Preface

Setting Profitable Prices is a handbook that will guide you step-by-step to setting an optimal—profitable—price.

It is written for marketers, business owners, CFOs, and CEOs—anyone who needs to price a product or service. It is also for those who don’t have the budget to hire a pricing consultant to advise them. A pricing consultant with a budget to do research for you will probably provide a more profitable price than you can yourself—even with this book. But a pricing consultant will cost anywhere from $10,000 up to hundreds of thousands of dollars. Plus $10,000 or more in research costs.

This handbook will walk you through steps a pricing consultant will use—steps you can take yourself to save the money. By following these steps, you should come up with a price that will produce far more profits than the average company without a pricing consultant. How do I know this? Because surveys show that most businesses use cost-plus pricing. In Chapter 2 you’ll learn why this is a disaster for profitability. The next most used method is competitive pricing—another profit-killing method. Again, Chapter 2 will show you why.

This handbook will take you through the steps a pricing consultant will use in determining your optimal price. It won’t include all of their steps—it won’t do research for you!—but it will move you far closer to optimal than you can get without it.

Best of all, you get this profit advantage for the cost of a few hours of your time and the (ridiculously low!) price of this book.

Author Credentials

Who am I and why should you listen to my advice on pricing? Let me introduce myself.

I have a doctorate in marketing, with a dissertation on pricing new products. And I teach marketing and pricing, previously at New York University and Western Connecticut State University, currently at Lock Haven University.

Through my consulting company, Pricing Strategy Associates, I have consulted on pricing and new business development primarily for small companies, but also for AARP, Food Network, ABC, and Playboy magazine.

I am the author of the following books on pricing:

• Pricing Psychology Report
• 46 Ways to Raise Prices—Without Losing Sales
• The Tao of Pricing

I have also done substantial research on pricing, which has been published in the following publications:

• Journal of Product & Brand Management
  • Translating country-of-origin effects into prices.
  • The changing price of brand loyalty under perceived time pressure.
  • Risk and acceptable maximum discount levels.
• International Journal of Revenue Management
  • Using consumer-perceived risks to set optimal discount levels.
• International Journal of Business, Marketing, and Decision Sciences
  • Can discounts be too deep? Consumer perceptions of product discounts during an economic downturn.
• Proceedings of the Behavioral Pricing Conference
  • Incumbent price responses to an entrant: a re-examination of previous research.
  • Risk factors that affect consumers’ preferred discount levels.
  • Maximum acceptable discounts.
• Proceedings of the International Academy of Business and Public Administration Disciplines
  • Pricing of green products: premiums paid, consumer characteristics, and incentives.
  • Re-examining consumer acceptance of innovation.
• Proceedings of the Northeast Business & Economics Association:
  • Consumer processing of higher-than-expected prices.

If You Can Afford a Pricing Consultant . . .

If you have $40–$200K to spend on picking your best price(s), I recommend you hire a pricing consultant and insist on that person conducting discrete-choice conjoint pricing research for you.

You can find pricing consultants at PricingSociety.com (by clicking on their “Pricing Experts Directory”). Discrete-choice conjoint is the gold standard of pricing research, and one of the few methods of researching prices that produces reliable results—results you can safely use.

If you’re talking to a pricing consultant who recommends research where you ask consumers the maximum they would expect to pay and the minimum they would expect to pay for your product, drop the consultant and get a better one. Results from this (and almost all other pricing “research”) are completely unreliable in the real world. You want discrete choice research, perhaps with some other add-on research to answer sideline questions.

FYI, discrete choice research is not a do-it-yourself project. The software alone costs about $6,000, and the training to learn how to use it and analyze it would be another $3,000 or so, plus weeks and weeks of time. (Not to mention you’d need a couple of bottles of aspirin; my head hurt for weeks while I was learning it!)

Don’t Have the Cash to Invest?

If you can’t afford to hire a consultant, you’re still in luck. Buying this book has cost you about the price of a good lunch. Using the techniques you’ll get here could result in you getting the know-how and the research you need for no additional cost. At worst, you might need to spend an additional $200–$500 in research costs.

Can you sell your product or service online or through the mail—even if that will not be your primary method of sales? If your answer is “yes” then you are in luck. Using this book and concluding with online testing (as described in Chapters 11 and 12), should result in a very profitable price for your product or service. Maybe even close to what you could get using a consultant.

If you can’t sell your product or service online or through the mail and you don’t have the money for a consultant, then this book will help you price as profitably as you can without using those tools. But, know that using a price consultant would probably make a substantial difference for you.

How Big of a Rush Are You In?

This book contains 16 chapters and has four accompanying Excel worksheets that will guide you through setting the most profitable prices you can possibly set without hiring a pricing consultant and without conducting discrete choice pricing research.

If you can, read all the chapters and do all the Worksheets in detail.

However, as someone who ran businesses as a one-person operation, I know you often have to make time decisions that are less than optimal.

At the start of each chapter, and on the worksheets, I’ve indicated where you can cut corners—if you absolutely must. I also explain what you’re risking by those shortcuts—so the choice is in your hands.

Chapter Summaries

Part 1: How to Set Prices for Maximum Profits is your introduction to profitable pricing.

