Is There a Next Best Alternative?

On this episode of Christopher Lochhead: Follow Your Different, we talk about Pricing, and how it can be a Superpower. Our guest, Dr. Rafi Mohammed explains how pricing strategy is one of the most underused power levers in business, and why you should start using it.

Dr. Rafi Mohammed has written over 90 articles on innovative pricing strategies for Harvard Business Review over the years. He is the author of The 1% Windfall: how successful companies use price to profit and grow and the art of pricing. Also, he has got a brand new HBR article out called Expand Your Pricing Paradigm.

When the smartest people in business want to work strategically on pricing, they go to Dr. Rafi Mohammed. So this may well be a very, very valuable episode that could be a demarcation point for you personally and your business.

Pricing is about Capturing Value

This dialogue could not come at a more timely manner for Christopher, as there have been multiple questions and discussions with him with CEOs who are asking very deep questions about pricing. And while him suggesting to double the price was being outrageous, Dr. Rafi agreed to his point that Price should be a function of value.

To calculate their profits, many businesses, in Dr. Rafi’s opinion, erroneously use the formula “cost times a certain percentage,” which he claims is fundamentally flawed. For Dr. Rafi, Pricing is all about capturing the value of the product or service. He gives a story about it to illustrate the point:

“A little example I have of that, that sort of illustrates a story is street vendors in the middle of Central Park. The minute that it looks like it’s gonna rain, many street vendors double the price of their umbrellas. But think about that: the doubling of price has three important thing components of pricing. First of all, it shows that price really doesn’t have a correlation with cost. The second point is price is all about what is the customer’s next best alternative. So if I’m in the middle of Central Park, I can hightail it to a local CVS six or seven blocks away, then get right on to buy an umbrella. Or I can have the convenience of it right now. And the third and most important point of that very simple story is pricing is all about thinking like a customer, how’s your customer thinking?”

– Dr. Rafi Mohammed

Dr. Rafi Mohammed on Highlighting the Unique Value

One of the common practices that is also observable in the tech and Silicon Valley industries is that they view their competitor’s price, and adjust accordingly if they think they are “better” or roughly competing on the same level.

The issue that Dr. Rafi sees in this is that most companies only have a vague idea of the “advantages” that their companies have over their peers. Most do not pinpoint what makes their products or services “unique” from the rest, hence they have problems capturing and justifying the correct value for their product or services. This lack of definition also makes the market more spread out, as consumers have a harder time figuring out which one is the better alternative from each other.

Highlighting the “uniqueness” or in some cases, the “premium” qualities of a certain business also helps consumers figure out if they’re getting a decent price for it, or just paying too much for a small added convenience.

“Here’s also the beauty of pricing. Even if you’re not as good as is the next best alternative pricing come in to save the day? And you can sort of look at customers other eyes, they look, I get that don’t have all the bells and whistles of this of this alternative that you’re looking at. But is it really worth the 40% premium that they’re charging over what I am? And I often tell people that if consumers always want the best, we’d all be driving Rolls Royces.”

– Dr. Rafi Mohammed

The Value of Category Design in Pricing

Christopher then addresses the elephant in the room, which is how category design can affect the value and eventually the pricing of a product or service.

Dr. Rafi explains that his point before still stands, which is how radically different this new category is to its next best alternative. It’s important to communicate with the consumer that they need it because it’s radically different, rather than this is different, therefore you want it even though It pretty much functions the same.

“[An example would be] going from cell phone to smartphone. I could look you in the eye and say, “Look, we have all these different features. You can use apps in the internet, and you can start to put numbers to that.” And so, I think you’ve even in it in a new category, you can base a price off of what the customers alternative would have been, which is an older category plus the extra work they’d have to do.”

– Dr. Rafi Mohammed

To hear more from Dr. Rafi Mohammed and how Pricing can be a Superpower, download and listen to this episode.

Bio

Dr. Rafi Mohammed has been working on pricing issues for over 25 years.

He is the founder of Culture of Profit, a Cambridge, Massachusetts-based company that consults with businesses to help develop and improve their pricing strategies. He also holds the title of Batten Fellow at the University of Virginia’s Darden Graduate School of Business.

Rafi is the author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow (Harper Business), which provides a blueprint for managers to create a comprehensive pricing strategy.

His first pricing strategy book, The Art of Pricing (originally published by Crown Business), has been translated into seven foreign languages.

Rafi has written 90 articles on innovative pricing strategies for the Harvard Business Review. He has a feature article published in the September/October 2018 HBR magazine titled “The Good-Better-Best Approach to Pricing.”

Rafi is a frequent commentator and contributor on pricing strategy issues to the media including Bloomberg Business Television, CNBC, Fox Business News, Today Show, National Public Radio, New York Times, Wall Street Journal, and BusinessWeek.

Rafi’s research has focused on bundling, one of the most popular yet least understood pricing tactics.

This research was published in the Rand Journal of Economics. Rafi has also worked on pricing issues at the FCC during the telecommunications deregulation, National Economic Research Associates (NERA), and Monitor Group.

Rafi was born in Milwaukee and raised in Cincinnati.

He is an economics graduate of Boston University, the London School of Economics & Political Science, and Cornell University (Ph.D.).

Rafi is an avid Bruce Springsteen fan.

Links

Follow Dr. Rafi Mohammed’s works!

Pricing for Profit | Twitter | LinkedIn

HBR Article: Expand Your Pricing Paradigm

The Art of Pricing

We hope you enjoyed this episode of Christopher Lochhead: Follow Your Different™! Christopher loves hearing from his listeners. Feel free to email him, connect on Facebook, Twitter, Instagram, and subscribe on iTunes!