The 1% Windfall Book Summary

Book Summary

15 min

Audio available

Brief Summary

A robust, value-based pricing strategy should an integral part of your corporate culture if you want to maximize profit.

Cost-plus pricing is an outdated method that can leave profits on the table. Think about the value to your customer by comparing your product to alternatives to set a price. Adjust your price up or down to maximize total profits by targeting a price that balances quantity sold with profit margins. Plan for challenging situations like a recession and offer alternatives to that accommodate resistant customers. Creative pricing strategies can lead to greater profitability.

About the Author

Rafi Mohammed is a pricing expert with more than 25 years of experience in pricing issues.

Originally from Milwaukee, Mohammed was raised in Cincinnati. He received degrees from Boston University and the London School of Economics and Political Science before receiving his Ph.D. from Cornell University. He is the Batten Fellow at the Darden Graduate School of Business and the University of Virginia.

Mohammed’s commentary has been featured on several media outlets, including the Harvard Business Review, National Public Radio, the Wall Street Journal, and The New York Times.

He founded a consulting company called Culture of Profit. Through that organization, Mohammed works with businesses on their pricing strategies.

Topics

Entrepreneurship

The 1% Windfall Book Summary Preview

Key Insights

If you’re not thinking about how to price strategically, your company is probably missing out on profit.

The standard advice for pricing is based on adding a profit margin to what it cost you. This cost-based pricing strategy is problematic because what you’re selling is about more than what it cost you.

Your price should be based on the value it brings to your customers. What they’re willing to pay is not based on what it cost you. Value-based pricing strategies can help you plan for different situations, and keep the profits rolling.

The 1% Windfall refers to a study from McKinsey & Company that found that imposing a 1% increase in prices can create an 11% increase in operating profits. Thinking about your prices creatively for all situations can lead to a big payout.

If you just need to think about one customer, price relative to their alternatives.

A value-based pricing strategy for one customer or one product prices according to the target customer. Specifically, you need to price relative to the next-best alternative for your customer.

This is a one-on-one pricing calculation. You identify who you want to sell to. Then, you identify what the alternative is priced at. Use your best judgment to adjust your price above or below that price.

For example, if you have a home to rent, you can compare it to the nearest neighbor also renting out their home. If your home is a little better, bigger, or has an extra feature, you can adjust upward. If the neighbor’s home has the upper hand, you can adjust downward.

Of course, you should try to get a sense of the market. Make sure you’re not tethering yourself to an outlier. Think through the comparison to the next-best alternative.

By looking at what is selling and what it’s selling for, you can introduce your product with a pricing strategy that fits the market.

If you have a broader customer base, maximize profits by finding the ideal balance between demand and margin.

A one-on-one pricing strategy may be ideal for introducing a product to a single customer or a small number of customers. But a multi-customer value-based pricing strategy is a little different.

Let’s say you produce large quantities of your goods and there’s more variability in your target customer base. Start with a general idea of the right price using the one-on-one pricing strategy you would have used for a single customer.

Then, you need to estimate how many units you can sell at that price. Your profit margin per unit multiplied by the quantity sold will be your total profit.

But that estimated price based on a single customer may not maximize your profits. When you take a small dip in profit per unit, you could sell a lot more units. The total profit may end up being higher even if the profit per unit is lower.

On the flip side, you could have a higher price with a greater profit for every unit you sell. This means that you’ll likely have fewer units sold. Your total profit...