By now you should have heard of Martin Shkreli. He’s the CEO who overnight changed the price of a 62 year old drug used to treat malaria from $13.50 per pill to $750. The New York Times article quotes him as saying “It really doesn’t make sense to get criticism for this” making him less sympathic a character and his motivations driven by price gouging. In the past, he has been called a “boy genius” in the hedge fund world where he is known for his uncanny sense of stock market timing. But Mr. Shkreli didn’t dial into what kind of timing works and doesn’t work when it comes to pricing strategy and this is where this story picks up and his history as a stock picker leaves off.
Pricing is an art of finesse–of understanding the numbers but more so, understanding the emotional drivers of value, consumer mindsets and brand. The value positioning in the marketplace is key to supporting healthy pricing strategies and this is a function of brand and marketing. The sales team has to communicate this value clearly to potential customers–it’s a long game of numbers, brands, beliefs and compelling conversations that builds price support in the marketplace. It appears to me that Mr. Shkreli understood the spreadsheet behind the pricing but lacked any other sensibilities that would have a market accept the kind of price increase he was selling.
I see Mr. Shkreli’s terrible misstep into the public light as not only a lapse in judgement but a lack of knowledge as to how to price products efficiently given the vertical it operates in. He gave no creedence or acknowledgement to the drug’s pricing history, he said nothing of making any sort of improvment to the drug that would signal a reason for the price increase, he didn’t even reference a shortage of materials or labor in making the drug–essentially, he said nothing to indicate to the market that there’s a need for a price increase other than his own need and without a clear signal as to why the increase, his actions spelled out a case for exploitive profiteering.
His was a novice’s approach to raising prices–essentially, making a big and unneccessary mess visible to millions. Maybe it’s the equivelent to “how not to price” reality show. So what did Mr. Shkreli do wrong from a pricing standpoint? He broke one of the cardinal rules of pricing: percieved fairness. I am going to make an assumption that Mr. Shkreli is a spreadsheet jockey. On his spreadsheet, these numbers make sense. In the marketplace, these numbers signal outrage. When a company prepares to raise prices and a significant one as well, it must do a number of things to prepare the public to accept a pricing change. Because Mr. Shkreli did not signal to the marketplace in a manner that addressed the perceived sense of fairness prior to the price increase, he left himself only one option–that is to clean up the mess that he’s made in the marketplace.
I’ll be talking about this case study at the #Inc5000 in Orlando, October 21st. Registration is open to Inc 5000 winners.