Pricing Determines Profit
During season two, pricing was an issue in more than one episode. It is an important component to business; one that can lead a business to riches or sink a business to bankruptcy. Pricing must be considered for every product or service sold.
The task in episode five of the second season consisted of working with QVC, an electronic retailer that does over 4 billion dollars a year in sales. The teams picked a product, set the price, and sold their product on live TV. The women of Apex chose to sell the It Works! Cleaning Blocks, a set of sponge-shaped supplies that removed stains from walls, cabinets and other surfaces. Initially, Stacy R. was placed in charge of setting the price by Pamela, the Project Manager. However, Pamela and Stacy clashed over the price and Pamela decided to price the product herself at $27.23, a price that was greater than Stacy’s suggested $19.99
The men of Mosaic chose the DeLonghi Panini grill. They were also seen in intense discussions regarding the price. Kelly wanted to price the grill just over $71.00 to maximize profits while Raj felt that going over $70.00 created a psychological barrier for potential customers. Chris, the Project Manager, followed Kelly’s suggestion and priced the grill at $71.25.
In the end, Apex sold 659 sets of cleaning blocks at $27.23 for a total of $17,944.57. Mosaic sold 252 grills at $17.25 each for a total of $17,955. Mosaic won by a mere $10.43, sending the women of Apex to the boardroom.
In the boardroom, Jennifer M. voiced that the team lost because Pamela set the price too high. Pamela said she thought she set the price too low, something that both Trump and Carolyn completely disagreed with. The remaining members of the team also thought the price was set too high. They believed that a lower price, such as the $19.99 suggested by Stacy would have resulted in many more sales and therefore more profit. It is the same pricing philosophy of Wal-Mart. You make profit on volume, not price with this kind of product. Cleaning blocks are not a product that offers prestige or something of exceptionally high quality. They are a disposable cleaning product, and should have been priced as such. Privately, when asked, Carolyn said that the team lost because of the price, and that was decided solely by Pamela. When Trump called Pamela, Stacy R. and Maria back into the boardroom, he said he totally disagreed with Pamela’s choices during the task and as she was pleading her case, Trump said, “Pamela, you’re fired.”
Unfortunately for the men of Mosaic, they did not learn from Apex’s pricing mistake. During the very next episode, week six, pricing was an issue. The teams met at Trump Model Management and were given their task. Each team was to pick an emerging designer and work with him or her to create new fashions. The teams would debut their lines at the Avon Fall Fashion Show, and the team with the highest sales would win.
The men were clearly out of their element with this task, and the follies that followed were humorous enough to make Carolyn laugh so hard that tears filled her eyes. John was Mosaic’s Project Manager and he delegated the pricing of the items to Kevin and Wes. Kelly was heard in an interview stating that John should have had more control over the most important issues, like pricing. Kevin and Wes determined pricing by doubling the numbers that their designer, Ilse, had given them. They were confident in their final prices and Kevin stated, “We felt we were in the range.”
After the show, Carolyn announced that the men of Mosaic sold $7,735 worth of merchandise. George said the women of Apex did much better with $22,060. Trump called the victory a “big beating” and said the men simply priced their line to high.
Before meeting trump in the boardroom, John talked with Raj and Chris about who he should bring into the boardroom. The consensus was that pricing was the critical flaw and that Kevin and Wes were responsible. However, John worried that he might not fare well with two strong people like Kevin and Wes, so he decided to bring Andy back with him, thinking he was a weaker player and that he didn’t really do anything on the task anyway.
John opened in the boardroom by telling Trump that the critical error was pricing and that Kevin and Wes were responsible for the prices. After much pointing fingers, John picked Kevin and Andy to join him back in the boardroom where one of the three would get fired. After Trump discussed the three with George and Carolyn, he brought the three men back into the boardroom and asked John why he did not bring Wes in as well, if pricing was the critical error. John could not answer. Trump said that Kevin did make a big mistake in pricing, but John made the mistake of not bringing Wes back into the boardroom. But worse of all, John, as Project Manager, had no involvement in the pricing of the clothing line. Trump called that decision “inexcusable” and fired John.
During episode thirteen of season two, pricing again was an issue. The teams were tasked to sell the brand new candy bar from M&M/Mars, the M-AZING Bar. After actually helping make the bars they would sell, the teams hit the streets with those bars that passed the strict M&M/Mars quality standards. With the winning team being the team that brought in the most profit, it should have been obvious that winning the task would not be decided solely on how many M-AZING Bars were sold, but also at what price each bar brought in.
