Pricing is the fastest and the most effective way to maximize profits. The right price can boost profits faster than increasing volume or reducing costs will but the wrong price can shrink profits just as quickly while diminishing your brand value.
Price is even more important for direct to consumer brands as your shoppers cannot touch, feel or see the products so they rely heavily on visual and perceptual cues in their decision-making process. The perception of price becomes more important than the price itself. A price is no longer just a number but a reflection of the perceived value of the product or service in the customer’s eyes.
A study published in a 1992 Harvard Business Review by Michael Marn and Robert Rosiello, studied 2,463 companies and found that a 1% price improvement results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3% (respectively).
And yet, most businesses continue to use primitive approaches to pricing. Mainly the cost-plus approach and the competitive pricing approach. Cost-plus pricing is setting price by evaluating all variable costs and adding a markup. In the competitive pricing approach, you compare the quality of your product relative to competitors and set a price according to this relative comparison. Here you assume that your competitors know what they are doing, otherwise it really is a case of the blind leading the blind. Both are useful as a form of bench-marking, however relying solely on such approaches often leads to either overcharging or leaving money on the table.
My favorite books on pricing strategy
Although there is no substitute for individualized pricing strategy development, I recommend all my clients and colleagues to invest some time in learning how to price their products and services even before considering consulting with a specialist.
Handbook on the Psychology of Pricing: 100+ effects on persuasion and influence every entrepreneur, marketer and pricing manager needs to know
Dr. Markus Husemann-Kopetzky 2018
Prices are paid by people but too many companies solely focus on their internal costs and their external competitors while assuming that people behave rationally and always seek the best value.
The Handbook on the Psychology of Pricing takes a consumer centric approach by offering comprehensive collection on psychological pricing and demonstrates with a plethora of effects how customers predictably behave irrationally. Pricing books are often tedious and difficult to read but here the author does a great job presenting the most up to date research in a fascinating, approachable and actionable way.
You can take any of the 100 psychological effects explained in the book and easily plug & play many of them today to influence your customers buying behavior and watch your sales and profit rise.
Dr. Husemann-Kopetzky backs each effect by solid academic research by translates hundreds of academic papers into a handy manual for business owners and managers to optimize prices from a customers’ perceptive.
William Poundstone 2011
Ever wandered into a designer store and felt so happy because the prices didn’t seem as high as you expected? That’s because many designer brands carry obscenely expensive items on display to make everything else look like a bargain in comparison. People used to download music for free, then Steve Jobs convinced you to pay. How? By charging 99c. cents. Ever wondered why text messages cost money, while e-mails are free? Why do jars of peanut butter keep getting smaller in order to keep the price the “same”? The answer is simple: prices are a collective hallucination.
Priceless is both actionable and entertaining. The author takes you through recent research on decision making, to educate and to leave you wondering about what money and prices really mean and why you never thought that designing your customer’s perception of your brand could be so easy.
Leigh Caldwell 2012
Clients ask me all the time what to do with some new and exciting strategy they’ve discovered in a book but find it difficult to implement. This book aims to solve this.
The Psychology of Price tells you, step by step, how to use the psychology of price in your business. No matter what you sell, whether a product or a service, to consumers, to other businesses, or to government. It starts with the first steps in using price to position your product or service, then explains how to price differently for different segments of your market, followed by a series of pricing techniques that help you work with, rather than against, the way your customers’ minds work.
Leigh Caldwell uses the story of a fictional business, The Chocolate Teapot Company. This company uses pricing strategies to create a whole new product category, achieve a premium position for it in several markets, and make big profits by understanding the psychology of its customers.
Hermann Simon 2015
Hermann Simon is one of the most recognized experts on pricing strategy and the chairman of Simon-Kucher & Partners consulting firm. In his book he leads us through stories and first hand experiences throughout his extensive career to maximize value to both the customer and the business.
Our life is a constant string of decisions whether something is worth our money or our time, as a business we also try to convince other people to part with their money or their time. Price is the place where value and money meet. Price is the most powerful and pervasive economic force in our day-to-day lives and one of the least understood. This perceived complexity of pricing leads many managers to set prices based on rules of thumb and hunches, often leading to setting price that disappoint both your customers and you bottom line.
