Brandt On Leadership -- Are You A Pricing Pussycat?

Dec. 21, 2004
Toughen up with these three rules on protecting your margins.

Management lessons arrive in the strangest places. Consider, for example, the concept of the Louie DePalma Number. DePalma, in case you've forgotten, was the volatile and venal dispatcher on the television series Taxi. The predicament of the Louie DePalma number comes from an episode in which DePalma had a classic pricing problem: Given a willing but not naive customer, exactly how high a price can you charge to maximize profit -- without scaring the customer away? Of course, nothing was ever that simple for DePalma. His pricing problem arose after he loaned his apartment to drug-addled taxi driver Jim, who promptly burned it down, destroying all of DePalma's worldly possessions. Fortunately, Jim's wealthy father agrees to write a check for the entire loss -- no questions asked. All he needs, Jim tells Louie, is the number. For DePalma -- never one to let ethics get in the way -- the question of how much he actually lost never mattered. The real issue was how much he could reasonably ask for -- without scaring away his benefactor. He started at $15,000. Then reasoned that he could get $30,000. Then speculated that he could get as much as $50,000. Then worried whether a round number or an odd number would be more credible. Then feared that even $30,000 seemed too high. Meanwhile, Jim's father is on the phone, checkbook in hand. What, he wants to know, is the number? Welcome to the Louie DePalma dilemma. Every business faces this issue every day; in many ways, pricing is one of the most difficult -- and nerve-racking -- arts in business. Unfortunately, most executives are pricing pussycats and needlessly cheat their firms out of margin dollars because of: Ignorance: Many managers -- especially those with limited market experience -- mistakenly assume that price is somehow related to cost. In fact, price is determined solely by what a customer will pay -- regardless of cost. Fear: At the same time, executives at many manufacturers have given up on aggressive pricing, believing that customers will never again accept a significant price increase. This rapidly becomes a self-fulfilling prophecy, as customers begin expecting you to be their "value supplier," and your margins evaporate. Even worse, timid pricing eventually diminishes your brand from "value supplier" to "cheap," making even "bargain" sales harder. How do you overcome Pricing Ignorance and Fear? Follow three rules: Add non-product value: Manufacturers that expect to maintain pricing and margins must create customer value that extends beyond the product itself -- whether through services or product bundling or information. Highlight this added value and then charge for it -- making sure that you . . . Ask for enough the first time: I don't know about you, but I have never once been paid a dollar more than I asked for. Second chances in pricing are always lower, so you might . . . Consider asking for too much: One of my favorite pieces of advice came from a friend on the lecture circuit. He claimed that pricing was an art best summed up in the following phrase: "I like to give them a price that makes them gasp," he said, "but not hang up." Given that the urge to haggle is as old as human history itself, why not let the customer believe that he or she is the sharpest negotiator in the world by beating down your first (and highest) offer? On the other hand, you could try DePalma's approach: After agonizing debate, he settles back where he started -- at $15,000. To which Jim's father replies: "I thought it would be twice that much." What's your Louie DePalma number? John R. Brandt, formerly editor-in-chief of IndustryWeek, is CEO of the Manufacturing Performance Institute, a research and consulting firm.

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