 Before I start talking, raise of hands, who are engineers in here in the crowd? Okay, awesome, followed by people with finance background or finance degrees or roles, awesome, marketing, and sales, marketing, sales, pretty good mix. Lucky pricing managers here? Obviously you won't be here then. Done question, not a good start. So finally, product managers, a good mix. So this kind of helps me to get an understanding of where I should be with this. So a little bit about my background so that you guys at least start trusting me on what I'm going to talk, spend four years inside my conductor industry doing embedded pricing for Fortune 500 company, followed that with a pricing strategy at UI for about a year and a half and then did same leading pricing product management for AWS. More recently, I moved to Alexa because there's where the fun is. So today's topic would be more around understanding why pricing is needed and why it is important for us, why are we even here? It's a product school, right? Why am I here? So let's jump right in. So today's agenda, I'll start with comprehensive pricing 10 minutes, then go through some of the pricing types, not an exhaustive list, but some of the top five pricing types you would see out there. Then talk about importance of price communication and wrap it up with a fun interactive pricing exercise. So next slide, I've attempted to give a one page on everything you need to know to get a right price. I guess, sorry, that's a smart move, right? So what I can say, like you will walk out of any conversation around pricing with a lot of these different things and everybody coming from different directions, trying to make sense out of your pricing, right? And then everybody, like people from sales would have sales and revenue numbers to talk about why the pricing should be lower, where it should be. Engineers and product managers, they want to mark their prices very high because they feel they have made it the best product possible. Finance guys are fighting, I want my margins, where are those margins at? So everybody's pulling and marketing guys are like, hey, give me more money to spend on brand enhancement and all that stuff, right? So I'm pretty sure I've kind of like tickled everybody here and now we are talking some interesting topics. So nobody can actually tell you the right price. Sorry, like that's the bad news, but then the whole presentation from here would talk what we should do, what we can do to come to the best guess or best attempt at pricing our product, right? So let's move on. Why is pricing important? Why not any other thing in our organization? Why is it so important? So a lot of data has been ran with a lot of organization who have probably reached maturity or who have done a lot of businesses. The following is an average of what we have found. If you can increase your pricing by 1% or your price by 1%, the average net profit growth you see 11%. Compared to that, only 6% increase is seen if you improve your cost or cost of good soul. Or if you work really hard towards making your processes efficient and everything, you'll see an average 4% increase in your net profit margin. So now that gives me, as a product manager, if your boss comes to you and he gives you two projects, one improves the entire process efficiency of your pipeline and then there's this other guy who's talking about, hey, this is going to just improve your pricing by 1%. Pick the right project for your next promotion. So that's where you need to place yourself. So that's why pricing is important. Just not for, so it talks about top line, but it translates into a very effective, very huge bottom line growth. So that's where we are at, right? That's why we are talking pricing. Let's go. So now I'm going to talk about comprehensive pricing. So pricing can also be thought of as a traditional product management. What do I mean by that? Usually I've seen product managers thinking about pricing as, hey, this is my product. This is awesome. Let's price this at $100, right? That's what pricing in naive order stands for. But in reality, people who have been part of a lot of the business side when it comes to marketing sales or actual project pricing manager or even the real product managers who have been doing pricing, they realize there is a whole lot more of it, right? And what this framework kind of shows is what a product manager has to be cognizant of before they are doing their pricing and how effectively and efficiently they can create a product and the pricing practice around their entire product life cycle. So just to give you an example, when you think about a product, you think about, hey, there is this vision you create and then you break down that vision and then you come up with a minimal viable product and then what you do is like you launch. After you launch, you try to figure out the success metrics to that and then you try to measure whether your launch product is performing against it or not. And then you collect the feedback and use that feedback for your next launch or products or current product improvement. So what you will see next through these different slides as we dive deep into each of these is pricing is no different. It has to go hand in hand with your product definition. Let's move on. So let's dive deep into pricing strategy and goals. So a lot of times when a product is kind of created, generally the product manager tries to align their product with what the corporate goal is. But then a lot of that goes missing when you're trying to create a pricing goal for big for startups. It's very easy for a product manager to align with the CEO because he has that great visibility and what's going on where they want to take their startup to but then in a bigger firms, product managers are left and lurch and they do not have that visibility on what their corporate goals are. Now, instead of throwing this big names or words, I'll try to give an example. Assuming there's a product manager sitting in Apple and we all know like as soon as we talk Apple, we what are we thinking already premium consumer like ton of goods, right? Delights customer and price real heavy. Yes, sorry. Nobody from Apple, hopefully, but it doesn't matter, right? I mean, everybody pays for the premium and the experience they get. Think about a product manager. He understands that goal. And what if he comes up with, I don't know, like a touch flip phone? Three billion people out there who would buy that. There is a huge market in many, many different countries. Right? There's a price point he can put, which is real cheap, real good with probably the technology which was used for iPhone one and have a great product out there for three billion people. That's probably twice the current user data user base of Apple. But is he aligning his product to the corporate goal? The answer is no. The pricing of that has to be under hundred bucks. Does the pricing goal aligns with the corporate goals? No. The day he presents this might be his last day at the company. So you got to start thinking that let me have that conversation with my management or my senior leaders to understand what the corporate goal is. So that's where we're important. Now converting those goals into actual strategies. How do you kind of think about those strategies now? Now, if you have understood where my corporate goal lies, there are four questions you want to answer. Who are my customers for this current product? Right? They could be same as what your company has or might be different with this product you're trying to launch. So you got to be really crisp about defining the segment of customer you're