If you asked a product manager what the scariest part of their job is, I think that you’d get a lot of them telling you”pricing”. It’s sorta a black hole – you make a guess, cross your fingers, and then hope that enough customers buy your product at a given price and that you’re not leaving money on the table. On top of all of this, it turns out that there are 7 common pricing mistakes that product managers make – are you guilty of making any of these?
Mistake #1: My Product Is Not Worthy
Since we work with our products day in and day out, we have a tendency to become just a bit too familiar with them. This can lead us to start to believe that there is nothing about our product that deserves “premium pricing”. This is always wrong. Every product has some unique feature or use that will allow it to demand a higher price.
Mistake #2: An Average Price Is A Passing Grade, Right?
What could be simpler thancharging all of your customers the same price. Just imagine how nice this would make things for your sales teams and for the billing team. Oh wait a minute, could you be leaving money on the table? The answer is yes.
Over at UPS they had aone price fits all strategyfor years. Then along came FedEx and they cleaned UPS’ clock by offering their customers variable pricing which allowed some to pay more than the average and some to pay less. Turns out that this is what customers were looking for.
Mistake #3: Can’t Go Wrong With Cost-Based Pricing
So I’ll give you that creating and explaining a price based on your product’s costs is actually pretty easy to do. However, and this is a big “however”, this is completely the wrong way to go about doing your pricing.
The reason that it’s wrong is becauseit’s inflexible. As you sell more, your costs will go down. To do this type of pricing you’d have to recalculate your prices for each product and the first one that you sold would be way too expensive.
Mistake #4: But The Other Kids Were Doing It
All product managers are guilty of doing this at one point in time or another. We look around in our market space andsee what our competition is charging for their product.
The problem with doing this is that you are assuming that the competition knows what they are doing (not a safe assumption) and that your product is exactly the same as theirs. Since both of these are probably wrong,don’t price your product this way.
Mistake #5: Motivating The Sales Team In The Wrong Way
The ultimate goal of any product is togenerate as much profit for the company as possible. The problem is that all too often sales teams are working with the wrong motivations to make this happen.
Most sales teams are motivated byvolume of sales. This causes a problem because a great way to pump up your volume is to slash your price (and your profit). It instead you motivate the sales team based on the value that they deliver, then you’ll be doing the right thing for the company.
Mistake #6: Staying In Your Silo
If you’re going to doproduct pricing correctly, then a bunch of different departments within the company are going to have to work together. All too often this isn’t happening.
Product management is going to have to work with finance and sales to create prices that work. Everyone’s going to have tocrawl out of their silosand pull together on this one…
Mistake #7: But The Customer Said That It Was The Right Price…
When did a customer ever come up to you and say “I’d like to pay more for your product?”I’m betting never.
Letting your customers tell youwhat to price your product at is a bad idea– they’ll never tell you the truth. Instead, you’re going to have to determine the value and then use that information to create a price that your customers are going to be willing to pay.
What All Of This Means For You
Yes, coming up with a price for your product can bea scary thingfor any product manager to do. However, it’s also probably one of the most important jobs that you have.
In order to do a good job of pricing, you’ve got to make sure that you’re not making one ofthe 7 pricing mistakes that we’ve covered. Now that you know about them, you’ll be able to avoid them.
At the end of the day we’ve all got to remember that there isa difference between your product’s price and the act of pricing. Your product’s price is what your customer is willing to pay for it while pricing is what a product manager does to make sure that customers are going to want to buy it. Good luck!
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™
Question For You: If cost-based pricing is wrong, then what do you think the right way to price a product is?
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What We’ll Be Talking About Next Time
Product Managers have long struggled withthe idea of getting an MBA. Sure, it seems like a good idea, but who has the time or the energy to haul yourself off to some college campus several times a week to attend classes. There are those “online” universities that let you do it all over the Internet, but they still seem just a bit shady. Isn’t there another way to get the results that you want?