Author: Rafi Mohammed

Earlier this month the Rolling Stones kicked off a brief 2013 tour celebrating their 50th anniversary. The Stones have always been aggressive in setting ticket prices, and it appears they’ve pushed too hard this time. With arena seats reaching $600 and general admission packages in the “Tongue Pit” (close to stage) topping out at $2,000, ticket sales are reportedly tepid. As a result, tour promoters are on the verge of a “19th Nervous Breakdown.”

I have a particular interest in this topic, because I attend concerts frequently. (Over the last thirty years, I’ve seen Jimmy Buffett nearly 120 times.) I also have a professional interest because concert tickets are a great way to understand pricing — whether it’s the role of scalpers, the use of dynamic pricing, or concerns about whether high prices hurt a musician’s brand. In fact, I wrote my PhD dissertation on rock concert ticket prices.

The situation faced by the Rolling Stones — sagging sales due to high prices — is one that all companies are susceptible to. Quite simply, sometimes you overshoot. When this occurs, the challenge for a premium company is how to discount in a manner that doesn’t damage their brand nor anger customers who paid full price. Here are some tips to help front man Mick Jagger, as well as managers in the same situation, profitably navigate out of this mess.

Add Value. The most common remedy to this malady is to maintain price but add value, so customers feel they’re getting more for their money. Guitarist Keith Richards could casually drop in an interview that this may very well likely be the band’s last tour (the “hedge” in the wording is intentional). Or, as the band did at its opening gig in L.A., they could bring in special guests such as Gwen Stefani and Keith Urban. These additions make the experience more memorable, so customers value it more.

Lower Value to Justify a Lower Price. At every tour stop, the Rolling Stones made available a limited number of “for the fans” $85 tickets that instantly sold out. The catch to these discounted tickets is you don’t know where you will be sitting until show time — you could be in the “Tongue Pit” or row ZZZZ. This hurdle was designed to identify price sensitive customers. Fans who are willing to pay more (those entertaining clients, for instance) are less likely to purchase these tickets due to the chance of ending up in nosebleed seats. Now, as seats remain unsold, promoters can release more of these $85 seats, explaining that additional seats opened up due to production issues. This could be true or, of course, an excuse to make available more discounted tickets.

Manufacturers and retailers play similar games to lower costs without creating a perception that the product is less valuable. For instances, high-end appliance manufacturers can deliberately inflict cosmetic blemishes on excess inventory to then discount at a “scratch and dent” sale. While this tactic sounds strange, it can make sense by preserving the value of the brand while finding a justifiable reason to lower prices.

Sell Via a Different Distribution Outlet. Why not use scalpers to sell excess inventory? To avoid tarnishing their brand, bands often sell the best seats via scalpers (so that fans blame scalpers, not the bands themselves, for inflating prices). In a different twist, the Stones could offer bulk discounts to scalpers — who would then sell at low prices — thus shielding the band from looking weak. Analogously, this is why premium brands often sell discounted merchandise at outlet stores.

Tell a White Lie. Within each ticket price category, say the $600 one, there are thousands of tickets that vary in quality. The remaining tickets in each category (thus, the less desirable ones) can be discounted under the guise of “newly released seats.” Similarly, salespeople can tell clients that they have been “authorized” to offer loyalty discounts to their best customers.

Tell the Truth. As long as there is an explanation, it’s possible for premium companies to discount without damaging their brands. The Ritz Carlton in the Cayman Islands, for instance, drastically lowers room prices during the summer because of hurricane season. This rationale doesn’t damage the Ritz’s brand, and it allows the company to charge hefty premiums in-season. The Rolling Stones should simply admit: “We blew it.” Following this admission, prices can be cut for less desirable shows held on Sunday to Thursday evenings. This discount could lure in aging boomers who had refrained from purchasing due to the pressure of working the next day.

Offer Mixed Bundles and Volume Discounts. Customers expect discounts if they buy a mixed bundle (a lower price for buying 2 or more products: a McDonald’s Value Meal, for instance) or in large quantities. Discounts can be offered for buying, say, a Rolling Stones/Paul McCartney bundle or a Family Pack (buy 3 tickets, get the fourth for free). In this case, the rationale for employing these tactics is to provide an explanation for the price drop.

