Responsibility #5: Determine Product Pricing Strategy
By Michael Colemere and Candianne Haacke
Steps to Private and Public Sector Pricing
For a product manager, setting and maintaining a pricing strategy can consume a great deal of time and effort for both private and public sectors. With the industry recognizing over 20 types of pricing strategies, it can be difficult for a product manager to know where to start. Without over-engineering it, following three steps will help product managers determine their pricing strategy.
Gather data. The product pricing strategy is part of the overall product strategy. Its effects extend beyond the cost of the product and imply value. The more product managers know about their customers, the more likely they will be able to understand perceived value and maximize profitability. Assuming similar products are on the market, existing data is already available. Review competitor pricing. Identify profit margins. Determine which customers are likely to generate the most profit. Form a small pricing team that can help collect, process, and discuss data. Engage with the team regularly to learn from mistakes and avoid a “set it and forget it” pricing model.
Example of a Pricing Strategy
While working at Tektronix, product manager David Monk found an innovative way of working with pricing teams. The printing market was very competitive, and conditions caused them to constantly rethink their pricing strategies. So their pricing team regularly held a “dumb ideas contest.” One of the dumb ideas was to give free black ink for life with the purchase of a printer. The reason this seemed like such a dumb idea was because black ink had the highest profit margin. Surprisingly, free black ink for life resulted in selling historic amounts of printers, which caused colored ink sales to increase, more than compensating for the lost profit from black ink revenue. From this example, we learn that pricing can be a way to change markets. Netflix similarly emerged as a result of reducing both out-of-pocket expense and time to watch a movie.
Focus on value. Don’t make the mistake of focusing on volume of sales or profitability alone. Instead, focus on consumer value. Consumers make purchasing decisions based on “worth-what-paid-for.” This is a principle taught by organizational design consultant Paul Gustavson. It means consumers find a product worth the price they paid. For example, people are willing to pay $600 to $900 for an iPhone because they feel the value is greater than or equal to the price they paid; they also feel the value is greater than competing Android options.
Companies like AT&T use this value metric to indicate customer satisfaction. With nonprofits, organizations compete for the consumer’s time, attention, and identity, but not money.
By way of example, the makers of FamilySearch (a nonprofit family history organization who aim to be the largest collection of genealogic and historical records in the world) were quick to focus on creating value. In a recent study, they learned how overwhelmed consumers were by family history. Consumers wanted family history research to be easier and to take less time. So, FamilySearch is reducing the time necessary to experience success by providing bite-sized engagements anyone could do. Some of these less-time consuming engagements include writing a story, uploading photos, reading about one ancestor, and more.
If a product is seen as valuable, it will “sell” or “be used.” Measuring value can be tough, but is certainly possible and very worthwhile.
Form three options. Once product managers know their audience and understand costs, the next step is to form three viable pricing models — one conservative, one aggressive, and one in between. Applying a Goldilocks approach to pricing will give executives options to consider (instead of relying primarily on intuition). As they consider each option, support inherently increases.
The following five rules can be used to develop successful pricing models:
· Price needs to be higher than the cost
· Consumer value needs to be higher than the price
· Price is driven by supply and demand (consumer benefit)
· The business needs to be clear on its pricing goals
· Pricing is a strategic activity not to be confused with short term offers
It’s important to note that each pricing model should be tested against sales scenarios.
Product pricing is best determined when the strategy includes stakeholder support, an understanding of consumers, and a focus on consumer value. Developing the pricing strategy is a continuous effort that is tuned and tweaked as costs and economic factors change. When product managers recognize that pricing is an indication of consumer value in the form of time, energy, and identity or money spent a successful pricing (“worth what paid for”) model can be achieved in either private or public sectors.