 Okay, I think we are ready to begin. Good morning, good afternoon, good evening, depending on where you are. My name is Carlos de la Maria and welcome to this pricing webinar for product managers. Before we begin, a little bit about me. I have been in the field of product management for the last 20-plus years and during that time I had the opportunity to work with great companies and great minds in the field of product management that taught me a lot about product and innovation, including the topic for our discussion today, product pricing. I am an engineer in electronics and I have an MBA in innovation and sustainability and currently I am the VP of Product Management for Cuba Systems and my LinkedIn is shown on the screen in case someone wants to connect. Now, with the formalities covered, let's talk pricing. Pricing is a topic dreaded by product managers. The reason is simple. When properly done, it is not an easy task. Pricing is part of a broader subject, which is how to convert the output of a company into economic work. Now, you might think, pricing, economics, then why is it pricing a function of the finance department? Simply put, pricing is more than generating revenue. It also has to do with product strategy and it helps develop, it helps a product create an image in a relationship with the customer. Pricing in the hands of finance will be biased towards achieving revenue targets only. Pricing is also more than coming out with a simple number. It involves making a series of decisions, such as determining what should we charge for, aka pricing dimensions and determine the pricing itself, as well as making or taking decisions about having or not having pricing tiers as well as decisions about using the global or per region pricing. Even though there is a lot of science in pricing, I don't think it is an exact science. And in fact, based on my experience doing pricing for many companies, the knowledge of what problem we are solving for customers and how much eliminating that problem is worth to them is something that equations cannot predict and that is the reason for the world art on the title of this webinar and also the reason for my choice of leaving image for this presentation. If it happened to Brasli, it can happen to anybody. Before I forget, when I use the word product here on this chat, I am equally referring to a product, a service, or even a paid for feature of a product. So please just have that in mind. During this chat, I intend to present a series of principles and propose a simple but structured framework to help product managers create prices where both your customers and your companies come out as winners. Not only there is no universal formula that will spill out that the perfect pricing you need to set for your product, but also pricing considerations will change depending on your product, its market and the business environment. Even when we talk only about technology products, there are a million of variables to consider. That depends on your product. Is your product a pure hardware product or is it a hardware plus a software solution? Maybe it is pure software. So if we say it is software, then are we talking about licensed software or subscription software which by the way can be, for example, on-premise software or cloud-based software. All of those are important considerations when determining the right price for your product. At the end, as product managers, we end up having to solve some kind of multi-dimensional puzzle. Now, one thing remains common. Pricing decisions are supported on four principles. First, pricing must align and support corporate strategy. We cannot set premium pricing if our corporate strategy relies on mass volume. Also, the understanding of how much customers are willing to pay to solve a problem or also known as customer perception of value. Product costs, how much it is costing us to make this product happen for customers. And last but not least, the pricing of alternative solutions. The questions I received the most about pricing are for cloud-based subscription software. I guess it is a business model that is becoming increasingly common, yet it is one of the most difficult price. For this reason, and although the discussion today I think is applicable to products in general, let's choose a fictitious product as a way to make this discussion easier. Let's say our product is a cloud-based subscription service that allows customers to broadcast a message from one microservice to many microservices. And let's say that it is not a commoditized product. And I will talk a bit about commodity products later. All right, so there are multiple approaches to pricing. Some of the ones I have seen before are shown on the screen. The first time I had to do pricing for a product was in a very... I was working in a very small company. And I remember a discussion with the owner of the company where he just said the way we will price our products, which contain hardware and firmware, is adapt our cost of the hardware components, multiply that number by two, and that's it. There was no consideration for the cost to develop the firmware or the cost of assembling and testing the unit, just to mention a few. And there was another case where high management decided that we just needed to land in the middle of our competitor's price. So for my pricing exercise, I just found the pricing of those competitors, calculated the average, and the pricing exercise was pretty much done and approved. There are other examples that I put down on the slide. And the last one I am going to mention is the fourth one. The no need to sell it. This was for a product in a very commoditized and highly regulated market. For this product, that was by the way a large electrical power converter, we knew the price range per what customers were willing to pay. And it was actually a very narrow range. And we just have to make sure that the product we created could be sold at that