Product managers know that how they price their products can be the difference between runaway success and total failure for their products. However, knowing this and knowing how to price well are two completely different things. In fact, there is often a great deal of outside pressure on product mangers to change their product’s price all the time. When should a product manger do this, and when should they not?
An Introduction To Breakeven Analysis
It turns out that numbers are on the side of a product manager when it comes to pricing. Assuming that you’ve done your homework and you’ve come up with what you believe to be a fair price, then you’ve got a good place to start from.
Almost without fail, folks on the sales team will show up and tell you that you’ve priced your product too high – they’ll never be able to sell it at its current price. This is where break-even analysis comes in.
The trick is that any discussion about your product’s pricing can’t just be about the price. Instead, it needs to also include a discussion of how many units will be sold at a given price. You got it – what we’re really talking about here is profit. Your company doesn’t really care if you sell a million copies of your product at $1 each or just one copy for $1M. What they care about is the amount of profit that they’ll make from selling your product.
Break-even analysis gives you the tools that you need to figure out how your product’s price and the quantity of products that need to be sold are related.
How To Use Breakeven Analysis
What break-even analysis is going to allow you to do is to calculate the minimum number of sales that your sales team is going to have to make in order to make up for any lowering of your price (or fewer sales if you are going to raise the price).
Here’s the formula:
The formula uses the amount that you want to change your product’s price by (in $) and divides it by your current margin (CM – how much profit you currently make on each sale) added to the price change once again. Note that the price change has a sign – negative if you are lowering your price, positive if you are raising it.
If you’d like to hear me explain this in greater detail along with some additional examples, it’s all online at Product Pricing: Cost Plus is Wrong, So What’s Right?
Final Thoughts
As product managers we are ultimately responsible for the success of our products. How we choose to price our products plays a big role in their long term success. Nobody will ever be happy with our pricing and we’ll always be asked to make changes to it.
Breakeven analysis is a tool that product mangers can use to expand the pricing discussion to include sales quantity. This turns the entire discussion into a profit discussion and that’s the type of conversation that product mangers should be having. Product managers who can do this will have have found yet another way that great product managers make their product(s) fantastically successful.
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What We’ll Be Talking About Next Time
So what do product mangers mange? Generally I’d agree with you if you answered “products“; however, I’ve been giving this some thought and I think that we’re missing the mark if that’s our answer.