Hermann Simon’s lifelong journey has taken him from rural farmers’ markets, to a distinguished academic career, to a long second career as an entrepreneur and management consultant to companies large and small throughout the world. He helped countless managers and executives use pricing as a way to create new markets, grow their businesses and gain a sustained competitive advantage. He also learned some tough personal lessons about value, how people perceive it, and how people profit from it. In this engaging and practical book, he leaves you wanting to learn more and do more―as a consumer or as a manager.
Robert G. Docters 2011
Contextual Pricing describes how buyers are influenced by comparison points and contextual messages more than by actual price levels. Identical products can sell at radically different prices to the same target audience. This is how Procter & Gamble, GE, Coca-Cola Company, Amazon, Google, Microsoft, and others make sure they get the best possible price.
This book is full of market tested case studies that will help you understand how your customer makes contextual pricing decisions. Contextual pricing can help you create a better pricing strategy and easily implement using simple tactics and pricing tools such as bundling, upselling, hooks, and so much more. It can also help you avoid common pricing mistakes when raising or lowering prices and discover how you can win the competition through superior strategy, not through lower margins.
Ernst-Jan Bouter 2019
Businesses are defined by two important functions: the inventor who creates value by turn ideas into products and services, and the salesman who can sell these products or services. This book focuses on the third business skill, the often-neglected business skill, pricing. Price is how you actually make money so setting and asking the right price is the only to hit business targets.
The Third Business Skill shows you in a clear and concise manner how to set optimum prices using accessible models and examples. Such as the 12 C’s for price drivers and the three layers for pricing research are frameworks that help you define your pricing strategy. Discover how Google, LinkedIn, Apple, BMW, Gillette and other successful companies achieve high profits by using optimized pricing strategies but also the mistakes successful companies such as GE’s made in pricing.
Rafi Mohammed 2010
Leading pricing expert Rafi Mohammed shows you how to reap a financial windfall and foster growth using the underutilized and often overlooked strategy of setting prices.
The 1% Windfall reveals how modest incremental changes to price can yield significant rewards. A study of the Global 1200 found that if companies raised prices by just 1%, their average operating profits would increase by 11%. Using a 1% increase in price some companies have seen even more significant growth in profits: Sears, 155%; McKesson, 100%; Tyson, 81%; Land O’Lakes, 58%; and Whirlpool, 35%.
But how can you set the right price? Backed by research and real-life examples, The 1% Windfall offers guidelines that you can follow to create a comprehensive pricing strategy for any product or service. The result is a mind-opening, clear blueprint for companies to price for profit and growth.
No B.S. Price Strategy: The Ultimate No Holds Barred Kick Butt Take No Prisoner Guide to Profits, Power, and Prosperity
Dan S. Kennedy 2011
If you’re a small business owner, this book is for you. Too many small business feel that the cannot possibly compete with the giants without dropping their price and oftentimes believe that they can’t achieve financial success. Dan S. Kennedy empowers small business owners to take control of their profits by taking charge their price.
No B.S. Price Strategy invites entrepreneurs re-evaluate every belief about pricing and take a more creative, bold approach, using price to their advantage and allowing them to be as profitable as possible. Liberating small business owners from all fear and timidity surrounding the concept of pricing, Kennedy teaches small business owners how to avoid the 9 ultimate pricing mistakes, including comparing themselves to competitors’ lower prices, how to stop attracting price conscious customers, and how to start offering premium pricing options. He also shows how to discount the right way, the secret to price elasticity, how to break free from the price-product link, and, most importantly, how to set prices for the greatest profits.
Utpal Dholakia 2017
Pricing decisions are among the most important business decisions that a manager can make.
How to Price Effectively introduces the value pricing framework, a structured, versatile, and comprehensive method for making pricing decisions and executing them. The framework weaves together the latest thinking from academic research journals, proven best practices from the leading pricing experts, and ideas from other fields such as medical decision making, consumer behavior, and organizational psychology.
The book combines modern research on pricing with many real-life examples to help you set the right price. The book discusses which factors you should consider when making pricing decisions, the role played by each factor―costs, customer value, reference prices, and the value proposition― and how they work together, the importance of price execution, and how to evaluate the success of pricing decisions.