Pricing is a Product Management’s Responsibility Too
In helping executives manage price better™, I find that product managers often have no real responsibilities for pricing. I found this true at many companies ranging from those delivering highly engineered products to those selling commodities. Rather, pricing is often managed by commercial officers (sales) or finance.
In both studying strategy and marketing at Booth Chicago as well as teaching marketing strategy at DePaul Driehaus, it was and is a given that product management and pricing are tantamount to one another.
If product managers don’t make pricing decisions in many real businesses but academia assumes they do, there is an obvious disconnect between theory and practice. Does that mean academia is making a bad assumption, or does it mean that businesses confuse common practice with best practice?
To address this question, let’s explore what a product manager should be able to meaningfully contribute to pricing decisions and the effort required to have them engaged in pricing decisions.
OK, this should be obvious to everyone.
Product managers develop products to meet customer needs. How well a product meets customer needs determines how relevant a product is to the market, and the price that market would be willing to pay. This is where product managers have something to contribute to pricing decisions.
Different customers need different things. The beauty of market segmentation is in its ability to aggregate customers according to their needs.
Using needs-based market segmentation, product managers identify the features and benefits needed in a product to attract a given segment away from a competitive alternative. Some segments will demand a lot of features and benefits, others less.
In adding or subtracting a feature, product managers are responsible for thinking about both the cost of that feature and the impact of that feature on the willingness-to-pay of the intended segment. As features are added, a product should be attractive to more market segments. Concurrently, as features are added, the cost to produce will increase. As a result, either the price will need to rise (thus deterring some segments from purchasing and reducing the addressable market) or the margins will need to decline (thus reducing the profit of the product). Managing this tradeoff is a product manager’s responsibility.
Aha! Here is one of the differences between theory and practice. Product managers often aren’t held accountable for these tradeoff-decision outcomes. Should they be? Can they be?
Engaging customers in the buying process usually, but not always, requires some form of discounts or rebates. Whether it is a temporary promotion, long-term commercial policy, or tactical negotiation, prices generally vary between the aspirational List Price and final Pocket Price (what some companies refer to alternatively as the net, net-net, and triple-net price, yet there is no broadly-accepted meaningful difference between these jargon terms).
While commercial policy may be the domain of sales, product management should have a seat at the table. Managing phase-outs related to new-product launches generally impacts the pocket price. Product managers may have set prices to have a well-defined differential with another product’s price. If the pocket price on the phase-out product drops, does that mean the pocket price on the new product must drop as well? Which products should be eligible for a negative price variance, and which should not? How big of a negative price variance can a product sustain and remain profitable?
Informing these price-variance decisions are a product managers responsibility for they impact a product’s profitability. Recall: product managers are responsible for the profitability of their products, and held accountable accordingly.
Aha! Here is a second difference between theory and practice. Product managers often aren’t held accountable for profitability of a product sustained in marketing engagement. Should they be? Can they be?
Product managers undoubtedly can be held accountable for the profitability of their portfolio. It is reasonably possible to make portfolio profitability a key performance indicator of a product manager. And it reasonable to make this part of their compensation package, thus holding them not only accountable but impacting their own economic condition based on the quality of the decisions they make.
Yes, it is possible. But should they be? Let’s look at the effort required.
Defining good List Prices on products is work. The value proposition must be converted into money, and the potential market segments’ willingness to pay must be revealed prior to product launch. While the research technique to use will vary between products, research must be done. To get this research done well, product managers must participate. This takes time—not a lot, but some time.
Often, when it comes to doing market research on setting the List Price of a product, I hear that product management is too busy and can’t devote the time to the project. That is a pity.
Good market research must engage the right participants. Without knowing who the target market is, it is impossible to be sure that the research results reflect the view of the target customers. Sample selection is a known failure of many market research projects.
Likewise, good market research must start with a reasonable hypothesis to test. Without knowing the suspected differential benefits, competitive offers, and price range expectations, it is near impossible to design a useful research approach for pricing.
Product managers hold segment, therefore sampling knowledge, value-proposition and hypothesis development requirements, better than anyone else in a company. I am not calling for them to be experts in pricing nor market research. But it does seem that they are the best resource for creating the baseline information required to define the market research approach and effort. If not them, then whom?
On the outside, the time requirement should be less than 40 hours spread over several weeks. Does that seem like too much effort?
Defining commercial policy, thus the allowed negative price-variance between List and Pocket prices, is work.
Pricing Councils, which engage sales, marketing and finance with the support of experts in pricing, are a proven best practice for guiding commercial policy. In as much as product management is a part of marketing strategy, product management should be engaged in setting commercial policy though the pricing council.
The Best is Better Than the Common
We’ve identified the unique expertise product management brings to pricing decisions, the time this would tax them, and a method to hold them accountable. Given the value of their input and the low level of time required, pricing can and should be product management’s responsibility too. On this issue, the difference between theory and practice is the result of confusing the common with the best.