looking. What is the value you're trying to provide with your product? And then what are the problems your actual customer have? So both things like a lot of times you feel that you're going to answer every problem they have. But then there is the other side to it. Is it like can I do everything what they want? No, I'm sorry. I cannot help Mike with every problem he has. Right? So that's where we are and always keeping competition in mind. So your strategies kind of form out of goal from the goals. It's like, okay, I'm going to serve this market. I'm going to provide them with these little features or these little problems I'll solve with my next generation or my current announcements. And that's that's already kind of dictating where your pricing is going to start. Then you start thinking, okay, when I'm talking this kind of product, I'm trying to be in this price range. So you see how your product strategy kind of also ties to your pricing strategy. And then if you have defined a product which gives you a price range of say a thousand dollars for that phone. Now you start thinking can be execute on this. So that's where a pricing vision and a product vision has to align. You thought about a product, but can the market support the pricing vision for that as well? Does that make sense? Let's move on. Moving on to architecture and implementation. So price architecture is more about how do you set that initial price? So initial price is the list price. You'll get into different verb different terminologies loose use for price. But this is like the retail price for the consumer goods or we have to when we are thinking about pricing, you also kind of want to think about any kind of products, a SaaS service offering or any kind of like product and service combination offering, right? So the architecture basically talks about things like for say SaaS offering on its dollar per person per month, dollar per unit of time per unit of unit usage and etc. Right? So that's kind of architecture. How are you going to come up to that piece? A good architecture of pricing and needs a very good understanding of cost. So we'll talk about a lot of the models where it will seem that you don't need to have understanding of cost, but having your cost done helps a lot of analysis. So let's dive a little bit deeper to understand what is the problem with cost when you're thinking about pricing during my consulting. I consult with a lot of 4 to 100 companies and one thing which was consistently missing in many top firms as well is the accurate understanding of their cost. And now you would say, hey, when I'm trying to like start a new startup and I don't even know what my sales are going to be or where my cost is going to be, how do I kind of think about it? Right? So there's a lot of that done by a lot of projection and best estimation analysis or where your product is going to be. Right? So a lot of us through other courses have learned how do we do that projections and realistic projections, right? So one of the ways to think about rights at a cost is the first aspect which kind of everybody gets right that, okay, you can track all your material in with this track all your all the HR expense for your every employee. So you have a very good understanding of how much did you spend in terms of the R&D and the product development piece. If your projections are 100,000 unit and if you're going to spend about a hundred million, you know where we are landing with that cost, right? One thing which consistently goes missing is the bottom three or four parts. So that is, that includes like an intangible part to your, it's an intangible cost to your product. People don't realize that there has been or there will be a significant effort for marketing and putting those ads out there on Facebook and getting that eyes and pops and whatnot, you know, like different clicks click-through rates and whatnot. So that can accost something, right? People miss out on that. Understanding where your customer service is like a lot of the SaaS solutions like you know CRMs and all that, they cost a lot of CSRs, customer service Rs where there are Tams on the field and other field engineers. They are used for deployment and a lot of times that those Rs are given for free. Again, customer service calls depending on how big your clients are. Those costs are very rarely taken in account when you are creating your initial place. That's where a product manager, he needs to understand that when he's building that product, how much of these other things what is product need? If you are in a very simple plug and play, then probably not so much. But if you're talking and implementation like Salesforce.com, SAP or something like that, a lot of this, right? And then you got to understand how do you kind of account that for that in your unit revenue. So this is a process of pricing architecture where you get a very solid understanding of your costs and then basically come up with a pricing strategy for that or pricing architecture for that. And a lot of that would be like I'll tie that when we talk about different types of pricing. Moving real quickly to pricing implementation. So pricing implementation is how you kind of communicate the logic, the feature set. To your internal or so that they are on board like finance has to agree that okay, I'm going to only give you 5% for this product. Oh my God, you're making my life up. Right. And sale or vice versa. Right. Like if you go to sales and this is why we expect 40% more and you will have really hard time selling this because this is very high premium product. So you got to tell different value propositions features. Why is it better than competitors and all that? So there has to be that product manager who can understand, not only makes a very good product, but he can actually put into words why he made that and what's the value proposition for its customer and why they should pay this price. So that's where the implementation aspects comes into the picture. Right. So now what do we need to kind of enable all this? Pricing analytics. So this is this again ties back to you know, like you've launched your product after initial price setting. How's my product doing? Right. So this is very where it kind of starts coming. So the first aspect of effective depth data analytics and tracking the value. So there are like a lot of tools which kind of helps you gather that market analytics to combine into your product. Right. And that's during your initial phase. So hey, how is market pricing their SAS model? So if the market is doing dollar per person per year, can we start going and offering one price forever? That kind of information needs to be extracted. What are different pricing model? What are people doing? You know, like what are different price changes my competitors are offering? What are different similar products doing in the market? That's where an effective analytics comes into picture. Similarly, those analytics needs to now convert into dashboard and tracking mechanism to understand how does your different segment or feature or products are getting reactions like there could be different geos, which is a more price sensitive versus the other would like your pricing and they are like buying it. Right. So so a good analytics dashboard or success metrics would first understand that and try to give a feedback. Then you can have price discrimination based on by customer by customer region or both or a mixer of both. Right. So that's where a very sophisticated models start come playing in. Then some of the things which a nice pricing organization need to track is price waterfall. We'll