Driving Lessons: Product Mangers Learn To Ride The Economy

by drjim on April 15, 2009

Product Mangers Need To Learn How To Ride Economic Ups And Downs

Product Mangers Need To Learn How To Ride Economic Ups And Downs

The Dow Jones Average plunges 700 points in a day. Then it rises 500 points the next day. Your best customer just suddenly goes out of business one day (Enron, Lehman Brothers, Circuit City, etc.). Sure seems like no Product Manger could ever learn to deal with the worst economy in a generation…

Wrong! Our brother and sister product mangers in Eastern Europe, South Africa, and Latin America have been dealing with markets like this for a long time. They see this as a time to take over rivals, implement bold ideas, and generally boost their business. Want to learn their secrets?

Martin Roth and Richard Ettenson over at the Wall Street Journal have been doing some digging in order to find out how product managers can make the best of tumultuous times.

One thing that they’ve discovered is that when the economy tanks, this is a great time to prepare for the future by getting your customers to trade up. This sounds rather backwards right? I mean when times get tough, people tend to trade down. Even though the margins on your stripped down products are skinner, most product managers think that SOME sales are better than none.

In emerging markets, product mangers have realized something much deeper. They get their customers to trade UP to premium products even though corporate budgets may be tight.

The key to doing this successfully is to be very, very careful about how you set the prices for the different tiers of your product offerings. You can’t make the price differences between basics and premium products too much or else your budget constrained customers will get turned off.

Instead, what you need to do is to accept a lower profit margin on your premium products – in fact, lower than most companies are normally willing to accept. However, we  are not currently living in normal times. You want to signal to your buyers that your premium products are a good value.

If you can signal to your customers that your premium brand is offering them more value for the money, then they will be both more willing to trade up to it as well as to stick with it during hard times.

An example might make all of this a bit clearer. Say your product is a software package that you sell in a basic package for 20 users that you price at $10,000, an advanced package priced at $12,000, and a premium package priced at $13,300. When the economy sours, what you want to do is change your pricing to what use an approach that’s called line symmetry. Now all of your packages are priced the same ($10,000) but the number of user licenses changes to 20 for the basic package, 17 in the advanced, and 14 in the ultimate. Now not only is the overall price lower, but the incremental price for each user license is smaller and more consistent.

Using this type of pricing scheme during a recession makes it easier both economically and emotionally for your customers to trade up to your premium products. Hard times call for novel product manger ideas.

Have you changed the pricing for your products to better deal with the recession? Are you trying to get your customers to trade up to your premium product offerings? Are you being successful? Leave me a comment and let me know what you are thinking.

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{ 2 comments… read them below or add one }

Stuart Foster April 15, 2009 at 10:37 am

I like the concept of “trading up to premium” a lot. It makes sense, but often can be a tough sell (go figure right?). The problem these days is that a lot of companies think quarter to quarter…not year to year. So they are after the short term gains that can be achieved by cheaping out some of their investments. Do you have any suggestions to help convince companies to temper this urge?

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Dr. Jim Anderson April 15, 2009 at 3:03 pm

Stuart: ouch – you’ve gotten right to the point! Ultimately, it comes down to who’s running the show: is the decision maker a “short timer” or a “long timer”. If they are looking to move on (or up) quickly, then there is probably no way that you’re going to be able to get them to look beyond the current quarter. So don’t even try. However, if they in it for the long run, then you’ve got some options. The key here is to get enough “face time” with them that you can ask the questions that, when they answer them, they will reach the conclusion that getting customers to trade up is the solution. Nobody ever said that this was going to be easy, but that’s why product management is so fun…!

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