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Pricing strategy targets 'hidden' profits

The Art of Pricing: How to Find the Hidden Profits to Grow Your Business
Rafi Mohammed
Crown Business 240 pages, $24.95

Value, like beauty, is in the eye of the beholder, pricing and strategy expert Rafi Mohammed says.

''Understanding that different customers place different values on the same product or service is the most important concept in pricing," Mohammed writes.''It's not finding a single perfect price number, it's about creating a series of strategies designed to capture the value each customer sets for your product or service. These strategies will uncover your product's hidden profits."

To illustrate his point, the author refers to a December 2002 auction hosted by Sotheby's to benefit Book Aid International. The item that attracted the most action was a ''teaser" index card donated by ''Harry Potter" series creator J.K. Rowling. The card contained 93 words that supposedly were clues to the plot of Rowling's forthcoming book, ''Harry Potter and the Order of the Phoenix."

One Harry Potter fan group collected $23,656 from its members in an effort to buy the card and then publish the words on its website. But the bidding was so fast and furious that the fan club didn't even get the opportunity to submit its bid. A collector won with a bid of $45,231, five times higher than Sotheby's preauction estimate.

The lesson from that auction and from auctions in general, Mohammed insists, is simply that some people are willing, for reasons of their own, to pay more for something than others are. Mohammed puts it this way: ''This commonplace notion is the lesson that any auction has to offer a pricing strategist. It's why some people, for example, willingly pay $278 for a serving of Tsar Imperial Beluga caviar while others would not consider eating -- let alone paying for -- this delicacy."

The flip side of the ''lessons from an auction" concept that Mohammed believes is crucial to pricing strategy is ''the law of demand." He underscores the obvious truth that high prices temper demand and low prices stimulate demand. All businesses to some extent employ that age-old pricing strategy. Retail stores, he reminds the reader, typically start prices out high at the beginning of the season and eventually drop them to make room for the next season's inventory.

But the law of demand alone is not enough, Mohammed says.

''The only way to price for profits and growth is to incorporate both the law of demand and lessons from an auction into your pricing strategy," Mohammed writes.

Using those two concepts is key to developing the kind of multiple-pricing mind-set that enables a business to profit from each customer's unique product valuation, Mohammed says. He explains that multiple-pricing strategies allow one to charge more of customers who are willing to pay more, while offering discounts to those who are not.

With that strategy, says Mohammed, you will make higher profits from those customers who value your product the most and at the same time increase your customer base by selling more to those who value it less.

This book can be a two-edged sword. Business owners and managers can use its lessons from an auction to figure out how to raise profits without raising costs. Customers, however, can also use some of its guidance to figure out how to save and still get value.

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