Setting prices have always been a breeze for us ever sinc we started the business.  I never could recall us working on executive committee meetings and discussing how we set prices.  For most items, we had a standard cost plus some markup which was set by people not even in the managerial level.  Most of the time, if mention were made on prices, it was generally on feedback that either some models were hitting end of life ( new models coming out) or our competitors were aggressively pricing certain products, and in response we would approve some markdowns.

However, as we expanded the business especially unto retail, we have started to understand more about pricing as a competitive strategy, and I found myself recounting a favorite comics strip I saw about 25 years ago during my high school day which I believe highlighted much of what price setting is all about.

The main character in the strip had just procured a lot of great artwork for $25, and he proceeded to display his wares at the marketplace and selling it for $35 apiece.  After a few days he was hardly moving the merchandise, and in desperation, he decided to try a different tack.  He put the price up to $80, and then scratch it out, and marked it down to $55.  After doing so, the artwork started selling briskly.  He not only increased his profit per piece, but he was able to sell them much faster!

Here is another piece which talks about how to set prices using a new breed of price optimization software, but generally, I would like to recount also their  example on price setting.

The store was selling three different power drills:  an entry level one for $90, a mid range one for $120, and a top tier one at $130.  The price conscious people went a lot for the $90 model, while the customers who wanted the best got the $130 one.  The $120 one was hardly moving.

After much debate, they decided that the middle drill be sliced down to $110.

By pricing the mid range at $110, they were concerned that it made the top drill seem more expensive, but it was not affected.  The drill aficionados were fine shelling out $130 and continued to get the top model.   However, by pric ing down the mid range, it did made the entry level drill seemed less of a bargain, and more and more people were fine putting out an extra $20 for the slightly better model.  As a result, the store purportedly sold 4 percent fewer entry level drills, but 11 percent more of the mid-range, and thus profits overall rose.

Is price setting an art or a science?  The article recommended buying price optimization software to maximize that. Of course, we all know that when you buy airline tickets and/or hotel nights, you are endlessly bombarded and seduced by variable pricing optimization software that seemingly crank out bargains and changes every minute.  But maybe we always thought it did not apply to our business, but maybe it does.  In almost all industries, effective pricing strategies is certainly turning out to be one of the most important competitive weapons a business should wield!   Maybe if you have not, high level meetings should more frequently discuss and review with how you price your products and services.

Related Posts:

- Profits Straight to the Bottom Line 

-If Somebody Bargains … 

- Necessity never Made a Good Bargain     

I got this cool quote from an ad of a local japanese restaurant Mizu, which had its Japanese chef Ken Imamura prominently announcing:

“I create original, delicate Japanese dishes, Because I Ken.”

This is an interesting insight…  Sometimes, we see so many women in dept stores that we tend to think otherwise, but according to this article, women still earn only 77% of what men got, though this is an improvement over 1985 when women on average earned only 65% of what men get.

Yes, they spend more on clothes and personal care, but men tend to spend much more on other things.

Lay Off, Suze Orman! | TIME

                                 Men Women
Car ownership            $2,000 $1,154
Eating out                  1,847   1,095
Entertainment             1,459  1,075
Clothes and related       823   1,069
Audio and visual           632     489
Personal-care products  196     458
Alcoholic beverages      501     221
Tobacco and smoking    266    137

Source: Bureau of Labor Statistics