Launch a Product – Step 2: Pricing
This is the second in a series on “What does it take to launch a product?” This blog is about pricing which is a critical exercise in the process of launching a product. The observations shared here are focused solely on B-to-B sales (business to business, not business to consumer which has many different nuances.)
Golden Rule #1: Sales cannot set standard pricing
Every once in a while, I will hear from someone that their executive team wants sales to set the pricing because they are most aware of the marketplace and the competitive pressure. And while I agree that Sales should have a tremendous amount of input in the pricing process, they shouldn’t have the final say in setting *standard* pricing. It is a bit like having the fox watch the henhouse. Anyone with a quota has different incentives with regards to pricing than someone who is objectively trying to express the business value of a product. Once Standard pricing is set by Product Management (PM), then Sales will have an active role in deals-based pricing or ICB pricing. But Standard pricing must be owned by an organization without a quota.
Golden Rule #2: PM (or Finance) should define both Published Pricing and the floor
In the b-to-b world, like most other markets, pricing is negotiated. It is often the case that you want to publish your standard pricing which is the price that you would love to get, but you understand that there needs to be some wiggle room for the Sales force to negotiate. Our experience has been that when PM sets the standard and the floor, Sales has clear boundaries that they can move within. Some skeptics will say that Sales will always go straight to the floor and that may be true but it depends on a number of factors – namely their comp plan. If good salespeople will make more money by pricing closer to the standard/published pricing, then they will. Less experienced sales people or folks who are compensated on volume and not margin will likely go straight to floor pricing. But if PM defines it, the company should still be confident that adequate margins are maintained, even at floor pricing.
Golden Rule #3: Deals-based (or ICB) Pricing should be approved by Sales Management AND Finance
When multiple products are included in a deal or the competition is fierce or you are trying to “buy” a new logo, then you may want to go below floor pricing for a particular product. It may even be that you give one product away for ‘free’ in order to get a deal on 5 other products. Whatever the situation, there needs to be a process for getting deals-based pricing approved. If you have strong sales management with a keen eye on the bottom line, then their approval can be good enough. Our experience, however, is that if you include Finance in the process, not only do you get an unbiased view, but you also actively engage your Finance department in the realities of the business. It is good for the accountants to understand the pressures that the sales force faces.
Golden Rule #4: Set Standard pricing with (1) Market Info, (2) Competitive Data and (3) Cost/Margin info
When Product Management is setting standard pricing, we believe three data points need to be considered every time. First you need the market information – what will a prospect pay for this service? If you think the service is awesome and should fetch $1,000/month but the feedback that you get from prospects is that they only value the service at $100/month, then you have a disconnect that needs to be reconciled. One way to accomplish that reconciliation is with competitive data. If the competition is getting $950/month from their service, then that gives weight to your $1,000/month argument. If a competitor is offering a comparable service for $150/month, well you get the idea. Finally, PM *must* take costs and margin into account. If your cost on the product example above is $200/month, then PM cannot and should not set standard pricing below that. Volume cannot solve the problem if you lose money on every sale. However, if the marketplace really won’t pay more than $100/month and your costs are $200/month, then you need to initiate a cost reduction plan immediately or choose not to sell the product. Back to our previous Golden Rule on deals-based pricing, one particular product could be sold below cost, provided that the margin is made up for on the other products in the deal.
All of this assumes that you are working in a normal business model. If you are trying to buy market share or drive up top line revenue to make the company attractive for an acquisition, then you may look at a different pricing strategy, but otherwise, these Golden Rules should help ensure that you set up the right processes with the right owners. Pricing is yet another aspect of Product Management that is harder than it looks. But when done well, you can position your product for maximum sales, maximum revenue and maximum margin.
The third blog in this series is about Sales Enablement. Please click here to keep reading.
Originally posted on a now defunct site on 3/26/13