Pricing: which other discipline would give you a B+ for being smart enough to be a “Don’t Know”?

SKP - Price Underestimation 1280x720Knowing that you “Don’t Know” – and having the courage to admit it – can often be a very smart option. The best option – rather obviously – is to be able to calculate the correct answer, but in many situations including this one, the next best alternative is to know when you don’t know and be prudent enough to say so. In this case 17% of the respondents in this research would – in my view – get a B+ for being smart enough to admit that they “Don’t Know”. Let me explain.

If most people had answered this simple question correctly the “Don’t Knows” wouldn’t get a B+. They would just get a F for not getting the answer correct because the realistic expectation would be that they should be able to get it right, after all, most people did. But in this case only 4% of respondents got the answer correct so the expectation is very different.

And before we go any further – given that 79% of the respondents attempted to estimate the answer and got it wrong, of which 75% of them got it “strongly” wrong – I think it might be worth interjecting that there is an exact answer to the question posed. You know like 2 + 2 does have a unique and exact answer, which, by the way, isn’t 3 which sounds ridiculous to say it, but that’s not dissimilar in business terms from what the majority of the respondents in this research came up with when answering this simple pricing question.

Now let’s contrast the B+ execs – the “Don’t Knows” – with the 75% who thought that they knew the answer while they clearly didn’t, yet nevertheless guessed wildly and – as it turned out – inaccurately at the answer. Before we do though let’s also note that 74% of the 75% “strongly underestimated” – and only 1% “strongly overestimated” – the impact of a price reduction. That’s a hugely significant bias.

And what’s the consequence? Well, the 74% will be much more likely to cut prices which have a hugely negative impact on their own business and also probably run the risk of inadvertently starting a price war with negative consequences for their entire industry. That’s why I’d grade them an “F”: the consequences of strongly underestimating the answer to this question in business are serious and far reaching.

This reminds me somewhat of Joe McNally, country manager of Compaq UK, who was somewhat anxious at the prospect of hiring another MBA who might think that they knew everything but in fact didn’t. And I think this excellent research from Simon-Kucher & Partners shows why he was right to be worried. His encouragement to me on my first day at Compaq was, “If you don’t know, just say you don’t know. No-one will mind.  We far prefer you say that you don’t know than you pretend that you do, and screw it up for everyone”. Wise words indeed.

 

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