“It is not the business that earns a profit adequate to its genuine costs of capital, to the risks of tomorrow and to the needs of tomorrow’s worker and pensioner, that “rips off” society. It is the business that fails to do so.” – Peter Drucker, The Delusion of ‘Profits,’ Wall Street Journal, 1975
I was recently recommended a great book, Confessions of the Pricing Man How Price: Affects Everything by Hermann Simon, widely considered the leading expert on business pricing of all time.
Doubt this? Well, Mr. Simon is so renowned and respected as THE pricing guru that he has built a $300 million+, 32 offices (in 22 countries), 860 employee consulting firm focused exclusively on advising many of the biggest and most profitable companies in the world (including American Express, BMW, Coca-Cola, Goldman Sachs,Grainger, LinkedIN, Skype, among very many others) advice on pricing strategies that maximize profitability and the customer purchase and consumption experience.
This “Win-Win” duality – that yes we can charge a profitable price for our products and services and that our clients and customers can feel good about it, is a simple but incredibly profound wisdom that the vast majority of businesses just don’t get.
And not doing so costs them dearly.
Because in this Internet Age of ours – with no matter what businesses we are in or what we sell – there are thousands of competitors offering similar, comparable wares, far too often we are all seduced by the siren song that if we just lowered our prices…
…sales would increase and with greater volume “eventually” we would figure out how to reduce costs to make up for the lost margin.
Unfortunately, as Mr. Simon explains in his book, lowering prices is almost never the right strategic choice, and referencing the Peter Drucker quote above, makes the profound point that as business owners maintaining sustainable is not only a business imperative, but a moral one too,
To achieve and maintain high prices, Simon advises that as sellers we must 1) shun from our minds forever the “Engineer’s Fallacy” that if we just build a good product “they will come” – i.e. that marketing and branding do not really matter and 2) to truly “get” that the buyer’s pricing experience is decidedly not a one-time event at the moment of purchase, but an “experience over time.”
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And as that experience is a high quality one where our product / service delivers on its promises and confers emotional, psychological and social benefits that are important to buyers, then the price charged – no matter how high – will be experienced as a fair one for almost all buyers.
Let’s put this all into three quick ways to put these pricing insights to work right away:
#1. Buy and Read Simon’s book. It will change forever for the better how you think and act about pricing in your business.
#2. No time for that? Then start thinking less about the features of your product and services (technical specs, input costs, delivery time, etc.) and far more about its benefits (safety, prestige, sex appeal, contributing to the greater good, etc.). “Benefits Thinking” like this will immediately get us focused more on marketing and branding and less on operational costs and considerations.
#3. No time for #1 or #2? Then just raise your prices! Reference my “Using the 20% Rule to Double Business Results” logic and challenge oneself to raise prices 20% this year, consequences be darned.
My strong bet, and Mr. Simon would most concur, that doing so will create a virtuous circle – happier customers at the moment of purchase and throughout their consumption experience, and more profits too.