talk about that right here. So this is what I call a price waterfall. What does that mean? A price waterfall starts with list price. That's like your initial price. That's where we are at. And then see one thing. There's no cost out there till a little later. Right. Right around that pocket margin. Then you would see what is this? You know, like as a product manager, I was thinking like there's cost and then there's this price. But then my value of my product, which I'm pocketing is going down. So basically this increases this shows that this is where you price your product at per unit. And this is what you end up getting. So pocket margin is basically the margin you end up pocketing with this product. So what's going on? Let's let's go through a little bit of that. So a lot of here is what marketing and sales are trying to play with to actually get that product sold. Our fund product managers marked it at $100 per person per month. Man, market is setting at $45. Right. Our finance guys are like, no, there's no way I'm going to go below $60. So that kind of thing happens. Right. And so if you see there's like a lot of these discounts, like some program discounts for for different kind of regions and strategic programs, volume discounts for your big enterprise customers. If you're selling international, there are like a lot of effects adjustments and kicks you have to take. Now the actual buy price. So they are coming to the buying price. So there are a lot of other discounts, like if you bought through certain channel discounts, other promotions during if you want to push a product out, different product, you're sitting in a different life cycle of the product and you want to push those out. So a lot of that kind of comes into picture right here. Now you sold the product. Let's let's get that shipped. So all that kind of comes here. So actual actual logistics invoice. And then there are other discounts with like what delivery timing is given for these products. So those are other discount. And finally you take off all your cost of material sales costs and everything to finally come up to pocket margin. So if you're a product manager sitting with just a cost figure and thinking that okay, let me charge 20% over what I what my cost figures are. That is the stack you're missing. Right. So you got to start thinking about the stack. Get this data. There are people out there. The standard industry standards. If you are a startup. Where are where is everybody landing? So data is the king. Analytics is going to help you. And guess what? There are pricing tools and software. So a smart data analytics competitive intelligence tracking and margin analysis is very necessary. In this graph, when you do margin analysis at every point, it is very easy to figure out where is the highest cost you're losing out of this. So a lot of times what will happen is you might have a very shitty cost of material compared to industry or your logistics is not too good or you're giving too much discount upfront to just to be market. Probably your sales guys are not that good. I mean, you got to look at your bonus plans a little bit. Right. So that's giving you a high like high level understanding of that's what we call price leakage. So you thought it should be right here based on all your research. Where is the leakage happening? And if you have a very good software or good tool to track it, that's where you will get the right data. You'll be able to pinpoint that when our competitors when Samsung can do it for this much, why can't we setting Apple? So another couple of things won't go too different to it code to invoice is pricing software which kind of helps you do that code negotiation with your with your customer or partner Williams, ODM or direct partners and then configure price code is a very sophisticated solution generally used by complex enterprise or SaaS solutions. Then you have multiple different things you're selling. You have a huge product portfolio and your customers want very specific things according to their needs. So you basically configure your your offering price it based on their requirement and the timing delivery and everything and then you send the code. So that's that's that's something where I wanted to tell a lot of people what can be to be or thinking of like getting to a SaaS market basically lot of like Cisco's and Salesforce SAP and many other companies that you've got to like understand these two pros, Vendevo, Zellian. They are basically Salesforce comms of the pricing word very big software not endorsing any of them but they are the folks out there just in case. Yeah. Very briefly touching like so usually most of the organization product managers are responsible for price setting. So huge owners on us says things messes up and you know who's who's on the line of fire, right? But then the execution of pricing by execution. I mean who's on the road doing the real negotiation and everything that's done by two or three layers of pricing managers. So why is this important? Because if you want to become a product manager to a principle and then become a GM in a big firm, you have to understand profit and loss statement. You have to have that control and if you don't if you just get like if you're just happy about setting a price and hey throwing it off on the other side of the wall you're never going to get there. You have to understand what happened there. Whether you're spending a marketing budget where the price leakage is what is my business doing? GM is pretty much the CEO of that product line. He's just not making features. He's actually delivering bottom line profit. So that's that's where a very solid organization of like different levels of communication, different level of price negotiation and things like that comes why we need tiered tiered organization. You want to make sure your top guys only get to talk to tier one deals and so and so forth. Right. So that's what it is. Let's move forward. So jumping in type of pricing strategies. So I'm going to talk like so five top pricing strategies used in different industries. So you'll get a different flavor of why I'm talking about one versus the other. What we should be thinking when we are launching one product versus the other type. This is a mixed room. So yeah, like everybody can get something out of it. So pricing that makes sense for your customer and your product. Right. So before we jump into different different pricing models or types. I want to understand I want you guys to see what this is. So basically what I've tried to map is profit and sales for your product has a cyclic effect. As a GM or a product owner you want to always measure where your profit stands right or how your product is doing. So you can aligns with your product life cycle as well. So there's a product development phase where on your left right here where you're just throwing money at it. Then you launch with an MVP start making some money but not profit. You're still putting a lot of money because there is some traction now. Right. Okay. This thing works. People at least are talking about it. Right. And then you start seeing growth and during growth you see a very high margin. So one interesting thing to note is this point at the growth. You're still not sitting on the peak of your sales. But if you see your profit has almost reached a peak. What does that mean? It's like the excitement in the market has taken and now you know like people have accepted this but guess what? You are very soon if you're a smart product manager who is still thinking about what to do next you are probably thinking about next product because this is