Olivia: In 2008, if Sears had raised its prices by just one percent—a single penny on the dollar—its operating profits could have skyrocketed by 155%. Jackson: Hold on, one hundred and fifty-five percent? From a one percent change? That’s not a typo. That sounds like you've discovered a cheat code for capitalism. Olivia: It’s not a cheat code, but it is the most overlooked, and most powerful, lever in business. And it's a lever most companies are absolutely terrified to pull. That incredible finding is the core idea behind the book we're diving into today, The 1% Windfall by Rafi Mohammed. Jackson: Rafi Mohammed... he's not just some business guru, right? I think I read he's a serious academic, a pricing strategist with a Ph.D. from Cornell who has spent decades focused on this one single topic. Olivia: Exactly. He founded a whole consulting firm called 'Culture of Profit' based on this philosophy. His argument is that pricing isn't just a number on a tag; it's the engine of the whole business. And today, we're going to pop the hood and see how that engine works. Jackson: Okay, I'm in. But you have to explain that Sears number. How is that even possible? It feels like you're breaking the laws of math.

Olivia: It feels that way, but the math is surprisingly simple and that's what makes it so powerful. When a company cuts costs, say by 1%, only a fraction of that saving might make it to the bottom line after implementation costs. If you want to increase sales volume by 1%, you have the costs of producing and selling that extra 1%. But when you raise your price by 1%, where does that extra revenue go? Jackson: Straight into the company’s pocket? Olivia: Exactly. Every single cent of that price increase, assuming your sales volume holds steady, drops directly to operating profit. Mohammed gives a great, simple example: imagine a manufacturing company with a 5% profit margin. For every dollar in sales, they make five cents in profit. Jackson: Right, a pretty standard, tight margin. Olivia: Now, they raise their price by just 1%. So that one-dollar item now costs $1.01. Their profit on that item is now six cents instead of five. Jackson: Okay, an extra penny. Doesn't sound like much. Olivia: But what's the percentage increase from five cents to six cents? Jackson: Oh. That’s a 20% increase in profit. From a one-cent price change. Wow. Olivia: That’s the windfall. And it’s not just a hypothetical. A famous McKinsey study of the Global 1200 companies found that, on average, a 1% price increase would boost operating profits by 11%. For some companies with thin margins, like Amazon or Tyson Foods, the book calculates the jump would be over 20% or even 80%. Jackson: This is blowing my mind. But it all hinges on that one little phrase you used: "assuming your sales volume holds steady." That’s the big fear, isn't it? The moment you raise your price, customers will flee. Olivia: That is the absolute core of the fear, and why most managers, as the book says, are deeply uncomfortable setting prices. They'd rather do almost anything else. Think about Costco. They're famous for their $1.50 hot dog and soda combo. They haven't changed that price in decades. Jackson: Yeah, it's iconic. People would riot. Olivia: They probably would! And that price has become a powerful symbol of their value proposition. But the book forces you to ask: what is that symbol costing them? That price has become a psychological prison. The fear of customer reaction prevents them from making a rational financial decision. And that's where the real strategy of the book begins. It’s not about blindly raising your price by 1%. It's about fundamentally rethinking what a "price" even is.

Jackson: Okay, so if it's not just about adding a few cents to the price tag, what is it about? How do you get this windfall without scaring everyone away? Olivia: You do it by realizing that a one-size-fits-all price is a relic of the past. Mohammed argues that you need to move beyond a single price tag and use a toolkit of three main strategies to give customers choices. The first one is called "Pick-a-Plan." Jackson: Pick-a-Plan. Sounds simple enough. Olivia: The story that makes this crystal clear is about Terminix, the pest control company. In the early 2010s, their industry was mature, sales were declining. Most people only call an exterminator when they see termites, which is already too late. Jackson: Right, it's a reactive purchase. You have a problem, you pay to fix it. Olivia: Exactly. So the COO, Tom Brackett, challenged his team to be disruptive. A guy named Steve Good led focus groups and found that for most homeowners, termites were "out of sight and out of mind." They weren't going to pay for a one-off inspection if they didn't see a problem. Jackson: That makes sense. It feels like a waste of money. Olivia: But what if it wasn't a one-off fee? Terminix developed a new pricing plan. Instead of a big fee for a single treatment, they offered a recurring annual fee. For that fee, you got a comprehensive inspection, any necessary treatments during the year, and—this is the genius part—a guarantee to cover any termite damage that happened on their watch. Jackson: Whoa. So they didn't sell a product, they sold a subscription. They sold peace of mind. Olivia: Precisely! They shifted from selling a reactive treatment to selling proactive protection. They tapped into a market of 72 million US homes that didn't have termites but could benefit from protection. Sales of their renewable plans jumped 12% in the first year. They didn't invent a new chemical; they invented a new pricing plan. That's "Pick-a-Plan." Jackson: That's brilliant. It completely reframes the value. What are the other two levers? Olivia: The second is "Versioning," which is probably the one we see most often. Think of Poland Spring water. You can buy a giant 5-gallon jug for your office water cooler, a 2.5-gallon jug at the grocery store for your fridge, or a 16-ounce bottle at a convenience store. It's all the same water. Jackson: But it's packaged and priced differently for different needs. The office, the home, the person on the go. It's like good, better, best. Olivia: Exactly. And the third is "Differential Pricing." This is charging different prices to different people for the exact same product. The classic example is airline tickets. The business traveler who books a flight for tomorrow pays a fortune. The vacationer who books three months in advance and stays over a Saturday night pays a fraction of that. Same seat, same plane, wildly different prices. The book notes that a staggering 94% of airline tickets are sold at some kind of discount. Jackson: So you have Pick-a-Plan, Versioning, and Differential Pricing. It seems like a lot of companies are already doing this stuff. I've seen some reviews that call the book's ideas a bit basic or repetitive. What makes Mohammed's approach so special? Olivia: That's a fair critique, and it's one the book indirectly addresses. The genius isn't necessarily in inventing these individual tactics. It's about organizing them into a coherent, conscious strategy that you can deploy systematically. He calls it the "Pricing Blossom."

