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The Product Manager and the Art of Pricing: Moving from “best guess” to data-driven practices – Part 2

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.

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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.

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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.

In Summary:

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

Striving for Product Excellence?  See our next Product Management Course.

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The Product Manager and the Art of Pricing: Moving from “best guess” to data-driven practices – Part 1

Guest Post by Sagy Gulinka

Part I – Quantitative Tools

Pricing is one of the critical and complex processes in a company. Complexity stems from many factors, among them are company’s strategy, competitors’ pricing and positioning, market segmentation, products’ portfolio, cost structure and more.

Pricing decisions making associated with these factors requires data from different sources and involvement of different stakeholders in the organization, sometimes with conflicting interests. In light of this complexity, it is no wonder that Product Managers sometimes feel that their impact is eroded and they find it difficult to navigate pricing decisions.

Another point worth mentioning, and I face it frequently – pricing discussions are too often qualitative in nature and are not based on enough quantitative data and facts. This kind of discussions is sometimes leading to bad pricing related decisions. As bad as it is, in life, every problem can be also an opportunity – Product Manager’s opportunity to lead a structured pricing process based on facts and data. The Product Manager is in a central position and in close relations with all stakeholders and hence can be the focal point that balances a variety of different vectors.

Directors tend to side with anyone who brings facts and knowledge to a decision-making process. The tools available to product managers include:

  1. Quantitative metrics and reports that point to the price performance of the product
  2. Methods and specialized Pricing knowledge
  3. The presentation of an integrated picture of the various considerations (marketing, sales, development, finance, etc.)

Example: Quantitative Analysis – Sale Price Distribution

Sometimes you may be asked questions such as: “Why is the average deal price significantly lower than the goal you have set a specific corresponding segment of customers?”

This below form of presentation better allows understanding the company’s sales operations because we look at the amount of deals made at every price level rather than just discussing the average deal price…

Price Distribution

In this example you can identify a well-known phenomenon called the Magnet Effect. Sales people are selling at the lowest price allowed to the point where they have to get a managerial approval (in the graph above it is happening at a price of 110). Even an intermediate level manager will try to exhaust the process prior to turning to the next level of approval (for the price of 70).

I will quote a sales manager at a large high-tech: “We did not hesitate to drop the price as long as it was allowed, but we made a tremendous effort not to reach the regional manager for approval…”

The key, in this case, was the remuneration model of the sales team that was based mainly on sales quantities and without direct binding to the sale price. You can see in the chart different selling prices of the same product within a specific market segment and it is clear that there are deals that were closed at a too low a price due to the magnet effect.

This example demonstrates how collection and integrated presentation of quality facts and data can assist in fixing product pricing and sales guidelines which immediately inflicts on the company’s bottom line.

In Part II of The Product Manager and the Art of Pricing we will explore 2 additional tools that are more qualitative in nature. See you soon…

This is a guest post by Sagy Gulinka, Owner at TMsight

Striving for Pricing Excellence? See details about our upcoming Pricing Workshop

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4 Assumptions that Product Managers Must Challenge when Setting Price

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