The funk that the Rolling Stones are in the midst of is yet another reminder of why pricing is such an important strategy for companies. Aside from being a key driver of profits, a misfire can have serious ramifications. The Rolling Stones invested 50 years of hard work to be crowned the “greatest rock and roll band.” It’s a shame that due to poor pricing decisions, the Rolling Stones are closing out their career amidst allegations of greed, headlines reporting on poor sales, and the taint of desperation from employing tacky discounting methods.

Last week over 100 leading cancer specialists signed their names to an op-ed in Blood, the journal of the American Society of Hematology, which lambasted the prices of cancer drugs that often exceed $100,000 annually. These researchers opined that high prices are preventing patients from being treated, and they questioned the ethics of pharmaceutical companies.

This isn’t a problem only facing uninsured patients: The op-ed claims that in the U.S., for instance, even insured patients pay an average of 20% of drug prices out-of-pocket, meaning these drugs can cost a patient $20,000 a year. Those numbers can be even higher because many patients suffer multiple ailments, requiring more than one pricey drug.

The key to solving this problem is to forget about regulation, charity, or public shaming and instead focus on how to help drug companies make even more money.

This may sound counterintuitive, but a win-win opportunity exists. Making expensive drugs more accessible and getting pharma companies on board involves adapting pricing tactics successfully used by other companies in similar situations to help them sell more. The key components that lead to a solution are as follows:

Understand the dynamics of a high fixed cost/low variable cost industry. While pharma companies spend billions on research, the actual cost of manufacturing a treatment (such as a pill) is minimal. This cost structure enables pricing flexibility. This is why Las Vegas hotels, for instance, have premium prices on weekends and rock bottom discounts during the middle of the week. As long as mid-week prices cover the low nightly variable costs (mostly the cost of cleaning the room), any higher amount is gross profit. With the current high prices, pharma companies are only serving weekend customers. Like other high fixed cost/low variable cost industries, they could make more money by learning to extend discounts in the right circumstances.

Understand that there’s profit in serving discount-oriented customers. Activating dormant customers through discounts is a common growth strategy. Coach, the manufacturer of fine accessories such as handbags, activates price-sensitive dormant customers via a network of outlet stores that offer up to 70% off full retail prices. In North America, for instance, over 30% of its stores are outlets, and 45% of its total retail square footage is dedicated to discount outlets. Even “dollar menus” at fast food restaurants generate enviable cash flows. For example, the incremental gross margin of a $1 McDonald’s double cheeseburger is 55%.

Understand micro-differential pricing. The dream of every pricing strategist is to somehow determine and charge the highest price that each customer is willing to pay. This is why, for instance, auto salespeople size you up by noting how you dress and asking questions such as “What do you do for a living?” They are trying to figure out how much you are willing to pay — this process results in different prices for different customers. Solving the $100,000 drug problem involves emulating car salespeople. Pharma companies should be encouraged to set prices based on a patient’s income as well as their other drug costs.

To implement smarter pricing that saves more lives, and brings in more revenue, the pharma industry should create a straightforward grid that specifies the annual maximum a patient should pay out of pocket on pharma expenses. Key variables that determine this maximum include income (verified by IRS data), family size, and their other pharma costs. Patients can submit this data to a third party agency, discounts will be applied based on these criteria. For instance, if it is determined that a 30% co-payment on a $100,000 annual treatment for a middle class family of four is too much, the patient can be reimbursed $15,000 by the drug company, which still nets a healthy $85,000 in incremental revenue (since this family wouldn’t have purchased the drug without the discount).

There are already several foundations and prescription assistance plans in place today to help low income patients. But the $100,000 drug issue is also a middle to upper-middle income issue — and the industry should address the problem in a way that helps create more revenue.

Discounting shouldn’t be thought of as charity. In fact, it’s smart business for pharma companies.

