Pricing requires collaboration and cross functional alignment. Marketing, finance, operations and of course sales all play important roles. But one of the most important partners for pricing is product management. It is product managers who shape the features and functions that create value (without value there is nothing to price) and the product manager is responsible for developing and communicating a deep understanding of the customer. At Ibbaka we frequently partner with product management in our pricing strategy work.
Having heard from a number of pricing experts (Chris Herbert, Tim Smith, Tom Nagle), and a top sales coach (Reg Nordman), we reached out to one of the best product management leaders and coaches we know, Alan Albert, to get his insights into value and pricing. This interview is part of our collaboration with the skill insight and skill management platform TeamFit to understand the skills needed for pricing expertise. The is part of our ongoing research into pricing skills that we are conducting with the skill management platform TeamFit.
Alan has an impressive track record in product leadership. He is the original product manager and designer behind Filemaker Pro (still the best-in-class application for the average person to build a database). He has conceived and led the design of products that have generated more than a billion dollars in revenue. Alan is a great collaborator and has built partnerships with major companies, including the design firm IDEO that now plays an important role in the global design thinking movement. Over the past decade he has been a CEO, board member, advisor and investor.
Today Alan heads the strategic advisory firm Marketfit, a leader in facilitating customer-centric strategic alignment. MarketFit’s Value Discovery Research™ methodology applies qualitative and quantitative rigor to gain deeper customer insights. In Alan's words, “'I have a low opinion of my own opinion. My skills focus on bringing multiple perspectives, pattern recognition and continual learning into the process of strategic decision-making."
Ibbaka: What are the roles of product management and pricing and how do these interact?
Alan: This depends a lot on how the company is organized and the stage of the product. I have seen all sorts of approaches. Sometimes pricing-product alignment is managed inside the C-suite. In other organizations the pricing expertise is brought in from outside, and can work with anyone from sales to finance to product. But in my view, pricing work is usually best managed by the product team.
Ibbaka: Why is that?
Alan: The product team has, or should have, the most comprehensive view of the customer. Ideally it is product management that integrates information from across the company and directly from customers. It listens to and supports services and support, sales and marketing. Product management should also be engaged in primary and secondary research on the product and the value it creates for customers.
The role of product management is to organize all this input and share this integrated customer insight across the whole company.
Often disagreements, like those between marketing and sales, are based on differing sets of incomplete information. Each function has access to different information sources and uses information in different ways.
An effective way to help resolve these disputes is to have a single shared set of data that is as complete as possible. Product management should lead in the collection and interpretation of this information so that all functions have a shared understanding of the customer.
Ibbaka: How do pricing and product management interact?
Alan: The key is to aim for strategic alignment. Too often pricing is seen as something tactical, and price setting is a tactical response to an immediate pressure. Tactical decisions at best find a local optimum and rarely lead to the best outcomes.
Good product strategy starts with understanding what the target customer values, and focuses a company’s efforts on delivering value according to that customer perception. Pricing strategy is a powerful tool, but to be effective it has to be in alignment with product strategy and, in turn, with customer values.
Improvements in pricing strategy can lead to quantum changes in outcomes. Gains from pricing tactics are more incremental.
Ibbaka: Does (or should) the relationship between pricing and product management change over the lifecycle of the product?
Alan: If the proper groundwork has been done, you should have a solid pricing model aligned with the customers’ perception of value. Within a well-defined customer segment, perceptions of value can change, but tend to be relatively stable over time.
What the customer values most is your guidepost in setting pricing strategy and designing pricing models. When you truly know what customers value most—and it is possible to know—you can win. Most companies do not accurately understand their customers’ values.
A grounded understanding of what the customer values, supported by data, can fuel and focus innovation, marketing, and also pricing throughout the product lifecycle.
Pricing needs to work with product management to make sure that the pricing model reflects customers’ values and the price has to be in line with the value the customer perceives. Ideally, you should charge based on the units of value as the customer perceives it.
Getting back to your question, as the product is adopted, other parts of the customer journey come into play. Pricing has an impact all across the customer journey. Value depends on context and the context of the buyer and user are different. So one needs to understand value in each context.
