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Monday, July 13, 2015

A simple exercise for pricing new products

In most of my product management experience, I have been spared much of the difficult work of defining my products' pricing model. The truth is, in big shops like IBM and Microsoft, there are dedicated professionals who have forgotten more about pricing than most of us will ever know; they are the ones that set the price (often against the complex backdrop of a huge, multi-faceted portfolio and opaque strategy). However, with smaller companies and startups, pricing can be a very difficult exercise that can easily take on the feel of "Voodoo Economics".

If you're product competes in a mature market, pricing is often fairly straightforward as your competitors and industry norms and history provide some guidance. In these instances, disruptive business models that change the pricing model can be fertile ground for innovating and avoiding simple (margin-sapping) price-wars.

If you're in a new market or even one that you're creating (the kind of "Blue Ocean" opportunity we should all be pursuing), defining a pricing model (metric, price point and discount schedule) can be daunting. In this post, I'll propose a simple practice that can provide some guidance, primarily in the B2B world where products must be positioned with prospects by sales professionals (solutions addressing complex problem spaces rarely go viral!).

In the case of complex B2B sales, a great way to stimulate creative thinking on pricing is to work backward from the sales pitch. I know this sounds obvious, but this approach is often overlooked. By definition, complex sales involve multiple decision-makers and influencers. There is a high probability that beginning with the first pitch, sales professionals will have to gradually refine a business case that begins with a concise expression of value. A crude example would be "Our product will save you around X Euros/Dollars/Won per year but only costs [some fraction of X]". In practice, the value proposition of many products isn't so clear, i.e., reducible to a obvious monetary value. Regardless, this type of logic will almost inevitably be employed.

To draft this pitch you should enlist the help of a sales professional. Before you do that though, you need to have dissected and decomposed the mythical entity known as "the customer". The truth is, when an organization buys your product, there are many stakeholders that, by definition, impact the sale: the economic buyer, influencers, end users, administrators etc. You need to understand each of these constituencies and have a solid idea (later to be validated with them) about "what's in it for them" relative to your product. Armed with these hypothesis and an intimate understanding of your product, you are now ready to speak directly with a customer-facing sales professional to draft a high-level pitch. In my experience, it won't take them long to identify the pricing messages and positioning they think will resonate with prospective customers.

Once you've elaborated the pitch a bit, you (with the help of sales, ideally) should do some direct validation with folks in your target market(s). Your goal is to find out if you understand their perception of value and which messages are most convincing. The variables in the equation can be tricky to determine, but its basic structure is simple: our product can generate a value of X but will only cost you some fraction of that amount. If you have close relationships with some members of your target market (clearly the right goal), you can begin analyzing what metric works for them, e.g., per processor, enterprise-level, and get their reaction to your proposed price point.

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