Conversely, there are things for which we’ll pay handsomely
because its what we really want – the brand new $30,000
pickup truck in front a mobile home. If we dont examine an ad-
equate number of buying decisions that our customers make, we
open ourselves to erroneous conclusions about the value image
has to them.
2. Research companies in noncompeting industries that target the
same customer you do and have similar price points. If I were
Nordstrom, I wouldnt compare my price multiples to Mer-
cedes, as the prices are too disparate – a few hundred dollars to
a $1,000 vs. $30,000 to $90,000 for an automobile. If I made
that comparison, Id leave money on the table. Instead, I’d com-
pare my prices to Godiva and Ghirardelli chocolates or A.H.
Hirsch bourbon whiskey. The price points are much closer and
they have that top-of-the-line image presence.
3. Using the information from these noncompeting companies,
determine the price multiples they use at various price points
(assuming they offer multiple levels of image enhancement).
The results of your analysis can easily be put into a table format
like that of Table 3-7.
4. Decide which of those price points you’re going to target and
use the highest price multiple you find. This is not the time to
be modest. If your offering is superior, you should be compen-
sated more than anyone else.
5. Multiply the premium multiple in Step 4 by the price of the
bare bones, no-frills-attached offering in your industry. In
essence, you’re going to be looking at the WalMart or Aveo in
your industry. You’re going to apply your multiple to their prices
to establish your price.
Now that you now have a methodology for calculating the image value
of your offerings, lets turn our attention to innovation.
When we look at the market for innovation we see three categories of
64 Pricing for Profit
Early adopters – those who love being on the leading edge and
regaling others with stories of the obstacles they overcame as
early adopters.
Dependability buyers – those who buy once the product or serv-
ice has proven to work consistently.
Late adopters – those who are “forced into accepting new products/
services because their previous choice is no longer available.
What price are these buyers willing to pay? Lets go back to the ex-
ample I used in Chapter 1, VCR and DVD players. Both have run the
cycle from new technology to market saturation. Both followed the same
pricing path. How much did each buyer pay?
Early adopters $1,000
Dependability buyers $400
Late adopters $100
The early adopters paid 2.5 times what the dependability buy-
ers did and a whopping ten times what the late adopters did. Again,
these are only two products. We cant translate that into a pricing pol-
icy you can use. We can, however, modify the image approach and
perform similar calculations to get you higher compensation for your
Innovation Formulae
Here are the steps involved in calculating the value of innovation.
1. Determine how important innovation is to the market you’re
targeting or want to target. Are they early adopters, depend-
ability buyers, or late adopters?
2. Research innovation companies in noncompeting industries
that target the same customer group you do and have similar
price points. What do you want to learn?
Where they set their price point when launching a new of-
How long it takes for dependability buyers to enter the mar-
ket, and what price theyre willing to pay.
Elementary School Math: Quantifying Value 65

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