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Comprehensive Pricing (10 mins)
Different Types of Pricing(15 mins)
Price Communication (7 mins)
Pricing Exercise (8 mins)
1% increase in Price leads to 11% rise in Profit Margin
1% decrease in cost of goods leads to 6% rise in Profit Margin
1% increase in operational efficiency leads to 4% rise in Profit Margin
Comprehensive
Pricing
Pricing
Strategy and
GoalsPrice Tools &
Software
Pricing
Architecture &
Implementation
Price
Analytics
Pricing
Organization
Pricing Strategy &
Goals
• Pricing Goals should be created in line with Corporate
Goal
• Pricing Goals should be well understood by the
Product Manger
• A solid pricing strategy should consider following 4
aspects about your product:
➢ Who are my customers?
➢ What is value I am providing to the customers?
➢ What customer problem does my product solves?
➢ Who all are your Competition?
Pricing Strategy &
Goals
Pricing Architecture &
Implementation
Pricing
Architecture &
Implementatio
n
• Pricing Architecture represents the initial price setting
method
• A solid price architecture includes costs of goods sold,
and unit contribution cost :
➢ R&D or Product Development
➢ Operations
➢ Manufacturing
➢ Marketing/Advertising
• Pricing Implementation means how is price
communicated to the customers, sales and everybody
else in the organization
Pricing Tools & Software
Pricing Tools &
Software
• Smart data analytics, competitive intelligence tracking,
Margin analysis, etc. can be done through pricing
softwares
• Quote-to-Invoices are the tools for creating, presenting
your price quotes to your customers
• Configure-Price-Quotes tools are used by
sophisticated and complex software solution makers to
create pricing packages
• Pros, Vendavo, Zilliant are some best in-class pricing
softwares
Pricing Analytics
• Product managers need to create effective data
analytics and tracking points of value is important for
price setting.
• Understanding Customer Segments, product and
feature mix, pricing bundles, SKUs should be analyzed
over time, geos and competitors
• Price Waterfall and Dispersion Charts are effective
tools to understand the true Net Profit and source of
Price leakages due to in-effective discounting
• For SaaS companies, the margin on entire deal/quotes
and each of the products should be analyzed to help
sales and marketing efforts
Pricing
Analytics
Pricing Organization
Pricing
Organization
• Usually Product Manager are responsible for price
setting process - An effective Product manager should
not only do data and market analysis but also take
feedback from sales, field engineers, pricing managers
to understand the customer’s ability to play
• A strong pricing organization involves 2-3 tiers of
Pricing managers and director - each manager is given
liberty to maintain P&L statement of their business line.
• A pricing organization has to collaborate with Sales
teams during the deal negotiation process to make
sure the deal goes through and at the same time
protect profit margin
Sales and Profit over
the Life Cycle of the
Product
The right Pricing model depends on the
what phase your product is.
The Pricing model can change vastly
over the life cycle of the product -
Sophisticated transition of pricing model
can cause a significant blow to you
competitor.
Cost Plus Pricing • Cost Plus pricing is a cost-based method for setting the
prices of goods and services. Under this approach, the direct
material cost, direct labor cost, and overhead costs for a
product are added up and added to a markup percentage (to
create a profit margin) in order to derive the price of the
product.
• This methodology is used for pricing mature products.
• Competitive advantage is gained in 2 ways
1. By providing more features and/or value at same price
to the customers
2. Giving better prices by achieving cost efficiencies like
improved operations, cheaper raw material, cheaper
labor, etc.
• Used for standard products, with little or no differentiation.
Not ideal for growth industries especially making any
software or tech products
Skimming• Selling a product at a high price, sacrificing high
sales to gain a high profit is called "skimming" the
market.
• Skimming is usually employed to reimburse the
cost of investment of the original research into
the product: commonly used in consumer
electronics industry, e.g., Smart Phones, Smart
Watches, etc.
• This strategy is often used to target "early
adopters" of a product or service, who are
relatively lower price-sensitive: their need for the
product outweighing their need to economize; a
greater understanding of the product's value; or
simply having a higher disposable income.
