How much does your product cost? Is it the right price? Both of these questions are a part of the product development definition. As product managers when we set a price for our products we might also set up some discounting rules, and then we prefer to pretty much leave things alone. However, what if you couldn’t do that? The product managers over at trash hauler Waste Management ran into this problem and if they didn’t find a solution, then the company was going to lose millions.
A Pricing Problem Piles Up
So what’s the big deal you might be saying? A trash company just drops by and picks your trash up once or twice a week. How hard could that be to create a price for? It turns out that it’s actually quite difficult and that’s why pricing is not often listed on a product manager resume.
In the case of Waste Management, one of the issues that the product managers were facing was a simple issue of volume. Waste Management has over 22 million customers (wouldn’t we all like to have that problem?) and this means that they have to produce over 100,000 price quotes every month.
The reason that pricing for trash pick-up isn’t just a simple cut-and-dried process is because there are so many different variables involved. The first issue that has to be considered is if a customer is located on an existing route – if so, then they will be cheaper to service. Things just more complex from here. Additional factors that have to be included when calculating a price for a customer include: type of waste, weight and volume, scrap value, any rules on where the garbage can be taken, and how many competitors are also vying for the business.
Using Pricing Optimization Software To Haul Off A Pricing Problem
So what did the product managers over at Waste Management do to solve their pricing problem? They started by building some predictive analytical models in order to learn what factors really drive market prices.
Their next step was to implement a pricing optimization software package (also sometimes referred to as revenue management software). I’d like to be able to tell you that it was as simple as getting the new software up and running and then they were done, but as with all such things in life it was not that easy.
The product manager’s next step was to use what they had learned from creating their analytical models to customize the pricing software to match both their industry as well as their market. It turns out that Waste Management sells its services in 25 different regions. This meant that they needed to create 25 different customized statistical models that would allow them to both create prices for each region while understanding price sensitivities.
The end result of having this new pricing tool is that the Waste Management product managers have a lot more control over their prices. They can now adapt their prices when they are trying to break into a new market. When a customer calls for a quote, they can factor in if the customer has called recently with a complaint or if they are in a highly competitive area. Knowing more means that the Waste Management product managers can create better prices which will drive more sales of their services.
What All Of This Means For You
Very few product managers claim to be good at creating prices for their products. We all tend to try to be members of the “set it and forget it” club. However, over at Waste Management they couldn’t do this. It was time for them to add pricing to their product manager job description.
The product managers at Waste Management were facing a huge problem: they were creating 100,000 custom quotes for their products every month. Clearly using a product manager’s gut instincts wasn’t going to be the best way to create optimal prices. Waste Management ended up implementing a pricing optimization software package and spent a lot of time customizing the analytical models that it used in order to automate their product pricing.
Pricing for products of any complexity will never be fully automated. Human intervention will always be required. Product managers need to look for tools that can allow them to simplify the process of creating the optimal price for their product for each customer. Do this right, and your product’s pricing problems will be hauled away for you!
Question For You: Once implemented, how often do you think that product managers should change the analytical models that their pricing optimization software uses?
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What We’ll Be Talking About Next Time
This is the kind of story that I really like – it has a Porsche in it! Hopefully everyone know who Porsche is. They are the German car manufacturer who makes ridiculously fast sports cars and then sells them for an awful lot of money. It’s how they go about doing the selling part that just might hold some lessons for Product Managers…