The Importance of Pricing Strategy

A local article today about Brown-Forman's increased profits had the following interesting passage.

The company sold more of its top brand, Jack Daniel's, at higher prices. Brown-Forman has made Jack Daniel's more expensive so it didn't look cheap next to the super-premium brands, CEO Paul Varga said in a conference call with investors yesterday.

It will take a little more time to be certain that the higher prices were the cause for the increased sales, but it does tie in well with buyer psychology. Seth Godin also has a post on pricing where he tells an old story.

Twenty years ago, I participated in some pricing meetings on my new line of computer games. In the room were two Stanford MBAs, two Harvard MBAs and someone from Kellogg, I think. How did we decide between $24.95, $29.95 or $34.95?

We flipped a coin.

But we were scientific about it. A single elimination ladder, best of three.

I would say that in the last business I owned, it pricing was our second biggest challenge. A price can send many different messages, and you want to be sure you present the message you intended.

  • Rob there can be miles in-between what a CEO says and what really made the difference. I’d like to see some wholesale pricing, some street pricing and sales velocity during 2005. Maybe he’s on the money but still… Or maybe ask a distributor for the scoop.

    I read Godin’s post… Is “unhelpful” a word?

  • Rob

    I think Seth was just trying to point out that pricing is important and poorly understood. Granted, he doesn’t have any answers.

    And you are right about BW. For instance, the entire market could have increased and Jack Daniels sales just went up along with everything else. It’s like getting a good return on a stock portfolio in the late 90s. Who didn’t?

    But if JD sells more units and increases market share, I think that’s pretty good evidence that the price increase did what they hoped it would.

  • As long as you “know” there was a price increase that was sustained from beginning to end of the supply chain (and throughout the year without any rebates or other backdoor discounts) then sure I guess that is “pretty good evidence that the price increase did what they hoped it would.” I didn’t see the supporting data.

  • Lisa

    If pricing was your 2nd biggest challenge, what was the first?

  • Rob

    But isn’t that the dirty little secret of the business media? No one wants to read an article that goes into detail about how they knew that the price increase led to the increased sales, so the writers don’t write it. By not writing it, everyone assumes that somewhere, someone has done the work to validate that it was the cause. Even if no one has. And of course the CEO is going to take credit whether it was the cause or not. So what you end up with is lots of “facts” and ideas floating around in the business media that may or may not be true, but no one anywhere along the line has verified them. It’s like the Underpants Gnomes again.

    Hiring good people. We interviewed a lot of people to find just a few good ones. It was a huge chunk of my time, but I think it’s worth it to get the right people on board.

  • Yeah I was thinking of your post below on “then a miracle occurs.” That’s a classic.

  • Jason

    I’d highly recommend reading Tim Harford’s “Undercover Economist” – the article on pricing strategies that companies employ, and the economic rationale behind it, is enlightening.

  • Gooberman

    Whether you agree with him or not, you must admit that DSabAQyYUO has a lot of sources.