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 servic...