Product Managers Learn To Optimize Prices In Order To Boost Margins

by drjim on April 30, 2012

Forget market share, it's really all about profit margin…

Forget market share, it’s really all about profit margin…

So what does a product manager need to do in order to make his / her product more profitable? As I suspect every product manager learned during the last global recession, cutting costs associated with your product is one important step. That’s a nice skill to have on your product manager resume, but it’s not enough. Once that’s done, what comes next? How about raising your product’s price? Great idea, but how does a product manager go about doing that?

Why Raising Your Product’s Price Is So Hard To Do

During the product development definition stage, we set a price for our product. Then things change. How hard could it be to raise your product’s price? Just go out there and do it – right? Hold on just a moment, you really don’t just want to raise your product’s price. What we’d all like to do is to find a way to optimize our product’s price. Hmm, that sounds rather fancy. Let’s see how we can go about doing that.

What product managers would like to have is a way to have the insight that they need in order to both improve and manage their product’s profitability, defend their profit margins against internal and external threats, and finally come up with a competitive price that their product’s market will accept.

The first thing that a product manager needs to decide on is just exactly what do you want your product’s price to do? You’ve got a lot of choices here. Do you want your price to get customers to come in and check your product out? Do you want it to simply boost your margin?

When salespeople get involved in determining what your product gets sold for, this is when things really start to get tricky. Since the sales person really controls the company’s relationship with the customer, in the end they are the ones who get to control your product’s pricing no matter what you’ve told them.

As the bad economic times start to fade into the past, product managers are seeing demand for their products start to rise. Now is the time for them to figure out how to get their product’s pricing right.

3 Things That A Product Manager Needs To Do In Order To Raise Prices

I think that we’re probably all on board in regards to wanting to come up with the right set of prices for our products; however, how to go about doing it is the unanswered question.

It turns out that there are three separate steps that product managers need to take in order to come up with the types of insights that you’re going to need in order to convince your sales force that your price is the right price.

Price analytics is the process by which a product manager uses all of the data that you have about past sales in order to determine what is important to your customers. While doing this task, you need to look at what the data is telling you and determine the variables such as share of invoice, volume trends, and customer total revenue which influence how much your customers are willing to pay for your product.

Price optimization comes next. During this activity, the product manager creates pricing models that use market data to create price bands that the sales teams can use with specific customers or in specific situations. The goal of this activity is to identify the specific areas where your product can generate higher margins by increasing it in one situation or decreasing it in another.

Finally, price execution comes into play when the product manager focuses on communicating the product pricing scheme out to the sales teams. This activity includes finding ways to enforce the usage of the prices that you’ve created and finding ways to prevent your sales teams from creating their own discounts.

What All Of This Means For You

The days of squeezing more margin out of your product simply by looking for ways to reduce costs are coming to an end. We’ve all been there, done that. This means that product managers are going to have to finally bite the bullet and take a look at how they are pricing their products.

The goal is to find ways to maximize the profit margin of their product. One of the biggest challenges that we all face is that our sales teams don’t like to be told what they should be selling our product at. In order to address this, product managers need to start to do 3 things: price analytics, price optimization, and price execution. Keep your eyes open, these are going to start showing up in the next product manager job description you take a look at.

I agree that tinkering with your product’s pricing can appear to be a dangerous thing to do. However, the payback can be fantastic: you can significantly boost the margin that each sale of your product brings in. Be brave and start to perform the 3 pricing actions that we’ve discussed and then sit back and watch the money start to come rolling in…!

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

Question For You: What do you think is the best way to get your sales team to sell your product at the price that you’ve set for it?

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What We’ll Be Talking About Next Time

If you have been out to a mall, driving in traffic, or attended a sporting event lately then you’ve seen that just about everyone had their faces planted into a mobile device of some sort. From a product manager point-of-view, this sure seems to be telling us that we need to find a way to get information about our product onto everyone’s mobile phones. But how?

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