inevitable. Your sales will keep rising but the way it is happening is by more discount more more you know like marketing spending. You know so your your gap between actual profit margin and your product sales that's widening. So if you're a smart product manager you will anticipate that and your product roadmap should look for version 2 parallel market parallel segment different country expansion all these different strategies where your pricing and product can still stick. Right. So that's what you're looking. So with this in mind I really want to talk about one line if you want to take out of this slide is a successful product manager would be able to transition from one pricing model at point X to a different pricing model on the when you're at a different part of your product cycle journey. Right. Like if your product is mature have a very successful transition. We'll keep your customer guessing and we'll keep your sorry we'll keep your customer interested and we'll keep your competitors guessing. Right. They are not able to follow you then. What the hell is going on? Let's get into the cost for pricing. One of the simplest form of pricing. It's basically cost at a markup. There's your price. Right. A lot of people think about the pricing like that. Probably the worst possible pricing do. And you know like let's let's just explain for people who don't know the technology. The way it works is you try to get a good understanding for the cost the cost of material cost of labor and every overhead which we kind of talked about. So you get a total cost and then you're talking. Okay. I see my competitors making 20% or I think if I make 20% I should be happy with it. That's what I need to survive. Let's get that going. Right. So that's that's cost-plus like I mean simple Excel not even the second tab and you got it. Very easier. I like we are rocking already. So that's what you're pricing. Again. Is it that bad? I mean made it sound simple. No, probably not. Like this is still using many mature industry. Right. Like probably insurance where everybody's cutting through. You know, so how do you effectively or who who who who who can even use this this kind of pricing strategy. A competitive advantage is gain in this scenario in two ways. One is if you can provide somehow more value. Or more feature. Right. At the same price. Right or lesser price. Right. So that's a competitive advantage in a very stable industry. You have shaken something. Right. I give examples and if it's like HR software company giving the HR software for free. I mean they have caused a lot of shakes out there. How are they making money? They're trying to sell insurance at a premium on their flat. Amazing business model. That's a competitive advantage or extra feature for same or zero value. Zero dollars. Right. Let's go next. Or you can somehow find a cheaper way to make same product. Engineered word. Now there's lemonade. Same look. Same everything. Five dollars less per square feet. Hey, I'm buying that. Right. So that's what cheaper labor. Easier to fit. Less raw material. So this mechanism or this pricing is still not dead. It's still out there. Every work. Everything we see around us is mature. So there is a lot of improve chance of improving this. And if you can improve this, this will still be a great method to price. I see. We are a lot of us are in technology industry. So probably not so much for a tech product. Right. So let's get moving. Probably getting young already. A total opposite of cost plus pricing is price skimming. So basically. Price skimming is has been used very effectively by consumer electronic products, especially when they're innovating and generally they start at anywhere between 500 to, I don't know, like even. Yeah, 500 to like 5000% growth. So basically what they're trying to sell. Luxury just not value. Just super luxury. Right. Who are they trying to target? Or why? Why are they first of all doing it? Right. They want to recoup the cost of their investment as soon as possible. So if you are in one of those innovative very rapidly growing industry where there is more innovation. This is which this is one of the pricing strategy, which is very effective, you know. All you need to bring even is probably 1% of your time to address the market. You know, so if you can understand your segment well and you can address the pricing based on that, that'd be great. Now who is your segment in this? So if you guys understand the adoption curve of people of humanity, it starts with innovators, early adopters, early majority, late adopters, laggards, and I don't care about who the hell you are. So that's like the last few percent of the population and the first three basically 3% for innovators, 20ish and 34 for early adopters and early majority. Right. That gives you close to 50% of your population. This talks about the first 20 to 30% people in that first population group. If I can get them excited about this, this is a luxury thing. It has got nothing to do with the actual dollar spending making their product. So people who outweigh the need for, need of having their product, outweighs their need for economizing on that category. That's where this pricing is very effective. And then as soon as we kind of recoup that, we want to take the, take the price down and you know, well, that just fades out their product. A very good example on this slide is iPhone. Again, not trying to haze, right there, but that's where that's, that's what Apple has done very effectively with every product since its inception. And that's, that's a customer experience. That's something we all love. That's why we have that. So that's, that's a very good example. Now a total opposite strategy, I wouldn't say total, but kind of opposite strategy is penetration pricing. And that's generally done to penetrate into the market. Skimming didn't care about getting more people, you know, like excited, but penetration talks all about, I want more. I want everybody and I'm going to just try to send a person and I'm going to be trillionaire or something. So that's what penetration pricing is. So basically it starts real low, get everything excited, get people to talk about it, get them interested, get them talking. And so if you are in the industry where you're making you know, like some kind of app or some kind of value at a software, you start with a very low and then once people adopted, they just can't live without it, you start flipping a little, like you start charging a little bit more and more as you provide more value as you have more people who talk about you and things like that. Why is this used? It, it, it looks to create a lot of goodwill or generate that self social market, media marketing kind of a deal within itself based on its pricing. Hey, did you try that app? It's a couple of bucks. It gets the perfect selfie and I can also like upload to Snapchat right away, right? I mean, it's $2. What else do you want? And then this throwing five more filters for five bucks in a year. I'm sucked into that already, right? So that kind of like strategy is, is this. Um, again, what it does in some of the niche market, it scares off your competitors. That's very important. If you, your product has low barrier to entry and I mean, I understand, like we all talk about that when we design our product, right? Barriers to entry. If your product has low barrier to entry, you want competitors to be scared of you rather than, oh, come on, we define this product segment for you and let's come and take my market share. So that's, that is very important. Like that's, this is one of the strategies when you're thinking when the low barrier