In early-stage innovation the product manager should drive pricing decisions
By Steven Forth
Who should own pricing decisions? There are as many opinions on this as there are pricing experts. For good reason. The answer to this question depends on the company's goals and organizational structure, and on just where the product is in the lifecycle. Candidates for pricing governance leadership are the CFO, the head of sales or chief revenue officer, product marketing and product management. But for early-stage innovation, in the build up to launch and for the first few years on the market, I believe the answer is clear. The product manager should be responsible for pricing.
Why?
Pricing depends on the differentiated value a product provides to a customer. In most cases it is not practical to craft a price for each customer (that will change) so we tend to price for specific market segments. It is the product manager that is in the best position to understand and deliver value and then connect value to price.
In too many cases, though, product management follows a flow something like the following.
The Contentional Process - A Recipe for Failure
One builds a product then figures out the costs. (This is easier said than done when it comes to factoring in the cost of development. It is not usually clear what to divide by. How many units will be sold?). Many companies then add a margin to this (this is called cost-plus pricing), do a reality check against the alternatives and benchmarks out there in the market, and set a price. Sales goes out and tries to sell. In most cases, sales comes back and says, "The product is too expensive. Oh, and by the way, it can only be sold if the following seven features are added." Value? Does the customer get value? Who knows. This is a recipe for failure and it is the reason so many products fail. Let's look at an alternative process.
The Value Based Product Development Process
Start by understanding how you can create economic and emotional value for a specific customer segment. See what other segments can get value from your planned product (or service or solution). Connect value to price (this is called value-based pricing). Communicate value (including support for your salesforce in selling value). Target sales on the customer segments that get the most value.
By starting with value, connecting value and price, and then focusing on the targets that get the most value you set up to win.
A few things to remember about value.
Value is relative to the alternative, and there is always an alternative.
Economic and emotional value both matter, even in B2B.
Economic value is the impact your offer has on your customer's business model.
Emotional value impacts willingness to pay (WTP).
When you look at this proposed process, you can see why the product manager needs to own pricing at the beginning of the voyage. The process begins with understanding value in the target market. Then working out how to deliver that value. This is the product manager's job. Coming up with a pricing metric and pricing architecture is technical work, and most product managers have little experience of this. The CFO and sales leadership have even less experience, and they tend to be further away from how the product creates value.
Of course the CFO and head of sales need to be part of the pricing decision making. In offers where there are high delivery of service costs, operations leadership also needs to be involved. The CFO has to provide guidance on revenue recognition. In a SaaS business, she or he will also want to test the pricing model to see how it will impact the Lifetime Value of the Customer (LTV) and Customer Acquisition Costs (CAC). Pricing has a big impact on financial performance. The head of sales, or chief revenue officer for companies that have integrated sales and marketing, is also concerned as she or he will need to build the revenue generation system that can communicate the value (communicating value should be a design goal for revenue generation systems).
Over time, responsibility for pricing may shift to the sales leader and later on to the CFO or the head of operations. Once a product is established in the market and the focus is on scaling the head of sales usually takes over pricing leadership. As the market matures and more and more data is available the CFO often takes over and uses the data for pricing optimization (companies should optimize for value creation before they try to optimize pricing). In mature markets, where margins tend to thin out and operating costs become a strategic lever the head of operations needs to be closely involved in any pricing decisions. In many industries, and not just manufacturing, there is a connection between volume - cost -price. Operations optimization and pricing optimization go hand in hand at this stage.
So, as the product matures it is normal for pricing leadership to move across functions.
Product Manager - establishing value
Sales Manager - building scale
CFO - optimizing pricing and its impact on other metrics (LTV and CAC)
Operations - managing demand-volume-delivery
What is the role of the CEO in all this? In a well run company, the CEO is responsible for making sure that winning aspirations are aligned and that the right where to play choices are being made. How to create value is a where to play choice and the CEO needs to be in close contact with value creation and pricing decisions. The market segmentation, target customers, value metrics and pricing metrics should all be reviewed with the CEO. The CFO should work with the CEO and product manager to make sure that the pricing model can support the targeted LTV and CAC. Pricing is part of the brand, and should support the brand attributes and positioning. Sales will often be pushing for lower prices or more aggressive discounting. At the end of the day, it is the CEO who has to bring all of these different views into alignment.
In Vancouver, BC? Join us Wednesday, Nov. 22 at Making Pricing a Strategic Priority in 2018 with the Product Management Association of British Columbia.
In Madison, WI? Join us Tuesday, Nov. 28 for Pricing Your Product for Success with ProductTank.