Drug companies already profitably implement differential pricing on a macro-level: This is why drugs are cheaper in third world countries than in the U.S.. Why not employ differential pricing on a micro individual-to-individual basis? The U.S. may be a rich country, but there’s a gigantic income difference between poverty-ridden inner city areas and, say, Beverly Hills. If a patient skips a treatment due to price, that’s not only a loss for the patient (whose health will suffer), but it’s a missed gross margin opportunity.

Micro-differential pricing is a win-win strategy: higher profits will be reaped and more patients will be served.

Doctors signed on to the Blood op-ed in hopes of starting a dialogue on high drug prices. It’s an important topic, and one that demands a solution. The key to solving the $100,000 drug challenge is to encourage the invisible hand actions of profit-seeking. The micro-differential pricing opportunities available due to the high fixed/low variable costs structure of drug companies would enable as many people as possible to benefit from pharmaceutical advancements.

J.C. Penney and its CEO Ron Johnson have parted ways. The news wasn’t terribly surprising as 2012 had been a challenging year: sales were down by $4.3B, the company lost close to $1B, and its stock price dropped by more than 50%. Despite Johnson’s and his supporters’ pleas of “give us more time,” Penney’s board finally succumbed and exhaled, “No mas.” In a “meet the new boss, same as the old boss” moment, Penney announced that its previous CEO, Myron E. Ullman III, is returning to the helm.

What led to Mr. Johnson’s downfall? Two words: over ambition. First, he tried to wean customers off of coupons and sales in favor of everyday low prices. To be clear, Johnson was offering low prices, not the lowest prices, as Walmart does. This initiative failed miserably. A lesson for all businesses is when selling commodity-like products, unless customers believe you have the lowest prices all of the time, you routinely have to offer deep discounts. This pricing strategy failure could have been anticipated by testing the concept with customers as well as learning from similar attempts to ditch discounts. Both Macy’s and American Airlines previously tried to stop discounting in favor of everyday low prices, but quickly had to retreat due to poor customer reception.

Just as important, Johnson was trying to significantly change the retailer’s merchandise offerings and hence, its customer base. And while this can be done — Millard Drexler accomplished this for J. Crew — the initiative was taking too long. As a result, old customers weren’t coming in (no coupons, changing merchandise) nor were new ones (not enough critical merchandise mass to attract target new customers). As a result, same store sales dropped by 31.7% in Q4/12.

So now what should J.C. Penney do? It can’t revert to its past strategy because the chain was spiraling downwards before hiring Ron Johnson in late 2011. From 2007 to 2011, the chain store’s operating profit dropped from $1.9B to (-$2M). Something had — and still has — to change.

Ron Johnson’s overall vision was spot on. One of the biggest threats to most brick and mortar stores is the simple fact that customers can buy the same (or similar) products at a cheaper price on the web. To combat this inherent price disadvantage, several brick and mortar stores are now willing to match online prices — a practice that devalues physical stores. What Johnson was trying to do is differentiate J.C. Penney in two ways: (1) Sell boutique merchandise which is not available elsewhere (thus, customers can’t buy it cheaper on the web) and (2) Provide a unique shopping experience — again, something that customers can’t get from Internet retailers. The strategy was straightforward: build a retail chain that provides customers with reasons to visit a store, instead of buying on the web. The reality that all retail chains need to realize is if they are selling products which customers can purchase cheaper online, their brick and mortar future is grim.

Here’s what J.C. Penney should do now: stay the course on its product differentiation strategy (i.e., building 80 to 100 boutiques) but do so at an expedited speed. And don’t just go back to using sales to bring customers into stores — embrace the strategy of discounting. While Johnson was reticent to discount merchandise sold in the newly constructed boutiques (in the vein of the “no sale” policy at the Apple stores he used to oversee), I say discount these products. Big sales will effectively communicate the availability of new specialty merchandise to new target customers and provide a call to action to visit J.C. Penney.

With Johnson’s departure, J.C. Penney bought itself another year before facing a Montgomery Ward-like bankruptcy. The 111-year-old chain is truly at a crossroads of either being transformational or fading into oblivion. Mr. Ullman’s ability to execute quickly will be the key driver of J.C. Penney’s ultimate fate.

