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Executive Times |
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2006 Book Reviews |
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The Art
of Pricing: How to Find the Hidden Profits to Grow Your Business by Rafi Mohammed |
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Rating: |
*** |
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(Recommended) |
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Click on
title or picture to buy from amazon.com |
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Conversational 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 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 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 URL for this review: http://www.hopkinsandcompany.com/Books/The
Art of Pricing.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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