Product Management for Pummies - Part 5
Price Determination
How to price a product or a service..? As I wrote in the last blog, our margin has to be near the fire (which is the value of the product) in such a way that it gives us heat and light, but not so near that it hurts us. Margin represents our value addition to the value of the product.
How to determine this distance..? There are three parameters that determine this distance. First of course depends on the business environment, as explained in the last blog.
Second parameter is the value that is really perceived by the customer. In the fire that we lit, we expect a value. Our customer may perceive a different value of the product than us. Most of the times the pricing issues boil down to this difference in perception. If pricing can break a sale, then it is because of this condition.
Third parameter is the simple pressure on Customer side sourcing departments to constantly cut costs and prices of procurement, particularly in electronics goods. Customer departments will try to achieve this by promoting competition (even if it is innovative products) and hard bargaining. Most of the times, pricing issues due to this can delay the sale or reduce the sale, but not stop it entirely, unless the product is abundantly available and non-innovative in nature.
Coming back to the second parameter, the value perceived by customer, one method to determine the value perceived by the customer is to create a P&L for the customer, from the customer shoes. Many a times, product managers create a customer’s P&L in such a way that they need to sell that P&L first, before they sell the product.
Such a situation is ridiculous. Product manager needs to create a P&L only based on facts and that finds acceptance with Customer at face value without any great issues. No customer is going to accept a P&L projected by Product Manager. But then his objections should not fundamentally change the P&L.
Another way is to quantify the customer benefits of our solution in terms of loss that would otherwise incur to the customer. This is easier said than done. Many a times such quantifications would be 1 or 0. Either customer looses a lot or customer gains nothing. To arrive at a value that makes sense is difficult. Still one can put a probability of such occurrence and quantify the customer losses. Ofcourse this is not exhaustive.
The fundamental idea is to quantify the customer benefit or loss and from that derive the value of the product. Once quantification is done, the pricing can be determined more close to the value perception of customer.
The third parameter, the pressure on customer side sourcing department, has to be handled through a mix of relationship and what I call as revealing-ship. The customer needs to see that we are to our bones and there is not much he can extract out of the sale anymore.
In some cases, I have seen sourcing department personnel not only want to see their suppliers bone dry, they need to get the feeling that they have made them bone dry. Then only they will get satisfied. So the sales managers need to give that pleasure to the sourcing department personnel in 2-3 steps, so that they get satisfied of their action. This is what I call as ‘revealing-ship’.
A product manager needs to determine the price of a product taking into account all three factors.
Selling the price to Customer
There are several environments in selling the price to a customer. One is when there is no benchmark or competition for the product pricing. In this case the pricing depends on the value of the product as discussed in the last section.
Another is when there is a benchmark for pricing and we are actually above the benchmark. And the product manager finds it to be difficult for him to manage the pricing expectation. This turns a real hard bargain. This causes a lot of heart-burn in the sales team that is sandwiched between the customer and the product manager.
Product managers and Sales need to take a call together on the realities of the sale. The product manager needs to work as a team and share the stress of the sales team. The Sales need to deploy the best of their relationship. The product manager needs to bring out differentiation of the product either in customer need or in terms of future pricing benefits or in terms of scalability of product needs.
At some point they may even need to take a call on qualifying the sale and its potential together. They may need to decide on progressing with the sale or dropping the sale.
Pricing Pressures
A product manager often needs to face revenue related pressures from different quarters. There will be pressures from sales on squeezing the price, there will be pressure from management on increasing the bottom line, there will be pressure from operations or technology for increasing resources.
There is no way a Product Manager can handle this pressure all alone himself. It is simply out of question for anybody to do it.
The only way is to make revenue focus as part of business process in different departments. Sales, Technology, Operations or Support need to see their activities in terms of Revenue they generate.
Once when I was talking to sales groups on driving revenue focus, a sales person retorted “I know the revenues that I am generating. I can have revenue focus. How will a technology person have it?”.
I told him “It is simply the realization that you earn your salary and are getting paid out of your own efforts”.
And a successful product manager will communicate appropriate revenue focus to his technology and sales organizations. Just because Sales teams are handling revenues, it does not mean that they will have revenue focus. Many a Sales people I have met, who think their salaries are getting paid by investors and shareholders and not by their sales.
And one way to communicate this revenue focus is to make a P&L for every business activity. Even in a product, it could be done for every project, so that Sales and Operation teams see every project in revenue perspective.
For every product model or version, the technology has to see a P&L. They have see their efforts and the results. A product manager needs to create these tools and keep communicating this vision to his people.
Unless the revenue focus is built into every level, revenue pressures cannot be handled by product manager.
Revenue and pricing pressure is like the Temple Chariot. It needs to be pulled by all the relevant people in an organization. It cannot be left to be handled only by Sales or Product managers. And to ensure that is the job of a Product manager.
Revenue Categorization
The next challenge in Revenue focus is to assign or categorize the revenue appropriately to the product or project. In B2B organizations there are Product Revenues and Project Revenues. Project Revenues are those associated revenues with delivering, installing, commissioning, operating or maintaining one or more of products. Product Revenues are those associated with a product. Sometimes several products can get combined and typically sold in one lot.
In these cases it may be feasible or infeasible to separate the revenues out and categorize them. Hence Product Managers do not categorize the Revenues appropriately. They typically assign the revenues to the product that they perceive as the maximum value.
But if a product manager carefully categorizes the revenues, it may be possible to make a sale at higher profits or avoid loss making sales.
How..? In my next POST…..