to entry is low and anybody can enter and you are trying to like scare them with either your goodwill, low pricing or ability to serve, right? You got to make sure that as a company who is implementing that your cost of operations are low because you're almost giving it for at a negative margin pretty much, right? Another problem with that is if you're, if you only end up getting, you know, like people who are really cheap or people who don't, who want your service for free, they might start dropping off and you increase prices because that's what you're trying to do. So in this graph, I basically try to like show a different type of pricing and what they're doing. So price getting starts real crazy high up there probably for same price of same cost of implementation. And then it tries to like get all this margin and recoup all the investment right here and then go down in its value versus penetration has an opposite strategy. So again, two different industries we talked about two different kind of mentality and thought process, right? Let's move on to freemium pricing, my favorite type of pricing, right? Again, I think everybody kind of knows about it. What freemium means start with free and then do something with it or try to get money out of a different channel. Like Google is a great example. You give your search for free, but then I sell you at Facebook. I take all your data and sell it to people. Sorry. Okay. So that's this where I'm at with a premium. There are many different ways I've seen this being executed for different B2B and B2C customers. Want to like so some of the limitation like some of the implementation are giving limited feature for free and ask them to upgrade as they want more value or give them limited capacity for cloud and all that limited use of time or limited support from your staff. Want to touch briefly. I am big fan of limited use of time. I love the Salesforce model that you can use my I have four tiers of offering, right? You can take my best tier offering like everything all the guns with all the guns and vessels implement that use it for two months, three months, what not. And then I charge you what I told you I will charge. Right. So I mean that kind of gets people interested. You filter out people who will just use you for a little bit and you're supporting and there's a whole lot of cause going in. I mean, that's what I'm fan of, but then different things make sense for different businesses, right? Like customer like LinkedIn for that matter, which is a feature implementation. That's great strategy for them, right? They earn ton of money through their ads through their through the hiring recruiters, right? Then other people are just around in the community and the network is grown. So so they try to get monetization through the recruiter like a different community is paying for the rest half of their community. So there is no one right answer, right? There are different things you want to break down and understand who is actually going to give me give me money. What is the value proposition I'm giving for my customer, right? And also want to free want to just remove people who does not give you any kind of monetization advantage. I've seen that that being done in a lot of companies. Best Buy was one of the big examples of that where they started moving. So they were becoming a showrooming thing. People went there click. Okay. Find it at everything else.com or cheap electronics.com. Thanks Best Buy for the experience. So they're trying to like filter out a lot of the product skews they kind of get, which is only in Best Buy or skews which are generally for premium buy and things like that. So that's that's a very good strategy. Again, this is I go for startup. This is especially for software company to get a lot of traction among this customer segment. They are targeting and you know, it's easy to communicate your value proposition. They can try everything. They can see everything and if they like it, they stick or they don't. So that's this is a very effective model. Now we talk about value based pricing. This is one of the most sophisticated. So this is sort of the pricing world value based pricing. I mean, so generally there is a very subtle difference between so value based pricing talks about what is the value provided to the customer versus the cost which went in building that software. Right? It basically tries to compare your software or the value you're providing with the next best option to keep to give you a very simple option. So let's go back in the days when people used to do stuff like typing, right? Probably they are I've employed five people. Their salaries running $500,000, right? And there's this other company who built a software for $50,000 and has about $10,000 annual maintenance fee, right? So now their cost is about $60,000 on year one and $10,000 every year. They could literally start pricing anywhere between $60,000 and $500,000 and they'll still be wiping off this like they'll be making value for this customer, right? So that's where the value lies. That hey, I'm giving you this value because your second best option was sitting at $500,000. So what you would want to price it at probably $400,000, right? The first year you make whatever $360,000 and the next year you start making more, right? Similarly, this proposition is using like has been used with all the software companies since inception, I would say like Microsoft was one of the first pioneers of that like when they started pricing their products. So softwares are generally at anywhere between 90 to 95% margin or your enterprise agreement and things like that. That's where they start their list prices at and then it can like all the crazy waterfall thing happens with the tiered customers and whatnot. So that's a value based pricing. So again, very important part is to understand how do you can implement this like a lot of times implementation of value based pricing is understood by understanding what are different parameters which are causing different usability or reason for cost. And then you kind of come up with a perceived value. Again, a sophisticated value based pricing generally tries to even discriminate between different regions, different segment of customers and even different features. You know, feature discrimination is obviously easy. So that's that's value is pricing. Let's go and talk about a price communication. So what I want to do keeping on topic of Apple today. Communicating your price is super, super important. You made a product and kind of started with my top communicating by your price is where it is very important. We'll see how what's happening in this and we'll talk about this. That's where I start getting less boring and more interactive with you guys. So and I hope the technology helps me. Okay. But you got to know. He's straight because always been a part of Apple's DNA to show me the variance just like we visit. And there's going to be one of the last three from the chief pinball box. Nothing's being said to Apple. It recognizes when you do say it. And from that point, it sends an anonymous Siri ID in order to command you're looking for June 5th 2017 communication is all encrypted. Let's watch it right now. So this is the home pod to break through home speaker Wi-Fi speakers if they're good quality of $300 to $500. The smart speaker might cost you $100 to $200. So it's not unreasonable for a home pod to be priced in range of $400 to $700. So we're really excited to tell you that home pod is going to be priced. While he does that a pop quiz for people who are almost sleeping right here raise of hand who can tell what