5 Secrets To An Effective Pricing Strategy For Product Managers

by drjim on October 28, 2013

What is the right price for your product?

What is the right price for your product?
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Pricing really should not be all that hard to do, right? Pricing is just another part of your product development definition. Find out what your customer is willing to pay, design a product to be sold at that price that will give you a 25% profit margin, and poof you should be all good to go. However, somehow life never seems to be that easy when it comes to creating the right price for your product and that’s why you need to know the following 5 product manager pricing secrets…

Secret #1: Analyze

I can’t even begin to tell you just how important this step is in creating the right price for your product is. Get this right and you’ll have another skill that you can add to your product manager resume. Assuming that your product is not brand new, then you’ve already been selling it for a while. This means that you’ve got some data on both what seems to be selling and who is buying your product.

You need to take the time to sit down and look at what your data is telling you. What you’ll be looking for is information on which types of configurations of your products are the most profitable. Additionally, you are going to want to determine which of your existing customers are generating the most profit for you. Note that often times your largest customer may actually be costing you money.

Secret #2: Develop

Once you have a good understanding of what product configurations are selling and who is buying your product, your next step is going to be to develop pricing strategies. You are going to want to develop different strategies for different scenarios.

As you are doing this, you are going to have to be sure to account for different company circumstances – both your own company and the company that you’ll be selling to. As a product manager you always need to be aware of the larger social and economic world that your product lives in and account for events (such as a global recession) in your pricing strategy.

Secret #3: Form

Pricing is a big job. In fact it’s probably too big of a job for you to handle all by yourself. In order to perform the pricing function correctly, a great deal of data needs to be constantly collected and processed.

In order to do this correctly, you are going to need a team. The team that you create to handle pricing for your product needs to be willing to step up and face new challenges. Not every decision that they make will be correct – they need to be willing to learn from their mistakes and move on.

Secret #4: Price

Ultimately this is what it all comes down to, right? The goal of any pricing exercise is to find the correct price to set for your product that will end up generating the greatest sales volume and the largest profit for your company.

The trick to setting the right price for your product is to make sure that you price for your company’s profit margin. Don’t make the mistake of trying to price for volume of sales. If you do this then you just might find that you’ve sold a lot of your product but that the company has not made very much money based on your efforts.

Secret #5: Emphasize

As product managers we are always tempted to come back and play with our prices once we’ve finally set them. It turns out that this is ok to do if we know how to go about doing it.

What is important is that you have a consistent pricing strategy. Remember that the price of your product is a communication channel between you and your customers. If your customers can understand why pricing changes are occurring, then they will be willing to accept changes in your prices (think about gas prices and car drivers). If you send confusing messages in your product’s prices, then your customers will go elsewhere.

What All Of This Means To You

You can have the best product in the world with all of the features that every customer is just dying to have; however, that does not mean that your product is going to be successful. It will ultimately come down to how you price your product: have you found a price that will attract enough customers while at the same time allowing your company to maximize the amount of money that they make on every sale?

In order to ensure that you’ve set the right price, you need to take the time to analyze what kind of transactions bring in the most money, develop a pricing strategy, form a pricing team, price for a profit, and emphasize the importance of a consistent strategy. All of these steps should be a part of every product manager job description.

This may all see like a lot for you to be doing all at the same time. However, if you are willing to take the time to do it correctly, then you can be assured that you’ve set the correct price for your product. Get this right and your product is one step closer to being a success!

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: How often do you think that you should revisit setting a price for your product?

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What We’ll Be Talking About Next Time

One of the toughest jobs that any product manager has is to do is to communicate with a wide range of different people. When we have a new idea, a new strategy, a change to our product development definition, or a new product feature that we’d like to implement, sometimes getting what we want to have done (and why) across to somebody else can be the hardest thing that we do.

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{ 2 comments… read them below or add one }

Roger L. Cauvin November 1, 2013 at 8:29 am

A few years ago, you cautioned against cost-based pricing, which prompted me to write this piece on value-based versus cost-based pricing. The bottom line is that you need to start with a value-based approach, but the margins need to work for your business, as you wrote in this most recent entry.

You’ve outlined many important guidelines here: pricing data collection, analysis, and experimentation (while maintaining some level of consistency). But how do you start? What is the value of the product, and how do you quantify it? I suggest negative pricing, which quantifies value in terms of the costs to prospects of not using the product.

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drjim November 1, 2013 at 11:28 am

Roger: You’ve read my old stuff! You bring up a number of good points: ultimately product pricing has to be all about value. Yes, you’ve got to keep an eye on what your customers are going to be willing to pay and that’s going to limit what your margins can be, but as you said taking the time to find out what your customer’s lives would be like WITHOUT your product is a great place to start…

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