As organists at stadiums across the country are again playing “Take Me Out to the Ball Game” on Opening Days, another game is quietly being played in box office backrooms. Last year, 17 out of the 30 Major League teams were using some form of dynamic pricing — the concept of raising and lowering prices in accordance with demand — to price ballpark tickets. This year, the practice seems likely to grow.

It’s impossible to set the “right ticket prices” months in advance of an individual ballgame. Of course, some variables allow teams to initially set prices that reflect the unique value of a game including opponent (e.g., higher prices for the ongoing Yankees — Red Sox rivalry), weekday vs. weekend dates, and promotions like Bat Day. But there are other factors which fluctuate until game day that can’t be anticipated, such as the teams’ records, quality of pitchers, and weather. Any changes in these components of value can make a game “hot” or, conversely, a “bust.”

Dynamic pricing makes sense for baseball as it shares key qualities that have enabled other industries (airlines, hotels, and rental cars) to prosper from this strategy: fixed capacity, low variable costs, and a “product” that expires at a certain time. However, to make the most of dynamic pricing and minimize backlash, team owners should keep the following in mind:

Temper the Urge to Jack Up Prices During Times of High Demand. Given the opportunity, I am always happy to recommend raising prices. However baseball has unique constraints that mandate keeping prices in check. First, the sport is viewed and marketed as “America’s pastime,” not “follies for the rich.” As both Apple and Netflix discovered the hard way, a change in pricing strategy can adversely impact an entity’s brand. Sure, it’s tempting for teams to raise prices for popular games, especially when scalpers are charging astronomical sums. But keep in mind that scalpers aren’t carrying the risk of tarnishing a long trusted and egalitarian brand image that is crucial to Major League Baseball’s (MLB) continued success.

Just as important, revenue doesn’t solely come from ticket sales. MLB earns profits from several other avenues including broadcast rights, merchandise, and sponsorships. If the average fan can’t afford to attend a game, managers are right to worry that this might dampen their interest in the sport and negatively impact other non-ticket related profits.

The Real Opportunity Is Filling Seats via Highly Discounted Prices. I am endlessly fascinated by how effective discounts are in quickly selling products. Not long ago, for instance, downtown hotels used to be vacant on Saturday nights. After all, who would want to spend the weekend at a city hotel that caters to business travelers on weekdays? As it turns out, a new segment — leisure travelers — is happy to…for the right price. Within four years of introducing its highly discounted “BounceBack” weekend rates, Saturdays went from the second lowest occupied night to Hilton Hotels’ highest.

Discounts can accomplish the same for sparsely populated stadiums. To be clear, I don’t mean small price cuts: I am talking about big “50% off” price breaks that hotels use to fill their excess capacity. Just like Hilton, the primary goal of these discounts should be to expand their customer base by attracting a new segment of attendees. So while a game may be a “dud” to regular game-goers, there are many other fans of America’s pastime —perhaps more interested in the experience than game intensity — who may attend at a discount. Lower overall prices can also attract regular attendees, who usually sit in the grandstand, simply for the opportunity to enjoy a game from the best seats. In addition to boosting attendance and revenue, activating new customers enhances interest and generates new profits from related income streams.

One hurdle to offering drastic discounts is its potential effect on season ticket holders. It’s important that these valued customers continue buying upfront and don’t hold out for potentially lower prices. The remedy is straightforward: provide automatic refunds to season ticket holders when “like” individual ticket prices are lowered due to weak demand.

MLB’s focus on pricing provides a lesson to all businesses. It’s both challenging to initially set prices and important to realize that the value of a product or service often changes over time. Because of the resulting mismatches in value and price, it makes sense to regularly review prices to ensure you aren’t shorting yourself or missing new sale opportunities.

Twice a year, many of the finest restaurants in the Boston area participate in a discount promotion called Restaurant Week. Diners are offered an attractively priced “special” three course menu (typically with a few options for each course) — this year lunch is $20.13 and dinner is $38.13

This successful promotion — which is offered in many U.S. cities — packs restaurants and provides lessons that all businesses can learn from about discounting.

Lesson 1: Don’t crowd out full-paying customers. Restaurant Week is offered during low demand time periods — usually during the end of the summer (August) and spring break (March).

