PRICING MYTHS

In a chapter on how you can create a culture of profit, Rafi Mohammed
lists the many myths that come in the way. Such as, that setting
prices involves marking up prices (cost-plus); and that increasing
market share involves a trade-off between price and share. Ruing that
marking up costs by a certain percentage or using ‘the way that we
always have done it' methods often have
In a chapter on how you can create a culture of profit, Rafi Mohammed
lists the many myths that come in the way. Such as, that setting
prices involves marking up prices (cost-plus); and that increasing
market share involves a trade-off between price and share. Ruing that
marking up costs by a certain percentage or using ‘the way that we
always have done it' methods often have become part of a company's
culture, Mohammed advises in The 1% Windfall: How successful companies
use price to profit and grow' ( www.landmarkonthenet.com) that a
value-based price should be the foundation of every company's pricing
strategy for it captures the product's value.

To instil a value-based pricing mindset within the company, the author
recommends the use of anecdotes, personal experiences, and fact-based
case studies. For instance, he urges you to ask staff members how they
evaluate prices for their personal purchases. “Do they estimate the
cost of a product and have a strict rule of purchasing only if this
cost is marked up by 50 per cent (or less)? Most don't. Instead,
consumers evaluate a product by comparing it with its next-best
alternatives and selecting the one that offers the best value (in
terms of both price and attributes).”

Reversing the inverse relationship

On the trade-off myth, Mohammed avers that it is possible to achieve
both the largest market share and highest profits. He traces the
common trade-off myth to the elementary economics lesson about the
inverse relationship between price and quantity in a demand curve —
that a higher price leads to lower quantity sold and vice versa. “As a
result, companies seeking a higher market share believe that the only
way of doing so is through setting bargain prices. But gaining market
share in this manner rarely results in the highest profit for a
company.”

The antidote, according to the author, is to consider ‘a pricing
blossom strategy' of offering a variety of prices and plans for a
product, rather than one bargain price. By targeting customer segments
through pick-a-plan, versioning, and differential pricing tactics, he
assures that the maximum number of customers can be serviced.

A key principle highlighted in the book is that you should speak and
sell in terms of net prices. Recommended value read for finance
professionals.

D. MURALI

(This article was published in the Business Line print edition dated
July 14, 2011) become part of a company's
culture, Mohammed advises in The 1% Windfall: How successful companies
use price to profit and grow' ( www.landmarkonthenet.com) that a
value-based price should be the foundation of every company's pricing
strategy for it captures the product's value.

To instil a value-based pricing mindset within the company, the author
recommends the use of anecdotes, personal experiences, and fact-based
case studies. For instance, he urges you to ask staff members how they
evaluate prices for their personal purchases. “Do they estimate the
cost of a product and have a strict rule of purchasing only if this
cost is marked up by 50 per cent (or less)? Most don't. Instead,
consumers evaluate a product by comparing it with its next-best
alternatives and selecting the one that offers the best value (in
terms of both price and attributes).”

Reversing the inverse relationship

On the trade-off myth, Mohammed avers that it is possible to achieve
both the largest market share and highest profits. He traces the
common trade-off myth to the elementary economics lesson about the
inverse relationship between price and quantity in a demand curve —
that a higher price leads to lower quantity sold and vice versa. “As a
result, companies seeking a higher market share believe that the only
way of doing so is through setting bargain prices. But gaining market
share in this manner rarely results in the highest profit for a
company.”

The antidote, according to the author, is to consider ‘a pricing
blossom strategy' of offering a variety of prices and plans for a
product, rather than one bargain price. By targeting customer segments
through pick-a-plan, versioning, and differential pricing tactics, he
assures that the maximum number of customers can be serviced.

A key principle highlighted in the book is that you should speak and
sell in terms of net prices. Recommended value read for finance
professionals.

D. MURALI

(This article was published in the Business Line print edition dated
July 14, 2011)