If I ask you "What is your favorite colour?" you might give a different answer if I were more specific about the context and asked "What is your favourite colour for a salad?" The values that impact customer retention are in a context different from the values that trigger an initial purchase. Pricing can be designed to support the entire customer journey.
One of the tricks of effective product design is to make your product strongest at delivering value in areas where your competitor is weakest. If you have good market segmentation and are targeting the segments where you can deliver the greatest value, this focus can help capture additional market share.
Similarly, rather than copy your competitors’ pricing, you can tune your pricing model to take advantage of your competitor's weaknesses. If your pricing model is better aligned with customers’ perception of value than your competitors’ pricing, you are going to win.
Ibbaka: What pricing skills do product managers need?
Alan: Again, we need to think about the strategic and tactical levels.
At a strategic level, the product manager should aim to align the pricing model with the product strategy and with corporate strategy. Brand positioning and the image the company is trying to project are also important.
The role of the product manager is to make sure that decisions are made, based on the best available information, to find and organize that information, and to make sure there is alignment. So the product manager needs to understand what data is needed to make pricing decisions and to align pricing with value.
The key is to have a solid understanding of the customers’ values and to make sure that this information has been rigorously researched for each segment.
The value of a product to a customer can be known, measured, documented and shared. It is the responsibility of the product manager to ensure that the company’s strategic thinking integrates these multiple sources of qualitative and quantitative information.
At a tactical level, too often decisions are informed solely by backward-looking information. SaaS companies in particular tend to focus almost exclusively on usage analytics. Making effective use of this data requires a very solid understanding of statistical and cohort analysis, data modeling, and other data science skills.
Using only this kind of data to manage pricing, or the product, is like trying to drive using only the rearview mirror. It’s dangerous. Backwards looking information can tell you what the customer did, but not why they did it. More importantly, it can’t tell you what to do next.
The answer lies in also integrating customer insight research, cognitive models and a solid understanding of cognitive bias. You have to be able to distinguish between opinion and fact.
So product managers need a combination of skills at both the strategic and tactical levels.
Ibbaka: What skills should pricing experts have to work more effectively with product managers?
Like everyone else, pricing people have to understand the difference between advocating for one's own opinion and advocating for the optimal outcome. People have to let go of the need to be the one with the right answer and instead focus on helping the team find the best answer.
The pricing team should be bringing solid knowledge of fundamental pricing concepts, which product managers often lack. They need to be tracking new pricing models that are emerging in other areas and how they could be applied to the product, and they have to be able to lead the interpretation of data from a pricing perspective.
The ability to explain value-based pricing is especially important.
Ibbaka: How would you describe value-based pricing to a product manager?
Great question. Basically, it is the development of a pricing model that is based on value as perceived by the target customer. This contrasts with other pricing models, where the price is based on costs, desired margin, or other aspects of the seller.
Customers’ own values determine how they respond to a particular offering. So the pricing model can play a huge role in helping to forge a strong connection between the value being offered and what the customer is most willing and able to pay for. In other words, the value metric (how the customer perceives value from what you sell) should connect to the pricing metric (the units by which the price changes).
There is always a value metric, whether you know what it is or not. A product manager’s role in value-based pricing is to ensure that the value metrics are accurately identified, and that the pricing metrics chosen align with how the customer experiences value.
Ibbaka: How do you see pricing evolving?
Alan: We have seen the pendulum swing from one-time purchases to subscriptions. This has led to vast increases in data about buying behaviors and product usage. Data science is increasingly being used to inform pricing decisions.
To date most of this work has been focused on backward-looking data, and the emphasis has been on understanding past customer actions in an effort to help guide future decisions.
In the future, understanding of customers’ perception of value will become more widely recognized as a more effective predictor of their future behavior. We will apply data science not only to behavioral data, but also to information about customers’ values. The integrated customer-centric analysis of these two types of data will fuel great advancements in pricing and product management decision-making.
In the future, understanding of customer value will be recognized as a better predictor of future behavior. We will apply data science to information about customer value to make better pricing and product management systems.