Interview with Rafi Mohammed, PricingforProfit.com

Half a year ago, we did a review of Rafi Mohammed’s “The Art of Pricing”. Recently, Rafi dropped us a note about his new project, PricingforProfit.com and we took the opportunity to interview him on his thoughts about his book, “The Art of Pricing”, his views on pricing and his future plans. If you are an entrepreneur interested in learn about Rafi’s insights on pricing, this is an interview which you should not miss.

Introduction to PricingforProfit.com (by Rafi Mohamed)

PricingforProfit.com is the first (and only) web site dedicated to helping businesses create a comprehensive pricing strategy for their products and services. The site is comprised of three key content areas. The first, Pricing Explained, reveals that pricing for profits and growth is as simple as understanding 2 concepts and implementing 3 strategies. These concepts and strategies are discussed in detail. The next section, Pricing Tool, provides an interactive Value Decoder pricing calculator to help visitors start finding the right price for their products. Finally, a Blog section discusses specific pricing issues and keeps readers informed of the latest pricing developments. Readers are encouraged to send questions about their own pricing challenges. The site’s content is primarily based on the ideas in Rafi Mohammed’s book, The Art of Pricing. PricingForProfit.com aims to be the Internet hub for pricing strategy.

SGE: Tell us about your background. What are you currently doing?
Rafi: I’ve been working on pricing issues for the last 17 years. I have an economics Ph.D. from Cornell University. At Cornell, my coursework focused on pricing issues and I wrote my dissertation on pricing/bundling strategies. Bundling is one of the most popular yet least understood pricing strategies. I developed a new theoretical bundling model and presented the first empirical test of the profitability of bundling using data from the rock concert industry. My dissertation was published in the Rand Journal of Economics, a leading academic economics journal.

I’ve worked on pricing issues at the Federal Communications Commission during the telecommunications deregulation and as a consultant at Monitor Group and Simon-Kucher Partners.

Today, I continue researching pricing issues and work with companies to improve their pricing strategy.

SGE: What prompted you to write the book The Art of Pricing?
Rafi: I believe that pricing, a key task for any business, is a real “dark horse” strategy for most companies. What I find so perplexing is that businesses work so hard to create a product or service that consumers will purchase. But when it comes time to profit from the value they create, most companies don’t give their pricing strategy the time and effort it deserves. As a result of poor pricing, most companies have what I call “hidden profits.” The good news is that once companies sharpen their pricing skills, these hidden profits can be uncovered almost instantaneously.

The reason why companies tend to drop the ball on pricing is because they haven’t had solid guidance on setting prices. The handful of pricing books on the market focus on the theory of pricing. My book is the first “how to” pricing book for managers to create a comprehensive pricing strategy for their products and services. It incorporates the latest academic thinking on pricing but focuses on making these theories managerially relevant.

What’s been most gratifying about the whole book experience is the feedback I’ve received from readers. People have really benefited from the pricing techniques I outlined in the book. Business people take a lot of risk to bring their products and services to market – 80 hour work weeks, professional risks, investing capital, low wages, etc. I believe that if their entrepreneurial efforts are successful, they and their families are entitled to profit.

SGE: What are the important lessons on pricing do you want readers to draw from your book?
Rafi: Most importantly, businesses need to understand that prices should be set to capture the value that customers place on their products. All too many managers set prices by simply marking up their costs. In deciding how much to pay for a product or service, few of us ever think “the most I’m willing to pay is double what it cost to manufacture it.”

I have a story in the book about street vendors in Washington DC. Whenever it looks like it is going to rain, these savvy vendors double the price of their umbrellas. This simple story illustrates the key point about pricing…it’s all about value, not cost.

Next, it’s important to understand that viewing pricing as a search for your product’s “perfect price” guarantees that your product will have hidden profits. The reason is that for any product or service, different customers will have different valuations. Some customers are willing to pay more than others. Thus, no matter what “perfect price” is set, some customers would have paid more while others would have purchased had the price been lower.

This anomaly, different customers are willing to pay different prices, is what makes pricing a genuine strategy. The goal of a comprehensive pricing strategy is to use different tactics to profit from this simple fact that different customers have different valuations for a product or service. In the book, I detail the key strategies (differential pricing, versioning, and segment based pricing) that empower a company to price for profits and growth.