kind of pricing was that and clue. It's one of the five we just discussed raise of raise the hands please. You started first. Yeah, penetration. Okay, another guess very possession. Value value value value. All right, so we have a good understanding of like value or skimming like somewhere there and then there was penetration. Yeah, Apple doesn't do any kind of they don't care about people actually using it, but they do right. So a clue was there while I was talking about all the pricing types that Apple does skimming all the time. This to me was value. He was telling a Wi-Fi speaker cost whatever and then a smart speaker cost 120 bucks and we are we could have done that over 400 bucks. But I'm giving you that value at 350. I've been an Apple fan of own an Apple iPhone for like 10 years now. I've never seen ever a price announcement by Apple where they are justifying their price. So Apple is now feeling the need of communicating value. Right. They cannot just skim that market of voice assistant is very crowded. It's it has big jagranauts out there. Right. I'm right there. Self marketing. Sorry. Sorry. So whatever but that's what it is right for the first time I see Apple communicating value and that's what it is what it mean what what I mean when I say pricing communication fire is necessary right. People should know people should care that you care. This is the way to show that you care. Right. Let's let's get into another example of this pricing communication gone really wrong. Who was live in 2011. Okay. Everybody made nobody here wasn't around there. Who knew Netflix. Everybody like don't need to raise that. So this happened right. What happened let me tell you just briefly. They used to be 999 for both their DVD deliveries and streaming back in the era of 2011. And what they did was their product managers realized that hey people who do DVD they don't do streaming and people who do streaming they don't do DVD. Let me do this. Let me just split it into two. Give people DVD for eight dollars. That's two dollars per month in your pocket. Let me give streaming to people for eight dollars. That's again two dollars in your pocket. What people read that as this. They're trying to cause their prices by 60% they read that messaging as they never explained it right. This is when you go through books. They never explained it. It was $16 to them for the same service right which was a 10 bucks. This is how all street treated them. They were sitting at a high of forty three dollars and they did that and in no time they were nine bucks. And I'll tell you after split they are 200 close to $200 today. Guess what you probably fired some of those guys. Okay let's let's do another interactive pop quiz. What could they have done with this to still keep these people so they had 80,000 people drop rate. That was a whole lot of subscriber out there. 80% loss in their market sorry market valuation. What could they have done back then when they were when they knew this data. They could have offered a DVD only plan at a lower price point so that was that that was the only plan. But I mean like they split off the 999 and then split it there but they could have offered it even a fraction lower. I feel like is based on the maturity model like DVD sales were kind of late and so just that as a category was kind of getting eliminated in 2011. Very good talk right. They could have also approached the DVD watchers and the streaming watchers individually and tell them OK we realize you just watching streams. We price you two bucks less because you don't use the DVDs and there you go. It's a great opportunity. Any other shot like that's a very good like answer to your communicate communicate communicate any other takers in my cell. OK good. I would say like OK 8 bucks for streaming if you also want to be which is like a diminishing segment you couldn't purchase it for three dollars more. Perfect. That's what I was thinking. Guess what. A dollar for DVD only a dollar for streaming the together look 16. I'm used to both. I don't want to choose. Why do you take that away charge 11 bucks. For both they are not going to take both like if you were already making profit at 10 if you were already like I didn't show this graph right here was like this. Why do you want to decrease yourselves right there and then probably take away that. I'm so happy this happened. My talk was in October 12th because I was going to go only like my slave was this I added this segment can you see it like it's very cramped October 5th 2017 happened. Their announcement of price raise was so well communicated. One dollar right one dollar right increase in price for 1099 and only my premium so 1099 is their most popular multi user you know like my mom and dad and everybody you can all share have all the accounts and then for create premium. So now they understood well and the basic plan still stays at night so they have clearly marked 3 seconds and they are trying to treat them differently right and with that the timing of this was amazing that was right before the second season of stranger things. $2 more for stranger things in take 5 more man. And they also said we're going to use this money to give you more of stranger things. Right not a very good bit like sorry but more quality product content that's where Netflix is going you know like I will give you better content for $2 a month are you serious. Yeah take it. So that's where that's the price committee and guess what happened in 3 days. Almost 10% jumping stock that was that price is on 7th they probably last Friday Monday this Monday. I pulled it today morning. It's a that's where they are at. So that's a value for the strength of good communication. Before wrapping it up I want to talk that every business person or business man or anybody doing anything on earth needs to have ethics and that kind of goes a long way. This case kind of occurred earlier this year and it has been happening. Don't want to really call out people this is just an example of what happened. My land was selling EpiPens and they came into like everybody's eyes because they were selling this almost life-saving drug EpiPen for some kind of allergies and millions of people I think 29 million Americans take it. It's like a pen you maintain in your pocket and if you are exposed you can take it otherwise it's crazy you got to go to ER. Their prices for these EpiPens soared from $100 in 2009 to $600 and that's like a monthly refill. That's not like take ones and be done. That's my that's what I've researched if I'm wrong let me know but that's like your monthly or one shot or something like that like that's one one month dose and that's $600 they have raised it to $600 and so there was this whole lawsuit against them. Am I providing you a value? Yes. Hell yeah I'm keeping you alive right. Are you going to pay $600 of course all your money is going to go down the drain once you're dead. Is that ethical? It's not we as whatever chair you're sitting whatever decisions you're making try to make sure that you don't stop being human. That's where ethics for me it's it's it's prime for me. So now let's get into a fun exercise after all that beer drinkers in the house. Awesome so this is going to like be popular I think you know like some products and whatnot but I thought like people might know but beer is something you know so let us run through there are two exercises here and I'm going to just do by two of hands and then we're going to really run through what it kind of means. So I'm trying to launch a new Mexican beer generally made out of and this is like made out of blue agave makes some spices and whatnot I'm