In two jobs prior to Dstillery, among other things, I had responsibility for managing product pricing. In that role, I’ve priced hardware, software, SaaS services, professional services, support services, and labor. At some point, I had jotted down a bunch of notes on how the pricing process should work and I thought I would share them here.
It has been said that pricing is not an event, it is a process. And it is not just a process that should be owned by finance, sales or marketing but one that needs to be truly cross-functional.
This diagram outlines the key activities that go into setting, managing, and measuring prices. The various activities can be, and often are, owned by different functions depending how each organization is structured, but there needs to be someone looking across all of these activities in a holistic manner. The key role of the “pricing owner” is to coordinate across all the interested functions and drive the process to establish the best pricing model for the company.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
— Antoine de Saint-Exuper
The amount of printed material available about managing and running great companies is pretty staggering. And, like fad-diets, the philosophies espoused in this literature seem to be either overly simplistic or incredibly weird. That’s why I found this article in the most recent issue of The Harvard Business Review pretty refreshing.
Two researchers looked at the historical performance of over 25k public companies in an attempt to identify a common set of strategies that separate great performers from mediocre ones. They looked at the impact of innovation levels, risk taking behaviors, M&A activity, hiring practices, and so on. In the end, none of those factors were determinant. In fact, the researchers did not find any silver bullets or magic strategies. What they did find, were three simple rules that are practices by all these great companies:
- Better before cheaper—in other words, compete on differentiators other than price.
- Revenue before cost—that is, prioritize increasing revenue over reducing costs.
- There are no other rules—so change anything you must to follow Rules 1 and 2.
It is obvious if you think about it-if you have a better product or service, more people will want to buy it. As long as your price is in line with the value it creates, unit sales and revenues will be strong. This point is often lost by the short sighted equity markets and financial press which seem to love all cost-cutting announcements. It has said many times, “you can’t cut your way to greatness” and the research here seems to prove this point.
The authors call this discovery “liberating” because it gives managers the flexibility to follow any tactics or strategies that support the first two rules and offer advice:
Here’s how to put the rules into operation: The next time you find yourself having to allocate scarce resources among competing priorities, think about which initiatives will contribute most to enhancing the nonprice elements of your position and which will allow you to charge higher prices or to sell in greater volume. Then give those the nod.
This is, now quantifiably, a recipe for success.
Back in January, Duncan Watts of Microsoft Research spoke at m6d’s ADSCON event at NYU. Duncan has a unique view of the world having begun his career in the hard sciences (math and physics) and migrated to social sciences. He quoted a passage from his book on the paradox of thinking rocket science requires brilliance but social science less so:
Typically people in these positions [public policy makers, marketers, economists] do not expect to get everything right all the time. But they also feel that the problems they are contemplating are mostly within their ability to solve – that “it’s not rocket science,” as it were. Well, I’m no rocket scientist, and I have immense respect for people who can land a machine the size of a small car on another planet. But the sad fact is that we’re actually better at planning the flight path of an interplanetary rocket than we are at managing the economy, merging two corporations, or even predicting how many copies of a book will sell. So why is that rocket science seems hard[?]
This is really interesting thought. Rocket science is, clearly, very hard. Rockets are complex systems but the physical laws governing the behavior of these systems are predictable and consistent. People, and social interactions between them, are also made up of very complex systems but human behavior is anything but predictable and consistent. Given this unpredictable nature, maybe it makes sense that studying human behavior in a scientific way is much harder than it is given credit for.
A few weeks back, I had the opportunity to attend Practical Product Management training from Pragmatic Marketing. The instructor, John Gatrell, said something about the maturity cycle in early stage organizations as it relates to product management that I had not considered before.
Jon said that in the beginning most startups are engineering led (this part I knew). Since the founder usually leads the product development team, this is likely the one time when a company is most market-driven; where they are most focused on building the products to solve real market problems. As the organization grows and functional specialization begins, a professional sales team is hired and the development organization become more removed from the market and loses some of this focus.
With the new sales team in place, the company focuses on top-line growth and the organization tends to become more sales driven. One down side of a sales driven organization is that the sales team can get overly aggressive and will sell features that the product doesn’t necessarily support yet. More and more the product roadmap gets determined by the commitments sales people are making to clients in order to close deals. This approach helps win business but is not a strategic or thoughtful approach on how to evolve a product for long term market success.
Eventually, the sales team asks for help telling the company’s story and the organization will strengthen its marketing capability. The marketing team will naturally focus on outbound activities like PR, collateral, and lead generation that help build the sales funnel. At this point the company is talking to the market but probably not listening as effectively as it could be.
When the company reaches this point, it needs to evolve back towards a market-driven, listening organization that is centered around solving real market problems. The Pragmatic approach emphasizes, and I agree, that the key role of the Product Manager is force this market-centric discipline on the development organization. The Product Manager needs to synthesize all the information he or she receives to make data-driven decisions about how to evolve the product and not simply respond to the latest “must-have” feature from a sales rep.
As a side note, I’m glad that Pragmatic has certified me after 7+ years of operating without a license to practice product management. It is quite a relief to be legit.
Earlier this week I had the opportunity to post on the m6d blog about some exciting technology we’re developing to ensure the quality exchange inventory we buy. I re-posted it below, but you can (and should) read the original here.
Ad exchanges are like a garden bed. Just as soil doesn’t know the difference between a flower and a weed, ad exchanges do not always distinguish between good and bad inventory. It takes a vigilant gardener to weed out any undesirable elements. Lately, Media6Degrees has been doing a lot of gardening.
We are, and intend to remain, the most aggressive company in the exchange ecosystem in rooting out the bad stuff so that we buy only the best impressions for our marketers. We’ve been told repeatedly by our supply partners that nobody takes inventory quality more seriously than we do.
Our approach manifests itself in four areas:
- Brand Safety
- Ad Collision (also known as Unintended Roadblocks) Prevention
- Fraud Protection
We were at the beach yesterday when a freak rain storm blew through. It was a crasy weather change: from beautiful to stormy back to beautiful in the span of 15 minutes.
When I was with the channel team at MessageLabs (now Symantec.cloud) we faced the problem Allen is describing:
The bad news: distributors completely, really, totally, absolutely don’t/can’t successfully sell/distribute a product (or service, or combination) that is (1) new, so requires educating the end-customer, (2) requires training of the distributor’s salesforce to understand, (3) isn’t immediately easy to sell.
MessageLabs was early mover in the cloud-based email security space. We had a number of very large re-sellers that gave us great reach, but their salesforces just weren’t suited to selling a product that required a high level of customer education. Our channel partners became very effective “introducers” but our direct sales team still had to do a lot of c0-selling.
The introductions gave us access to great accounts but the scale and economics companies typically look for from distributers wasn’t there. In some ways, it was the worst of both worlds. We were giving up margin to the partners and still incurring the high costs associated with a direct sales model.
My 11 year-old nephew threw a perfect game in Little League a few weeks back and Newsday wrote about it it today.
It was a Sunday afternoon, the fourth inning and it would be the last pitch of the game. As he prepared his delivery, Thomas recalled, “I closed my eyes and prayed to God saying, I hope this is a strike.
The southpaw had faced 12 batters from Bellmores Long Island Storm, and struck out seven of them on the way to a 12-0 win. It was that rarity of rarities in the baseball world — major, minor or youth league — a perfect game.
He’s a great kid and I’m very proud of him.