Thursday, September 28, 2023
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The absolute science behind product pricing

The absolute science behind product pricing

Every now and then you come across a blog on product management that really gets you: well written, thought through, witty, recognizable and making a complete joke about a topic. I came across the Cranky Product Manager years ago. At that time she was not disclosing a lot about herself, now (well, not updated recently) her profile is fully visible as Sue Raisty.

One of her blogs is on pricing and it’s so darn good that I recommend everyone who needs to do something in the area of pricing to read it. My post below will not come close, and i’m not trying to. Respect Sue, thank you for your inspiration.

All of my pricing experiences have been in the B2B space. So if you’re looking for recommendations on retail pricing you are in the wrong place. I am no expert on retail pricing, and isn’t retail pricing visible to everyone and therefore super easy? I’m probably saying something very silly right now…

Myths On pricing for product managers

Myth 1 – Pricing happens before development starts

You’re building a great product and have figured out pricing long before development started. It was part of the business case for building this product in the first place right?

Yeah right – development cycles typically take a long time. Even when you do some agile magic and work towards an MVP it will still take forever. Building solid business cases for products is a myth. I have not experienced companies so mature that they are able to go through a business case where costs are lined up against future revenues. Most products are build based on gut feel, portfolio plans and a solid vision. Pricing is not part of this.

Myth 2 – Trust the sales team to figure out pricing for you – they know their customers best.

If you are doing an annual price check for your products, yes they are a good source. Best is to do some number crunching on your SAP or whatever ERP system you use to first to understand trends in customer behavior. Then work with the sales team to understand why customer A left us mid-year. ‘Did they, oh really I didn’t know’, or why customer B adopted your lower margin version of the product: ‘Well they just wanted to pay less’. When checking prices, it’s not just important to understand the volume for each of your products, but more importantly the gross margin. Did you actually make some money on your customers.

For new products, your salesteam will typically has no clue what the best price points should be. Better rely on other sources and just keep your salesteam in the loop.

Myth 3 – Ok, lets trust google for helping you figure out pricing

We’re not in retail, remember. B2B pricing is not out there on a website for someone to download. You can google all you want, and it will help you understand what competitive products are out there but that’s pretty much it. If your B2B product is sold on to retail customers you can try to do some simple math to understand how your competitors are pricing products. E.g. if the price of the competitive retail product is $100, and you expect the resellers margin to be up to 30%, you can assume your competitors price is around $70. That’s it though – you will typically not be able to get any help from Google.

Myth 4 – Sales gurus of your competitors can tell you everything about the pricing strategy of their company.

Start by interviewing salespeople who are looking for a new job. The interview process is a good and solid place to ask all sorts of questions to candidates. What do the processes of competitors look like, how much discounting do you do, what was their latest victory. It’s a bit of a game, and your competitors will do the same. You will get some insights into the pricing policies of your competitors, but you typically don’t hire those in charge of pricing and pricing strategy.

Myth 5 – You product manager, you own pricing

This is the section I like best also in the Cranky PM’s blog. You think you figured it all out and have come up with a brilliant strategy. Then you set up a meeting with your boss to get the check in the box. What a deception….

The boss has been around longer than most of you, and probably comes up with 5 arguments why your pricing is not working. You will walk out of the room with option A or option B.

Option A – The boss has changed all your prices, and this is what it will be moving forward. You feel like an idiot that you did not come up with this, or you were just overwhelmed by your boss and don’t know if this is the right job for you.

Option B – The boss has sent you back to your room to do some homework. Desk research, talk to some people, analyse a few more spreadsheets. Your job is to redo the pricing and come up with a better rationale for your pricing (aka – do research and then come up with the pricing model your boss suggested in the first place).

OMG – if nothing works, what should I do?

Zhin Zhu and the subtle art of pricing

You are probably sitting in your room now thinking about the options left to come up with a superior pricing strategy. Your mind is blank….. So let’s come up with something simple. It really starts by figuring out what type of company you represent, and pricing logically follows your companies philosophy and business model. I like to make an analogy to car companies, as most people understand this.

  • Do you consider yourself to be a Lexus, offering high quality services and a small range of luxurious products at high prices to your customers,
  • Or are you more of a a Toyota, offering decent cars and a wide selection at affordable pricing,
  • Or do you perhaps consider yourself to be a Tesla, offering amazing innovation and first mover tech, but accept the fact that sometimes there are a few flaws.

Pricing follows strategy

The pricing will follow your strategy. If you consider yourself a Toyota like company, your processes are focused on efficiency and offering products at scale. Your products need to appeal to the masses, and you will have some low cost, medium cost and high end product in your portfolio. So a broad and differentiated portfolio with options. Decent quality, affordable products, lifetime guarantee.

When considering yourself a Lexus, your portfolio will be smaller, and your focus will be on delighting your customer with superior service. Your customers are willing to pay for this. Your brand speaks quality, and you are recognized for this.

Pricing follows your strategy. High priced products for Lexus, affordable pricing for Toyota, high priced products for innovators like Tesla.

Use your experience to come up with a base line. Then start testing pricing by talking to customers. Consider pricing to be part of rolling out the MVP. Once a few customers have agreed with the price levels, you can scale up and release your portfolio.

Test the waters for a few months, and keep talking to your sales team, and customers if the pricing is right. You can start tweaking from there.

Products follow a lifecycle

Final words on pricing – pricing follows a lifecycle, just like your products follow a lifecycle. The behavior of your pricing depends from product to product. It’s not so easy to just say something useful about the right price point for each stage in the lifecycle though 🙂

Introducing a new product typically means starting with a high price. The logic is that you can always lower prices, but raising them is very difficult. You can also start with a low price to enter a market, and once you’ve established a market share use your influence to raise it, or add variants of your product with additional features.

An end-of-life product for example at the same time can be provided for a low price as you want to get rid of it. At the same time, you can also price it very high, as those few customers who are still interested are willing to pay a higher price, as there probably are not a lot of places left where they can buy it.

the end.


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