The Art and Science of Product Pricing...

Product pricing is a touchy feely subject, hence the following disclaimers for I get into it...

1. There is NO one-size-fit-all solution to your pricing problem.
2. Don’t look for a one time silver bullet for product pricing.
3. Pricing varies drastically between verticals, products, company stage, etc.
4. This article is meant to give thought frame work around pricing and not a meant to be a perfect solution to your product-pricing problem.
5. Hence read this article and make it your own for addressing your product-pricing needs…

Getting the product price right is one of those ever elusive goals that almost all product companies are after. Companies undertake product-pricing activity for many different reasons, for example:

1. New product introduction
2. Updates to existing product
3. Changes to sales / revenue targets
4. Changes to product costing
5. Changes to competitive landscape

Just like other product related activities such as product management, product development, support, etc., product-pricing activity should also be given its due time, resources and priority. Without thorough data driven process companies will find themselves not convinced about product pricing and end up going to square one again.

Hence before beginning on the product-pricing endeavour, here are some of the steps that companies should think about.

Again, a word of caution before I delve into various aspects of the framework given below… this is a simple framework, and companies should pick up the pieces that are applicable to them, as opposed to strictly following the process. I’m not a believer in blindly following any framework and neither do I promote it. I encourage companies to study various frameworks and then pick the one that they believe will benefit the most for their specific situation and then look into the application of it. I recommend that companies should not look for silver bullet or ‘one size fits all’ approach cause there is none!

Having said that, the first step in product-pricing exercise is to really nail down the reason for undertaking the exercise. Instead of CEO, Business head, Sales head initiating the conversation, it’s recommended that once a quarter there should be a pricing check point. There are a couple of benefits of doing that:

1. Sales head can provide you with the market pulse on the manner in which competitors are positioning pricing and customer input on pricing.
2. Product Marketing Manager can share insights on changes in competitive pricing.
3. As a team, companies can determine the circumstances under which pricing needs to be looked into on emergency basis. For example recently airlines suddenly started cutting their ticket prices, telecom operators slashed priced of Internet usage, etc.
4. Identify any data collection tools that need to put in place or updated so that right data is collected on ongoing basis so that it can be used for objective decision making.

The discipline of having these conversations periodically helps companies keep an eye out for any ecosystem changes that might force them to think about changes to product pricing. In case the company has multiple products or product lines that are related to each other, then it becomes even more imperative to have these periodic checks. Through these meetings companies should be able to nail down if product-pricing changes are required and if, yes, what are the reasons for those.

It always helps to keep track of various industry best practices around pricing. This is an ongoing exercise. It helps you in understanding the following:

1. Industry rules and regulations specific to the industry vertical that company operates in. For example recently SpiceJet was pulled aside by government for selling tickets for Rs. 1
2.  Accepted pricing norms in the industry.
   
   a.     Who pays for what?
   b.     Acceptable price range
   c.      Things that can be included or excluded from pricing perspective
   d.     Pricing transparency norms, etc.

           3. Pricing models that customer / consumers are familiar with and can relate to.

The idea here is to get pulse of the eco system and understand what’s working and what’s not.

Know thy Customers! Understanding your customers purchase psyche is extremely crucial. You should know atleast the following things about your customers:

      1. Customer’s perception about value of the product category

a.     Is it a must have or a nice to have?

      2. Buying process: The end-to-end process that Customers go through as part of     product purchase.

a.     How are budgets approved?

b.     Who is the buyer?

c.      Who is the approver or approvers?

d.     How do customers compare products?

e.     How do they use the product?

f.      Which features matter to them the most?

g.     How long is the buying process?

h.     How far in advance do customers plan the purchase?

i.       Payment recovery once the product is sold

j.       Objections raised by Customers in the buying process

      3. Customer segmentation: All Customers are not born equal. Broadly customers can   be grouped into various categories. This categorization or segmentation can help in creating pricing models based on Customer’s ability to pay for and use the product. For example:

a.     Volume (High / Medium / Low)

b.     Global (Users from multiple geos using product)

c.      Number of users (High / Medium / Low)

d.     Bargain hunters

e.     Smart cookies

            Each of these segments should be studied in-depth so that product offering and pricing can be tailored to them.

4. Data capture: Customer segmentation can be done successfully only if data is related to customers is captured by Sales, Support, Marketing and product teams. Without this data, Companies may be flying blind and not know what’s working for them and what’s not. Typically, the longer time window data companies have to work with the better it is. In case, the of new product release, this may not be possible, but then put the systems in place from day one so that the data is captured from the get go. Companies can use CRM systems, home grown systems, etc., but they must use some system. Otherwise the data is lost in emails and permanently lost when folks move on from organization.

