Hermann Simon has some ideas to share about pricing: he co-founded a well known international consulting firm specialized on the topic. Confessions of the pricing man is a mix between personal memoirs and a pricing class. Along a set of chapters, the author shares a lot of what he learnt over the yers.

Below is a synthesis I wrote for my own use as to what I choose to retain. Though, there is much more than that in the book. Also, it may be partly crytpic in case you have not read the book. I wrote it for me.

Curatus est une initiative pour faire lire aux professionnels plus d’ouvrages… professionnels. Lisez le manifeste. C’est aussi une sélection d’excellents livres pros regroupés au sein du Guide Curatus. Et une maison d’édition qui édite par exemple les Règles du jeu professionnel. Rejoignez le mouvement !

(et si le pricing vous intéresse et que la synthèse ci-dessous semble cryptique, “Le Pourquoi du combien” peut vous intéresser. L’ouvrage reprend une partie des idées développées ci-dessous de manière courte et claire)

1. Define or accept your price positioning, avoiding being a price taker

  • Premium price champions have the right price to value relationship for a customer segment big enough to exist. They maintain superior value over time, develop strong brands, invest heavily in communication and shy away from special offers. This positioning is somewhat easier to achieve than ultralow and luxury that require more drastic choices
  • Ultralow champions have this strategy from the start, one does not become a low-price player. They are extremely efficient, don’t do anything that is not absolutely required by the customers, are procurement champions, create economies of scale, control their full value chain, and focus advertising on price. Their products are simple yet robust, easy to use and to fix, they develop locally in the lowest cost locations, and still maintain adequate quality. There is typically space for only one or two ultralow champions in a given industry
  • Luxury champions offer the highest level of performance and prestige.They maintain high price that contributes to the prestige, limit volumes to create scarcity, strictly avoid discounts, hire top talents and control their value chain. And they need enough clients willing to pay to compensate for the high fixed costs required to provide the highest quality. Luxury positioning requires a high-interest product and a specific Corporate DNA
  • Price takers have no pricing power on their industry and sell at the market price. This positioning typically does not allow a player to be successful. And industries where the price is set by the market are typically bad industries to be in.

2. Define or accept your implicit price setting mechanism

  • Cost plus: are you defining your prices based on your costs?
  • Leader: is there a dominant player in the industry that is de facto defining the price point?
  • Competition: are you looking at competitors and then matching their price or positioning slightly differently based on their pricing logic?
  • Market-based: are you using the market demand curve? (which requires to know it)

3. Choose your name for price. Prices come with many names and choosing it right is part of the art, e.g., Price, Compensation, Fee, Schedule of charges, Honorarium, Commission, Toll, Premiums (for insurance), Tuitions (for Schools), Tax (for government), Rent, Wage, Salary, Bonus

4. Ponder the price dimensions you wish to consider:

  • Base price
  • Reduced price: discounts, bonuses, rebates, conditions, special offers
  • Segmented price by package size, product variant, customer segment (e.g., child, senior), tie of the day, location, or phase of the product cycle
  • Additional price for additional services
  • Two dimensions price with upfront charge and a usage fee
  • Complementary product price: razors and blades, smartphones and data plans
  • Bundle price for several products together
  • Negotiated price based on personal negotiations
  • Suggested price for manufacturer, wholesale and retail

5. Tailor your prices to your customers and your situation: there is no absolute truth and it always depends on the context. Here is a checklist to consider:

  • Acceptable variable price, e.g., Germans compare trip costs based on fuel cars, pushing Deutsche Bahn to develop two-dimension pricing discount cards such as DB50
  • Below round price thresholds such as 9.99, it does work in practice though it makes no rationale sense
  • Price structure, should you bill per month, per year, at the beginning of the year or at the end of the year? Pros and cons depend on the amount and the client perception
  • Sunk costs, can you make part of the price feel like a sunk cost for clients?
  • Price in the middle of two, most people will take the middle price of 3 offers. They will the middle offer is the smart choice, assuming low price is bad quality and high price is luxury
  • Anchor prices, what are the reference points of your customers on this product or another?
  • Re-anchoring, can you re-anchor your prospects with a very high price offer that will change the perception of the lower price options?
  • Moon prices, they are prices nobody pays and everyone gets a discount on? (everyone likes to have negotiated a discount)
  • Mental accounts, money for grocery is not the same as holiday money, what you got for free has less value than what you paid for; it makes no rationale sense but it works
  • Individual elements on top of bundles, suggesting a discount, e.g., checking account for €1.00, checking account + credit card for €2.50, and credit card only for €2.50
  • Differing the price, paying later feels better, nevertheless paying in many installments repeats the pain of paying; consider differing the price with care
  • Incremental volume discount, it harms profit less than full volume discount and is acceptable for most customers
  • Prestige effect, i.e. is the fact that the product is expensive part of the appeal?
  • Scarcity, can you make your product scarce or create the perception of scarcity?
  • Asymmetry between the utility of gains and losses, the pain of losing $1,000 is stronger than the joy of gain; what are the gains and losses within your price?
  • Reluctance to part with what we have, how could you use it for pricing?
  • Cash backs, the utility of gains and losses is asymmetrical and the cash back money may be used differently than a price reduction
  • How to write the price, should you write $17.00, 17, or even seventeen? Research suggests seventeen is a lot less painful than $17.00 with the dollar sign
  • Less expensive alternative, could you propose a cheap alternative to your current product?

