This is probably the most important business (or marketing) book you haven’t heard of. Hermann Simon doesn’t think much of a business that doesn’t make money. Like him, if you too are tired of the frenzy about “unicorns” that don’t make any money and want to sink your teeth into old fashioned conversations about profits, Confessions of the Pricing Man is a book you don’t want to miss.

1. BOOK SUMMARY
Confessions of the
Pricing Man
Hermann Simon

2. Never run a business in which you have no influence on the prices you
charge.

3. I don’t think much of a business that doesn’t make money.

4. Pricing is always a reflection of how people divide up value.

5. “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.”

6. The Russians have a saying, “In every market there are two kinds of fools.
One charges too much, the other charges too little.”

7. The most important aspect of pricing is “value.”
The price a customer is willing to pay, and therefore the price a company
can achieve, is always a reflection of the perceived value of the product or
service in the customer’s eyes.

8. Price and value are one and the same. Managers have three tasks. Create
Value, Communicate Value and Retain Value.

9. The quality you bought endures long after you have forgotten the price.
Better be cheated in the price than in the quality of goods.
Consumer research and behavioral studies show that we struggle to
remember prices, even for products we just purchased. But quality, good or
bad, stays with us.

10. Two of the most powerful intangible benefits we willingly pay for every day
are convenience and peace of mind.

11. “The single most important business decision in evaluating a business is
pricing power, and if you need a prayer session before raising price, then
you’ve got a terrible business.” Warren Buffett.

12. Price is likely to serve as an indicator of quality when buyers are uncertain
about a product’s underlying quality. This happens when they are
confronted with a product that is entirely new to them or one which they
rarely buy.

13. Buyers look for reference points or “anchors”. This process of anchoring
doesn’t even have to be a conscious one. As consumers and buyers we
often use price anchors subconsciously.

14. When buyers know neither the price range of a product category nor have
any special requirements (e.g., high quality, low price), they gravitate
toward a price in the middle of the range.
The less a buyer knows objectively about the quality of the products and
prices in an assortment, the stronger the pull of the “magic of the middle”
will be.

15. One of the cleverest tricks to boost sales is to create the perception of
scarcity.

16. The most important argument for the existence of odd prices is that
customers perceive the digits in a price with decreasing intensity as they
read from left to right. 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.
According to this hypothesis, customers underestimate prices which lie just
under round numbers.
My own findings show that it makes no sense to set prices at $9.90 or $9.95. If
you want to remain below a price threshold, then you should set your price
as close to the threshold as possible, which means $9.99 in this case.

17. The pain we feel from a loss is greater than the happiness we feel from a
gain, even if the magnitude of the loss and gain themselves is equal.

18. The choice of the price position affects the overall business model.

19. Michael Raynor and Mumtaz Ahmed studied more than 25,000 companies
listed in US stock exchange between 1966 and 2010 and used ROA as their
measure of success.
Their research revealed two success guidelines, which they referred to as
“better before cheaper” and “revenue before cost.”
These interesting findings imply that the share of companies which are
successful with a premium price strategy is greater than the share of
companies which have achieved sustained success with low-price
strategies.
“Very rarely is cost leadership a driver of superior profitability .”

20. The pursuit of profit is both a driver of excellent pricing and an outcome of it;
there is no way to separate the two topics.
Profit is ultimately the only valid metric for guiding your company. The
rationale is simple: profit is the only metric which takes both the revenue
side and the cost side of a business into account.

21. “Profit is a condition of survival. It is the cost of the future, the cost of staying
in business.”

22. This means that every business has only three profit drivers: price, volume,
and cost.

23. The obsessive pursuit of the wrong goals—customer counts, revenue, and
market share —leads even the sharpest managers to neglect the effects
that discounts and promotions have on profits.

24. Price is the only marketing instrument you can employ with no upfront
investment. This makes it an especially powerful marketing tool for small
business or start-ups with tight financial resources.

25. “Pricing is guesswork. It is usually assumed that marketers use scientific
methods to determine the price of their products. Nothing could be further
from the truth. In almost every case, the process of decision is one of
guesswork.” David Ogilvy

26. The rule of thumb, again, is to share the impact of the changes – whether
positive or negative – evenly with your customers.

27. An attempt to establish price advantage will not work unless customers
notice and understand it. Price signals are harder to convey clearly in a
period of high inflation.

28. One uniform price —even when set optimally—exhausts only part of the
available profit potential in the market.
Price differentiation only makes sense when one succeeds in erecting a
“fence” between the potential buyers with a higher and those with a lower
willingness to pay.

29. Techniques for price differentiation include; nonlinear pricing, price
bundling, price bundling with optional accessories, unbundling, multi-person
pricing, differentiating with location, time and nature of goods, dynamic
pricing, Hi-Lo, EDLP, advance sale prices, advance booking discounts,
penetration strategy, skimming strategy etcetera.

30. One can make a price cut only when one charged enough to begin with.

31. Innovations in pricing include; pay per use, freemium, flat rates, pre-paid
systems, customer driven pricing, pay what you want, auctions etcetera.

32. Under normal circumstances, managers tend to show a preference for a
“lower prices, constant volume” alternative, but this tendency becomes
more pronounced in a time of crisis. The effort to keep sales and capacity
utilization up, and keep people at work, takes precedence. But in a time of
crisis, that can be precisely the wrong approach.

33. The biggest challenge facing pricing in the modern world is overcapacity.
As long as this root cause remains unaddressed or unresolved, any changes
companies make are just doctoring with symptoms rather than finding
lasting cures. The path to rational, reasonable, profitable prices often
requires the elimination of excess capacity.

34. Pricing belongs on the CEO ’s desk.