4 Assumptions that Product Managers Must Challenge when Setting Price

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One of the most challenging tasks of product mangers is to set the target price for their products. This task is even more challenging as there are certain convictions that are“public-knowledge” and often raised by the rest of the stakeholders in the organization.

These assumptions may create misalignment between product management and sales management on the target price as well as ending up with a price that is too low.

#1: “We cannot charge more than our competition”

When penetrating the market with a new product, it is a common assumption that price must be lower than the incumbent market leader in order to put a foot in the door.

Well, this isn’t necessarily true. If you have a product that has unique features that are not offered by alternatives or competition, you can certainly apply a segmentation approach where you target a subset of the market that is looking for your product uniqueness. The segmentation can be geographical, demographical or any other parameter of choice. The higher the value customers place on your product or service, the higher the price they’re likely to pay. It’s a natural law and a fact of human behavior.

EVE model will help to position and communicate your price

Key take away for the product manager:

 Segment the market

 Define your ideal customer

 Tune your product accordingly

 Apply value modeling to set the right price

Supporting Tools & Related Conventions:

 EVE price model

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#2 “Customers care only about price”

This is a common belief – which is far away from the truth. Of course they care about price, but this is only part of the big picture. A basic marketing concept refers to customer’s “persona” which reflects your target customers’ behavior, likes, dislikes preferences, tastes, lifestyle, income levels etc. By learning these attributes, you will gain a lot of insight that will help you to set the right value for your products or services and from there – the right price.

Key take away for the product manager:

 Study your customers’ needs

 Tailor your solution around it

 Set the right Price

Supporting Tools & Related Conventions:

 Persona Analysis tools

o Price-sensitive customers

o Convenience-centered consumers

o Quality/Status-conscious customers 

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#3 “Let’s penetrate low. We will increase the price later”

Many entrepreneurs set a price that looks attractive in order to trigger market traction, without first checking if the price covers their costs and cerates profitability. The notion that customers will be willing to pay you more for the same product as they become addicted to it, is delusional. If you set a price that favors your customers, but is bad for your business, it will only be a matter of time before you won’t have a business anymore. Conjoint analysis can help in prioritizing between the features and set a profitable roadmap

Key take away for the product manager:

 Understand what your costs structure

 Set the right Price (low enough to attract customers but high enough to be profitable)

Supporting Tools & Related Conventions:

 Cost Structure Analysis

o Direct costs

o Indirect costs (or “Overhead” costs)

 Conjoint price model

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#4 “Product cost structure must remain product manager’s property”

Many product managers believe that their product’s cost structure must be kept hidden from the rest of the organization due to possible risks:

1. Sales pressure to reduce price

2. Information leakage to customers

3. Information leakage to competition.

To explain a price to your sales team, you need to discuss your margins, and explain why it is important to detach the target price from the product cost. This means that you may defend low price for a high cost component (merely because it is not a differentiator) and a high price for a low cost product (i.e SW) because it is a differentiator. EVE model analysis will help you stand in front of your sales team and explain your price and target margins.

Company’s stakeholders should be aligned with your pricing strategy, knowing why you priced each feature the way you did, and feel comfortable defending it in front of the customer.

Key take away for the product manager:

 Be as transparent as you can – internally!

 Deliver a win-win pricing strategy for you and your customer

Supporting Tools & Related Conventions:

 EVE model combined with product cost analysis

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Product Management Experts.