How to bullshit about pricing strategies
Harvard’s (very) unusual blunders
I never throw mud at competitors: it’s not elegant, and those that would deserve a critique are sufficiently inadequate to disgrace themselves.
But I would be very naive at thinking that I can be a serious competitor of Harvard authors and teachers since, with that label, they play a totally different game than mine.
I therefore feel free to criticize them, especially for the following reasons:
- since my studies in the States, that included the attendance at some courses at Harvard, I have always appreciated the high quality of most material produced by the School, and I don’t like to see that part of this material is total crap
- furthermore, given that for professional reasons I am practically obliged to stay up to date about what is supposed to be worth reading and studying (like, at least in principle, Harvard books and teaching material), I don’t like to throw my money in the garbage for something that wouldn’t be worth a penny
- I am particularly interested in pricing strategies and decision support systems in pricing (I’m a maniac of DSS and judgmental models), that are a critical part of strategic marketing, and think that we should expect from institutions like Harvard and their teachers at least some intelligent contribution on these topics.
That said, let me tell you why I think that Steenburgh & Avery’s so-called HBR Tool for Pricing for Profit (Steenburgh is from the Darden School of Business, and Avery from Harvard), that I paid 39 dollars and was sold by the Harvard Business Review as a tool that … will enable you to price products or services to maximize profits is total crap.
- First of all, it is well known that people (and companies) buy products and services, more or less consciously, based on their perception of the value/price ratios offered by competing suppliers. These authors repeat the classical and widespread logical mistake of defining value in terms of price (a circular reference by definition). In many businesses, the level of price could also contribute to the perception of value, but the overall perceived value depends on many other factors (functional, logistic, psychological, emotional, …) and can be measured or at least estimated independently.
- The authors propose the “variable costs” (as a matter of fact, without specifying that they are talking about the “unit” cost!) as a minimum level to start from. It is true that, in rare cases, companies could decide to lose money on some products to make money on others that are strictly connected to the losers (e.g. Gillette razors and blades), but if the objective is “pricing for profit”, starting from the unit variable cost is a total nonsense.
- The authors suggest using up to five competitors’ prices to determine the price range that reflects your product’s relative value (again, value defined interms of price), and even identifying substitute products’ prices (!), without alerting the user about the risk of referring to different market segments. In their Excel model, there are no indications whatsoever about the importance of defining a relatively narrow price range: outside a “reasonable” range (for example, a maximum price larger than 50% of the minimum price) it’s very likely that we are comparing apples with oranges.
- Their Excel model produces a graph in which quantities are on the X axis and prices on the Y axis, and this prevents from finding the “real” function of the demand curve, in which, obviously, quantities depend on price, and not vice versa (we are not talking about commodities!). Furthermore, there are no indications about how to find that function and measuring the elasticity to price at various price points (easily doable with Excel), nor is there a mention of the possibility of using the Excel Solver in order to maximize contribution, given a specific demand function (and the explicit objective of this tool!).
- Finally, in the texts that are supposed to explain the authors’ Excel model, there are other serious inaccuracies or omissions, such as the lack of explanation of the critical importance of the concepts of unit and total contribution (not even mentioned in their 6-word glossary!). These are the actual triggers of profitability, while the calculation of profit, after subtraction of fixed costs like in the authors’ model, could be totally inappropriate, given that we are talking about the price of a specific product or service within a “hopefully” specific market context, and not about the overall product portfolio of a company.
Do you think that this would be sufficient to ask for a refund of my 39 dollars from the HBR, together with appropriate apologies?