Product Ownership — Maximizing Value with Product Pricing
Introduction
Regardless of the source (e.g. PSPO-I or PSPO-Advanced, Scrum Guide, or this article) you should know that the purpose of the Product Owner role is to “maximize the value of the Product”. There are many ways to maximize the products’ value, for example by continuously making choices about what to built and what not to built. Another way to maximize the products’ value however is to influence the products’ pricing.
Fun fact: The average product manager spends 13% of their time pricing.
Source: Product Focus Survey 2017
Many Product Owners we’ve met, don’t have anything to do with Pricing though. In various organizations, we’ve encountered Pricing departments that set the prices for all the products and services for the entire organization. If something similar is the case for you, if you don’t have a role in the Pricing process, then why should you care as a Product Owner? This is exactly what this article is about. Sales and Pricing is one of the topics we cover in the Professional Scrum Product Owner — Advanced course by Scrum.org. And since this is quite a new topic for many Product Owners, we decided to write an article about it. Enjoy!
What is Product Pricing?
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.
Source: https://en.wikipedia.org/wiki/Pricing
So what is interesting about this definition? We think the most interesting part is that Pricing is a process. Something being a process means that it will happen at least more often than once. Or in better words; Pricing is a process that should happen on a regular basis.
The Product Pricing process
In some organizations, Pricing is a manual process, where people set new prices manually, and where they inspect and adapt regularly. In other organizations prices can be set automatically. For example, think about websites where you can book a hotelroom or a flight. These kinds of companies can typically change their prices automatically, based on predicted demand, availability, season and other factors.
When taking a high-level view on a typical Pricing process, we see the following steps:
- Inspect various sources / documents
- Inspect the Company Goal
- Set the Pricing Strategy
- Set the Pricing Tactics
- Adapt the prices, tools and communication
The various steps including it’s contents are explained in more detail in the following sections of this article.
INSPECT — Relevant inputs to inspect when setting product prices
A first step to take when you want to set or change your products’ prices, is to inspect some valuable information you may already have. The Inspect step is therefore all about making information Transparent in order to Inspect it (for yourself, but maybe also for your stakeholders). There are some sources that we’ve found very valuable when setting or changing our products’ prices, some examples are:
- Win / Loss Analysis — If your company is a commercial company, then it is very likely that there is a ‘sales machine’, which gets new customer orders or assignment in for your company. Therefore, they will probably create quotes for customers. In addition, it is then likely that your company has participated in tenders (via a Request for Proposal). These tenders and quotes are great sources of information. Analyse them, try to find out why your organization has won or lost tenders/quotes. Why did prospect customers choose your company? Why did they choose for the competitors’ product/service? Was it about the prices? Or about the (perceived) value?
- Competitor Offering — If you want to set/change the prices of your products/services, than you better know what your competitors offering is. Learn more about their Pricing model if possible, but also make sure to understand where they differ from you. Create a Strategy Canvas for example, to compare products and services. Find your unique differentiators, and also know about your competitors USPs.
- Cost — Of course, one element of setting a price on your products and services are the costs of designing, building, maintaining, servicing and improving them. You should know about the Total Cost of Ownership of your product. Once you know that, you know how much revenues your product should produce at a minimum.
- Predicted Demand and Availability — In many cases predicted demand or availability are influencers of price. It is the simple concept of “offer and demand”. When there is high demand, and low offer, prices will likely increase. When there is low demand and a lot of offer, prices will likely decrease. It’s probably a good idea to obtain some insights about market trends, about your products usage, about sales trends, about customer trends, etc. Try to understand how demand and availability are likely to change in the (near) future.
- Value Proposition— Another relevant aspect to look at is of course; Is your Value Proposition (still) correct? You could for example check this via the 5Ps (Problem, Pervasiveness, Pay, Position and Possible). You could also use canvasses like the Business Model Canvas, Lean Canvas or Product Canvas. The simple thing is, if there is a mismatch between your product and the customers’ needs, or if there is only little value in solving the customer problem, then that will influence the prices.
COMPANY GOAL — Company Goals influence your Pricing Strategy
Every organization has a goal to achieve. There may even be multiple goals. With the topic of Pricing in mind, the way we look at it, is that each product should have a clear goal to achieve. Maybe you could also call this product goal then. However, the product goal should be in line with the company goal, so that’s why we’ll stick with ‘Company Goal’. Looking at Company Goals, there are a few typical examples we face, which are:
- Increase Revenues — For many products and organizations, there is a goal of increasing overall revenues. When managing your product, this could also be your main goal. Increasing revenues, for example by bringing in new customers.
- Increase Margins — When the company and product goal is to increase margins, we frequently see organizations focusing more on reducing costs, optimizing processes and improving overall efficiency.
- Increase Marketshare — This company goal is mainly focused on getting new customers in, which may contribute to increasing revenues at the present time and/or in the future.
- Reduce Churn — This company goal is about keeping the customers that the organization has. It is (usually) more difficult and costly to attract new customers than it is to keep current customers.
