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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

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