Pricing, the dark side of Product Management

Pricing strategy is one of the most important tasks that belong to product management. It is somewhat of a black art, and there are many cooks trying to get their hands in the soup pot

Well, as the Dude sits here, sipping on my first Caucasian of the afternoon, and contemplating firing up a J to complement it, it seems that a series of discussions around pricing of products are in order. Whether you sell hardware (widgets), software, or a service, the price should represent the value to the customer. Sounds simple, but in actuality, it can be quite complex to quantify value. Price it too high, and your sales will be sluggish (or non-existent), price it to low, and you leave lots of dollars (euros, pounds, yen, etc.) on the table. Many companies that I have worked for have poor processes for setting prices. I have always tried to bring a repeatable process to the table (with some mixed results).

The foundation is what is the value of your product. If you can define it well, then the rest of the pricing strategy becomes straightforward. There are several mechanisms for determining value. I usually slog through the Porter-Sloan methodology, worth the price they ask for their license. It is rigorous, quantitative, and it tries to remove the subjective from the equation. However, it does require a lot of analytical research, and massaging of data that is cumbersome to accommodate, particularly if you are not sure of your competition (direct or indirect) which unfortunately is a trait in my market segments. This leads to some ambiguity, and assumptions that feel funny to make, yet it is a good, data driven approach. This is the gold standard.

Lately, I have been reading the book: Pricing Strategy by Tim Smith, which provides a textbook like experience, with enough algebra to satisfy a technical geek like the Dude. Very scientific, and lots of formulas algebra, and the like stir the mathematics geek in the Dude.

Before thisseries gets into a more technical discussion though, there is one source of assistance for pricing that you should avoid like the plague. Your sales team. They will uniformly convey that whatever you are pricing at is too expensive, and if they are lazy (nb: not all salespeople are lazy, just many of the ones I deal with are), they will whinge about it being so hard to sell because competitor X will discount more, or competitor Y has a lower price, or Competitor Z has this whiz-bang feature that we don’t have, so we must have a lower price. Truth is, when you get factual information, price sheets, features from a data sheet, or do hands on competitive analyses, you find that all these specious arguments fall apart. Sales just likes to have a lower price so that they don’t have to work hard to convey the value. Or, “it is easier to be the low cost leader”.

As product managers, we need to prioritize our development efforts to provide tangible value to customers. Value is what we sell, and we need to convey to both the customers, as well as the sales channel the value of our products. Easier said than done.

(heh heh, I found this gem in my “drafts” folder from almost 3 years ago. Still valid today)

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