- Achieve Survival — Achieving survival is not necessarily an ambitious goal that organizations would like to achieve of course. However, sometimes you have to do what you have to do in order to achieve survival. If this is the situation a company is in, then it will most likely influence the Pricing Strategy.
PRICING STRATEGY — Deliver more value through the right Strategy
The objectives of setting the price of a product are typically to: maximize profit, meet target sales or market share, and maintain a price that is stable in relation to competitors’ prices. There are many factors (internal and external) that influence a products’ price. Internal factors include the cost of creating the product, marketing strategies, product specifications, distribution, production plant capacity and promotion for example. Some external factors influencing the price include market competition, legal factors, target audiences, data, personalization and of course demand and supply. There are various Pricing Strategies you can employ, we’ll explain five common Pricing Strategies below:
Cost-plus Pricing — Cost-plus pricing is a pricing strategy in which the selling price is determined by adding a margin or buffer to a product’s unit cost. This means that an organization has to deliberately maintain a product cost breakdown, in order to prevent selling the product below cost price. Cost-plus pricing is a common Pricing Strategy for government contracts, utilities and single-buyer products that are manufactured to the buyer’s specification.
Example: As you can see in the picture, there is an airport in The Netherlands which crosses one of the highways via a bridge. This airport used to do maintenance on this bridge and the tarmac every 4 years, in order to keep it safe and in good quality condition. Since doing all this work was very costly, the airport asked one of its vendors if they could calculate (via software) how often the maintenance really had to be done. The vendor calculated how much it would cost to build the product, added some margin to that and came to the (for them) great price of around € 40.000,-. Some time later, the project was executed, software delivered, customer happy and bottles of champagne opened to celebrate. After some time, the Product Manager asked the client: “Okay, so this all is very nice, it’s good to know that maintenance could be done every 6 years instead of every 4 years. But, just out of curiosity; how much does this actually save you?” Then it turned out this would save around 40 million euros. So, maybe it would have been more beneficial to choose a different Pricing Strategy right?
Competitive Pricing — Competitive Pricing, or Competition-based Pricing, is a pricing method in which the price of your product is based on competing products in the market, which form the benchmark for your prices. Typically, your product is then sold at a price (just) above or below the benchmark of your competitors. Setting a price above the benchmark will result in higher profit per unit but might result in less units sold as customers would prefer products with lower prices. On the other hand, setting a price below the benchmark might result in more units sold but will cause less profit per unit.In very competitive markets, selling organizations have little control over their prices. In competitive markets, price is mostly determined by supply and demand.
One of the advantages of Competitive Pricing is that no complex calculations are required. Selling organizations basically follow the common market price, or a price set by the market leaders. In addition, in competitive markets, the burden of price-based marketing is lifted. However, other forms or marketing efforts might be needed.
The downside of Competitive Pricing is that when most competitors adopt (roughly) the same prices, price is no longer a differentiator. This means that organizations typically have to make additional marketing efforts in order to attract customers. Additional marketing efforts might include aggressive advertising, better customer support, market saturation and others.
Value-based Pricing — Value-based pricing is a Pricing Strategy wherein prices are based on the buyer’s perceived value. Value-based Pricing is a Strategy that is often used by companies that offer unique or distinguishing products or services in comparison to competitors. Value-based Pricing is rarely used for commodity products, but is more applicable for products and services such as attorney fees, architectural design, car customization, and other custom products and services. Another form of Value-based Pricing is to take a small percentage of the costs saved or extra profits made by the customer (for example as a consultancy company taking 5% of the cost savings that a company makes after helping them with their Agile transformation).
Example: Mr. Davis wishes to have his car, a 1969 Cadillac Coupe, restored. It has been sitting in his barn for a while and rust has eaten most of its parts. He approached KustomKars Company to do the job. Based on the value it would give the owner, the company quotes an all-in price of $30,000. Mr. Davis agrees to the price as he believes that it is a fair measure of the benefit he will receive.
KustomKars now has to work within a budget and make sure that the total cost it will incur will be within $30,000 if it wishes to make a profit. If the company wishes to earn at least $2,000, then target costs must be set at up to $28,000. However, the satisfaction of the customer must not be sacrificed. The perceived value must still be met.
Example source: AccountingVerse.com
Price Skimming — With the Price Skimming Strategy, selling companies set high prices after the initial launch of the product, so that they can quickly recover a large part of the costs made and also generate large profits quickly. Price Skimming is a common Strategy in technology markets, such as games, videos, mobile phones, gaming consoles and laptops.
The idea with Price Skimming is that once the upper class market has been served (product units sold are decreasing), the price is lowered in order to also attract another target audience and increase the customer base. This is interesting for the groups of potential customers who were not able to afford the product or were not willing to pay the higher price after initial launch. Price Skimming results in a larger market share and continuous sales.
The biggest advantage of Price Skimming is that the organization generates higher profits in the earlier stages of the product’s lifecycle. This is useful because R&D and development costs for technology products are high. By setting high prices, these high expenses can be recovered quickly. Another benefit of high prices is that customers often associate high prices with high quality.
