This is Part 2 of a series of four posts on pricing a solution portfolio.
Part 2 - Setting Goals (this post)
Part 4 - An Integrative Solution
Please take our survey Value, Innovation & Pricing Insights from CEOs
It is impossible to design pricing without setting goals. For a single offer this is mostly a question of alignment. In some of the companies we work with, there is a lack of alignment on pricing goals between product, sales, marketing and finance. We even provide a simple self assessment tool that can be used to assess this (have people in different functions complete these assessments and then compare the results). When one moves to portfolio management, things get more complex.
Before we dig into this, let’s work through the most common pricing goals. These are shown in the graph below. Pricing goals are grouped into market, financial operations and unit economic buckets. It is possible to combine goals, with one goal being primary and a secondary goal, but when doing so it is usually a good idea to choose the goals from separate buckets. Another approach is to use one goal as the target to optimize and the second goal as a target or floor. For example, one could have a primary goal of increasing market share by 5% to 30% of the category, but only provided that net profit remains above 70%. Another common approach is to combine a revenue growth goal with unit economics goals. One can grow revenue by increasing average revenue per unit (ARPU) and reducing churn.
Layering in a portfolio of offers makes this more complicated. Different offers can play different roles in a portfolio and thus have different pricing goals. One has to factor in how different offers in the portfolio impact each other and where each offer is in the technology adoption cycle. Many companies are often challenged when bundling a set of offers to create a compelling solution. This is where goal conflict often arises. Goal conflict can derail the best thought out pricing strategy. Let’s dig into each of these.
Roles and goals
Each product in the portfolio should play a clear role. There are a number of well understood roles that products play. The roles can be general, applying across the entire market, but they are more likely to be segment specific. You should not be trying to cover all possible segments. As part of your value-based market segmentation, you should have targeted specific market segments and chosen not to play in others.
Anchor and frame - this offer is meant to put the price of the other offers in context. A common example is the high priced bottle of wine on a restaurant menu that makes the mid range bottles look like a good investment
Entry - this is the offer that is meant to lure customers into your solution. In most cases you want to be able to up sell from this offer to other offers. Entry offers are sometimes associated with penetration pricing, when one sets the price at or below that of the next best competitive alternative.
Target - this is the offer where you want to have most of your customers. It is generally the offer that makes the biggest contribution to your pricing goal.
End of life - every offer will eventually become obsolete, or so commoditized that you no longer want to offer it. Pricing of end-of-life offers is its own special skill set. In some cases prices are increased to milk the last few dollars while encouraging customers to move on; in other cases prices can be steeply discounted to draw out the life span as long as possible. Remember, an obsolete offer for one segment could be an entry level offer for a different segment.
Transitional - this is an offer that is a stepping stone to another offer. In some ways, the Entry offer is one type of transitional offer, but there can be many other transitional offers. Many companies also use transitional offers to help users move off an end-of-life offer.
Enabler - an offer that sets the customer up for a future offer. For example, one might offer data collection services, perhaps at a discount, to seed the data needed for an artificial intelligence (AI) offer.
Once you understand the role of each offer, you need to set goals. These are the typical pricing goals listed below (note that in a portfolio goal setting is a two step process).
Capability development (this is a new goal for us, based on some recent project work, more on this later)
Unit economics (customer acquisition costs (CAC), lifetime value of a customer (LTV), months to recoup customer acquisition costs, value to customer (V2C))
Portfolio governance and managing conflict
The need to manage potentially conflicting goals within and across portfolios makes governance an important part of portfolio pricing. In an ideal world, there would be no conflict, but few of us are so lucky as to live in an ideal world.
There needs to be a formal mechanism in place to identify and then manage pricing conflicts. These conflicts can arise between offers in the same segment or between segments. Governance needs to cover both possibilities, which means it needs to include people senior enough to resolve conflicts between different divisions, whether these be functional or geographic.
In the real world, segments have fuzzy edges. It is not always clear which segment a potential customer falls in and what package is most suitable. This can be handled with good package design, where fences guide the customer to the best offer, but this will never be perfect.
One source of conflict is between optimizing customer lifetime value versus optimizing lifetime value to the customer. In pricing, the goal is to optimize for both, and make sure that one is not playing a zero sum game (a game where one party’s win is necessarily the other party’s loss), but this is not always possible. Whether one wants to favour the customer’s interests over one’s own, and give up some short-term revenue or profit, or if optimizing one’s own metrics is primary often depends on the role the offer is playing in the overall portfolio.
Another cause of conflict is when the offers in a portfolio fall into different profit and loss statements. These can be the hardest conflicts to resolve. It is hard for anyone with P&L accountability to just ‘take one for the team.’ Working out these tradeoffs and compromises requires a mature leadership team with good strategic and collaborative skills.
Order of operations
Determine where each offer is on the technology adoption lifecycle today
Forecast where it will be in 1 year, 3 years and farther out depending on the speed of innovation in your industry
Define your overall pricing goals (we recommend using Roger Martin’s cascading choices model, see Pricing in the context of strategic choices
Define the goals for each offer
Look for ways in which these goals can
Conflict with each other
Support each other
In our next post in this series, we will go deeper into how to look for interactions between different parts of the portfolio. It is these interactions that make a portfolio a more powerful system than a group of individual products. If there are no interactions, then you can just price each offer independent of the others. Though this means you are not developing and leveraging synergies, and that you probably have a weaker competitive position than you might think.