Most of my work is really fun and challenging in all the right ways. However, where people don’t seem to be happy is in the area of pricing. And it comes from an expectation. The expectation is that pricing is simply generating a number. The conclusion people come to is that they can be given a formula for developing that number and walk away happy. I have recently worked on a competitive pricing project and had someone in a training class struggling to resolve a service pricing issues. In both cases, the search was for a magic bullet formula. And I truly wish I had one. In reality for these situations, all that is available is a lot of hard work, examination of lots of data and some detailed assumptions.
Developing pricing with a lot of unknowns reminds me of the scenario in Isaac Asimov’s Foundation where they develop a formula to understand the future of humankind. It is a vast formula to which learned professors add their small contribution after many years of study. And it can still be undermined by a singularity that disrupts the entire equation.
Much like the premise in Foundation, you need to understand the underpinnings of your pricing situation. I’ll repeat: “your pricing situation”. For other than the most trivial of pricing: “I sold last year’s model for $100 and this years is a lot better so we’ll charge $135 and keep the old one around as a entry level price point,” there is a lot more to do.
To start with you need to understand your strategic starting point. And this is well out of the realm of pricing. Are you a highly differentiated supplier of luxury goods to a discriminating audience? Are you Costco with a warehouse full of goods that people can walk through and serve themselves? Each one has a valid position in the market and a corresponding price point. And your pricing must be backed up by the corresponding experience. If I’m going to spend $10,000 on a handbag, I won’t be doing it at Costco, but in a luxurious and comfortable shop where I am waited on hand and foot – or arm. If I want 15 pounds of flour at a good price, I’ll go to Costco and carry it myself. And we cover this in the Strategy and Pricing sections of the Product Management training.
So when you approach the edges of the pricing world, the area where “Call for a quote” or “Custom” appear, you need to engage your analytic mind in the task. In this case, I’ll use the example of pricing a support product. The steps can be used regardless of the product you are pricing, but the questions you ask might differ.
Step 1: Define the problem. What are you trying to price? What are the parameters of what you are trying to price? Number of languages supported? Hours of Service? What are actual Support deliverables?
Step 2: Collect data. If you are working on a support product you’ll need to know how many times support was requested for a particular product. How long did the call last? How much does a fully loaded support call cost? How many people can really support this product at a first line level and then within engineering? Can you automate any of this support? This step takes time, but will involve you in a great level of understanding of your support organization. It may even lead you to understand how the system can be improved, but that is a story for another day.
Step 3: Develop guideposts. Write down your assumptions, guiding principles, boundary cases, profit margins – anything that will guide your thinking in the next stage. In most B2B situations, I suggest at this point that you can include a Good, Better, Best pricing scenario as it will make your sales person’s life easier – and allow you to sell more product overall.
Step 4: Spreadsheet number crunching. Collect all your data in one place and start to analyze it according to your guideposts above. Just a note to use as many variables as possible so that you can change your scenarios easily. I once hard coded a spreadsheet and was not happy when I had to make changes. I eventually ‘hid’ some numbers in the spreadsheet and can now modify it quickly as needed.
If you need to achieve a certain margin, that goes in as one variable. If you need to be priced similarly to a competitor that might go be a price point that you reference as you develop your price. You might also want to work the price in two ways: What does it cost you to deliver the product? What are most customers willing to pay? You may need to spend some time to research what people will pay. You will work on developing a couple of likely scenarios.
Step 5: Check your conclusions. Run your scenarios by the entire gamut of people that will be affected by it – especially if it is radically different from initial expectations. Get their feedback and work through the numbers again.
Step 6: Sell it and sign it off. Get the proper approvals and get it in the system.
Step 7: Communicate. Spend time getting your news out in the world so that people know why and how the price was set. You will have different messages to different internal and external audiences. The effort of communicating value and price at the same time can increase the effectiveness of your message.
Step 8: Check out the actual impact. Once your pricing scenario has been launched, give yourself a window to see how it is going and then check back in to make sure that your pricing is achieving its results. If it isn’t, you’re back to the spreadsheets.
So, if you wonder why we don’t offer a magic pricing bullet it’s that we know that the process involves a lot of thought and analysis. When you do have your answer, it is much easier to defend, much easier to implement and much more successful than an quick fix solution in which you don’t understand each of the pricing levers. Think of yourself as developing a pricing model which in time will be added to by other learned Product Managers as they learn more about the value the product brings in resolving your customer’s problem.