If Warren Buffett Needs to Review His Prices, You Probably Do Too

Posted on December 2nd, 2009 (1 Comments)

It’s almost universally accepted – and I agree - Warren Buffett is a savvy businessman. However, a casual review of pricing policies at his companies reveals missed profit opportunities.

Ordering California Brittle chocolates as holiday gifts from See’s Chocolates, Mr. Buffett’s candy subsidiary, I noticed an odd pricing structure. A one pound box is $15.60, while a two pound box is $38.20. Sure, a two pound box appears more decadent than 2 one pound boxes, but is this perception worth a 22% premium (same shipping fee)? See’s “if you buy more, we are going to charge you a premium” pricing strategy (which it also applies to some of its other candies) goes against standard convention. To capitalize on the law of diminishing marginal utility, larger volume sizes are generally discounted thus providing an incentive for customers to purchase more than they normally would. See’s “you’ll pay more” pricing misses out on two opportunities: (1) Sliding volume prices get customers to purchase more, and (2) If competitors are offering discounts on larger sizes, loyal customers may defect.

There’s also room to revamp the pricing policies of Mr. Buffett’s fractional ownership aircraft company, NetJets. Purchasing a fractional interest entitles owners to a set number of flying hours a year. This pricing structure misses profit opportunities because it does not account for the differing value that customers place on an hour of flying. Late Friday afternoon departures from New York can probably command a premium over Tuesday morning flights from Cincinnati. This pricing structure also ignores costs. During heavily trafficked times (holidays, for instance), NetJets has to charter extra jets (outside of its network) to accommodate increased demand from its owners. A “peak time” premium would yield a double win: increased profits and reduced charters. Just as interval condominium ownerships do – a week in South Beach during the winter holidays is significantly more costly than a week in the dead of summer – there’s an opportunity for NetJets to increase profits and grow by offering peak, off-peak, and hybrid interval ownerships.

Pricing structures at most companies today are a mix of “that’s the way that we have always done it” and “it seemed like a good idea at the time” policies. There’s profit and growth opportunities from reviewing your company’s pricing strategy. After all, if the Oracle of Omaha has room to improve his pricing, my bet is that you do too.

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