The 1% Theory of Pricing

Pricing, in general, is a very under-utilized tool in most marketers’ toolkits. Remember the 4 P’s?

Price, Product, Promotion, Place

It’s the first one!

And today, I want to share with you a bit of wisdom that originally came to me from Rafi Mohammed, author of The 1% Windfall. In the book, Mr. Mohammed uses a simple example to illustrate a way of thinking about pricing that shows marketers and business owners just how important a tool it can be.

Think about the price you charge for your product or service now. What would happen if you increased your price by 1%?

Most people would answer something along the lines of “not much”. That’s because 1% sounds like a very small change. The same amount of people would probably still buy, and revenue would go up 1%. Not a big deal.

But let’s look at an example that illustrates why the “common” thinking might miss the big picture:

Say you sell Widgets for $100 a piece. For every Widget you sell, you have calculated that you earn a profit of $10, after all costs are accounted for.

When you increase the price of your Widgets to $101, a 1% increase, what happens to your profit? It goes up to $11, a 10% increase!

I think we’d all say yes to a 10% increase in our bottom lines. Yes?

When most marketers do think about price, we think that we can increase demand by lowering prices. But why aren’t we talking about higher prices?

If you can justify them, even small increases in the prices you charge can result in massive growth in your bottom line.