Then comes the Competition, the ever changing and ever present force that impacts various aspects of your business, including pricing. In order to consider competitive impact, Companies’ should first know the following:

1. Who is the core competition?
2. Competitions’ geo presence
3. Who is the secondary competition and beyond that?
4. What pricing models do they have?
5. How big is their product adoption?
6. Feature comparison
7. How long have they been around?
8. Pricing model presentation
9. How often does the competition shows up sales scenarios?

The key here is to really use the competitive information to figure out the real threat that the competition poses in Company’s grown strategy.

Companies should really have handle on the product costing. Many companies in the B2C space create product and put it out there based on the way their competition is pricing the product. They assume that the pricing is such that they will be profitable anyways after a while. But this approach is suicidal! Because companies then one day suddenly realize that despite of high product sales volume, they don’t have a lot of margin and to be really profitable, they would drastically need to change the pricing or increase sales or cut costs.  A number of books have been written on product costing and it’s recommended that Companies should work with certified cost accountant for getting a handle on their product costing.

Product pricing is also a function on Sales and revenue targets. This is part of the top down approach of product pricing. A company can decide that they have to reach a certain revenue goal and work backwards from there to come up with an approximate price of the product. At this point they may realize that they have to price the product much higher that what the market is ready for or the other way round. In either case, the Sales team needs to be always involved in the pricing conversation, so that they can bring their market knowledge to the table. At the same time it’s necessary to note that they don’t use pricing as the reason for not being able to reach their sales target.

Pricing Models and Analysis is the most fun part of the product pricing exercise. This is where all the data that has been gathered internally as well as from external market is used for determine product pricing. Here are some steps that should be taking as companies try to come up with pricing model:

1. Identifying the key-pricing drivers:

a.     By users

b.     By organization

c.      By product units

d.     By transactions

e.     By functionality

There can be many more. Ensure that pricing is in line with the value the Customer is getting out of it.

2. Impact analysis: Every time changes to pricing / pricing model are suggested, impact on the following should be taken into consideration before rolling out pricing:

a.     Existing customers (to grandfather or not)

b.     Sales and support process

c.      Revenue and Sales target

d.     Profitability

e.     Product buying experience

f.      Acquisition of new customers

g.     Product Management

h.     Product Marketing

i.       Product Engineering

j.       Billing related changes

3. Pricing models: When coming up with product-pricing models, ensure the following:

a.     Easy to understand

b.     Easy to explain

c.      Easy to pay (annual payment option)

d.     Relates price to value (value driven)

e.     Room for Sales to provide discounts (introductory offer, seasonal discount, regular client discount, one time annual payment discount, etc.)

f.      Enables differentiation (charging for unique value as opposed to commodity)

g.     Has low barrier to entry of first time users (freemium)

h.     Has options for attracting large prospects (future customers)

Note: Avoid the word ‘unlimited’ in the pricing model wherever possible. Incase ‘unlimited’ word is being used, then should be explained in the terms and conditions.

4. Scenarios modeling are very critical to really understand the impact of pricing and pricing models. To do this, take existing customers and future customers and find out before and after impact. For example with current pricing Customer was paying X with new pricing customer will pay Y. Create real looking pricing page, rate sheets to understand the visual impact. Perform this activity for every customer segment and analyze the impact. Be especially sensitive about the impact on the customer segment from which the company is making large revenues. If this segment is adversely getting impacted then, the new pricing might have over all negative impact on the revenue.

Pricing roll out is equally if not more as crucial as the pricing model itself. A lot of internal and external training needs to happen before new pricing can be rolled out. Consider the following as part of new pricing roll out preparedness:

1. Overall roll out plan with departmental ownership.  Timing of rolling out of pricing changes is critical. Make sure that it’s not in or just before the time when you get the most orders (busy season, if there’s one for Company’s business). There is enough time to explain changes as necessary to the high value customers.

