Confessions of the Pricing Man: How Price Affects Everything

After looking at the wine list, most guests order a wine with a price in the middle of the list.

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Managers have become keenly aware that value alone does you little good unless you can communicate it successfully. That means that customers understand and appreciate what they are buying. Remember, the only fundamental driver of willingness to pay is the perceived value in the eyes of the customer.

Are there risks in doing this? Yes! If the potential buyer s with a willingness to pay $120 or more find a way to get the product at $90, our profits will look a lot worse than if we had a uniform price of $105.

If competitors really do cut their prices, then Company A suddenly has two problems. First, it will sell fewer units of the old products than originally expected, which means that it does not deplete its stocks. Second, it may have permanently destroyed the price level and may need to introduce its new version at a lower price.

The first digit in a price has the strongest influence on perception; that is, a price of $9.99 comes across as $9 plus something rather than $10.

A “ cost-plus ” mentality: In the minds of many customers, the price is closely related to the seller’s costs. In other words, consumers have a “cost-plus” mindset. They think that sellers base their prices on costs such as raw materials, manufacturing, and shipping.

For premium and luxury goods, one needs to know whether such prestige effect s exist and whether the demand curve has a part which slopes upward. If it does, the optimal price never lies in that portion of the demand curve. It always lies higher, in the part where the curve slopes downward again. This reinforces a key lesson in this book: you need

The company can offer such low prices because of its extremely high procurement volumes, its use of lower cost materials, and its “do-it-yourself” model under which customers pick up and assemble the furniture themselves.