Thanks for reading the ProductFix newsletter. Yesterday while out on a run, I listened to a recent podcast that covered the topic of Pricing (see recommendations). It didn’t cover some of the topics I was hoping for so I thought it'd be good to cover more here over the course of a few articles.
As always, if you find value in reading this please give me some love by liking and sharing with others.
Product pricing is a critical component of product positioning and critical to business performance. The pricing should be designed with intention and be linked with the overall business strategy.
In the world of enterprise software (on-prem and cloud), product managers frequently do not own nor take part in a lot of the pricing decisions. This is really a miss. However, they are not the only stakeholders that should be involved.
In this article, I discuss the team of key stakeholders that should be involved in defining product pricing, why, and how they should work together.
This is article is the first of a four-part series that will include also include Pricing Models, Defining Pricing Strategy, and Setting the Price.
What is Product Pricing?
Before getting into the nuts & bolts of pricing, it is important to first consider the scope of this discussion.
Pricing Model - Methodology by which prices will be set
Definition of the product offering - Key marketable features
Discriminating Price Levels & Tiers - Attributes price breakpoints are based on
List Price - Base price for a given offering, level, and options
Discounts allowed - Pre-defined negotiating power provided to sales
Special Pricing - Enterprise pricing and other unique scenarios
Critical internal inputs to this discussion would need to be the business strategy, organizational capabilities, and product definition. These provide a critical context for pricing to be the most effective.
Business Strategy - Provides critical context for how the business is planning to grow and position itself in the medium to long-term. Describes the commercial model for generating revenue. Sets the priorities for key business metrics.
Organizational Capabilities - Defines the capabilities and constraints for go-to-market options.
Product Definition - Describes what is available to sell and enables/limits options for differentiating value.
Product Pricing Team
The Product Pricing Team is a cross-functional team of stakeholders tasked with defining the pricing strategy and product price points. From my perspective, this team needs to function somewhat like a product team but with the narrow focus of working on the “pricing features” of the products.
As such, it should be the responsibility of the Product Manager to raise pricing needs and sense when it is necessary to revisit pricing. The members of this team should contribute to identifying these needs but the Product Manager must be continuously on top of market and customer research that can trigger it.
For small organizations, the processes surrounding the team can be less structured. However, for larger organizations with a portfolio of products, having a defined team in place is important to create a consistent approach to market and minimize internal friction.
Below are the 6 key stakeholders that should be included.
Product Management needs to be represented and may lead the discussions. They bring a deep understanding of the value of the solution through the market research that initially led to the creation of the solution.
As the Product Manager is continuously engaging in market research, part of their job should be to identify when pricing needs to be revisited. Then through a discovery process bring data and market insights to Pricing Team sessions.
For most organizations, the CPO will be the standing representative. Individual Product Managers should be pulled in to the discussions as needed for specific product reviews.
For most enterprise software companies that derive substantial or significant portions of their revenue from direct sales, it is critical to have sales at the table. They will ultimately be talking to prospects, sharing pricing, and explaining the value that it relates to.
Sales bring deep experience in engaging with target buyers and communicating product pricing. The chosen pricing must be something they are confident they can communicate effectively. Complex pricing structures and terms will cause friction in the sales process and sales should help the organization avoid those mistakes up-front.
Further, sales will bring very specific input into the appropriate list price versus discounting approaches that should be allowed.
Since this discussion will eventually tie to sales compensation plans, it is important to have the Head of Sales present. If like many businesses, you have a split the role to regional heads then each should participate in the pricing team. For the very same reason that you created different sales leader roles in different markets, the pricing team needs their input on how different markets operate to develop pricing that works.
As organizations get larger, their portfolio expands, and product options multiply frequently someone takes ownership of scaling sales operations. Whether this role specifically exists as a person or is just handled as a part of someone else’s job, their contribution to pricing strategy is important.
SalesOps should bring an understanding of how leads get converted to bookings and commissions get paid. They are responsible for understanding the details of how a pricing approach actually gets operationalized for sales and marketing.
Without their engagement, all the ideas may not be feasible. If something seems hard to operationalize, SalesOps should be engaged to come up with practical alternatives solutions.
Responsible for conveying the company brand and ensuring products are effectively positioned in the market, marketing is both a key contributor and a critical piece to executing on the pricing strategy.
Pricing can be an important component of go-to-market activities, from product pricing pages (if decided), analyst communications, to content marketing. While generally not specifically called out, the approach to positioning - such a penetration or premium pricing - must tie directly to the corporate brand and specific product marketing.
Further, in many organizations, Marketing own indirect sales channels. As such, they must bring the voice of partners into pricing discussions. If channels are important to the business strategy, Marketing would also have the important responsibility to ensure that the strategy supports their success.
Ideally, the CMO would be the person directly engaging in these discussions.
Finance is tasked with tracking and managing key business metrics. While they typically do not have a deep market or product understanding, they do know how different pricing strategies will impact those key metrics.
Example: How will product revenue be recognized? What happens if we give a guarantee on up-time? How does this fit with our accounting standards?
The CFO should participate directly unless they have a delegate that can adequately represent their perspective.
Depending on the market you are in, bringing in legal early can save time later. Ultimately, all the pricing structures that get sold need to be reflected in negotiated contracts with the customers. As much as sales close on key terms, legal can sometimes spend many days haggling over preventable issues that arise from the pricing strategy.
Legal has the ability to spot problems early like: Does this approach run afoul of any existing contracts we have, like with partners? If we can’t technically limit certain restricted usage is it auditable?
Other people may be relevant in specific industries and organizations. The goal should be to keep the team as small as possible while still maintaining a sufficient cross-functional view of the business and market.
How does the Pricing Team Work?
On a regular basis, the Pricing Team should get together to review and update existing pricing. They should be guided by the overarching Business Strategy and any current objectives in place.
Part of their work should be to contemplate how frequently to allow changes in the pricing. This must balance the need to adapt to learning from the market with the disruption that frequent updates might cause to their business.
Whenever a Product Manager determines pricing needs review they should be able to raise it with the team. Further, they should be able to present evidence that a change is needed and, better, what that change should be. If the Product Manager requires discovery assistance this team should be available.
Specific methodologies for determining the right model, strategy, and price points will be explored in subsequent articles.
Pricing is an important facet of product positioning and critical to business performance. Like any other product feature, pricing should be part of the initial discovery process and ongoing learning feedback loops.
When considered as a critical product feature, it becomes clear that Product should drive the process but a cross-functional Pricing Team needs to support it, provide a portfolio level context, and enable the implementation of decisions.
Next week, I will continue this Pricing series with an article on Pricing Models.
Podcast Episode: TEI 280: Learn how product managers should set product price – with Ben Malakoff
Article: Spotify’s Failed #Squadgoals by Jeremiah Lee (@jeremiahlee). Drove a lot of discussions this past week. It led to an article from Marty Cagan (@cagan) called Spotify v. Fitbit that put some context to the original piece and suggested the ultimate goal of organization design is business success.
Don’t be shy. Please hit the heart and comment to share your feedback. Beyond that, I coach product leaders to take advantage of best practices and challenge their own perspectives. If that sounds useful, take action now and schedule an appointment.