Part II – Qualitative Tools
In Part I of “The Product Manager and the Art of Pricing” I described the importance of exercising data-driven practices associated with Product Pricing decisions and also introduced the Magnet Affect through an example of Sale Price Distribution analysis.
In this article, I will present the use of 2 qualitative tools and methodologies for price setting and price execution.
Price Setting – Fixed Price or Variable Price?
Sometimes it is difficult to adjust the price model for different segments of customers, each with different needs and price preferences. One of the most significant decisions is whether to charge customers with a fixed fee or a per-use fee.
The model presented below allows us to make an initial adjustment of the price structure for different segments of customers and helps us to answer the above question.
The most profitable models usually combine elements of fixed and variable price.
Price Execution – Using a Price System
A connection between the worlds of pricing and sales is done using the method of Price System which enables different selling approaches to different segments.
This method outlines list price, target price, minimum price and floor price where each has a role in maximizing the sale price for each segment:
Small Businesses – Similar to each other so often set a fixed price for them, i.e. list price = target price = minimum price for a given segment.
Medium Size Businesses – Different from each other, but you can group them into groups according to characteristics that affect the profitability of the organization. These characteristics are called Counter Performance Elements. For example, Quantity consumed can affect our target price within a specific segment.
Note: In many cases a dedicated simulator is required to calculate the target price depending on characteristics of the customer.
Large Businesses – Very different from each other, have special needs and require non-standard solutions. A specific price should be set for them through a full economic model – Contribution Model.
Product Managers are operating in a very complex environment of both internal and external information and need to integrate the collection of the truths of the organization in order to recommend the right price structure.
Often, your product is sold in a number of segments, which requires multi-pricing depending on customer needs.
In order to maximize the potential of your product, you sometimes need to affect other areas of the organization. For example, the sale model of the product to different segments (which is basically under the responsibility of the Sales organization).
Your way to affect the price of your product is to be the most professional person and drive organizational decisions based on data, facts and principles of the world of pricing.
This is a guest post by Sagy Gulinka, Owner at TMsight
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