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.
The tasks associated with pricing can be lumped into three distinct buckets; strategy, operations, and analytics.
- Pricing Strategy is about how a company is going to make money; i.e. identifying how the customer values your product and how you will be paid for your product or service.
- Pricing Operations is about how you correctly price a solution for each individual customer or opportunity, usually in terms of a price quote or sales proposal.
- Pricing Analytics is about tracking pricing performance; i.e. how does what comes out the Operations process compared to what is called for in the Strategy.
In technology companies, the strategy element is often led by marketing or product management with strong oversight from senior management. Pricing a high tech product is a complicated matter because there is often a fundamental question of what sh
ould be priced (software, hardware, users, processors, sessions, etc.) In all companies the pricing strategy determines how you architect your business. If you want to compete on price, with a low margin product, you need a low cost structure with heavy automation and a light service-touch service model. If you want high prices and high margins, you better have the quality, features, professional sales reps, and high-level of support to command those prices.
Pricing operations is usually owned by some combination of sales operations, sales engineering, IT, finance, and product management. The price list is often owned by
Pricing Analytics is about measurement. Companies need to have a system to determine how well the strategy is working in relation to the prices they are actually getting in the market. If you think you have a premium product, but are discounting heavily, what does this mean? Are you meeting the margins you hoped for? If you aren’t realizing the prices you set out in your strategy it can be indicative of a number of things including a weakproduct offering or a weak sales team.product management or sales operations and maintaining it can be complex depending on the number of different items or combination of items that are sold. Creating price quotes is the usually the responsibility of sales or sales ops with help from sales engineering if there is a high level of technical configuration required in the sales process. Pricing Operations gets more complicated as promotions, bundling, and regionally specific pricing get lumped in. Pricing Operations also covers the discount approval process, i.e. the level at which can quotes be discounted before they need approval by managers and the process by which these approvals are granted (and tracked).
The sales proposal is the point-of-decision where the result of all the company’s marketing activities are laid bare before the customer. Like it or not, the price in the proposal is where the customer agrees or disagrees with how to value your products or services. Getting the price wrong means the rest of your efforts may be wasted and having a disciplined, cross-functional process to set and review prices is critical to the success of any company.