6. Get the best out of multiple segmented prices. Ideal pricing extracts the willingness to pay of each individual client. In practice differentiated pricing may bring a company to the borders of perceived ethics and segmenting clients incurs cost. It is art as much as science. Consider the below:

  • Segment your price to customer groups: adapting your price structure to the differences in willingness to pay is more optimal than a single price for everyone
  • Fence prices: prevent a customer segment to get access to the product destined to other customer segments through limits, distribution channels or features that will block access
  • Bundle your offers to segment customers and possibly sell more (or unbundle)
  • Use multi-person pricing: price differently for the person accompanying the buyer
  • Use time as a differentiator: times of the day, for first buyers, or one year after release
  • Use location as a differentiator: price may not be the same in every place and situation
  • Use price as a high quality signal: start a product high price then reduce the price by 25%
  • Use a high-low strategy: display high price all year long and rebates in specific periods
  • Use a low price entry strategy: create a brand by being an extremely good deal for some time before raising price (e.g., that was the Lexus market entry approach)

7. Open your mind to innovative pricing: pay per use, new price metrics compared to industry standards, flat rate for an unlimited access, freemium, price that is offset by a discount coupon somewhere else, pre-paid systems, pay what you want, auctions, reverse auctions…

8. Keep in mind there is art within the science, customers should perceive value for money and price wars destroy profits

A. Use art and science to define the ideal price

  • Pricing is guesswork: cross conjoint measurement with customer interviews, historical data and price tests to have a feel for the demand curve but k no single method is perfect
  • Ask around what would happen if price changes: customers, sellers and employees have a feel for price elasticity that provides a good one day answer to start with
  • Leave 50% of the value to customers: if your perceived value increases, consider raising the price by only 50% of the variation, likewise pass 50% of costs increase to clients
  • Cost plus is not bad per se: it guarantees profitability, uses hard data, and stabilizes the market if everybody does it; but price is likely too high or too low as customers are ignored

B. Sell a high quality product, at least vs. the price tag

  • Maintain quality: « Le prix s’oublie, la qualité reste », one cannot rip-off clients for very long
  • High price means quality: people suppose a high price means a higher quality due to experience (usually it is true), ease of comparison and an unconscious cost-plus mentality
  • Use transparent criteria to discriminate between people: people find normal that seniors and students pay less but there was a large outcry to Mac vs. PC owner online price changes
  • You can price commodity high: mineral water manages this hard feat

C. Beware of price reduction

  • Beware reducing prices to get volume: one typically needs a lot more volume to compensate for a price discount and additional clients may be borrowed from one’s future
  • Discount does not work on no-name products: people have a hard time believing you can have a good product with a low price
  • Beware of price wars: unless they have a strong cost advantage that prevent competitors to respond in kind companies typically do not win price wars and destroy value instead
  • Avoid price wars: never start a price war and do not answer to every competitor move
  • Drive for profits not volume and keep in mind that price is the most effective profit driver

9. Define and communicate to your colleagues the reasons to chase profits. High price and profits are not a motivating factor for everyone arount you.

  • Indispensable condition of survival, without profits the company will soon decay and lay off employees before it dies
  • Cost of staying in business and continuing to satisfy clients, without profits a company will decay and not be able to provide a good client experience on the long run
  • Cost to invest in the future, without profits a company will not be able to invest in new developments and serve clients on the long run

Final tought: Create value, quantify value and communicate value. These three simple steps are the prerequisite for good prices.