The 5 considerations that result in the best price for a product
The topic of this episode is pricing. It is a frequently asked about topic. Determing the proper price for a product impacts profit potential and sales volume expectations.
I have a great guest to help us understand the components of a pricing strategy and how to price a product.
He is Tim Smith, author of five books on pricing, Adjunct Professor of Marketing and Economics at DePaul University, and founder of Wiglaf Pricing.
Summary of some concepts discussed for product managers
- [3:05] Why is pricing important? Getting pricing right matters to the longevity of the business and ability to serve the customer. We need to consider fixed cost, variable costs, units to sell, and price. A 1% improvement in price results in a 12% improvement in profit.
- [4:43] What is involved in getting prices for a product right? There are 5 key parts to that question.
- Product strategy – who are competitors, who are the key customers (market segments), and what differentiates the product.
- Pricing strategy – what is the basic structure of pricing, such as a purchase, lease, or other exchange of value.
- Market pricing – what is list price, which is determined from the pricing strategy.
- Price variance – this is the go-to-market price, consideration of discounts, and use of promotions.
- Price execution – providing the correct price to customers.
- [8:06] How do we get the list price right? This requires market research to determine the customers’ willingness to pay for the value delivered by the product. Techniques include voice of the customer (VOC), economic value to the customer, conjoint analysis, and price elasticity methods. With these, we are trying to understand the value delivered to customers, the desired combination of product features, and alternatives the customer has.
- [22:10] Should promotional pricing be used? It’s an important consideration in a pricing strategy. As an example, consider the smartphone market. Apple uses no discounts and has 90% of profit share with 11% of market share while Samsung has 10% of the profit share with 22% of market share. Apple has been very successful generating higher profit with less market share.
- [27:38] What is a common mistake that is made with pricing? One is always pricing only on gross margin, only considering product costs and not considering value delivered to the customer.
- Tim’s pricing group, Wiglaf Pricing
“In an authentic world, failure is something you embrace. It’s almost a noble pursuit. I come from that world—it supported me in creating the punk aesthetic.” – Malcolm McLaren, manager of the Sex Pistols.
Thank you for being an Everyday Innovator and learning with me from the successes and failures of product innovators, managers, and developers. If you enjoyed the discussion, help out a fellow product manager by sharing it using the social media buttons you see below.