Can Product Managers Be Too Clever When It Comes To Pricing?

by drjim on September 22, 2014

Uber is a mobile application that lets you summon a ride

Uber is a mobile application that lets you summon a ride

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How much does your product cost? I’m willing to bet that you have a price sheet / guide somewhere that took a big effort to create. You probably had to study the market, study your customers, and study what the other guys were charging in order to come up with your prices as a part of your product development definition. Once you had done this, you then had to get a bunch of people to approve your prices. Whew – finally you were done, the prices were set in stone, and you moved on to other things. However, is this really the best way to price your product?

A Better Way To Price A Product – The Uber Model

So let’s think about pricing for your product for just a moment. What would the best way to do this be? We all know about supply and demand. The more that customers want a product (think snow shovels when there is a big snowstorm forecasted), the more that they are willing to pay for it. Every product has a similar model. Your product is probably more desired by your potential customers at different times of the day, week, month, or year.

Given this knowledge that your product becomes more desirable at different times, shouldn’t you be adjusting your price? Wouldn’t you want to raise your prices when customer demand goes up and lower them when there is less customer demand? For that matter, what would your customers think about this? Get this right and you’ll have something else to add to your product manager resume.

Uber is a relatively new service. They provide a free mobile application that anyone can download. In a big city, when you need a ride from one location to another, all you have to do is to use the mobile application to request a ride. When you reserve a ride, you pay using your mobile phone so there this no need to pay the driver. Very promptly a car will show up for you. You’ll end up paying roughly 1.5x what you would pay for a standard taxi ride, but you don’t have to hail a cab – your ride comes for you. Needless to say, Uber offers a product that is very popular with their customers.

Problems With The Uber Model

Now the thing about taxis is that although people may not like them that much, they at least know what they are getting when they get into one. Taxies have existed for so long that they have become highly regulated. This means that it is always going to cost the same amount to travel from point A to point B.

Uber’s pricing doesn’t work this way. Instead, during events such as a snowstorm or on New Year’s Eve after midnight, Uber’s prices go up. Sometimes significantly – 8x in some cases. As you can well imagine, Uber’s customers are not pleased about this. Uber points out that they need to raise their prices to make it worthwhile for their drivers to be out on the streets in these adverse circumstances. They also make the point that if you have a problem with their price, then don’t use the service.

From a product manager perspective, Uber has a publicity problem here. They are using supply and demand to offer dynamic pricing for their product. Customers are always going to complain when Uber prices shoot up. However, what the Uber product managers need to do is to start to educate their market. Sure, an Uber ride during a snowstorm might be very expensive; however, if somebody is using them to get a pregnant lady to the hospital during a snowstorm then the price might actually seem fair. Documenting stories like this and sharing them with potential customers will serve to balance the complaints the next time demand exceeds Uber’s supply!

What All Of This Means For You

Pricing a product has always been a challenge for product managers. Price it too low and you are leaving money on the table. Price it too high and you won’t be selling very many. All too often we have a habit of “setting and forgetting” our product’s prices because they are too hard to update. Knowing how to set the right price for your product is a key part of your product manager job description.

Over at the mobile application developer Uber, they’ve come up with a better pricing model. The cost of a ride increases when there are fewer cars on the streets: during snowstorms, on New Year’s Eve, etc. However, customers who are used to fixed prices tend to push back when they see the higher prices.

As product managers we want to maximize the amount of profit our company can get from our product. Incorporating dynamic pricing would be a great way to make this happen. However, we need to take the time to educate our customers so that they know what to expect.

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

Question For You: How can you convince your customers that dynamic product pricing is good for them?

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What We’ll Be Talking About Next Time

Eating at McDonalds is a guilty pleasure that we have all done before. It seems like there is a McDonalds restaurant on just about every corner and when we’re in a rush, or simply don’t have time to plan a meal, we always know that we can go to McDonalds to get something to eat. However, lately McDonalds sales have been falling in their primary market, the U.S. What has McDonalds done wrong and how can they fix it?

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