Lesson 2: Don’t encourage cannibalization. By this, I mean try to minimize the chance that customers who would have paid full price take advantage of the discount. For instance, No. 9 Park, a top Boston restaurant, doesn’t include its signature “prune-stuffed gnocchi” as part of its Restaurant Week menu. Instead, it offers new menu items that are likely lower cost. As a result, die-hard fans of prune-stuffed gnocchi can’t order it at a discount.

Lesson 3: Drop the dream of “they’ll try it at a deep discount and come back to pay full price.” We’ve been down this road several times. As Groupon has empirically proven, consumers don’t behave this way. Quite simply, most diners who come for the Restaurant Week promotion are deal seekers who will probably not come back…until the next time there is a deal. And to be clear, this is okay – if discount diners aren’t taking up a table that would have otherwise been occupied by a full-paying customer, it makes sense to reap the incremental margin.

Lesson 4: Capitalize on consumers’ “mental accounting” behavior. Richard Thaler, a well-regarded University of Chicago economics professor, believes that consumers establish mental accounts for specific occasions. So, if they save money on an occasion — say, dining out at a fine restaurant — it’s hard for them to mentally transfer these savings to another “account.” Thus, we’re tempted to spend it on the occasion. In my case, since I get such a good deal on the three course meal, I feel that I have some extra “house money” to blow on profit-laden extras (such as cappuccino, instead of coffee) instead of saving the money for another use.

Regardless of whether you are selling a service or product, the key to taking advantage of this mental accounting behavior is to provide upgrade choices. Many Restaurant Week participants, for instance, offer meal supplement options (to upgrade to a better course) as well as deals on wine. Proactive suggestion allows consumers to envision a richer experience and given that they have extra “budget” in their mental accounts, are tempted to spend it. Sure, diners end up enjoying an enhanced meal at less than the regular price — they get a bargain. But by encouraging diners to spend their mental account surplus, restaurants reap a higher profit.

While discounting is a common pricing strategy, most companies execute on it poorly. Instead of offering whimsical “finger in the air” price breaks which can gut profits, following the above pricing guidelines can rationally generate growth and most importantly, earn significantly higher profits.

This week J.C. Penney released its fourth quarter earnings results and they were dismal. Comparable store sales nosedived by 31.7% in the fourth quarter of 2012 versus the prior year. Internet revenue sank by 34.4%, and gross margin dropped from 30.2% to 23.8%.

What’s causing this financial Armageddon? The sole culprit is J.C. Penney’s new “Fair and Square Every Day” low pricing strategy. In January 2012, Ron Johnson, Penney’s CEO, announced that instead of offering weekly sales, the retailer was reducing prices across the board. Johnson’s pitch to consumers was in essence, “Why wait for a sale? We have low prices all of the time.” To be clear, Johnson was not claiming that Penney’s everyday prices are the lowest, simply “fair.”

The problem with this strategy is that when a retailer sells fairly commoditized products in a generic selling environment — as Penney currently does — it needs sales to motivate consumers to visit a store. Penney’s financial results have clearly demonstrated that without deals, few people are waking up on Sunday morning thinking, “I have to go to J.C. Penney today to hang out and shop.” Fair and Square pricing has been in place for a year, and comparable store sales have progressively worsened, declining from -18.9% to -21.7% to -26.1% to -31.7% over the last four quarters.

While Mr. Johnson sought to shy away from deep discounts, Penney’s 6.4% drop in gross margin reveals that it acted otherwise. Since merchandise was not selling, it had to offer bargain basement clearance prices to move inventory, thus reducing gross margin. So ironically, over the last year the best deals in retail have likely been at J.C. Penney’s clearance rack.

In fairness to Johnson, he has ambitious plans to revitalize the venerable retail chain by offering differentiated products (80 – 100 branded boutiques) as well as a unique shopping experience. In essence, he is striving to make Penney the Apple Store of general merchandise retail. It’s an outstanding idea that could be the model of success for retail in general — provide unique value that insulates brick and mortar stores from intense web retailer price competition. Early on, I suggested that Penney ditch this new pricing strategy — and return to weekly sales — until it achieves the retail differentiation that on its own might draws customers into stores.