price. Made enough margin and had a value proposition that was strong enough to be the preferred choice of customers. The fact that the product was a commodity made the pricing exercise more a cost reduction exercise as the price was pretty much set for us. Our strategy was more to look for unique features that allows to create alternative revenue streams. The message here is there are multiple ways to set pricing. And although there is no magic bullet, the best one I know of follow the same approach. There is a step-by-step building of a solid foundation that allows the understanding of how products create value for customers. Pricing is a serious aspect of product success and it should be treated with a lot of care and consideration to achieve a good result. Let's first clarify some terms. Cost. The term refers to cost or cost of goods sold. This is how much it costs a company to provide the product or service to the customer or that the customer is going to purchase for a price. I still see plenty of people using the terms cost and price interchangeably. Probably because when we go to store and we ask, hey, how much does this hammer cost? What we want to know is the hammer's price. In product management, cost and price mean two different things and therefore we must be aware of what term to use when. Now, price or pricing. When these terms are mentioned, we are talking about what customers pay in exchange for a product or service. It is the company's financial reward for solving a customer's problem. Value. Value is a monetary measure of how much is worth for the customer to have a problem solved. Now, these concepts are relevant as pricing is not done in a vacuum. You need to consider costs, margins and competitors and come with a number that is equal or less than the value the customer assigns to solving the problem your product intends to solve. The best pricing propositions I have made follow the structure shown on the slide and I want to make a couple of precisions before moving forward. I call it a document, you can see it there on the title, but it can be in whatever format you like that will help you get your message to your audience. It can be a presentation spreadsheet document. Another point is I regularly use the word proposal on this webinar. The reason is that according to my experience doing pricing, pricing is not done by the product manager alone. You need to present or you will need to present your proposal to higher management and get your approval or their approval. I know this is not the best looking framework but it will allow you to create some of the best pricing propositions you will ever write. One thing that might come to mind when checking the framework for the first time is why is the price point all the way to the end? Why do we have to have all those previous steps? The reason is that the price point is the result or should be the result of a process that collects a specific set of considerations. Funnels then apply relevant criteria and at the end proposes a number. A similar approach is actually proposed by the Nail and Hogan on the strategic pricing pyramid. As you can see, the setting of the price level is the last step in the pricing process. The pricing proposal is basically divided into six sections, into six areas. Those are introduction, tenants, cost drivers, alternatives, decisions and appendix. Or normally, my way to remember all that is what I call it-cada for short. In general, the first four sections of the pricing proposal provide a kind of readers with all the elements and background information necessary for them to give you well-thought-out and effective feedback. Again, because when it comes to pricing, the product manager will need to present her or his rationale to higher management. After those information sections, we have the decisions section where you let the reviewer know what your recommendations are and why. This section uses elements from the previous sections and adds new elements as necessary in order to avoid like smoke screens about how you took decisions. And instead, it aims to show a clear view of the rationale but you follow to make your decisions. And the appendix section at the end is where you add all the backup data that might be required if someone wants to deep dive into the information you are presenting. As one former manager told me once, put there enough information such that if a question is asked while reviewing the pricing proposal, you don't have to look elsewhere because all relevant information is on the appendices. Now, let's begin working on that pricing proposal. First, start with your customers. They will help you fill out at least the sections that are highlighted on the slide. Now, you are doing pricing, right? That means you already know or hopefully know which current or potential customers will like to use this product that you are trying to price. Now, you need to ask your customers, why is this product important for them? In other words, what are they trying to solve? What problem are they trying to solve? Or if we want to go to the jobs to be done way or framework, the question will be what jobs are customers going to hire this product for? Get clarity on that and write down the names of the companies you are interviewing. As mentioned in them, will give a lot more credibility to your proposal. Now, ask for a detailed example of how the product will be used to solve the problem. Now, the answer to these two questions that I just mentioned go into the introduction section. Also ask how are customers solving this problem today? Which alternative solutions will they use instead of your product and why? Ask as well what are the benefits your product has over the substitutes and vice versa. Also ask what are the natural or expected dimensions to use when voicing the customers. If you are selling laptops, it is very easy. Customers will expect to pay for X number of laptops. But let's say for our big fictitious