Mosaic, which consisted of Jennifer M. and Sandy, produced and sold 290 bars, while Ivana, Kevin, and Kelly of Apex produced and sold 323 bars. If the task would have been to see which team could produce and sell the most candy bars, Apex would have been the winner. However, the task was to make the most profit, thus pricing became the important factor. Sandy and Jennifer M. of Mosaic, priced their bars at $5.00 each and were able to sell them. Apex on the other hand started out with a pricing strategy of $2.00 a piece and were giving two for $3.00. Kevin, after having trouble selling the bars, dropped the price of the bars he was selling to $1.00 each. Ivana, who was Project Manager, was not pleased with Kevin’s decision to lower the price of each bar. She said that Kevin told her that he was going to sell the bars for whatever price he could get, a decision that was not approved by her.
Even after Ivana resorted to dropping her skirt to gain a price of $20.00 for several candy bars, Apex’s 323 bars sold for a profit of %560.75. Mosaic’s 290 bars netted a profit of $1,023.11 for Sandy and Jennifer M. Pricing was the determining factor. In the boardroom, Trump told Apex that they set their price too low. Trump was especially displeased with Kevin lowering the price as he did. He told him near the end that he hated that he priced the candy so low. Fortunately for Kevin, Trump was more displeased with Ivana’s stripping and losing record, and she was fired. If the situation would have been a bit different, Kevin could have easily gone home after his pricing mistake. When you have a limited resource, you can and should price higher. Low margin selling only works for discounters, such as Wal-Mart, when they have tremendous volume. The strategy works for products such as the cleaning blocks from episode five, where they did have the volume. Trump is obviously not a discounter. He prefers things of high quality, low volume, and high price. But at the same time, prices must be in an acceptable range for the market. Episode six’s lesson illustrated that the men priced out of the acceptable range for the merchandise they were selling. These three episodes reinforce that pricing is an extremely important element to sales. Pricing too high, or too low can be a critical mistake. The remainder of this chapter will look at general pricing considerations.
Jack Trout, in The Power of Simplicity, reminds us that Pubilius Syrus, a Roman writer from the first century, B.C., understood the essence of pricing and relayed it in eleven words, “A thing is worth whatever the buyer will pay for it.” Rather than bore the reader with marginal cost and marginal revenue concepts for optimal profit, or mathematical foundations and relationships of price, cost and profit, Trout offers some practical pricing considerations that have been proven over and over in the marketplace, and we will look at a couple of them here.
Stay in the Ballpark
Pricing is generally understood by the market. There is a certain range, or ballpark figure, that is accepted. This range is what the buyer will pay. If your price is not in this range, or in other words, “out of the ballpark,” you run the risk of your customers thinking something is wrong with your product because it is not priced high enough, or that they are paying too much for your product if it is priced higher than the established range. Therefore, you must price within the accepted range for each product. Obviously, if you can add additional value to the product or service you are selling, you may be able to come in at the high end of the range, or even surpass it because of the real or perceived additional value. And do not forget that you can experiment with higher prices to increase profits. You can always cut them back if you find you are edging out of the ballpark.
People Will Pay a Little More for Perceived Value
As long as you are still in the ballpark, customers will pay additional sums if they feel they are getting their money’s worth. They will not pay a lot more, but they will pay more. An example of this is between store brands and national brands in the supermarket. Consumers pay a little more for the “real” brand. Pricier box seats are purchased when customers feel they are getting more for their money.
High-quality Products Should Be More Expensive
People expect to pay more for a Porche than a Volkswagon, and they also expect the Porche to be of high-quality and to outperform the lesser priced car. When a product is of higher quality, you can price it higher. Not only is it worth it, it is expected. The quality should be apparent and visible. After a quick inspection, most people can determine the difference in quality between products. Brioni suits are often considered the benchmark of Italian tailoring and ready-to-wear suits run from $3,600 to $5,500, and the custom-tailored from $4,000 to $24,000. These suits are favored by power players, and close inspection of one of Trump’s Brioni suits compared to a suit in the $100-$200 range will reveal many differences in quality. The comfort, fit, and look of the higher quality suits are recognizable, and thus Brioni can sell suits at the much higher price.
High-Priced Products Should Offer Prestige
What image arises when you hear the names Mercedes-Benz, Ferrari, and
Lamborghini? Compare that image to
the image that arises when you hear Honda,
A Simple Summation
Trout sums up his advice on pricing with a very simple formula. “A thing is worth whatever the buyer will pay for it and your competition will let you charge.” While this seems simple, and in essence is, the actual implementation of setting the prices that will maximize sales and profits can be extremely difficult.
Remember, customers do not buy a product, they buy satisfaction of a want. Customers buy value. When selling a product, you must ask the question, “what is the value to the customer?” Value does not always equate to price. Price is not a simple concept, as we have already seen. You must look at the value concepts that help determine price. The high price itself may help determine value as in the prestige items above or expensive perfumes, furs, or clothes.
We saw that
pricing is a critical element to business, and we looked at a few of the many
pricing considerations the successful business person must consider.
Study your market, your customer, and your product and price accordingly.