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October 3, 2005

Jack Covert Selects: Jack Covert Selects: The Art of Pricing

By: Jack @ 8:50 PM – Filed under: Management & Workplace Culture

The Art of Pricing: How to Find the Hidden Profits to Grow your Business
by Rafi Mohammed, Currency, 240 pages, $25.00 Hardcover, October 2005, ISBN 1400080932
In the past couple of years we have had books on execution and business basics. Here is a book that is really "where the rubber meets the road" pricing. As a long-time merchant, I have always been interested in pricing and have looked forward to this book ever since I saw it in the catalog. David Schwartz, formerly in charge of Milwaukee's Harry Schwartz Bookshops and my boss, was a past master at squeezing the last nickel out of a price. I, on the other hand, thought he went overboard. The author agrees with David.
I enjoyed this book because the author, a highly regarded economist and professor on the subject, wrote a book full of real world examples--which is rather unusual. For example, he states in his search for hidden profits, how a small (1%) increase in net price would on average result in an 11% increase in operating profits:

Let me clarify a few terms in this statement: (a) by net price increase, I mean the price increase does not affect the quantity of products sold, and (b) operating profits are income derived from a company's own operations (excluding other incomes, such as those gained from financial investments). Suppose this 1% to 11% ratio applies to my book publisher, and the wholesale price of this book is $10. If my publisher achieved a 1% net price increase (e.g., the wholesale price rises by ten cents, and this carried through, so the retail goes from $25 to $25.10), its operation profits would rise by 11%...

As I was reading this book, I thought, 11% more profit Oh boy, where do I sign up? Then he comes to his three caveats for value-based pricing:

The final caveat regarding value-based pricing involves the role that competition plays in pricing. How are your rivals pricing? I recently discussed the virtues of value-based pricing with George, a friend of mine from college who is now a lawyer. He immediately understood the concept and spoke excitedly about how his advice reduces his clients' tax bills. Why not price according to value, he reasoned, by charging 10% of the savings instead of billing for a few measly hours of time (at $200 an hour)? I felt a little bad about bursting George's rapidly growing bubble of riches by inquiring about how his competitors priced their services. As it turns out, many lawyers offer the same advice (and resulting tax savings), and they bill by the hour. Who would you want for your $20,000 tax savings--a lawyer who billed by the hour (two hours at $200) or one who charged 10% of what he saved you ($2,000)? If many sellers are offering similar products, your price is constrained by what your competitors charge.

The book is filled with these relatively simple stories that make loads of sense about looking at your products and pricing strategy. I would strongly suggest starting with the final chapter, Chapter 10 called "It all starts on Monday morning" because it is a magnificent overview of the book and leads you back to the relevant chapters to review the many takeaways the book offers.
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