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Three phases of pricing for product managers
This episode is about pricing.
A lot of product managers are not very involved in pricing decisions. If you are one of them, you should change that.
Our guest, Ben Malakoff, learned how to price products and in this interview he shares what you’ll need to know to be part of pricing decisions, increasing your influence.
Ben has held several product management roles and is now the senior director for sales operations at FiscalNote.
Summary of some concepts discussed for product managers
[2:51] Let’s imagine we’re pricing a voice-controlled kitchen faucet. What are the elements of pricing a product?
Pricing is very much an art and a science. Three methodologies of pricing are value-based, market level, and cost-plus. For the voice-controlled faucet, there are elements of value-based because it’s a new, exciting product that you might be able to charge a premium for, and elements of cost-plus because it’s a hardware product connected to consumer goods and services.
[4:12] What are the three phases of pricing?
[4:45] Data Analysis
One of my mentors, John Damgaard, said, “In God we trust. All others bring facts.” To make your pricing opinion count, you’ll have to bring data. An important piece of data is unit sales—how many units and in what segments are you selling? Also, consider how much you need to discount to move a certain amount of product and whether people buy more with the discount. Identify the market size and trajectory. Faucet sales are significantly impacted by new home construction and remodeling, so if few homes are built, faucet sales may decrease. A couple of other types of data analysis are attach rates of other products and the cost of developing the product.
[6:39] Market Research
Market research is finding out what you can charge based on what you’re offering. You want to find out whether you can charge a premium for your voice-activated faucet. Find out what your competitors are doing. The most important activity is talking to your customers. Ask them how much they would pay for the faucet.
[8:08] Pricing Recommendation
The first two steps are the science. This one is the art. You have to somewhat take a leap of faith, because you won’t know the exact right price until you’re in the marketplace, but you have enough information to make a very educated guess. Use your data, market research, and team to assign a price.
[8:40] Why is pricing work important?
This is a very basic pricing process, but it’s very successful. I often see organizations not doing any pricing work. Just doing the level of work I’ve outlined often results in a 10x-20x ROI. Pricing work is a low-investment, high-return activity.
[10:39] Why are attach rates important?
Attach rates are a calculation of which products are selling together. For example, sinks or dishwashers might be sold with the faucet. This gives you insight into packaging. What could you bundle with your faucet and what promotions could you have? Nailing the price alone is only 1/5 or 1/6 of what you have to do for successful pricing. Packaging analysis is another important piece.
[13:09] How does SaaS pricing work?
SaaS pricing is primarily value-based. The SaaS companies I’ve worked with typically try to get a 3x-10x ROI, which is typically way above the cost. Cost is more of a factor in SaaS businesses that have certain suppliers or other major expenses.
[15:42] What market research tools do you recommend?
Know your competitors cold. Your price-to-value ratio is largely set by your competitors.
When you interview your customers, always ask their willingness to pay. Conjoint analysis is a great way to do that in a survey. A less advanced option is doing a large number of customer interviews. Ask four to five questions about willingness to pay in different packages. Start with general questions like, “Out of this list of products, which do you find most valuable and why?” or “What prices do you see in the marketplace?” Next, ask very specific questions like, “If I had this product, what are you interested in paying?” and, “If I added or took away this other product how would that impact your decision and why?” You’ll get a strong sense of direction by doing enough interviews that you can aggregate the data and do some quantitative analysis on the qualitative discussions you’re having.
It is important to be as objective as possible in customer interviews and avoid leading the interviewee. To avoid bias, you could create a survey that collects data more objectively.
[22:14] Once the product is in the marketplace, how do we adjust the price?
Take a very structured, time-bound look at your pricing. You can change your price as you look at the traction you’re getting, get feedback from your customers, and do additional data analysis. Look at what packages are successful and take unsuccessful ones off the shelf. At structured intervals, every 90 days or so, take a look to get a sense of how your product is performing and how your pricing changes are being received.
What common mistakes do you see with product pricing?
Number one, not raising your prices every year is a mistake. You have to raise prices every year because your costs go up. In the software world, a good price increase is 5-10%.
Another mistake is starting without price in mind. You’ll improve your pricing by considering pricing as you innovate.
Often organizations under-invest in pricing because no team owns pricing. The more you invest, the higher your return will be. Pricing work is a low-investment, high-return activity. Volunteer to take the lead on pricing, and you will become a skilled pricing person.
People often think they have to make their pricing very complex. Make your pricing easy for your customer to understand.
- Connect with Ben via his LinkedIn profile
- Learn more about FiscalNote, the premier issues management system, where Ben directs sales operations.
“The future is already here, it’s just not very evenly distributed.” -William Gibson
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.