product that we said was a cloud service that broadcasts messages from one microservice to several microservices. Do customers expect to pay for the number of messages sent or for the number of messages received? Or maybe for the size of the message payload or for the number of receivers of the broadcasted message. Maybe it is a combination of those. What you have to do is to list all the dimensions used by customers to characterize your product and to try to find patterns or commonalities among those answers that you receive. Now let's say that for our fictitious product the three most common parameters to determine quantity the ones that we found when talking with customers were the size of the message, the number of messages sent by second and the number of microservices receiving the message. Those three parameters will become the pricing dimensions for your product only if we can measure them by the way. Sometimes it has happened to me more than once the pricing dimensions chosen are not measurable by the system. In that case, normally there are like three alternatives that is of the capability to the system to measure those variables. Option two will be just calculate the desired dimension based on other dimensions that the system can measure or third one sometimes you just have to select another pricing dimension. Now ask customers what price looks fair to them and what and last but not least ask customers what the price will be where this product starts to become not so attractive for them and they prefer or they would prefer to either live with the problem or look for alternative solutions. Get customers to describe this price in the terms of those preferred pricing dimensions that in our mock-up case, in our fictitious product are the three that previously I shown on the screen. I usually ask these questions to a diverse set of customers until the information I receive out of them begins to converge. Begin populating the introduction session of your proposal with the information you collected from customers. Now pricing decisions to be taken. State the pricing proportions you need decisions about. Pricing is not as simple as saying product A costs $100. A properly done pricing exercise goes beyond that and it determines a series of things such what pricing dimensions to use. What is the price? Are there pricing tiers? Is the price a global or region? This is still kind of the introductory part of the document so you don't need to kind of go deep on these decisions yet. Pricing tenants. Pricing is a very wide topic. Before you embark on finding the ideal number you need to set some guiding principles in advance as a way to help you stay the course when several options are presented as well as a way to justify some of the decisions you will have to make. You will need like a north star when it is time to make some calls and to justify those calls, those decisions. The arms of that north star are the pricing tenants. To choose your pricing tenants you need to ask yourself what is the goal you have on your mind when you set the price? How is your price going to help you with your master plan for the product? And what emotions and feelings do you want your pricing to inside on your customer? Pricing, like so many other things in product management is a tool that allows you to achieve something. That something or multiple things is what will become your pricing tenants or pricing principles. Some examples for pricing tenants I have used before are on the screen. We don't have time to describe them all but let's talk a bit about the first two as examples. Cost following. Do you want your product pricing to follow costs? Meaning, for example, that when or where costs are lower then your price will decrease and vice versa. Or do you prefer, for example, to select like the higher cost case and price based on that. Meaning that when or where costs are lower your margin will increase. Another pricing tenants, for example, is the cannibalization of another business in your company. Do you want to move customers from one product of your company to another one? Maybe because the older product is becoming expensive to maintain or it is holding your company hostage to obsolete technologies. If that is the case then cannibalization has to be one of your higher priority tenants. Before even thinking about the pricing decisions you are going to take, select several pricing tenants and organize them in priority order. Let me give a couple of examples of how to use tenants to make pricing decisions. If you want to cannibalize a product, pricing can help you do that. If you state cannibalization as a high priority tenant for pricing then you could say later that the seeding price which I will explain in a bit is the price of the old product. In this way the price of your new product will be lower than the price of the old product therefore enabling cannibalization. If cannibalization is an accepted goal for this pricing, if cannibalization is an accepted tenant then using the price of the old product as seeding price becomes justifiable. Another example of how tenants help us make decisions, let's say that both cost-following and simple are tenants but cost-following is higher in priority than simple. When you are going to make, when you are going to take decisions on what pricing dimensions to use you might need several pricing dimensions to be cost-following. But having several pricing dimensions is a lot more complex than having only one. Which way to go? Well, you decided that you wanted to be cost-following so you need to include the pricing dimensions that allow you to achieve that even when it becomes a bit more complex for customers than having only one pricing dimensions. So you need to make sure that whatever pricing decisions you take they support your tenants. Otherwise there is a disconnect between your goals and the plans to get you there. If the price you intend to set on your product doesn't