Hermann Simon’s Confessions of the Pricing Man, how price affects everything is probably the most important business (or marketing) book you haven’t heard of.
The author makes the argument that only profit is the valid metric to guide a company and there are only three ways to influence it; price, volume and cost. But off these, while price gets the least attention, it has the greatest impact on profits. And the book is peppered with simple mathematical examples to demonstrate the power of pricing.
Hermann Simon says, price is ‘value to customer’, the price a customer is willing to pay is therefore the price a company can achieve. It reflects the perceived value of the product or service in the customer’s eyes. And prices determine how much money you can make.
The chapter on the psychology of pricing, goes beyond the well-known Veblen effect or anchor effects to summarize other fascinating aspects of pricing and is packed with wisdom like; two of the most powerful intangible benefits consumers willingly pay for every day are convenience and peace of mind.
Most managers and companies, the author contends, chase wrong goals with priority accorded to volumes (and share) instead of profits – the only metric that takes both the revenue side and the cost side into account.
In the chapter titled Price Differentiation, Hermann Simon explains the profit potential available with price differentiation versus uniform pricing. While most managers practice it intuitively, the explanation in the book using simple geometry is truly a “penny drop” moment. The chapter is packed with a variety of price differentiation tactics; from nonlinear pricing to bundling to dynamic pricing, skimming strategy to EDLP (Every Day Low Pricing) and more.
‘Confessions of the Pricing Man’ does not offer ready-made solutions, because every business and company will have its own set of unique challenges. But this book offers valuable perspectives to tackle real-world business challenges managers grapple with. How does a 2% price increase affect profits? How do you tackle pricing actions taken by competition? Cut volume or cut price? Price wars, managing overcapacity or pricing strategy during a crisis.
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.
Read a summary here.