Pricing Propheteer: The Warren Buffet school of pricing

My last column, Are you Pricing Like Dennis Denuto?, seems to have resonated with many readers of LeadingCompany, if the emails I received are anything to go by.

As an interesting juxtaposition, I thought I’d take a look this week at five of my favourite and most powerful pricing quotes. Three of them come from the same person.

“There is no bank in the world that accepts a deposit of market share”

Regular readers of this column will recognise this quote (which I have to attribute to ‘Anon’) as the title of a column I wrote several months ago on price wars.

Heavy discounting and price wars are a great way to win market share. According to the Margin Media blog, M&Ms, Quiksilver and UGG were the most-liked brands on Facebook in Australian in July this year, but banks won’t accept deposits of their respective 2.8 million, 2.1 million or 1.4 million likes.

Banks will only accept deposits of cash, and leading companies maximise that cash via smarter, value-based pricing strategies.

“Price is what you pay; value is what you get”

This is one of two quotes that have probably acquired pricing folklore status – the other being Oscar Wilde’s: “A cynic is a person who knows the price of everything and the value of nothing.”

The most important of these 10 words of wisdom from business extraordinaire Warren Buffet is the last word: ‘get’. Many companies think value is what they give, but companies do not determine the value their customers receive. Value is in the eyes of the beholder.

“The single most important decision in evaluating a business is pricing power”

On May 26, 2010, the bi-partisan Financial Crisis Inquiry Commission (FCIC) interviewed Buffet as to the causes of the financial crisis. When questioned about his investments in Dun & Bradstreet and Moody’s, Buffet, who does all his own analysis and makes his own investment decisions, replied that the single most important decision in evaluating a business was pricing power.

“If you have to have a prayer session before raising a price by 10%, then you’ve got a terrible business”

Buffet’s next quote provides some insight into what he actually meant by ‘pricing power’. The last thing a company wants to do before raising prices is to have a prayer session hoping the increase sticks. A company that has the power to raise prices without losing business to a competitor has a very good business. So how do you get this pricing power?

“Perhaps the reason price is all your customers care about is because you haven’t given them anything else to care about”

This quote from marketing guru Seth Godin provides some insight into acquiring pricing power. This quote beautifully sums up a self-fulfilling prophecy: if all you talk to customers about is price, that is all they will care about.

Apple doesn’t talk to its customers about price. They talk about the brand, the products, their style and the functionality. As a result, they have densensitised customers to price and sensitised them to value. The evidence is in 2004 research which found that only 2% of an Apple buyers’ purchase decision was driven by price, compared to buyers of Hewlett-Packard PCs, for which price represents 50% of the purchase decision.

Hopefully, these quotes inspire you to price more like Warren Buffet than The Castle’s Dennis Denuto.