allow you to achieve your pricing tenants then you need to review either your pricing or your tenants. Finding your product cost is fundamental. Cost is a key part of pricing as you don't want to be selling for less than what your product costs unless of course you are following up and those leaders strategy and product strategy is not the topic of this webinar. So let's assume that you are not willing to lose money every time you sell your product. Figuring out costs usually falls into the financial or accounting departments the so-called the cost accounting thing. If finance or accounting are not going to provide you with costs welcome to the world of product management where this will also become part of the things you have to do. Determining product costs however will be a webinar on its own or several and we can't spend time to kind of drive down that path today. One important point though about costs if possible the cost you get or you calculate it yourself if you have to do it should be stayed in the same pricing dimensions you found out that customers perceive as natural ways to characterize quantity for your product. I hope you remember when we talk about pricing dimensions if you don't a short refresher is if your product is laptops the natural way to count them is per laptop so your pricing dimension is per laptop and therefore the cost you get should be per laptop so you see everything starts kind of to line up. Now remember that some products are not so simple from the pricing dimensions point of view as an example for this webinar we took the fictitious micro service messaging service with the following three pricing dimensions the size of the message the number of messages sent by second and the number of micro services receiving the message if we follow the same logic we follow with the laptop example you need to calculate pricing base on those three dimensions meaning you should get costs in terms of each of those pricing dimensions. I have observed before is that customers consider a pricing dimension let's say a size of the message and when doing cost analysis we might find that the message size is not a factor in cost in that case you might want to eliminate that from your pricing dimensions as it doesn't help with your price being cost following and it also adds unnecessary complexity to the pricing which doesn't help with the simple tenant if you choose simple as one of your tenants so again tenants being very important here now regardless of who calculates the costs as the product leader and owner of the product you need to understand the why's of the cost they may be related to product architecture in the case of cloud based services or be driven by some particularly expensive components that are part of your product you also need to understand the per unit cost for laptops you will be charging a price per laptop so you need to know the price per laptop and for our cloud based messaging service if the pricing dimension is quantity of messages then what is the cost per message if we are charging per time then you need to understand the cost per second or whatever is the relevant unit of time you also need to understand cost driving factors how does the cost change with each and every one of the pricing dimensions you selected for example if a pricing dimension is message size how does the cost change with the message size does it remain constant or does it charge like linearly or how and also why one thing I have noticed when doing pricing is that the cost might have a dependency on variables that were not selected as pricing dimensions for our fictitious product the cost might have dependencies on how many messaging filtering criteria was applied to the message but customers might have not mentioned that as pricing dimension if you want your pricing to be cost following then you will need to add those cost driving variables to the list of pricing dimensions baseline costs are there any baseline costs in a cloud based product those are the costs incurred by the company even when there is no customer activity or usage as example a baseline cost of a baseline cost I manage a cloud based product that constantly executed appalling tasks to check for customer activity that tasks run even when no customers were active ungenerated costs for the company you need to understand if you have those baseline cost why are those costs there and how much are they now are there any other needs configuration anything else that can happen when the service is up and running that affects cost for example in the messaging between micro services product it is possible that this product perform retries when the message fail to be delivered those retries are invisible to the customer yet they may generate costs and therefore need to be accounted when calculating because of architectural choices filtering out messages or filter out messages and are not received which was the customer's desire behavior yet they may generate costs and think about extreme values on your pricing dimensions when you consider the dimensions used by customers to describe the uses of your product how does cost behave when you freeze all but one dimension and the one you didn't freeze you move from very small to very large again how is that affecting cost something that you need to understand also are there any geographical implications for cost if so those also need to be considered there might be a point actually in the direction of having like regional prices instead of global prices if one of your tenants is to be cost following so with a thorough understanding of your costs and the factors that can affect it you are ready to begin thinking how much money you can make or in more professional words the P&L of your product and that starts with forecasting you will need to create or obtain probably from sales the forecast for the product you are creating a price for same as other topics we won't have time today to discuss