In this week’s earnings call, Johnson seemingly retreated on his Fair and Square pricing strategy. Early in the call, he stated, “We’ll offer sales each and every week as we move forward.” But Johnson’s mea culpa has been limited by his lack of clarity and wishy washy stance on pricing, both to consumers and Wall Street. In October, for instance, he sent an email to customers reinforcing his pitch of not having to wait for a sale or coupon to get a good deal — and then paradoxically included a $10 off coupon in the same email. Just on Monday, the Wall Street Journal reported that Johnson is reticent to use the word “sale” and while Penney has announced sales will be timed to “events and holidays,” he would not confirm how frequently they will occur.

The latest ambiguity comes in how consumers and Wall Street are to interpret the word “sale.” Late in this week’s earnings call, Johnson indicated that sales will primarily be held on J.C. Penney’s brand products, but typically not on national brands. So sure, in a technical sense Penney will be holding sales. But with rival retailers heavily discounting national brands every week, the key question is whether discounting Penney’s own brands will be enough to achieve the ultimate goal of a sale: drawing in customers to its stores and website.

While there may be some positive effects, I don’t think J.C. Penney’s “sales” will be enough to remedy its financial meltdown. To entice masses of consumers, you have to discount products that they really want — that means well-known national brands. Discounting lesser-known, private-label brands simply won’t achieve the financial upside that J.C. Penney desperately needs.

So what’s next for J.C. Penney? Either it further revises its pricing strategy to include sales on national brands or it heads to bankruptcy court.

Last weekend, as snowstorm Nemo hit Boston and the snow was falling at record levels, I recalled an informal — admittedly unscientific — poll I conducted a few years ago among friends on the touchy subject of fairness in pricing.

Here’s the question I asked: “Suppose you own a hardware store. There’s been a heavy snowfall throughout the night and you know the moment your store opens at 8 AM, the limited supply of snow shovels will sell out. Should you raise price?”

To be clear, this is not an issue of how to set prices in a life-threatening situation (e.g., bottled water after a disaster). That’s an entirely different and far more complex discussion. In this case, if someone can’t afford a shovel due to a price hike, they have the option to borrow one from a neighbor or hire the local entrepreneurial kid to clear their driveway.

This simple exercise raises an array of fairness questions. For instance, if price is held steady, is it fair that those who show up right when the store opens get to purchase at less than the market clearing price? What about those who can’t arrive at 8 AM because they are working or tending to children? Or should the storeowner follow the mantra of economists to raise price until the market clears? In other words, allocate the limited supply of shovels to those who value them the most (i.e., are willing to pay a high price).

This pricing dilemma weighs heavily on the storeowner too. Is it worth it to potentially alienate customers for a quick profit windfall? Or, to take another view of the situation, if storeowners take the risk of purchasing a large inventory of shovels for the winter season, don’t they deserve to profit? After all, what if they purchase too many shovels and have to liquidate inventory at the end of the season at a money-losing price? If that happens, how many customers will say, “I’ll pay you more than the clearance price because I appreciate that you had shovels ready in case of a blizzard?” Nada. Is it fair to store owners to take all of the risk but not fully profit from their investment?

I was surprised at the responses to my survey question. Most felt it was okay to raise prices, not necessarily to the market clearing price, but enough to earn a tidy extra profit. I had predicted that my mostly non-business related friends would be adamant about maintaining price and selling on a first come, first served basis.

Here’s where it got really fascinating. I then followed-up by asking survey-takers how they’d feel if “two guys” set up shop in a parking lot and sold shovels at a high market-clearing price. Many had no problem with the sky high prices. In fact, some even expressed gratitude to the two guys for providing an essential service!

On the surface, these results don’t appear to synch with those reported by Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler in their 1986 article titled “Fairness as a Constraint on Profit Seeking: Entitlements in the Market.” In a Canadian telephone survey, Kahneman et al. asked respondents how they felt if a hardware store raised prices on shovels from $15 to $20 after a snow storm. 82% of respondents judged this action to be “unfair.”