going to launch in these three states alcohol content 4.5 can average alcohol content what we see in the my competition category and the carry wise okay we did something better like 95 calories for Lugger is that even possible? I don't know it's made it up competition is pricing it at 1.2 per bottle to 1.75 per bottle. Yeah so as a pricing manager myself I'm going to try to come at a right price in front of you guys right so raise of hands who drink beer. Yeah hand exercise band please a lot of counting for me everybody so everybody who just raise hands raise your hands if you are interested or if you have tried any of the Mexicans beer Mexican beer and would be interested in trying this product so I see a drop out of only 10% right. It's easy to say that we are all in California right now right awesome that what helps out of which who all really care about that 95 calorie raise your hands our beer actually down to like 20% like about 10 people probably not a big like if there is a no like it doesn't mean that they don't care it's like they'll drink it also I mean I'll take a little calorie so you got to understand what you're asking and what it kind of results right. Who's being on like only 4.5% of alcohol like or you want a little strong like so let's name frame this who wants more alcohol percent then 4.5 I think 4.5 is less like 20% right. So that's a very strong one so now for people who did who like 95 calories like we all are sorry and basically 95 calories and drinking Mexican beer given this competition pricing how many of you would want to pay $1 so out of 10 people one two three four five and there are more hands than there were like it's a dollar yeah right probably more than my saying right a dollar 25 okay almost the size of mine 95 calorie segment it's about 12 people a dollar 50 80% of that segment it's pretty good dollar 75 okay so we see some dollars right so what I did was first understand the entire segment so this was a segmentation and the pricing exercise and then basically coming up to right price so first of all who are beer drinkers and who have who like Mexican beers obviously easy to understand how I came did this the segmentation right I came to a conclusion that this is very appealing piece which I'm bringing for similar kind of products right if you saw through the survey that's an appealing piece and that can attract a lot of people now when I asked a dollar for this it's a bargain for people who care or don't care should I price it at a dollar because I see some people interested I mean the answer could be it's always maybe why this maybe if my supply chain can support this like to 20% people loved it among a population of 100 and that kind of translates to I don't know like 100 million bottles per month can my supply chain even support that can I even reach those people if the answer is no that's not the right price I don't want that many people I would only sacrifice my margin if I can satisfy that market dollar 25 and dollar 50 almost gave me 100% of the segment and almost like a 90 or 85% of the segment right if I don't my mat if my cost is sitting at 50 cents for this bottle which I did hide I'm making more profit at dollar 50 serving only 80% of my population then a dollar 25 which gives me entire town and putting pressure on my supply chain what if there is winner and people don't bring rear that's California they don't even be yours my country and I'm from Texas like it's all here out there so yeah so that's that's kind of like a model go ahead you had a question okay so a real quick similar exercise for craft beer actually do you want to do this like we kind of get it like this was a deeper segmentation for craft beer I see like we are really deep in really the time when we are about an hour so what I'm going to do is gonna just go into Q&A it was similar exercise so yeah so good well actually I'm curious the last exercise because don't you have to also take into consideration the fact that most everybody's going to be getting beer from a reseller and therefore you have to take into consideration what the markup is whether to go to store or a bar correct use cases yeah so this this kind of talks about control how much they're going to be getting it for whether you get some level perfect so the previous exercise is a lot about cost-less and competitor stacking this is about close to skimming and value that's where this exercise takes you like hey do I really want to address a very small segment of the market who understands who even understands the definition of American India failure like that's a lot of work that's a lot of like where's to chew right I'm going to drink that thing right and then I don't know like pick up orange spices and ginger in my beer I mean that's Moscow meal with blue moon what is that thing and so that's that's a whole different that's a whole different exercise we are we won't be talking as many books and numbers as value value value there you have like we're talking about like getting more shelf space from grocery stores because it's more or the grocery store can get more margin themselves they get on one of themselves off selling number of bars for tabs also and bars yeah things like that okay yeah open an opening the floor for everything sir yes I have a question if you consider the kindle and the pricing of books and kindle if I consider price equal cost plus margin obviously the price should be lower if I consider the price is based on the value it should be higher because I've got the book right now I can make you know note and think like and share so how Amazon came to so here's the thing there's something which I forgot to announce earlier is legally if I don't want to lose my job tomorrow morning I cannot talk about anything so anything which I talked had nothing to do with current pricing strategy of Amazon or anything legally down there let's talk about Apple and the I book so the idea is so how do you make the pricing of an electronic book knowing that the cost plus margin means price is lower but value-based pricing mean the price is higher yeah even skimming right so that's where a couple of things you start by thinking what what is so Apple has always done skimming late according to me where you should you put a value price for the first time again this is where the exact what I was telling you start with an initial price you launch you collect the data on how it's performing spend money on a brand and premium emplacement let's see if it freaking sticks and if it does wallah same price if it doesn't stick oh my god that was such a failure wallah right so if you had difficulty pushing out your stuff out of your supply chain and your your warehouses you know what to do scoundrel right so that's so that's where there is no right answer the right price is there which makes you uncomfortable the right prices which makes your customers a little uncomfortable as well then you are doing skimming and and value penetration and all has a different mindset go ahead how do you analyze like the three older sales like a cell tell me a mobile phone right price 349 have a flash sale correct you'll get all the all the orders in and go back to the supplier you get the cost of a Tesla Model 3 like a thousand dollars deposit for a 35,000 dollars car so so so basically the kids start a month right building the Kickstarter's out there we're trying to get the money to so what I call that is the fund me model and I'll give you that initial discount as a product manager for that I would figure I would want to know or understand where would my price value would be at launch right and now what am I doing is hey I want