The downside of Price Skimming is that organizations will limit their sales volume, because prices may be too high for the majority of the (potential) market. Another disadvantage of this strategy is that when the prices are reduced later on, customers might not be as happy as the initial group of people, who bought the ‘new’ product right after the launch.
Penetration Pricing — Penetration pricing is quite the opposite of Price Skimming. With this strategy the company first sets low prices for the (new) product, with the intention of quickly capturing market share. The goal is to attract customers away from competitors by initially offering low(er) prices. After the product has been accepted and adopted by customers, and once it becomes an established brand in the market, prices may be increased. Many people are enticed by low(er) prices, and it is an incentive for many people and organizations to switch between suppliers.
The benefits of Penetration Pricing are typically a high volume of sales, get in many new customers quickly and therefore quickly get more marketshare. Another benefit of setting low prices is that possible startups will be discouraged to enter the market and current competitors may be forced to leave if they cannot keep up with low prices.
The downside of this pricing strategy though, is that the margins and revenues per product unit sold are quite low and it might cause customers to question the quality of the product. Also customers may not be willing to extend contracts or repeat purchases when the prices are increased.
PRICING TACTICS — Apply various Pricing Tactics to make Pricing more effective
In addition to the Pricing Strategies, there are many Pricing Tactics that can be used. You find examples of 10 popular Pricing Tactics below, which are: Charm Pricing, Anchoring, Tiers, Bundling, Unbundling, Variable pricing, Luxury pricing, Dynamic pricing, Personalized pricing and Subscriptions.
If you want to learn about even more Pricing Tactics, then make sure to read this article from Nick Kolenda, which contains tons of Pricing Tactics, including all kinds of interesting examples.
ADAPT — Pricing is more than just choosing a number
Many people don’t realize that Pricing is a process and that setting great (smart) prices is actually quite difficult and complex. Pricing doesn’t end just after choosing a Pricing Strategies, applying Pricing Tactics and setting your price in the form of euros or dollars. Setting or changing prices typically requires a lot of adaptation in an organization. Here are some examples of what is typically needed in order to really set or change your products’ prices:
- Market Communication — Newly set or changed product and service prices need to be communicated to the market. Customers need to be made aware of price changes before the actual price change happens, which probably means communication to customers via a printed letter, digital newsletter, advertisements or other forms of communication.
- Internal Communication — Besides customer communication, your internal colleagues need to be aware of the price changes as well. For example, think of sales, account management, marketing, website or webshop team, developers of calculation/quote tools, etc. Your colleagues will probably need some time to process the price changes, so make sure to communicate this in time.
- System changes and tools — In most organizations, we use all kinds of tools and systems that help us to do pricing. For example, price calculation tools, price explanation tools, websites and webshops, invoicing or billing software, financial systems, etc. etc. Organizations use a lot of different tools and we’ve encountered some organizations that had up to 20 different tools (from online to Excel-sheets and all kinds in between) which were influenced by every price change made.
- Market feedback on price — When all the adaptation is done, the Pricing process isn’t over. This is actually when it starts all over again. Because the market might respond to your new prices in unexpected ways. Customers might start complaining about the new prices or maybe they even want to leave you and go to a competitor. Of course, it is a great idea to do price-experiments along the way of this process. Don’t wait with getting feedback from stakeholders and the market until all the work is already done and all communication and tools are adapted.
Define your next steps
Hopefully this article around Pricing was useful for you. Here is a quick recap of what we covered in this article:
- Inspect — We need to inspect various sources and information. The Inspect step is therefore all about making information Transparent in order to Inspect it (for yourself, but maybe also for your stakeholders);
- Company Goal — Every organization has a goal to achieve. There may even be multiple goals. Knowing your company (or product) goal well helps you to choose the right Pricing Strategy to achieve the goal(s);
- Pricing Strategy — There are various Pricing Strategies that can be used, each having different advantages and disadvantages. And each contributing to the Company Goals in different ways;
- Pricing Tactics — There are a lot of Pricing Tactics to apply to your products’ prices. Using the right Tactics may have a huge impact on your products’ sales;
- Adapt — Pricing is a process of regular inspection and adaptation. Pricing is not as simple as choosing a number. Setting or changing prices often involves changing many tools and systems and doing a lot of communication.
Want to learn more?
Hopefully this article Product Pricing was useful for you. Pricing is one of the many interesting topics that is covered in the Professional Scrum Product Owner — Advanced course.
We frequently publish new blogs and articles on Medium, so if you have any follow up questions or if you want to learn more, then please reach out. Alternatively, come and explore the Stances of the Product Owner in the Professional Scrum Product Owner-Advanced class. Find a trainer to your liking or in your area, and deepen and expand your Product Management knowledge and skills. And let us know what you think about the training! What did you like? What can be improved? Let’s collaborate to take the profession of Product Ownership to the next level.
If you’d like to experience the Professional Scrum Product Owner-Advanced course, go to Scrum.org to find a class in your area. If you’d like to participate in one of our classes, check out our Xebia Academy page for more information or inquire for an in-house class via training@xebia.com.