There are many potential explanations for these seemingly contradictory results, including different time periods (1986 vs. 2010), geographies (Canada vs. U.S.), and perspective (they asked from the consumer’s perspective, I from the seller’s). But most likely it’s the interpretation of the pricing implications. I wouldn’t expect consumers to judge a price increase that purely enriches a seller (i.e., not simply passing along a cost increase) to be fair. Few of us are willing to say, “Sure, charge me more so you can fatten your bank account.” That said, a price hike judged to be unfair may not affect a purchasing decision. After all, I am not too pleased about the jacked up Valentine prices for flowers and “special menus” at restaurants this week. But I’ll pay the premiums and won’t hold a grudge against the sellers, because I understand it’s just supply and demand at work.

The way you set prices is part of your relationship with customers, and part of your brand. Sure, it’s a safe and easy default to keep prices low in times of high demand. But there are likely to be enhanced profit opportunities by revisiting and challenging your company’s pricing norms. Consumers may be more accepting of price increases than you’d expect.

SeaWorld Entertainment Inc., operator of theme parks including SeaWorld and Busch Gardens, recently filed for an initial public offering (IPO). Best known for its aquatic shows featuring Shamu the killer whale, SeaWorld’s IPO filing specifies that a key future growth strategy will be to “expand in-park per capita spending through new and enhanced offerings…by providing our guests additional and enhanced offerings at various price points.”

So the next time you visit SeaWorld, be prepared to choose amongst an array of admission options ranging from Shamu (good = lower price), Shamu-Plus (better = higher price), and Shamu-Premium (best = highest price).

When most managers think about pricing, they harken back to their days of Economics 101: a rote downward sloping demand curve and an asterisked point labeled “perfect price.” At this optimal price, elasticity is such that it does not make sense to raise price (because the extra per unit profit is overshadowed by lost sales) nor discount (because increased sales don’t compensate for lower profit margin). If you rely on the approach suggested by this graph, pricing has traditionally been thought of as a simple search for one perfect price.

If your company views pricing in this manner, it’s not making the most of this powerful bottom-line enhancing strategy. First, a key challenge is few of us have actually seen a demand curve for our product — let alone an asterisked price point. But more importantly, even if you can determine your product’s perfect price, you end up in what I call a “Pricing Catch-22”: no matter what price you set, you’ll inevitably create missed profit opportunities. Some people would have paid more, while others would have purchased if only the price had been lower.

The way to break out of this Pricing Catch-22 is to offer good-better-best prices. Instead of creating missed pricing opportunities with a single price, this multi-price versioning strategy empowers you to capitalize on a downward sloping demand curve. Having an array of price points — low to high — allows customers to choose which price works best for them. At a gourmet restaurant, for instance, dining high rollers (those at the top of the demand curve) opt to dine at the chef’s-table (best) while those on a budget (a newly married young couple celebrating an anniversary, for example) arrive before 6:30 PM for the early-bird menu (good). By allowing customers to select the experience that works best for them, companies benefit by reaping higher margins from some customers relative to others. Just as important, they also grow their business by serving budget minded customers (with good versions); early-bird diners would probably not come if this discounted option is not available.

Another benefit of good-better-best is customers are more comfortable with this pricing strategy. Few of us take well to ultimatums, which is exactly what offering a single price is: “Here’s the price, take it or leave it.” In contrast, good-better-best is accommodating: “If the price is too high, consider our good version” or “You may appreciate the features of our best option.”

When this strategy is implemented, it’s often surprising how many customers choose the best version and its bottom line effect. In 2007, for instance, Southwest rolled out its Business Select ticket version. For $10 to $30 above the normal ticket price, customers received additional amenities — chief of which is priority boarding. In its first year, I estimate this best version increased Southwest’s revenue by $100 million and operating profit by 10%. In addition to reaping higher margins from high-end flyers, Business Select also generated growth by targeting new customers. I, for instance, rarely flew Southwest due to its no-assigned-seat policy. But since Business Select reduces this seating free-for-all, I now fly Southwest more.

If your company believes that pricing strategy is simply the search for a perfect price, it’s missing out on significant profit opportunities. Customers are better served and profits are enhanced by serving new customers as well as reaping higher margins.