Performance Based Pricing – Is It Right For Product Managers In Tough Times?

by drjim on July 6, 2009

Stormy Economic Seas Can Cause Product Managers To Consider Slashing Prices To Stay Afloat

Stormy Economic Seas Can Cause Product Managers To Consider Slashing Prices To Stay Afloat

Not to get too doom and gloom on you or anything, but how is your product doing these days? Sales a bit down? Sales fallen off a cliff? Desperate times call for desperate measures and I’m willing to bet that you are starting to get some pressure from upstairs / sales to start slashing your product’s price.

Don’t do it! Pricing is a complex beast and if you start slashing, you’re not going to be able to raise it once things get better. I’ve got a different approach for you to take – try performance based pricing.

What NOT To Do In Bad Times

I’m not sure about you, but in my experience when the good ship business starts to run into stormy waters, the first thing the captain wants to throw overboard are the advertising and marketing programs (to which product mangers are firmly attached). Clearly, communicating with the customer is seen as an unaffordable luxury.

Can you tell that I think that this is a VERY bad idea? After those budgets have been given the old heave-ho, the crazed captain and his crew start looking at your product’s price as a heavy weight that must be gotten rid of if the firm is to make it through the storm.

In these desperate times, what nobody seems to remember is that if you dramatically lower the price of your product, you will have done two potentially fatal things to your product from which it may never recover.

The first is that you’ve now cut any profit that your product has been bringing in. This is pretty much like drilling a hole in the company boat. Now not only do you have to worry about the economic storm swamping the boat, but you’ve got red ink flooding in to the lower compartments and you not having a bailing bucket.

Finally, can anyone take just a moment and think about what a very low price for your product is going to communicate to your customer? The low quality / diluted brand effect is going to be like a sailor’s tattoo – you won’t be able to remember where you got it, but it’s always there.

A Different Way: Performance Based Pricing

Difficult times require innovative thinking – put down your PowerPoint slides and get your calculator out. What this means for you is that instead of slashing your prices, perhaps it would be better to do away with your existing pricing model all together. How’s that for out-of-the-box thinking?

What we’re talking about here is moving from a fixed price scheme like you have today to a performance based pricing scheme. This approach is best suited to product managers who have service based products, but with a little creative thinking it can be applied to almost any product.

Performance based pricing calls for you to stop charging your customer up-front for the full price of the product. You may still charge them some smaller fee to cover processing the order and perhaps shipping and installation. However, in these hard times their up-front charges will be dramatically reduced.

Fear not – your product has not become a charitable gift. Rather, your contract with your customer now reflects a sharing between your two firms of the benefits that your customer will receive from using the product. Ah, how’s that for a switch?

The Devil Is In The Details

As you can probably imagine, just how that contract gets written is the key to your product’s and your firm’s long term success with performance-based pricing. Almost all of the risk in this setup now lies on your shoulders…

There are three key performance-based pricing considerations that you need to keep in mind when you are working out the contract details with your customer:

  • Stick With Customers That You Know: A pricing scheme like this needs to be used with customers that are operating in industries that you know something about. That new customer who is developing that tidal wave powered fuel cell is probably a poor candidate.
  • Define “Success”: Your customer is buying your product to accomplish some very specific thing. Do you know what that is? Do they? Working out an agreement as to what “success” looks like is critical to making this type of pricing work.
  • Control The Variables: Even if you both agree as to what success looks like, there are many other things that can get in the way of your customer achieving it. You need to lock down the possible variables that can allow your customer to claim that success was not achieved.

Final Thoughts

When you are awakened in the night by the ship’s captain who tells you that the boat is going down and your product’s pricing is too heavy and needs to be thrown overboard, remember that you’ve got options. In my experience, rash pricing decisions made quickly at the end of all-day strategy sessions always come back to haunt you.

Performance-based pricing is one pricing tool that you have that just might allow you to emerge from this economic storm with your product’s brand intact. This is how great product managers make their product(s) fantastically successful.

Questions For You

Are you getting pressure to slash your product’s price? Are you going to be able to say “no”? Have you tried anything else to lower your customer’s cost? Do you think that performance-based pricing would work for your product? Why or why not? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

Ok, I’ll say it one more time: times are tough all over. If you are a Product Manager who’s product is, how shall I say this nicely, priced on the high side then what are you to do in these troubling times?

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{ 1 comment… read it below or add one }

ashley kyle January 30, 2010 at 4:53 am

Interesting idea. I would have liked some more elaboration or some examples. Are you planning a continuation of this article?

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