Product Managers Need To Beware Of The Hidden Impact Of Discounting Their Product

by drjim on May 21, 2012

Sure, you'll see more products at a lower price, but at what cost?

Sure, you’ll see more products at a lower price, but at what cost?

Have you ever given any thought to the damage that you might be doing to your company’s other brands when you slash the price of your product? It turns out that cutting your product’s price might boost your product’s sales, but at what expense?

Say Goodbye To Your Margin

As a product manager, it can be very easy to focus on just one product. We see this product as the center of our universe and we’re always looking for ways to boost its sales because that’s one of the ways that our company evaluates us.

An easy way to boost the sales of any product is to discount itslash its price. This approach is so common that it’s almost part of the product development definition. We product managers know that we need to be careful here: cutting the price of our product is going to cut the profit that we get from every sale, but as long as we make enough new sales, then we should ultimately grow our bottom line. When we’re successful at this, we have something else to add to our product manager resume.

This is all fine and good; however, it’s when our company has multiple products that compete in the same market that we can run into problems (ex: if you are the product manager of a shampoo). What can happen in this situation is that when you discount the price of your product, you end up stealing away customers from your company’s other products. What this means is that not only are you losing margin on every unit of your product that you sell, but you might also be losing the profit margin that your company would have made on the other product that they sell.

It’s All About Price And Demand

Has this all gotten complex enough for you? What’s a product manager to do when we’re faced with a situation in which lowering the price of one product might end up impacting the sales of a another of the company’s products?

What you are going to want to do is to take the time to look at what’s called the price elasticity of all of the products that your company sells. Price elasticity refers to how much a change in the price of a product will affect the demand for a product (remember when HP slashed the price of their discontinued tablet computer to $99 and suddenly everybody wanted one?).

All too often as product managers, when we’re considering discounting our product, we assume that our product has a price elasticity that is somewhere in the middle of the likely range. That is, we don’t think that demand for our product will be greatly impacted by a change in price.

All too often, we discover that this is not the case. Instead, our potential customers are significantly impacted by the price of our products. What’s even more important is that the customers for our company’s other products are also deeply impacted by the discounted price that our product is now being offered at. The two groups of customers proceed to “jump on” our new discounted product and in the end, the company ends up losing money.

What All Of This Means For You

When a company offers multiple products that all address the same market, product managers need to be careful when they discount their product. Cutting the price on their product may end up harming the company’s overall profit margins.

Although reducing the price of a product may boost its sales, it may also end up reducing the sales of other products offered by the company. Product managers need to take the time to calculate what the net cost of offering a discount on their product is going to be.

It is possible to drive sales of your product by discounting. However, it is important to realize that there may be unintended side effects. Product managers need to be aware of these side effects and take the time to determine exactly what they will be.
Knowing how to manage your product’s price should be a part of every product manager job description. Learn how to do this and you can ensure that not only will discounts boost the sales of your product, but that they will also boost the company’s bottom line.

– 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 test the price elasticity of your product?

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What We’ll Be Talking About Next Time

Love ’em or hate ’em, business plans are a part of every product manager’s life. They should be a part of every company’s product development definition. Because we can’t do it all by ourselves, we need to make use of funding and resources from the company. In order to get what we need, the company insists that we tell them what we’re going to be doing. That’s where the product business case comes in. However, no matter how much time and effort you put into creating one of these things, it will all be for naught if you are making the following 5 mistakes.

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