Penetration Pricing • Penetration pricing is strategy of setting the price low
with the goals of attracting customers and gaining
market share. The prices are raised once the market
share is gained.
• This strategy can create goodwill among the early
adopters segment and can create more trade through
word of mouth.
• This strategy is very effective in discourage new
competitors from entering a market position.
• Great strategies for startups to increase demand for
their product and gain their customer attention.
• The main disadvantage with penetration pricing is that it
establishes long-term price expectations for the product,
and image preconceptions for the brand and company.
That makes it difficult to eventually raise prices.
• Also, one need to keep cost of material and operations
Freemium Pricing
• Freemium is a pricing strategy by which a
product or service (typically software, media,
games or web services) is provided free of
charge, but money (premium) is charged for
additional features, services, or virtual goods
through tiered pricing
• There are multiple ways this is implemented
: Limited features, Limited capacity, Limited
use time, Limited support, etc.
• Ideal for startups and software companies to
get a lot of traction among users.
Communicating value proposition for paid
tiered is very necessary.
Value Based Pricing
• Value-based price is a pricing strategy which sets
prices according to the perceived or estimated value
of a product/service to the customer rather than
according to the cost of the product or historical
prices.
• This pricing strategy is frequently used where the
value to the customer is many times the cost of
producing the item or service.
• The perceived value will depend on the alternatives
open to the customer. For e.g., We compare the
price of next best option and see if the new
product/service is cheaper than that.
• Sophisticated Value-based models can have
different prices for different types of customers,
and/or in different geos and/or feature
Price Communication
Apple Home Pod launch 2017 Video : Scroll to start at 12: 39. Stop at 13:05
• Communicating the reasoning and logic behind pricing your product is
EXTREMELY important, especially if you opt for Value based pricing or
Skimming.
• Price increase communication should be taken seriously – A Product manager
should consult legal team, marketing and professional writers before making any
price increase.
Price Communication done right
Price Communication gone wrong Netflix 2011 : Netflix splits DVD and streaming services➢ Netflix created 2 different services DVD and Streaming and each of them
were priced at $7.99.➢ A price reduction for only DVD or only Streaming user - This was supposed
to be win-win for both.➢ Netflix lost 80k subscribers and their stocked tanked by 80% in span of 7
months.
Price Communication : Lesson learnt Netflix Oct 5, 2017 : Netflix is raising the price of its mostpopular plan➢Netflix raised it’s prices by $1 to 10.99 for the most popular plan and $2 for
the 4K Premium Plan to $13.99.➢ Kept the price of basic plan at $7.99 for the price sensitive subscribers➢ Times the price raise just weeks ahead of much awaited 2nd season of
“Stranger Things”➢ Communicated the increase as a necessary step to keep producing quality
content
➢Stock prices went up by 9% in 3 days.
Ethical Pricing
April 3, 2017: Mylan hit with
racketeering suit over big price
hikes of EpiPen
➢ "Mylan has tried every trick in the book to avoid
taking accountability to the millions of people who
are living without the EpiPen they need to
prevent a life-threatening allergic reaction,"
➢ Big drug-maker Mylan was slapped with a class-
action racketeering lawsuit that claims the
company engaged in an illegal scheme to
dramatically increase the list price of its EpiPen
anti-allergy device over the past decade. Mylan
has 94% market share
➢ Prices were $100 in 2009 and they are sitting at
$600 in 2017
Pricing Exercise 1 • Launching a Mexican Beer – Lager. Made from blue agave and Mexican
spices
• Initial launch in California, Nevada, New Mexico, Texas, Florida and Phoenix
• Alcohol content : 4.5% abv
• Calories : 95
• Competition price: $1.2-$1.75
Pricing Exercise 2 • Launching a craft American India Pale Ale
• Initial launch in California, Portland, Washington, Texas, Phoenix, Florida
• Blonde , Mildly Bitter ( 50 IBU) with a kick of orange, spices and ginger
• Alcohol content : 8% abv
• Competition price: $4 -$8 per serving
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