The book “Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services” has been available for twelve months now.
To celebrate the first anniversary of publication, over the coming weeks, Chapter 2 of the book will be serialized, revealing nine myths that surround pricing. In this blog post, you can read about Pricing Myth Number 7, Number 8 and Number 9…
Myth #7: But the pricing model worked in the spreadsheet…
All pricing models work in a spreadsheet. You put the price in Cell B3, the volumes you’re going to sell in Cell C3, and the resulting revenue outcome (B3 x C3) magically appears in Cell D3. And the bigger the number in Cell D3, the more excited people get.
There are two simple things to remember about spreadsheet modeling:
- The assumptions in the model are more important than the calculations.
- The customer is the single point of failure, and they may not behave in accordance with your spreadsheet formulas.
Myth #8: The natural frenemy of pricing is procurement
“Frenemy” is a portmanteau: procurement can be both a “friend” and an “enemy” of pricing. Procurement or purchasing departments are often recognized as the natural enemy of pricing. There is no doubt that they can be a force to be feared, but only for the unprepared.
More companies have procurement departments than pricing departments. It shouldn’t be too hard to find a procurement professional who will share with you the strategies they employs to extract lower prices out of suppliers. Armed with this knowledge, you can work out how you’re going to counteract those strategies, and ensure you get the best possible price for your product or service.
Myth #9: Cost-plus pricing is financially prudent and responsible
A client once told me that it was financially prudent to use cost-plus pricing, and that any other approach to pricing would be financially irresponsible. He argued you must cover your costs (which is true) and that customers have to (and will) buy products priced on a cost-plus basis (which is false).
While cost-plus pricing is formulaic to apply and simple to explain to customers, it has countless disadvantages:
- It ignores demand, which in some cases can be treated as a proxy for customer value.
- The costs allocated to a particular product, and/or the cost-plus pricing formula itself, may be flawed (try asking an accountant if he know exactly how much of all costs can be attributed to a product).
- You run the risk of over-pricing in weak markets and underpricing in strong markets.
- You end up managing historical expenses rather than future prices and profits.
- It implies that if your costs decline as sales volumes increase, you should drop prices.
- If levels of demand are not a proxy for value, other sources of value are also ignored by cost-plus pricing. No one selects a certain telecommunications provider or buys a strong, skinny, extra-frothy, caramel drizzle, extra-hot cappuccino from a café because of a business’s cost basis. They purchase those products because of the value they provide – the network’s coverage or the barista’s ability to make such a ridiculous coffee.
Cost-plus pricing is also the starting point for our journey around a range of different pricing methodologies, discussed in Chapter 3.
We hope you’ve enjoyed reading about the myths of pricing, taken from the book “Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services” is available from the following retailers:
