Executive Times






2006 Book Reviews


The Art of Pricing: How to Find the Hidden Profits to Grow Your Business by Rafi Mohammed








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Rafi Mohammed’s new book, The Art of Pricing, encourages readers to think differently about pricing, and offers some solid ideas on how to improve profitability. His conversational style makes reading the book go quickly, but also disguises whether or not any of his methods are grounded in facts. Here’s an excerpt, from the beginning of Chapter 3, “It’s All About Value,” pp. 60-64:


The Fluctuating Value of an Umbrella

Washington, D.C., is one of my favorite cities. Its historic monuments, museums, and cosmopolitan culture make it a wonderful place to visit. No trip there is complete without vis­iting the National Mall area, a 2.5-mile, tree-lined grassy strip containing many of Washington’s most famous attractions, in­cluding the Lincoln Memorial, Washington Monument, Smithsonian Museums, and Capitol Building. Amid this beauty and historic splendor, enterprising street vendors sell everything from bottled water to T-shirts announcing MY PAR­ENTS VISITED THE NATION’S CAPITAL AND ALL I GOT WAS THIS LOUSY SHIRT. Of course, Washington is by no means unique with all of these—I know, for instance, that Hawaii and New York also have those shirts (thanks, Mom and Dad).

Taste notwithstanding, these vendors set prices in a way that every company needs to understand and incorporate into its business practice. These savvy sellers understand that cus­tomers base the price they are willing to pay on the value they receive from a product. So, at the first hint of rain, street ven­dors double the price of their umbrellas. This increase has nothing to do with cost; instead, it’s all about the increased value that customers place on an immediately available haven from rain.

For many managers, the moral of this story represents a shift in the way they think about price. The insight of the fluc­tuating value of an umbrella is not just relevant to street ven­dors; it’s applicable to every company in the world. No matter what product or service you sell, every pricing decision should be based on the value customers place on your product. You have to understand how customers value your product (as well as any optional features). Even minor services (e.g., custom or rush jobs) that may not cost you very much more to offer are like thunderstorm clouds on the horizon, signals that cus­tomers are willing to pay higher prices. How much hidden profit are you giving away because you are not increasing your prices at the first hint of rain?


Value:  The Foundation of Pricing


One of the biggest fallacies in business is that a product’s price should be based on its costs. Many companies set prices by simply adding a fixed markup on production costs. The prob­lem with this approach is that it mistakenly assumes (inten­tionally or not) that customers base their willingness to pay for a product on how much it costs you to produce it. Costs had little to do with charging $3.95 for pet rocks23 in the mid-’70s or the fact that baseball aficionados are willing to pay $100 for ticket stubs from the baseball game in which Cal Ripken broke Lou Gehrig’s mark of playing 2,160 consecutive games.24 Even though it costs the same, are you willing to pay the same price for a prime steak that you order medium-rare if it is served well-done? Customers choose the price they are willing to pay based on the value they receive from a product.


The good news is that simply changing the way you think about pricing can produce significant and immediate profit in­creases. The only role that costs should play is to act as a price floor. All value-based prices should at least cover a product’s incremental costs. Other than that, it’s all about value. Every­one needs to view pricing as a means to capture the value cus­tomers place on products. At a minimum, prices for those products that you “can’t keep on the shelf” should go up on Monday morning.


When the global manufacturing company Emerson Elec­tric implemented a value-based pricing strategy, it uncovered hidden profits. Jerry Bernstein, director of Emerson’s price-improvement team, described his company’s former pricing phi­losophy as follows: “You developed a product, looked at its costs, and said ‘I need to make X.’ You marked it up accordingly—and people would buy it.”25 In the late ‘90s, the company changed its pricing to focus on capturing the value customers placed on its products. This new perspective immediately uncovered hidden profits. For instance, an Emerson subsidiary (Fisher­Rosemount) that manufactured measurement devices bene­fited from value-based pricing. The company had developed a new sensor that measured fluid flows (to avoid pipes bursting or to ensure that mixtures had the correct proportions) at chemi­cal manufacturing plants. Using its old cost-plus philosophy, these sensors would have been priced at $2,650. After high­lighting and discussing the value of this new product (e.g., bet­ter accuracy and smaller size relative to competitors) with U.S. and European customers, Emerson’s pricing team discovered that customers were willing to pay more than what they had planned to charge. In addition, they found that customers highly valued (and therefore were willing to pay a premium for) the Fisher-Rosemount brand name. Because of these fac­tors, the final price was set at $3,150 and the company felt that profits were maximized. Had a lower price been charged, Fisher- Rosemount would have given away profits on each sale.


Shrimp is a product that benefits from a high perception of value. Because of the large influx of imports from shrimp farms in Asia and Latin America (now accounting for nearly 90% of the U.S. market), wholesale prices dropped by roughly 40% between 1997 and 2002.26 Despite lower costs, retail shrimp prices remained relatively frozen. In fact, shrimp entrée prices at the Landry’s Seafood House chain actually rose by 28% be­tween 2000 and 2003. Although one explanation for this in­crease is that Landry’s used bigger and better shrimp, CEO Tilman J. Fertitta conceded that his chain uses larger profits from shrimp to compensate for shrinking profits elsewhere.27 Despite shrimp surpassing canned tuna as the most popular seafood in the United States, these crustaceans are viewed by Americans as a luxury item that they expect to pay more for. This strong perception of value allows retailers to maintain or increase shrimp prices despite decreases in wholesale costs.


Thinking about price in terms of capturing value is the foundation of pricing for profits and growth. This insight alone can lead to greater profits on Monday morning, kudos from your boss, and a pat on the back from Wall Street in the form of higher share prices.


The benefit of reading The Art of Pricing comes less from getting answers to your individual pricing challenges than from thinking differently about pricing, or thinking about the issues in a new way.


Steve Hopkins, January 25, 2006



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The recommendation rating for this book appeared

 in the February 2006 issue of Executive Times


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