Summary: Smart Pricing

Review and Analysis of Raju and Zhang's Book

BusinessNews Publishing

• Publisher: Must Read Summaries
• Year: 2016
• eBook ISBN: 9782511019856
• Topic: Business
• Subtopic: Sales
• Index: Business

The must-read summary of Jagmohan Raju and W. John Zhang's book: `Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability`.

This complete summary of the ideas from Jagmohan Raju and W. John Zhang's book `Smart Pricing` demonstrates that many companies fail to establish a deliberate pricing strategy. In fact, many managers rarely give pricing much thought at all. In their book, the authors explain that this is a huge mistake as pricing offers an opportunity to move ahead. This summary provides readers with an insight into the possibilities of different pricing strategies and how some of the biggest companies have used them to push their companies forward.

Added-value of this summary:
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To learn more, read `Smart Pricing` and discover the key to establishing innovative pricing strategies that create value and capture customers.

Summary of Smart Pricing (Jagmohan Raju and Z. John Zhang)

1. Price – the forgotten business lever

It’s amazing how many companies work hard to grow their markets and fine-tune their operations but then pay little if any attention to how to price their products and services for maximum profitability. There’s a perception prices are beyond the control of managers. This is incorrect. Pricing is an important business lever and more time and energy needs to be devoted to developing a pricing strategy and doing the underlying research which will make it happen.

Most companies either set their prices arbitrarily or use one of three fairly ad-hoc and simplistic approaches:

1. Cost-plus pricing – specify a sales target, figure out whatyour costs will be at that volume and then add your company’s normal margin to come up with the retail price. The problems with this method of setting prices are:
   • When customers like what you have to offer, they don’t care about your costs. All they look at is its value to them. You might be leaving lots of money on the table.
   • It’s arbitrary to decide in advance what a “fair” margin is or isn’t. Too many factors can come into play here.
   • Cost-plus is inward looking. It’s based solely on your operations, not on what customers are willing to pay.
2. Competition-based pricing – look at what everyone else is charging and set prices a few percent below their price. Again, there are potential problems here:
   • You end up becoming passive rather than focusing on creating something customers will love. Instead of seizing the bull by the horns and figuring out how to price your offering so as to maximize profits, you merely monitor what everyone else is doing and mimic that.
   • You may lower your prices to protect market share and thereby generate some big losses. Sometimes pricing becomes a high stakes game of chicken where you wait to see who will blink first. Almost inevitably, the outcome of this kind of scenario is losses all round.
3. Consumer-based pricing – figure out what customers are willing to pay for what you have to offer and set your prices just below that threshold. Potential problems with consumer-led pricing:
   • Admittedly, this gives you the option to charge different prices to different customers but it also encourages comparison shopping. You end up training your customers to behave badly in order to save a few bucks.
   • Discriminatory pricing almost always disadvantages your best customers because you end up giving deep discounts to attract new business. Rewarding your best customers with rock-bottom prices is a much more pleasant way to do business.
   • You end up training good customers to behave badly in order to get lower prices. Negotiations become aggressive and unpleasant rather than focused on creating added value.

It is incorrect to assume the market sets prices all by itself. Marketers with decision-making responsibilities do that, and pricing is an important decision because it can affect your company’s profitability and therefore its very survival.

A manager effectively has only four levers which can be used to increase any firm’s profitability

Studies across a wide number of industry groups have shown:

• When fixed costs are lowered by 1%, profitability increases by an average of 2.45%
• A1% increase in sales generally leads to a 3.28% increase in the firm’s overall profitability.
• The effect of lowering variable costs by 1% is a 6.25% increase in profitability.
• Improving the firm’s prices by 1% leads to a 10.29% increase in profitability.

In other words, the potential upside benefits of pulling the price lever far outweighs the impact of the other three levers by a healthy margin. Furthermore, changing prices is much easier than cutting costs or generating new sales. Yet despite these obvious advantages, very few managers ever obsess over their current pricing strategies. This is a frequently passed over way to build and enhance your firm’s overall profitability.

The way you price your products or services also offers a great opportunity for differentiation. Many products today use comparable technology. A service design cannot be patented, but the way you price your offerings certainly can make you stand out from the crowd. This is especially the case in industries which have high initial fixed costs for development and then low variable costs in production. In these kinds of industries, pricing can be much more creative and therefore more distinctive than is the case for many conventional industries. The right creative pricing structure will appeal to the most profitable customers and a virtuous cycle will start amplifying the benefits for you over and over. The key to success is finding the right way to figuratively prime ...

Table of contents

• Title page
• Book Presentation
• Summary of Smart Pricing (Jagmohan Raju and Z. John Zhang)
• About the Summary Publisher
• Copyright