2. Marketing:

a.     Website

b.     FAQ

c.      Pricing collateral

d.     Checkout process (if there is one used for online purchase)

e.     Video (why is the change being made and how it impacts you – the customer)

f.      A-B testing readiness

3. Product:

a.     Incase there are features that need to be added to ensure correct pricing

4. Sales and Support:

a.     Updating sales and support process

b.     Training sales and support team

c.      FAQ (internal and external)

d.     Special process for High Value customers

e.     Process for breaking the news

                                   i.     Email

                                   ii.    Phone

                                   iii.   In-person

5. Setting benchmarks: It is essential to capture benchmarks before rolling out new pricing, so that impact of pricing can be checked objectively. Here are some of the benchmarks to that can be captured:

a.     Lead Generation benchmark

                                 i.     Number of leads / week / geo

                                 ii.    Average deal size by vertical

                                 iii.   Type of leads (lead mix)

                                 iv.   Lead sources

b.     Sales and Support Cycle benchmark

                                i.     Time to close deals

                                ii.    Competitive references during price negotiations

                                iii.   Number of price discussions when closing deals

                                iv.   Feature usage by customers

                                v.    Number and type of support queries

c.      Revenue benchmark

                                i.     Revenue by Geo and by Vertical

                                ii.    Revenue by Customer segment

                                iii.  Changes to customer segment mix

Once the pricing is rolled out, either to pilot group, or to everyone, the impact of pricing must be tracked. There are a number of ways to track impact:

1. Collect the KPIs and compare them against the benchmark
2. Get on call / emails with customers to get their reaction
3. Use the data from A-B testing to track change in customer behavior
4. Take corrective measure as necessary
5. Keep track of macro-economic changes as well, which may coincide with pricing rollout.

So before you take on the pricing exercise, ensure you the have time and resources to do justice to it…

Interaction with Students at Sunstone Business School

Being all in one: product manager and concept of product management

Takeaways from Guest Sessions by our student Milind Shirolkar
Guest: Aditya Bhelande, Founder of Yukta – a product consulting firm

Product management is one of prime focused elective courses here in Sunstone; Sunstone brings in live experienced individuals to share expert insights in this area.
Theme of Session was well poised of explaining concepts of product management: product strategy, product marketing, and product development. Mrityunjay, a senior Sunstone faculty, shared his views on role and responsibility of project manager. Mrityunjay also pointed out that a Product manager or a VP-product is a Mini-CEO of the organization. He is jack of all trades and intensively involved right from product grouting to product launch into the market. He also manages the support, continues improvement and reengineering of existing products.
Session was also involved in some brain-storming examples around digital marketing products such flash ads, social media marketing products. Here are some examples we worked on

• Credit card, COD , net banking tool for e-commerce site design and operating and marketing model for such a product
• Flash and road block ads in websites today, design and market model around such digit marketing products

Second half of the session was about interaction with Aditya Belande: founder of Yukta a product consulting firm. Aditya comes with 13 years’ experience in product management as product manager worked for many multi-national companies and some very innovative products
Aditya is a very witty and street smart person explained us the ground realities of a product manager, his behaviour and commitment required to the role.
His slides explained, product manager basically is

• Market orientated: Find opportunities, communicate with customers and prospective customer
• Researcher: Builds data cases, Identify business problems and find solutions
• Architect: Define Solution layers, features and operating procedures
• Diplomat: Works with Sales, quality, engineering, operations, and customer services teams to align them to one goal.

 Overall session left us with aura of excitement in field of product management and challenging role of a product manager and also guided us to crave road to become successful project manager in the near future .

Link to original article.

Experiences of a Product Manager

What a Product manager needs to know... from Aditya Bhelande

Tips for Engaging with ‘Sage on the Stage’

In the age of Internet, trends change faster than blink of an eye and businesses are evolving faster than ever. By the time you realize that a technology or business trend is emerging, something else is already come up to disrupt the situation that quickly makes the business / technology plans you are thinking of, look obsolete.

This continuous churn creates challenges for entrepreneurs who may quickly get disoriented and confused. In order to demystify this churn, and make sense out of it, the entrepreneur begins to reach out to the ‘Sages’. Which begs the question, who are these Sages? These Sages can come under various names, such as Mentors, Advisors, Experts and so on….

 

Now, as an informed entrepreneur, it’s your responsibility to really understand how, when and what to engage these Sages on. You may approach one of these Sages for…

• Getting highlight level perspective on a specific problem
• Engage them for solving specific business / technology problems
• Getting connected with the right people in the Industry, etc.

But as you think of engaging with Sage, I would suggest that you think of one, more or all of these things, so that you get best and most out of the engagement with the Sage. And it’s a fulfilling experience for both of you...

