In my 25 years in high-tech, I've spent a lot of time building and leading both product management and marketing teams. I've watched product managers spend endless hours trying to perfect that next release; balancing the needs for features, fixes, performance improvements, regulatory updates. On top of that, decades and decades of man-hours are spent developing core value propositions, competitive information, sales training and more.
Similarly, I've watched marketing teams (my own and others) trying to optimize the marketing mix and find that special recipe that fills the funnel with both quality and quantity of leads and materially improves the pipeline. Email, blogs, events, landing pages, collateral, webinars... the list of content and other "assets" goes on and on.
However, one area that I always feel gets short-changed is pricing. For example:
Many companies are still using "cost-plus" pricing models, completely ignoring any concept of what value their solution brings to a customer
Other companies simply take the price of a previous product and add X%
Some simply use their competitor as the baseline (e.g, we want to be X% more or less than Competitor ABC)
A 2014 study by McKinsey & Co. revealed that 1 percent price increase translates into an 8.7 percent increase in operating profits (assuming no loss of volume, of course). Additional, they estimate that up to 30 percent of the thousands of pricing decisions companies make every year fail to deliver the best price.
So, why is Pricing so overlooked? Here are some thoughts:
1. Unclear ownership. Does the CFO own pricing? The product team? Marketing? Marketing says they're not close enough to the customer... product managers say they don''t have the financial insight... Finance says they're just oversee and approve pricing. Everyone wants to provide input, but nobody really wants to own it.
2. Weak Analytical Skills. Getting pricing "right" requires building some models, doing some analysis, testing sensitivity and running different scenarios and sales projections. In many cases, these models don't exist. Finance is too busy or too removed to build them and product teams lack the financial analysis skills to build trusted and accurate models.
3. What is Value? In many cases, companies do not have quantitative proof/results of the value their solution is delivering. Sure, they know customers are happy, but they don't know what type of return or economic benefit customers are realizing. (I know that sounds insane, but it is pretty common)
4. Time (or Lack of it). Product schedules are always compressed and pricing always seems to be one of those things that gets crammed into the "pre-launch" activity list. People scramble to set the pricing, get the price list updated and get it out to Sales so they can begin pre-selling.
If all of this sounds completely foreign, congratulations! You have spent your career in a world of best-practices and I applaud you for that. However, if you've read this and found yourself nodding, grimacing or having feelings of remorse don't worry, it happens! Next time, I'll share some thoughts on how to make pricing your best friend and an awesome competitive weapon!