Jackson: The Pricing Blossom? Okay, that's a much nicer name than "Profit Extraction Matrix." What is it? Olivia: Think of a flower. At the center, you have your core product with its value-based price. Each petal is a different pricing tactic—a lease plan, a premium version, a student discount, a stripped-down model. A company with a full "blossom" has many ways to attract different types of customers. It’s a framework for thinking. Jackson: So it's a map for using all those levers we just talked about. Olivia: Yes, and you can use it for offense—to grow and enter new markets—or for defense, which is where it gets really interesting. Let's say a new, cheap competitor enters your market. What's the first instinct? Jackson: Panic. Cut all your prices to match them. A race to the bottom. Olivia: The exact response that destroys profits. The book highlights a story about 3M. They announced they might have to discount some products due to low-cost competition, and their stock dropped nearly 9% in one day. Wall Street hates price wars. The "Pricing Blossom" offers a smarter way to fight back, often using a "fighter brand." Jackson: A fighter brand? What's that? Olivia: It's a specific version of your product designed to go head-to-head with a low-cost rival, protecting your premium brand from being devalued. The perfect case study is Burger King versus McDonald's. Jackson: The burger wars! A classic. Olivia: McDonald's has the Big Mac. It's their icon. Burger King wanted to compete on price, but they didn't want to discount their own signature sandwich, the Whopper. That would damage its brand. So what did they do? They created the Big King. Jackson: I remember the Big King! It was basically their version of a Big Mac. Olivia: It was explicitly their version of a Big Mac. It was designed to be a direct competitor, often sold at a lower price. It was a fighter brand. It took the hit, attracting the price-sensitive customers, while the Whopper could remain the premium, full-priced hero product. Burger King got to compete on price without sacrificing the perceived value of their main offering. Jackson: That is so clever. You create a disposable champion to fight in the trenches so your king can stay safe in the castle. And that comes from thinking systematically, not just reacting. Olivia: That's the whole point. The value of the book isn't in revealing that coupons exist. It's in providing a structured, strategic way to think about which petal of the blossom to use when you're facing a recession, or inflation, or a new competitor. It turns panic into a plan.

Jackson: You know, when you boil it all down, this isn't really a book about numbers and spreadsheets. It's about psychology. It's about understanding what people value and why. Olivia: Exactly. The '1% Windfall' is the headline that gets you in the door, but the real story is that price is a form of communication. It communicates value, quality, and purpose. And if your company only has one way of speaking—one price for everyone—you're effectively ignoring most of the audience. The book's true legacy is teaching businesses how to become fluent in the language of value. Jackson: I love that. So for someone listening right now—maybe they run a small business, or they're a freelancer, or even just work in a big company—what's one thing they can do tomorrow after hearing this? Where do they start? Olivia: Don't start by changing your price. Start by asking a question. Take out a piece of paper and write down the answer to this: "What are three completely different ways my customers get value from what I do?" Maybe one values speed, another values security, and a third values status. Just mapping that out is the first step to creating your own 'Pricing Blossom.' Jackson: That's a great, practical first step. It's about understanding before acting. We'd love to hear what you all think. What's a product you've seen that uses these strategies really well? Let us know on our social channels. Olivia: This is Aibrary, signing off.