I am currently reading an absolutely brilliant book about pricing.  I can’t recommend it enough:  Hermann Simon: Confessions of a pricing man.

Until you have a chance to read it yourself, let me share with you a few quick thoughts:

Mr. Simon invites us to think about the situation of a buyer and seller at a bazar (where no posted prices exist and bargaining is the norm.)  The job of the seller is to find ways to estimate the willingness to pay of the buyer and place the quoted price just under this mark.  The chat as you begin your conversation is entirely designed to get information that will allow him/her to estimate your top price.  Between observations (key fob, shoe and clothes brands, etc.) and questions (where do you live, what is your job)…it is all designed to develop an estimate of your willingness to pay.  (Did you know that statistically mac computer users willingness to pay is 24% higher than those who use a pc?)

With this example we are asked to think about the relative nature of a person’s willingness to pay.  In the case of a wine related purchase we could imagine fluctuations based upon factors like: who is in the group, what time of day it is, what is the occasion, what other choices for purchase exist, the perceived brand value of the wine and the location, what payment method is requested, is it a gift, is it for cellaring, how warm it is, and many many more…

To realise our profit maximising price we should provide those factors that increase a customer’s willingness to pay (when we know what they are).  This is, according to Simon, not something that should be left to “gut feeling”.  “The reason one needs so much information is that one must understand the willingness to pay as narrowly as possible”.  With this increase of information we can refine our marketing segments and develop high value products that create opportunities for delightful customer experiences and maximum profitability.  As long as the price paid is less than the willingness to pay (I would have paid more) our customers feel good about the value received and our business as a provider of goods.

Win-Win achieved!