The book Confessions of the Pricing Man written by Hermann Simon is an interesting take on Pricing. An academician and consultant by profession he is also the founder of Simon Kutcher and sons. In his decades of career, he has helped several world class multinational companies on their pricing strategies to name a few, German Railroad, Corporation, BASF, Mercedes, Porsche, TUI etc..

I liked the way the book is written with an example-oriented approach. The book mentions plethora of real-life examples which provide immense learning and understanding on how pricing under various strategies has influenced organizations positively and negatively. 

Some of my learnings from the book:  

• Market share and Profitability must be balanced. At times profitability is neglected for Market share. 
• Every Product has a value, and pricing is all about whether something is worth the money. Price is nothing but Value.  So, a lot revolves around pricing in framing the market strategies. 
• Aggressive pricing may not always lead to increase in sales and may lead to reduction in profits. 
• The learning is that low Pricing always may not be the best strategy to sustain as low pricing needs volume and scale.
• Hence pricing needs to be sustainable considering the incremental demand and positioning without compromising profits.
• The kind of industry also matters price setting. In a heavy Industry company top order may take these calls whereas for a company offering products to retail customers (FMCG, Airlines, Hotel etc..) there could be multiple local level factors influencing the prices. 

I liked the quote mentioned in the book Russians used to say: In every market there are two kinds of fools one who charges too much and the other who charges too little. Hence there must be a balance between value and money. Pricing power is critical and determines to what extent the brand can charge the premium. 

The book also quotes Warren Buffet “The single most important decision in evaluating a business is pricing. A business may not be in right state if it needs to think about raising prices”.

The book argues that Pricing managers have three tasks: 

• Create Value
• Communicate Value
• Retain Value

The quoted example of pricing for London Olympics 2012 gives an interesting insight into pricing through value communicating value.

There is always a market clearing price in a market with free demand and supply. Any regulatory intervention / barriers disrupt balance between demand and supply. Price is a powerful indicator of scarcity. If organizations understand demand curve pricing can be optimally set to scale up. 

Some Pricing strategies mentioned in the Book…

Repositioning with the Prestige effect: Brands at times reposition themselves with revised pricing to scale up sales and revenues. Well explained through the example of how Chivas Regal developed a new label with a high-end feel and raised prices thereby repositioning the new label as a premium brand. Result was significant increase in sales. 

Price may develop a perception on Quality: At times Lesser prices may be a perception of low quality and vice versa. The quoted e.g. of the Cloud company explains the situation. Lower price points didn’t attract larger clients. But product repackaging with addition of new features changed the scenario despite being still inexpensive. This creates more of a Placebo effect. 

The concept of Prestige, quality perception and placebo is well explained by eg of how Volkswagen couldn’t make a mark in Luxury segment though Phaeton and how Audi took 20 years to get its positioning right. 

Magic of Middle: Well explained through the example of how different price points in a restaurant lead to customers building perceptions of wine for acceptable quality. 

The Achor effect at times is a fantastic phenomenon to generate acceptance and drive sales. Liked the example of salesperson can influence the quality perception and buying pattern of customer by showing high budget products despite knowing the budget. 

Creating Scarcity: A clever trick to drive sales by restricting quantity per buyer. 

Prospect Theory: The negative utility of giving up something we already own is significantly greater than the positive utility we get from something we need to first buy. Simon quotes his own example when he was asked to move from Business to economy class with a small refund due to over booking of flight. An initial No from him led to increase in refund amount to 1500 Euro’s to which he agreed. This may not always hold true as he quotes something similar where refund was exactly equal to the difference between Economy and Business class ticket price generating no value. 

Not all Low pricing strategies are wrong. Companies should take conscious decision about price position. Positioning and execution (logistics, negotiation) need to work together. Quality offered to end user makes a big impact. Focus should be on core products. Well explained through multiple examples of supermarket chain Aldi, IKEA and Ryanair

Can companies go lower than low: Depends on the segmentation of population and the affordability factor: Success in ultra-low-price segment needs reorientation and redesigning to simplify logistics and production. Key challenge is to find acceptable level of value to customer that will attract buyers and keep costs in line. Well explained through examples of Automobile and FMCG. 