how to do forecasting but there are some points that need to mention regardless 5 years forecasting is usually done normally the criteria for this time horizon is to do it until the time when the product kind of gets to a stable state now a forecast per pricing dimension needs to be done that or this means that in the case of our fictitious product will need 3 forecasts 1 for message size, 1 for number of published messages and 1 for number of message receivers forecasting is an important aspect of pricing as it will allow you to create sensitivity tables that you can use to fine tune your pricing after you start from pricing and ceiling pricing both of which we will discuss in a little bit alternatives, competition is everywhere even though we always try to place our products in a blue ocean rather than in a red one and as product leader you need to become familiar with all the substitutes for your product in the next section with this topic how are customers solving the same problem your product intends to solve today which one do you consider to be the most meaningful alternative and why? then provide information about each meaningful alternative a slide a point or paragraph for each alternative is recommended and discuss there why is this an alternative what makes it the same as yours different than yours, better than yours and what makes it worse than yours now beyond functionality we are talking about pricing so when your customers use the alternative products how much will they pay and why how does that compare to your costs and your ideas for price points sometimes it might not be necessary but I like to create a spreadsheet that allows me to change the price of every single pricing dimension I'm considering so I can see the effect it will have on customers in voice compared to my considerations compared to the competition all the information until this point is basically due diligence with the clarity provided by that information it is time to make some decisions each of the decisions that fall in this case are shown on the slide and follow the same approach the product manager writes writes down like a series of options and provides a description for each of them as well as the pros and cons all written in an objective manner so as not to bias the opinion of the reviewer or the programmer when considering pros and cons also remember to include the impact of each option versus the pricing tenants does the option support or contradict the pricing tenants okay at the end of each decision where you wrote down all the options write down an analysis that yields your recommendation for an option and of course the option we won't have time to talk about decisions for like tiers or for global versus regional pricing so we'll focus on the pricing dimensions and price point decisions pricing dimensions decision and follow the format mentioned on the previous slide and state three or four options for pricing dimensions based on what you learn talking with customers the cost drivers for your product and the pricing tenants present a non-violence analysis of each option and then conclude with an analysis that provides your recommended option for pricing dimensions now in my opinion product managers need to see pricing as a funneling exercise where at the beginning you have like an infinite vertical line that represents an infinite range of possible prices and the product manager role is to narrow it down to a price point that she or he can justify the first narrowing of that infinite pricing option range is the floor price floor price is that point below which the company needs to ask itself why is that we are doing this product does it make sense to move forward with this product I mean now once the answer is yes in my sense then we need to set that floor price now can the price the sales price be set a floor price sure but hopefully we as product managers can do better than that now determining floor pricing is something that usually the product manager doesn't do alone as selling for under floor pricing will imply the company will lose money with every sale and because of that finance is normally involved in setting the floor price what have I seen before I have had finance departments telling me don't sell below our lower cost plus points other finance department don't sell below an infrastructure margin of 30% so you get the point floor pricing is the minimum price where the company is interested in having this product as part of its offerings what important point if we go to a comparison between your product being a laptop or it being a messaging between micro services product you have selected one or more pricing dimensions and for each pricing dimensions you need to set a floor price in the case of laptop there is only one pricing dimension and that is quantity of laptops therefore you need to set the floor pricing or quantity only for our fictitious product we selected three pricing dimensions so you need to find floor price and the floor price for each of them the second point where you are going to narrow down your pricing option canvas is the ceiling price ceiling price is that price point above which your customers lose interest in your product and prefer to either not solve the problem your product intends to solve or use an alternative to your product the term I mean ceiling pricing is usually something that comes from your customer interviews first you specifically ask them about ceiling price second you ask them about substitutes and hopefully you did all the invoice simulation for your customers to reduce substitutes problems so here is where all that prep work begins to pay off you can take for example your biggest competitor and set their price a ceiling price or if you offer more real value than your competitor and can quantify it let's say 10% more than your biggest competitor then your ceiling price might be your competitor's price plus that 10% same as with floor pricing for