Education

Pricing myths

D. MURALI | Updated on: Jul 13, 2011

blbk4900.jpg | Photo Credit: grrks

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.

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Published on July 14, 2011
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