We’ve reached the last installment in my blog reflections on my MBA classes at Boston College. I have been floored with the reaction (about 600 views as of my writing) and hope that they have provided some value. In addition to the rundown of my classes, I will also include some closing thoughts at the end. If you missed my earlier posts you can find parts one, two, three, four, and five here on my blog.
Second Year: Second Semester
Pricing Policy and Strategy
Another go round with marketing guru Jerry Smith, this class was condensed into three weekends over the course of half of a semester. Similar to his Brand Management class, we walked out with tons of new tools and frameworks to help do pricing. The most poignant take-aways, however, where more thematic:
- It’s not about the feature, it’s about the value of the benefit it enables- We tend to want to charge more for something because it is packed with more features, but do the features add value? Are they the right features? Instead we want to price based on the quantifiable and explainable value of the benefits certain features provide.
- Pricing is a conversation with your customers- Rather than telling your customers what they should pay, or having them tell you what they are willing to pay, the best pricing results from a conversation with customers about what benefits they value and what formulas accurately represent the value of these benefits. Once you have done this, you can strategically construct your pricing having already secured customer buy-in.
- It’s all about setting the right frame of reference- You have to communicate to your customers how they should think about your product because the sphere in which they place your product will determine what they are willing to pay. If you let your customers or worse your competitors determine the frame of reference, you will have to adapt your pricing (and profits) to a different (and generally lower) point.
- Never unitize a fixed cost- Without getting into cost accounting here suffice it to say some costs (fixed costs), like rent, must be paid as a whole regardless of how much or little you do with them, while others (variable costs), like pieces of material, are incremental and directly correlate to the amount of units you produce. To explain all costs, accountants like to spread out the fixed costs across all the units but this is misleading and can lead to poor pricing decisions because it implies linear cost changes where there are none. (I’ve already written more than expected and hardly succeeded in clarifying-if you want to understand further, leave a comment and I’ll reply in detail).