September 16, 2014

The Art of Pricing

Buy The Art of PricingImagine that you woke up one day and had been endowed with the power to see hidden profits for your business.

You would wake up on this particular day and as you padded around for that first cup of coffee, you’d see a few dollars peeking around the coffee maker. You’d open up your computer and a ten dollar bill would be wedged between the screen and keyboard. You’d sit down to write something and pop right back up again because you actually sat on a pile of quarters, nickels and dimes.

Everywhere you looked and walked … everything you touched … was spilling out money.

This money could be yours. But it isn’t — because you haven’t priced for it. It is money that still belongs to your customer because you haven’t created the opportunity for them to give it to you.

Every business has hidden profits. And hidden profits are those little piles of money that we can’t see because we’re not yet endowed with the power of seeing them. The good news is that all of us can learn to start seeing these opportunities for increasing our profits. Rafi Mohammed’s book “The Art of Pricing: How to Find the Hidden Profits to Grow Your Business” can help you do just that.

Pricing is powerful stuff and it’s a shame that it’s often the most ignored component of the marketing mix. Granted, it’s not quite as sexy as a pretty ad campaign. But advertising costs money — and a good pricing strategy can actually MAKE you money. So where would you rather put your time?

Let’s get to the meat of this book.

Where to Start with Pricing

The biggest lesson Rafi teaches us is that setting a profit-building pricing strategy starts in YOUR HEAD.

The first step is understanding what you offer that your customers value. For example, if you’re walking through a big city like Washington D.C. or New York on a sunny day, you’ll see lots of vendors selling T-shirts and souvenirs and umbrellas. He says, “So, at the first hint of rain, street vendors double their prices of umbrellas.” That’s value.

The second key to finding hidden profits is to make it easy for your customers to choose you (translation: give you money) by giving them a variety of price levels and offering levels to choose from.

Example of Pricing

A great example of different price levels to offer customers and one that Rafi gives in the book is the story about his buddy Dave, the restaurateur. Dave wanted to grow his customer base beyond high-spending foodies. Take a look at this example from the book. Dave’s original question was “should I charge $18 or $31 for a dinner?” Here’s what Rafi writes:

“After some discussion we designed a set of pricing strategies that included early-bird specials, senior citizens’ discounts, regular menu prices; $200 annual charter memberships that included a 25% discount on all meals for a year; discounted three-course meal bundles, lower priced bar menu; premium chef’s table seating and hob-nobbing with the creative genius behind the meal.”

All that instead of charging either $18 or $31! Who knew that so much creativity could be included in pricing a restaurant meal?

How to Avoid Pricing Too Low

Sometimes we as business owners have a hard time understanding the value we bring to the table. I often see business owners (especially new business owners) under-price.

We are often the worst judge of the value we provide.

To cut through the temptation to price too low, and understand the true value of what you offer, Rafi suggests a value-decoder process. This process walks you through 5 steps to nail down a core price that you can work from to build offerings that will deliver more profit. You can find an interactive version of the pricing tool on Rafi’s Pricing for Profit website.

Read the Book

This is one of my favorite pricing books — and I think it will be yours too for this one reason: it’s written in plain simple English. It contains several process lists and strategies that you can actually read about and implement today.

One caveat, however: while this book isn’t heavy on the math component — that doesn’t mean that you can wing or swag your way through the strategy. I can’t stress enough how important it is for you to have a grasp on your costs. How much does it cost your business to exist? How much does it cost you to fill an order? What is your customer net worth? Don’t attempt any of these strategies without knowing and understanding your costs and loss leaders.

This book is an excellent read for business owners, marketers and anyone who has responsibility for and can implement pricing strategy for their business.

Other Resources

Finally, I’d like to refer you to more information. First, there is the radio podcast interview of Rafi Mohammed that I co-hosted on Small Business Trends Radio. You’ll hear directly from Rafi with more insights.

Second, I’d like to refer you to my companion article “8 Pricing Strategies you can Implement Right Now.” You may pick up a few tips for setting your prices, using psychology.

10 Comments ▼

Ivana Taylor - Book Editor


Ivana Taylor Ivana Taylor is Book Editor for Small Business Trends and publisher of DIYMarketers , where she shares daily do-it-yourself marketing tips, and is the President of Third Force, Inc., a marketing firm that specializes in getting your ideal customer to choose you. Ivana is the book editor for Small Business Trends and co-author of the book "Excel for Marketing Managers."

10 Reactions

  1. I think pricing was one of my major downfalls with my candle business. It’s really hard to estimate what a consumer will think is a good & fair price for a product. When I choose to reopen my site, I think I should take the time to read this book. He gave some really good advice during the radio show. I really need to find that balance between charging too much and too little.

  2. The book does sound interesting. Particularly the psychology of human behavior. It’s quite interesting and sounds like a good read.

  3. Amanda,

    I say the same. I have to look at this book next time we set up a new meeting place for entrepreneurs and businessmen.

    By the way: Did you receive my video email message?

    All the Best,

    Martin Lindeskog

  4. Setting the selling price of a certain business is really one of the hardest thing to do in business. It requires a lot of deliberation and justification. Maybe you can consult a number of people on how would they react to certain price ranges for a certain product you sell. After all, human behavior approach prices in a most likely manner. In addition, reading resources such as Ivana mentioned could be a good resource on determining fair prices both for your customers and to business owners.

  5. Thanks for the review Amanda and I agree with your comments regarding costs and customers net value as you can’t set prices in isolation.

  6. I have a friend with a number of years in the Jewelry and Gallery business and a number of very successful stores. He has a scientific approach where he prices on the high side and then brackets the price downward until he “finds” his market for a specific item. It’s really pretty basic…he’s letting the market determine price. If he is selling too rapidly, then he raises the price to slow the demand. In this way he controls the inventory and continually listens to where the market is. It’s all about what the customer thinks and acts on.

  7. Yes, pricing is an important strategy. No body will hit the perfect price for their products at the first try. It will grow over years through trial and error process.

  8. For some products and industries, pricing is simple (eg: follow the current market leader, standard markup, etc.). For start-ups with leading edge products or unique value proposition, it’s hard but need to get right, not-so-right, but not totally wrong the first time. Price it way off and you become more of a joke than a serious consideration for the decision maker.

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