma, life sciences, energy, and infrastructure. These are heavy compliance environments where you can't take too many risks. Historically, these industries lag in AI usage and often rely on "cost-plus" pricing or incredibly complex, non-intuitive pricing models. How do you see these regulated verticals adapting? What will be the biggest changes?
Hermann Simon: Regulation plays a massive role. In financial services, the two departments that most often oppose new ideas are Legal/Compliance and IT. They often simply say, "That’s not allowed." The same is true in energy and public transportation.
From a pricing and AI standpoint, you could develop much more innovative features than the regulators will actually accept. The real question is whether these industries will be deregulated. While it varies by country, there hasn't been a massive shift toward deregulation, and that remains a significant constraint on any new method.
Alex: What we’ve found—and I’m curious about your reaction to this—is that the best way to create momentum in regulated verticals is to reduce complexity. You have to ensure the buyer, the customer, and sometimes even the regulator have a crystal-clear picture of the offering. That is tricky to do...
Alex: At scale, you can't just move quickly. In many of these industries, everything is documented. In insurance, there’s a policy; it’s a PDF, not a website. The moment you turn that into a website, the meaning could change. Because it is a "blessed" legal document, you have to go through another approval cycle. This is an even more significant issue in pharma because of the clinical risks. Historically, it has been difficult to implement modern, engaging communications at scale.
We’ve found that by using AI, we can maintain compliance while making information easy to understand and act upon. This helps the customer perceive the value without needing to bypass regulatory requirements; it essentially creates modern consumer pressure on these historically slow industries. Some of our customers are innovating here and gaining a real advantage—they are the "hidden champions" of their verticals. That is our hypothesis: you can bring change to regulated industries by staying compliant but using technology to streamline the buyer’s understanding. Are you seeing any other innovations from your customers in this area?
Hermann Simon: Bureaucracy is currently the hottest issue in Germany, and I wouldn't confine it to the state—it applies to large corporations as well. The only way to solve this is to reduce both the regulations (the "paragraphs") and the people who create them. If you reduce the paragraphs but leave the people, they will simply create new regulations. If you reduce the people but leave the regulations, the people will eventually be hired back to implement them. Regrettably, I’m not optimistic that much is being done.
Alex: So, you’re saying human nature and organizational systems are resistant to changing these rigid structures?
Hermann Simon: Yes. I am a client of a large bank in Germany, and every time I have a request, it’s a bureaucratic nightmare involving endless forms. However, some companies are changing. I recently spoke with the CEO of Bayer, the pharmaceutical company. He mentioned they reduced their workforce by 13,500 people—mostly in middle management. Their goal wasn't just cost reduction; it was speed. Everything moves faster now because there are fewer levels and fewer people who feel the need to prove their worth by extending discussions. Large organizations must reduce their workforce to become faster and more adept at adopting new methods.
Hermann Simon: I was in China a few weeks ago for a conference. The Chinese speakers focused on one primary topic: innovation, with an emphasis on the speed of translating research into marketable products. This speed—from the lab to the market—is a specific strength of theirs and a notable weakness of ours. In Europe, if the public administration is involved in granting certificates or permissions for industrial land or infrastructure, it takes years. We can learn a lot from the Chinese speed of implementation.
Alex: That’s interesting. The US is also going through a shift; Silicon Valley has always been fast, but there’s a sense that new administrative approaches are aimed at adding "disruptive velocity" to execution. In Europe, we may not have that specific political catalyst, but there is immense market pressure.
Hermann Simon: The pressure is strong, but the political response is disappointing. You don’t see many countervailing forces. In Germany, for example, you have different factions pushing and pulling against each other, which results in very slow progress.
Alex: As we wrap up this enlightening discussion, let’s go back to your friend Peter Drucker. You’ve seen every management trend over the last few decades and even created a few yourself, such as the "Hidden Champions" movement. What has changed fundamentally over the last few decades, and what has stayed the same? Are there elements of that stability—or that change—that you find particularly problematic or promising?
Hermann Simon: When I look at the "two-by-two" of management history, one thing that has changed fundamentally is the access to information. Decades ago, information was a source of power because it was scarce. Today, the challenge is no longer finding information, but filtering it.
What has stayed the same, however, is that business is still a human endeavor. Despite all the AI and automation we discuss, leadership still comes down to trust, purpose, and the ability to motivate people toward a common goal. The "Hidden Champions" succeeded not just because of their tech, but because of their deep, decades-long relationships with their customers. That human element is the "constant" in an era of exponential change.
Hermann Simon: When I look back over the last three, four, or five decades, the biggest change for me has been globalization. Globalization has been the primary driver of growth. The innovation we have seen is also incredibly impressive—40 years ago, we had no internet, and 15 years ago, we had no modern artificial intelligence. We are witnessing a multitude of breakthrough innovations.
However, for me, the "mother of all problems" in macroeconomics and political science is demography.
Alex: I see.
Hermann Simon: In all Western countries, as well as most major Asian nations like China, Japan, and Korea, we have extremely low fertility rates. We have aging societies. These problems cannot be solved internally because there are simply too few women of childbearing age to reverse the trend.
Immigration is our only solution, but we must manage it better. We need more immigration of the "right kind"—skilled labor—and less of the "wrong kind." We may even need to go to countries like India and build large recruiting organizations, similar to what Germany did in Southern and Eastern Europe in the 1950s to attract guest workers from Italy, Spain, Portugal, and Turkey. We must also manage integration better to avoid the creation of ghettos. Demography is the root of our biggest long-term problems: pension crises, labor shortages, and even a drop in consumer demand—older people generally don't buy new furniture or washing machines. The only way to solve this is to manage migration differently.
Alex: That is a vital macro perspective. Now, switching to management thinking—you are consistently rated as one of the top 50 business management thought leaders in the world. Are there cycles of ideas that keep coming back, or has there been a fundamental shift in standard management practices? If someone wants to focus on one area to get the most value, where should they look?
Hermann Simon: I have two recommendations. The first is: Stay Deep.
The strongest part of the German economy is our "Hidden Champions." These companies have an extremely deep knowledge of technology and customer processes. I call this Deep Tech. They are highly specialized. You see the Apple iPhone, but you likely don't know that there are 567 German suppliers involved in its production.
Alex: I had no idea. That’s incredible.
Hermann Simon: Yes, 567. For example, Tesa, a manufacturer of adhesives, supplies 19 different types of glue for the iPhone alone. Henkel supplies another 50. These are very deep, complex value chains. From a German perspective, our strength lies there—not in mass consumer markets.
My second recommendation is: Speed Up. You must make your innovation processes faster.
Alex: Velocity.
Hermann Simon: Precisely. We must stay deep, but we must be faster. Our toughest competitors are the Chinese, and they are significantly faster than we are. We see this clearly in the electric car market, for instance.
Alex: For our listeners who want to dive deeper into your wisdom, Hermann, where is the best place to find you online or discover your latest books?
Hermann Simon: The simplest way is to visit hermannsimon.com. You will find my latest information and all of my books there. Remember: Hermann is spelled with two "n"s.
Alex: Amazing. Hermann, thank you so much for your time today.
Hermann Simon: I very much enjoyed our multifaceted and deep discussion. Thank you.