-Balajee Rajaram
How to price a product or a service..? As I wrote in the last blog, our margin has to be near the fire (which is the value of the product) in such a way that it gives us heat and light, but not so near that it hurts us. Margin represents our value addition to the value of the product.
How to determine this distance..? There are three parameters that determine this distance. First of course depends on the business environment, as explained in the last blog.
Second parameter is the value that is really perceived by the customer. In the fire that we lit, we expect a value. Our customer may perceive a different value of the product than us. Most of the times the pricing issues boil down to this difference in perception. If pricing can break a sale, then it is because of this condition.
Third parameter is the simple pressure on Customer side sourcing departments to constantly cut costs and prices of procurement, particularly in electronics goods. Customer departments will try to achieve this by promoting competition (even if it is innovative products) and hard bargaining. Most of the times, pricing issues due to this can delay the sale or reduce the sale, but not stop it entirely, unless the product is abundantly available and non-innovative in nature.
Coming back to the second parameter, the value perceived by customer, one method to determine the value perceived by the customer is to create a P&L for the customer, from the customer shoes. Many a times, product managers create a customer’s P&L in such a way that they need to sell that P&L first, before they sell the product.
Such a situation is ridiculous. Product manager needs to create a P&L only based on facts and that finds acceptance with Customer at face value without any great issues. No customer is going to accept a P&L projected by Product Manager. But then his objections should not fundamentally change the P&L.
Another way is to quantify the customer benefits of our solution in terms of loss that would otherwise incur to the customer. This is easier said than done. Many a times such quantifications would be 1 or 0. Either customer looses a lot or customer gains nothing. To arrive at a value that makes sense is difficult. Still one can put a probability of such occurrence and quantify the customer losses. Ofcourse this is not exhaustive.
The fundamental idea is to quantify the customer benefit or loss and from that derive the value of the product. Once quantification is done, the pricing can be determined more close to the value perception of customer.
The third parameter, the pressure on customer side sourcing department, has to be handled through a mix of relationship and what I call as revealing-ship. The customer needs to see that we are to our bones and there is not much he can extract out of the sale anymore.
In some cases, I have seen sourcing department personnel not only want to see their suppliers bone dry, they need to get the feeling that they have made them bone dry. Then only they will get satisfied. So the sales managers need to give that pleasure to the sourcing department personnel in 2-3 steps, so that they get satisfied of their action. This is what I call as ‘revealing-ship’.
A product manager needs to determine the price of a product taking into account all three factors.
Selling the price to Customer
There are several environments in selling the price to a customer. One is when there is no benchmark or competition for the product pricing. In this case the pricing depends on the value of the product as discussed in the last section.
Another is when there is a benchmark for pricing and we are actually above the benchmark. And the product manager finds it to be difficult for him to manage the pricing expectation. This turns a real hard bargain. This causes a lot of heart-burn in the sales team that is sandwiched between the customer and the product manager.
Product managers and Sales need to take a call together on the realities of the sale. The product manager needs to work as a team and share the stress of the sales team. The Sales need to deploy the best of their relationship. The product manager needs to bring out differentiation of the product either in customer need or in terms of future pricing benefits or in terms of scalability of product needs.
At some point they may even need to take a call on qualifying the sale and its potential together. They may need to decide on progressing with the sale or dropping the sale.
Pricing Pressures
A product manager often needs to face revenue related pressures from different quarters. There will be pressures from sales on squeezing the price, there will be pressure from management on increasing the bottom line, there will be pressure from operations or technology for increasing resources.
There is no way a Product Manager can handle this pressure all alone himself. It is simply out of question for anybody to do it.
The only way is to make revenue focus as part of business process in different departments. Sales, Technology, Operations or Support need to see their activities in terms of Revenue they generate.
Once when I was talking to sales groups on driving revenue focus, a sales person retorted “I know the revenues that I am generating. I can have revenue focus. How will a technology person have it?”.
I told him “It is simply the realization that you earn your salary and are getting paid out of your own efforts”.
And a successful product manager will communicate appropriate revenue focus to his technology and sales organizations. Just because Sales teams are handling revenues, it does not mean that they will have revenue focus. Many a Sales people I have met, who think their salaries are getting paid by investors and shareholders and not by their sales.
And one way to communicate this revenue focus is to make a P&L for every business activity. Even in a product, it could be done for every project, so that Sales and Operation teams see every project in revenue perspective.
For every product model or version, the technology has to see a P&L. They have see their efforts and the results. A product manager needs to create these tools and keep communicating this vision to his people.
Unless the revenue focus is built into every level, revenue pressures cannot be handled by product manager.
Revenue and pricing pressure is like the Temple Chariot. It needs to be pulled by all the relevant people in an organization. It cannot be left to be handled only by Sales or Product managers. And to ensure that is the job of a Product manager.
Revenue Categorization
The next challenge in Revenue focus is to assign or categorize the revenue appropriately to the product or project. In B2B organizations there are Product Revenues and Project Revenues. Project Revenues are those associated revenues with delivering, installing, commissioning, operating or maintaining one or more of products. Product Revenues are those associated with a product. Sometimes several products can get combined and typically sold in one lot.
In these cases it may be feasible or infeasible to separate the revenues out and categorize them. Hence Product Managers do not categorize the Revenues appropriately. They typically assign the revenues to the product that they perceive as the maximum value.
But if a product manager carefully categorizes the revenues, it may be possible to make a sale at higher profits or avoid loss making sales.
How..? In my next POST…..
-Balajee Rajaram
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