Art Of Pricing How To Find The Hidden Profits To Grow Your Business

9781400080939

1400080932

Chapter 1 Hidden Profits: Pricing for Profits and Growth My friend David Straus has always been interested in cooking, not just as an avocation but as a career. He's followed the tried-and-true career path of other successful chefs: attending culinary school and cooking at a variety of restaurants. Dave combined all of these experiences into a unique style of cooking and shares a trait that distinguishes the great from merely good chefs: he cooks to please his customers. So it wasn't a surprise when he recently called to tell me that he was opening his own gourmet restaurant. After catching up with each other, Dave shared a business problem that he was struggling with. "Rafi," he said, "I don't know what prices to set on my menu." With a hint of exasperation, he went on to wonder aloud, "Should I price the prime strip steak with morel mushrooms at eighteen or thirty-one dollars? How will the thirteen-dollar difference affect the number of customers that patronize my restaurant?" His pricing decision was further complicated by conflicted feelings of "not wanting my restaurant filled with just a bunch of rich people; I want to serve a more diverse group of customers. But then again, I am in business to make a profit." What's interesting about Dave Straus's pricing dilemma is that it reflects a fundamental challenge faced by every business in the worldfrom small startups to Fortune 500 companies. I've had the good fortune to work on pricing issues in aca-demia, government, and the private sector. As an academic, I wrote my Ph.D. dissertation, published new ideas in top research journals, and taught classes to budding managers on pricing. As an economist at the Federal Communications Commission, I worked on deregulating local and long-distance telephone rates as well as on public-policy issues that use price subsidies to make telecommunication services affordable to the poor. Today, I work with companies of all sizes in a wide range of industries on their pricing strategies. Throughout all these experiences, I've found that the root of pricing problems at most organizations is the same: they don't think about pricing in the right way. For most people, pricing is an unsettling exercise involving a mixture of compromise, fly-by-the-seat-of-the-pants analysis, guessing, marking up costs, following competitors, and doing things as they've always been done. What usually results is a price that "just works." Eighteen- or thirty-one-dollar decisions compromise at $24.50. What's the difference between using a price that "just works" and one derived from my pricing for profits and growth philosophy? A lot of hidden profits. The potential benefits of pricing extend far beyond making simple, black-and-white, $18 or $31 decisions. Continuing my conversation with Dave, I pointed out that his desire to expand his clientele beyond rich diners actually touches on my central idea about pricing: some customers will value your product more than others will. For example, budget-minded young couples with a mortgage and kids who want to celebrate their anniversary with a fancy dinner can't afford to pay as much as the well-to-do who delight in dining at the best restaurant in town. This simple realizationthat customers place different values on the same productsempowers companies to price for profits and growth. The right way to think about pricing is as a series of strategies that serve (and capture different profit margins from) customers with different product valuations. After an hour of discussing Dave's business, goals, and potential customers, we de