• Chapter 1: Why Pricing Is the Key to Your Success will open your eyes about the profit impact of pricing decisions. Most businesspeople greatly underestimate the effect on profits of either raising or lowering prices.
• Chapter 2: Why Most Companies Stink at Pricing (and How You Can Do Better!) will show you the problems with the most common methods of setting prices. Surveys show that somewhere around 70–80 percent of all businesses use one of two pricing methods—both of which are likely to result in lower profits for you.

Part 2: How the Market Will Value Your New Product will help you determine how your customers will value your product/service.

• Chapter 3: Analyzing Your Competitors’ Prices will show you how pricing consultants analyze your competition. Buyers typically look at prices relative to comparable product prices, so you need to get inside their heads to see how they will view your offerings.
  • The Competitor Pricing Worksheet will help you do this in a systematic manner. This worksheet can be found in the book’s appendix, as well as on this book’s companion web site.
• Chapter 4: Environmental Factors That Can Affect Your Pricing will walk you through outside influences that affect what consumers are willing to pay. These influences include economic conditions, technology changes, laws, regulatory changes, and cultural changes. Their effect on your pricing might be minimal—or it might be substantial.
• Chapter 5: Pick the Positioning of Your New Product will help you find the optimal position for your pricing. What does that mean? People will make many judgments about your product/service based on the price you pick. It sends out signals to consumers. For optimal pricing you need to be in charge of the signals you’re sending! For example, pricing a new product with a low price will automatically cause consumers to worry about its quality. Do you want to be the cheap, quality-suspect brand? The high-quality brand? Or??
• Chapter 6: Analyzing Your Buyer Benefits/Drawbacks Relative to Your Competitors will help you view your offerings against your competitors by looking through their eyes. This will help you decide how much more (or how much less) than your competitors’ prices buyers will expect from you. And, if the expectation is unfavorable, how to change it!
  • The Buyer Benefits Worksheet will help you do this in a systematic manner. This worksheet can be found in the book’s appendix, as well as on this book’s companion web site.
• Chapter 7: Picking a “Ballpark” for Your Best Price will start narrowing down your price choices. This starting point will already be better than most of your competitors, based as it will be upon the content already covered—competitor prices, value differences between your product/service and theirs, your product positioning, and current environmental factors. Once you have this range, the remainder of the book will help you narrow it to your most profitable price.
  • The Narrowing Your Price Range Worksheet will help you do this in a systematic manner. This worksheet can be found in the book’s appendix, as well as on this book’s companion web site.

Part 3: Your Cost Analysis will help you determine your costs.

• Chapter 8: Evaluating Your Costs—a “reality check”—will help you look at your costs to get a floor for your pricing. It will help you calculate your total costs—including fixed and variable costs—and evaluate what your profits would be giving the price range you selected in Chapter 7.
  • The Cost Analysis Worksheet will help you do this in a systematic manner. This worksheet can be found in the book’s appendix, as well as on this book’s companion web site.

Part 4: Fine-Tuning Your Price will help you insure your price will be optimal for profits.

• Chapter 9: Is Your Profit Potential Acceptable? helps you save the day if your target price won’t deliver enough profits. After looking at the price range you developed and your costs, many businesses will find the profit potential isn’t there or isn’t enough. Or you may just be hoping for more. This chapter gives you multiple options to add profits to your offering. Note: This chapter alone pays you back for this book. Why settle for less profit?
• Chapter 10: Psychological Adjustments to Your Price shows you how to make tiny adjustments (pennies or a dollar or two) to your prices that can result in large increases in units sold.

Part 5: Testing Your Prices will help you test your prices.

• Chapter 11: Testing Prices will show you why you need to test prices and help you evaluate the best methods of testing for your product or service. It will show you the difference between research and testing, and help you pick the cheapest, reliable method for testing.
• Chapter 12: Using Google to Test for Free (or Almost Free) will give you the specifics you need to set up an AdWords test or a Google Optimizer test. It will walk you through the steps needed to set up an A/B split test (where you test two or three different prices for exactly the same product). It will also show you how you can combine price tests with headline and other tests—to get the maximum amount of feedback in the shortest period of time.

Part 6: Pricing in Special Situations will provide additional pricing help for specific pricing situations.

• Chapter 13: Pricing Services provides additional help when you’re pricing a service instead of a product. Pricing services carries a number of differences and complications we typically don’t see in pricing products.
• Chapter 14: Pricing New Products/Services, Part 1: When Your Brand Is Unknown gives you insights from all the pricing research focused on brands unknown to consumers.
• Chapter 15: Pricing New Products/Services, Part 2: Competing with Established Brands looks at research that shows how much of a price premium established brands can possess, and at the various different price positions that will give you the maximum profit opportunities when you compete against known brands.
• Chapter 16: Pricing with Discounts provides you with the latest research on what works best and what doesn’t in discounting. It also points out where research has uncovered dangers in discounting to future profits. The chapter concludes with some final thoughts on taking this new expertise with you, with confidence, into future pricing situations. While you probably bought this book for a one-time problem, it will help you for the rest of your career! It can be the framework of how you approach each new pricing situation—to earn the most for yourself and your company.