Premium Pricing Strategy:  Customers will pay a premium only if they perceive and receive a high value in return. The perception of value is supported by factors like innovation, maintaining high quality, consistent communication of value, right positioning and staying away from offers. Some Examples quoted in the book:

• Apple vs Samsung: How Apple iPod became a hit compared to the MP3 player of Samsung. 
• Miele: How German consumer durable Brand Miele positions itself as a premium product by focusing on the longevity of its product. 
• Porsche: Case of Porsche Cayman is a fantastic example of communicating perceived value. 

The Book also highlights the challenges faced by Luxury brands. 

• It becomes a high-stake game in terms of getting highly trained staff, best designers, investment in communication and distribution, similar global service levels. 
• Challenges of grey market needs to be tackled for Products like watches, handbags etc. as original products enter gray markets thus eroding the value. 
• Also to avoid loss of value and reputation cashbacks and offers should be avoided even during times of weak economic scenarios. 
• Buyback schemes help companies retain high residual value. 
• Massification of brands positioned as Luxury and premium should be avoided. Above pointers are well explained through examples from various industries like Automobile, Apparels etc.

Pricing and Inflation: During times of Inflation prices need to be raised at the rate of inflation. Lower Price rise can be a loss-making strategy and can create a negative perception considering the price gap.  

Price Differentiation: Global phenomenon depending on the situation. Eg Pricing of a food item in a mall / standalone store / five star hotel may vary significantly.  Dinners are usually costlier than lunches, weekend dinners may be priced significantly higher. No differentiation may lead to loss of margins. 

Non-Linear Pricing stands out to be an interesting strategy depending on product line. Quoted eg of Beer and Movie tickets explains the case well wherein initial units are priced higher and subsequent unit prices move down. This tends to increase the consumption and may also leads to profit enhancement. 

Time based pricing is an interesting learning here. We may have seen Airlines offering discounts on last minute seats, bakeries selling items at a discount at the time of closing. While this is done to cover the costs / maximize the revenues regular offering may make the customers habitual of such discounts and may turn counterproductive. Hence implementation needs to be wise on this kind of strategy. 

Hi Lo Strategy is an interesting concept where strong brands resort to promotional pricing for limited periods. This may lead to significant sales volume jumps during promotional times. During normal times routine pricing is offered to protect the image and perception of the brand.  

Penetration Strategy: Keeping the initial prices low to set the foot and gradually raise as the brand building happens. Initial low price is a motivator for the customer to use the product and eventually translates into a domino effect once the word about experience and inherent value perception builds up. 

Price differentiation requires identifying the customers willingness to pay.

The Author also talks Innovations in Pricing like: 

Pay Per Use: Fixed pricing per usage. Innovative pricing on this concept has been implemented in wide range of industries from Tyres, paints, Insurance, Cable TV, Car rental etc. multiple examples have been quoted on this. I personally liked the example of Michellin where it charged the fleet owners per mile thus getting more value per tyre. 

Freemium: Free Basic version and payment for Premium version. Free attracts the customers and one he gets habitual to the product / service the willingness to pay goes up. Popular for online apps / softwares. 

Intelligent Surcharges: Additional charges for new features, new services, passing on cost increase or any other kind of price differentiation. Well explained through multiple examples in Airlines, Construction etc.. While surcharges are intelligent, they have backfired at times for hence it needs to be priced in cautiously.. 

Price Cut or Volume Cut: In times of crisis Price cut or volume cut to sustain profits purely depends on company and Industry. Even same industry may have different versions. Interesting example quoted of General Motors and Porsche is worth the read to get a perspective.  

To get more insights into pricing I would highly recommend reading this book. The example based explanation makes it simple to understand yet gives strong insights into what wonders pricing can play in determining the success of sales strategies..