ceiling pricing you need to find the ceiling price for every pricing dimension a bit about price elasticity of demand this is another topic that comes to the table during pricing discussions and it comes like this let's see how demand changes with price and let's just set the price of a product as high as possible before the demand begins to decrease and hurt the desire profitability of the product well not to anger economists and this from my point of view as a product leader for technology products this is something that in 20 years I have seen only what a company do as part of a pricing exercise and it was a very expensive and time consuming activity and the practical value of it was so doubtful that we didn't even need to think about the topic of elasticity when setting prices after that and so just a point of my personal experience there with this particular topic now with well thought out floor and ceiling prices we can relax a little bit as any price we select in that range might not be optimal but it is not going to be a disaster price either now it is a question of reducing of narrowing the canvas to a point where we can get the best price for our product now how to reduce that canvas there are a series of questions that you can ask yourself such as is your product a commodity I remember working with an antivirus product and mapping the pricing of all competitors pricing was very similar across the board and the most expensive offerings were either due to brand recognition or to some unique characteristics my antivirus product didn't have brand recognition but it had a way to integrate with our flagship product that made it unique and in our financial projections to be able to sell this antivirus to even a portion of our customers will be a success in that case we chose a price that was close to that of well known brands and of course was between the floor and ceiling price making sure finance got their money and customers didn't feel like they overpaid so in that case our pricing was set close to the ceiling price check your pricing tenants do they offer any guidance about how to fine tune the price you are considering for recommendation in a company I wanted to cannibalize an existing product as it was not profitable for some usage levels in that case I fine tuned the pricing in a way that it was cheaper than the product I wanted to cannibalize I selected a price that was between floor and ceiling price a commonly used tactic when your product has more and or better functionality than the rival is set the price similar to that competitor main competitor I should say and use the advantages of your product as the reason for customers to switch to your product and last bullet point there I remember pricing an electric power quality product that was designed for the auto doors by talking to customers we found that our competition products were our competition were products similar to ours that were designed for indoors which were cheaper but will break every six months while our product lasted for at least three years having floor and ceiling price we were able to set the price of our product such that it was a lot cheaper to buy our product than replacing the indoor product six times that is two times per year times three years and this gave us a very, very healthy margin and was significant savings for the customer one thing I always recommend to do is sensitivity tables just an example is the one that I put there on the slide I create a table that shows pricing dimensions kind of in the column versus floor price some price options I like to include on these three and ceiling price along with their margins for option two I choose a product that after all this work and interaction with the customers seems to be the one option one this applies normally between floor price and that option two or preferred price and option three is normally a price between option two and the ceiling price now what do I check here the questions are am I getting healthy margins are the margins too small am I getting margins that seem excessive the goal of a table like this is to give visibility into revenue and margins of each pricing dimension at each price point so you can see if the favorite pricing option is really the best sensitivity tables usually show revenue and margins at some point in the future when the product has reached the state a common value I have seen is five in the future but it all depends on the particular product and industry normally sensitivity tables are provided by the finance department so I won't go into how to create one what you have to do as a product leader is to try to make sure that all pricing dimensions are profitable as you don't want to be losing money to use cases for customers there are some other sensitivity tables you might get from finance again the point is to make sure that the product is profitable across the board and uncover any usage corner case that might result in an acceptable margins and please in all cases try to stay away from price wars everybody loses in price wars even the winners as they are the winners of a market segment where customers, because of the price war expect very underpriced products ok now some final remarks and is your pricing proposal needs to generate trust to that end define everything for example, don't say it is cheaper or more expensive, state the number don't say we talk to some customers write down the name of those companies don't say it will come later after the future is developed what does later mean spell out the date don't say the functionality is commonly used among customers say the functionality is used by 74% of customers for example, sorry a little bit of an interruption there and I think that's all the material that I have to cover today's topic thank you very much for attending and I hope that you learned a little bit my leading was in the presentation in case somebody has further questions so for now, thank you, bye