Pricing Risk: The Baseline Theory
In his bestselling book “The Theory Of Poker”, David Sklansky states that the Fundamental theorem of Poker is:
“Every time you play a hand differently from the way you would have played it if you could see all your opponents’ cards, they gain; and every time you play your hand the same way you would have played it if you could see all their cards, they lose. Conversely, every time opponents play their hands differently from the way they would have if they could see all your cards, you gain; and every time they play their hands the same way they would have played if they could see all your cards, you lose.”
This simple fundamental statement about knowing what your target is thinking can be applied to business strategy any way you can think of.
From negotiating the sale of a business, to negotiating the salary of an employee, to establishing a product price point.
This is because the theory points out that if you know what the other persons “has” (his motivations, and desires) you will be able to play against him correctly (extract the most value from him.)
But is it really that simple?
If you know what the highest price point someone is prepared to pay, should you just charge them that?
Actually, I don’t believe that you should. And this is because businesses operate in complicated environments - needing a lot more consideration than the thought process which would go with extracting value from ONE person.
What is the position in the market you want to occupy? Do you need testimonials? Are you marketing to the top end of the market and filtering down? If so, can you get more value from selling cheaper, but getting something else more valuable than highest purchase price from the early adopters? Etc. Etc.
If business were static, and you were selling in a vacuum: sure, go for the highest price point. But in the dynamic fluid nature of the modern day market place, I argue that you need to use your knowledge of market desire more intelligently than just extracting highest dollar from the market.
If you enjoyed this post, make sure you subscribe to my RSS feed!