to make sure so if I don't receive the funds I might not be able to launch my product so let's do this let's do and understanding what my cost would be at an average add a little bit of markup to make sure that I cover logistics people reach blah blah whatnot and still make a decent level profit so it is it'll be anywhere between across between your cost plus more pricing and value so you want to always say that hey my price is $100 but guess what I'm selling you at like $79.99 as a initial offering right you're getting 20% 25% so what you did is just make sure that you didn't discounted heavily to get their funds you're not knowing to get their funds you're going to give a value product if you had started with a $50 and you're telling them you're gonna sell it for $100 it will never sell it for $100 even when you have a successful launch it has to take a miracle to get there so you want to understand like the right balance right another thing which would help is like see the alternative solutions always baton it's called best alternative solutions yeah start up how you just define penetration pricing to your investors if you have penetration lost eight years sometimes as we've seen with some companies in the Bay Area I mean I have never been at a startup but then I've tracked a lot of them right sorry for the answer just to find that if so so there is a model which I'll tell you is customer lifetime value have you heard of that so customer lifetime value if for people who haven't heard of it is basically trying to get an estimate of how long a customer sticks to your platform so customer lifetime on the platform and the doubt the average dollar you can extract from that customer on your platform again for startups they do all sorts of projections that I can extract more because we are sitting at like a dollar now you're gonna raise prices and we are not gonna lose better options so with your investor there is always that pull and push but then that's the valuation model you follow a very good story again in 2013 when I was taking marketing at UT I was given Netflix paper right the stocks were back up again they were sitting at 63 they had gained their 80,000 subscriber and they were just sitting right there and it seemed like a turnaround story already working on that case I was an engineer and my partner was a lawyer we came up with a stock valuation with that model which we talked about at $253 before the split we looked at each other and we're like if you're gonna get an A we should buy stocks today or I think you're getting a C so guess what we did we actually fuzzed our numbers and got a like a hundred twenty dollar valuation for the company it actually they went they passed here in a box in less than two years right and we know it's part of the fan terminology it takes a lot to be part of the big five six right so so that's where I'm saying like that's the best model I try to do the valuation and the pricing like it's about the customer lifetime value and their adoption and their tickets I'll start from this okay I missed you I'll do this good okay I having assessed the market I think I can thoughtlessly say that we're creating a new market with our product now if we come in because it's the hard to benchmark against other people we come in a certain level on the basis that we're an exclusive product on the other hand that allows people who come behind us who I think want to because it's a new market to undercut us at what point should we be defensive about the way we price and say well we can anticipate people coming who want to run the company and lower our price you know so so I one line answer in a way I understand so a lot of times I have the for startups what has always stuck and made them successful especially there if their pricing has to stick is keep innovating make that customer delight experience because people who have already gotten on your platform who understands that you understand better than your competitors they will stick around they will and then if you still think that okay people are able to innovate better than you they are able to like you know delight their customer better that's when you take the pricing strategy right so always product strategy first I because I brought pricing here because it's product school we have I've seen a ton of awesome speakers here about product and how to think about it but then I wanted to bring the second layer of thought to the table yes okay that's nearly two more talks that's great that's my forte actually like that's my the biggest area like if I can talk that's why probably to chose more be to see in a generic pricing because I would be talking about more I'll take you go ahead yeah so how do you define the price for the product that's a very high its cost are very low variable cost so for example for the BS very like straightforward we can just like 20% because we know there may be $8 profound but how about for like Netflix maybe you have a very huge fix but maybe variable cost is pretty low how do you decide price yeah so this this basically it's a very good question especially for software industry and even a little bit of a consumer electronics and things like that what we make is even before you start making a product there's this exercise what I like to do is cost of implementation versus value possibly paid in the market right you always start thinking about value of your product so run a value-based analysis of your per unit and then do an analysis of your projected percentage market you can gain so basically this analysis if you can run with a 90% confidence to get a number then you do another thing which is called your R&D cost the least number of people in terms of your R&D production marketing and advertising what is the the cost you can come up with you know to get this product in the market right so so that's basically you're comparing two type of cost like so you can assume you on the left side with all the value and projected two-year sale I mean you always want to run two or three years as a startup also another good thing to see is what is the product lifecycle of your product you are in if you're in a phone business it's a two-year lifecycle if you don't recoup your money in two years hey bad news I think the industry is going to move faster than your product can software depends on what you're offering is so two-year revenue rate versus two-year run rate to actually get to MVP and some kind of maturity you stack that against each other if they're if if you see there's a big delta you talk to people are you you see this like okay now that's not right I'll take more all right let's say one more yeah examples you use in your presentation about Apple and Netflix they're very large companies they have a lot of rigidity and they set the price they can't change from a very long period of time for smaller companies a little bit more nimble and flexible and they're just starting out as you're an example they have more flexibility to set the price and adjust the price and test different price points do you have particularly like any strong thoughts on the frequency or the timing of the kind of price changes and how often can you do it and stay credible yeah so very very good question I think could have covered myself in the presentation but even though your startup I do not recommend changing your pricing a lot there could be one or two like coupon discount marketing programs because that shows weakness in the value you communicated it shows weakness in the leadership and it shows like basically weakness all too well so you say don't go don't go seriously alright thanks guys great audience