1. Think about what you want from the Sage: The input that you are going to get is going to be directly related to what and how you ask for it. Hence, define your ask as crisply as possible. This will prevent getting vague answers and keep the discussion focused. Another thing that will help, is, setting the context / background of where you are coming from and where you want to go as person and a company. Remember that right conditions are required for the catalyst to create a catalytic reaction. Therefore before you decide to engage, think about the following aspects of the engagement model:

a.     Time spent: How much time is the Sage expected to spend with you during the engagement? Is that time being spent in once a week meeting or on-going email communication? What is the protocol to respond to urgent issues where help / guidance is needed?

b.     Expected out come: What is expected out from the engagement? Is it only soft conversation or are there are any specific deliverables?

c.      Onsite / Off-site: Is the Sage supposed to be onsite for specific duration? Or is it a virtual engagement? What is the impact of that on the outcome of the engagement?

d.     Payment: Is it a retainer model with cash + equity / cash only / equity? Or is it milestone / deliverables based?

e.     Duration: What’s the duration of the engagement? What would be the minimum amount of time to figure out if the engagement is working as expected or not? Will it be sufficiently long for something meaningful to come out of it?

f.      Activities (core / non-core): Which activities will the Sage spend most time on? What are some of the associated auxiliary activities that you may want the Sage to focus on?

g.     Primary point of contacts: Who would be the primary point of contacts for engaging with Sage, so that Sage is not getting distracted?

h.     Communication methods: Given that Sages are busy people and communication methods like emails are abused, its best to discuss the communication method with the Sage for various type of activities? When would the Sage prefer phone to email or in-person meeting and vice-versa?

i.       Effectiveness metrics: Aspect of measurement should always be nailed down upfront, so that you can prevent having a conversation like… “I engaged with this Sage, but after 3 months I really don’t know what I got out of the engagement.” But as a person / company engaging with the Sage, you must know what you want out of it and how you are going to measure it, otherwise you will never know.

j.       Exit criteria: Knowing the exit criteria is as critical if not more than the entry criteria. Cause’ that is what, is going to decide the success or failure of the engagement with Sage. Hence think about when and how you would want to exit the engagement with the Sage.

2. Research the background of the Sage: Knowing the background ahead of time will help you in really understanding if the Sage can possibly provide you with the information that you are looking for. For example, if you are looking for business vertical specific information, then find a Sage that has deep background in that vertical and can connect you with others in that vertical. Talk to people and research to find out experience that the Sage has in solving business problems. Understand the scale of problems that the Sage has been a part of. Once you know what you are looking for in a Sage, it will help you immensely in identifying the right one directly or with the help of people.

3. Use the Sage’s time wisely: ‘Time is Money’ couldn’t be more true in case of your engagement with the Sage. This is because Sages are always time crunched and so are you, especially if you a Startup entrepreneur. Hence, think about how and where you would want Sage to spend their time. Otherwise you will end up being in a situation, where clock is rapidly ticking but value you are extracting from the Sage is minimal and below your expectations. To prevent getting into this situation, make a list of all the activities that you would want the Sage to be part of. Prioritize those activities based on your needs. After that review those with the Sage, so that you will know where you can leverage Sage’s time most effectively. Perform this activity with rigor every once a week or fortnight and you should be able to get best and most out of the Sage’s time.

4. Don’t abuse the Sages capabilities: There are a number of conversation which I have been a part of, where the Sage is asked to provide commentary on a topic that the Sage is not an expert on. Most Sages at that point will provide some high-level insights and stop at that. But there are a few that you should be aware of. The ones that provide misguiding advice in the hopes of squeezing more business from their clients. But as a person seeking advice, you must also be cautious of not providing encouragement for such conversations. Use your judgment wisely to save time, money and preventing yourself going on a wild goose chase based on misguided advice.

5. Don’t look for a Silver Bullet: As a Company / Person soliciting Sage’s advice, it’s your responsibility to not expect Silver Bullet answers from Sages for your business situations. In all probability, as a person who is in the middle of the situation, you have a better understanding of the situation. Leverage the Sage’s input as independent 3^rd party perspective to see if you have missed anything from data or problem-solving perspective. Also, know that what the Sage is known for may not work for you. There might be some useful pointers there, but everything the Sage knows may not be always fully applicable to your situation. If you expect answers that will solve your problems then, you would have set wrong expectations and measure the Sage’s effectiveness on the wrong scale. This would be an injustice for both you and the Sage.

So as you begin your journey of looking for the Sage take these pointers into considerations and share you experiences…