(Sales) Book Review: The Art of Pricing by Rafi Mohammed


By Victor Antonio, Sales Influence

If you’re like me, you’ve never given price-setting much thought. When you develop a product or service you simply looked at your cost of doing business, add a reasonable markup comparable to your closes competitor and there you have it…pricing! Right? Well, not so right according to Rafi Mohammed who wrote a book titled, The Art of Pricing: How to Find the Hidden Profits to Grow Your Business.

Mohammed’s book is all about how to increase profit and generate growth through better pricing. He argues that instead of offering standard competitive pricing, he makes the case that we should offer customers a variety of pricing options thereby allowing them to select one that works best for them.

He starts out with a great example of a friend who sought his advice after having opened a restaurant. The new owner finds himself in a meaty dilemma, “I don’t know what prices to set on my menu. Should I price the price the prime strip steak at $18 or $31?”

The owner has another dilemma but this one is the not in the pricing realm but resides in the moral realm of customer service. He doesn’t want to exclude people from coming to his restaurant, “I don’t want to fill my restaurant with just a bunch of rich people. I want to serve a more diverse group of customers. But yet I am in business to make a profit.”

What would you do? Well if you’re like most like-minded business people stuck between charging either $18 or $31, you’d probably compromise and settle in at $24.50. This is a representative approach to how most people or businesses set pricing today.

According to Mohammed, that is exactly the wrong way to go about setting price, “…the root of pricing problems at most organizations is the same; they don’t think about pricing in the right way.” Setting pricing today is what he calls ‘an unsettling exercise involving a mixture of compromises’ that include:

• Fly-by-the-seat-of-your-pants analysis
• Guessing
• Marking up costs
• Following your competitors
• Doing things the way they’ve always been done
• Result = Price that Just Works = Compromise

What Mohammed is suggesting in his book is that we rethink pricing in terms of finding hidden profits in order to generate growth. His central theme approach is based on the infrequently stated fact that some customers will value your product more than others will.

For example, in the case of the restaurant, you may have a couple that’s on a budget with a mortgage and kids who won’t pay the $31 but you also have an older couple who delights in fine dining and has no problem paying that amount. Why? Because customers place different values on the same product(s)! “The right way to think about pricing is as a ‘series of strategies’ that serve customers with different product valuation.” A series of pricing strategies for the restaurant may look like this:

• Early bird specials
• Senior citizen discounts
• Regular menu prices
• $200 annual ‘charter’ membership that provides a 25% on all meals on years
• Discount 3 course meal bundles
• Lower price bar menu
• Premium Chef’s table seating

In Mohammed’s words, “The right set of pricing strategies enables companies to serve (and profit from) as many customers as possible.” He goes on to say, “Pricing is not about setting numerical values, it’s about creating a set of strategies to maximize your company’s profits.”

He cites a few examples of other industries who’ve figured this out:
• Trains that vary price based on the time of day and distanced traveled
• Cellphone companies who charge by usage (minutes or megabytes)
• Telco companies who charge Fortune 500 companies more for a local line the they do low-income customers

Can you think of any others?

To grow your business, to generate more revenues, is not always about developing new products, but sometimes it’s as simple as taking the time to develop a pricing strategy to find hidden profits residing in your current products or services.

Mohammed’s book is loaded with pricing insights and perspectives that every company struggling to squeeze revenue should look at. My favorite example in the book is how he demonstrates how increasing your net margin pricing by 1% can translate into an increase in net profit of 11% to the bottom line. Don’t believe it? Read the book! I strongly recommend you go out and get you a copy of the book and stop giving away your profits.

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