The (ahem) "Art" of Pricing

A reader asks: “Cranky Product Manager, I adore you and worship you as a fount of wisdom. Plus I wish I looked as good as you do in a pair of jeans and high heals.  Oh, your Crankiness, can you please enlighten me on the art of pricing?”

At the risk of misinterpreting, the Cranky Product Manager believes you are asking specifically about enterprise software, where price lists are usually secret and transaction volumes are relatively low.

So here goes.  As a starter, here’s what DysfunctoSoft does, which is NOT recommended:

STEP 1: As the product manager, do exhaustive analysis in order to form The World’s Most Insightful Pricing Recommendations.

step 1a: First start off with some competitive intelligence - find out what your Big Nemeses (nemesises? nemesi?) are charging.

1. Get together with your former colleagues who are now at competitors.  Get ‘em drunk so they spill the beans about their price list. Be warned, you might have to provide sexual favors to get the price list in electronic form.  OK, if you’re too “mature” for that, try offering alcohol AND free babysitting.  Don’t forget to ask about the discount schedule.
   
   
2. Ask Sales Ops to notify you of newly hired Sales Droids who were formerly at competitors. Call these Droids their first week on the job. Introduce yourself. Offer to teach them all about the benefits of your product, to help them in any way you can, etc… Be oh-so-very-nice.  THEN, a week or two later, check in to see what the new Droids think of the price list.  “I’m revising it and wanted some ‘fresh eyes’ to give me some reaction.  How  do you think customers would react?  Do you think we’re competitive?????”
   
   If you are charming enough, and look as good in jeans as the Cranky Product Manager, at this point you’ll usually learn a lot about how your competitor prices.  If not, you might have to wait a few months, until this Droid is wandering around the Annual Sales Meeting drunk as a skunk.
   
   
3. Ask friendly customers to tell you what the competitors are quoting them. Again, because an NDA might be in play, sexual favors or expensive bottles of wine might be in order.  OK, probably not.  Maybe just a free training session or customer bitch session where you, Mr./Ms. PM, quietly sit and take notes and mutter niceties  like “Gee. That’s really insightful and an absolutely stellar feature idea. We’ll look into that.”  (yeah, right).
   
   
4. Back the numbers out. Competitors will put out press releases saying they did this huge N-million dollar deal with so-and-so, estimated X-jillion users for these fantastic new products. The number you’ll end up with is nonsense, but at least you can compare it to other nonsense (see footnote 1).
   
   
5. Google it. ’nuff said. And don’t forget the “way back machine.”  If government agencies are customers, they sometimes publish the price quotes to the web.
   
   
6. Ask those ho-bag Industry Analysts - although these weenies are usually only good for the “official” pricing, which means they are good for nothing. But you already knew that!
   
   
7. Engage “partners” (aka hired spies) – Hire a small “consulting firm” to attempt to purchase the software and identify the pricing model.
   
   
8. Not a great source of pricing info: Sales Droids who were not previously at a competitor.  They almost universally believe that you charge too much. Why this is, the Cranky PM does not know.  As direct sales people (NOT telemarketers), you’d think they’d realize that it’s easier to hit their number with a single million-dollar deal than with a hundred $10,000 deals.

Step 1b: Next, Mr./Ms. Product Manager, create a ridiculously elaborate pricing model that optimizes elasticity curves and spits out prices, the predicted revenue, and resultant market shares of all competitors.  Crack out your old Microeconomics text books from B-school. Feed all that demand and supply curve stuff into a crazy-ass Excel Spreadsheet with about 300 VB macros, all lovingly crafted so that you can pretend you are still a “real programmer” even though you abandoned writing code 5+ years ago.  Make sure you have some wacky game theory scenarios in there just to be as over-the-top and impractical as possible.  Put some Bayesian models in there too, and make sure it accounts for the current price of U2 tickets.

Use this spreadsheet primarily to prove to yourself that even though you didn’t get that Investment Banking job out of Business School, well, you DESERVED it.  Yes, you DESERVE to collect $600,000 bonuses in recessionary times without creating any value for society.  ‘Cuz you’re that good, you analytical wizard, you.

Oh wait, that massive spreadsheet ostensibly had another purpose… what was it again? …. oh yes, to validate the World’s Most Insightful Pricing Recommendations for your fantastic product.  You go girl/boy!

STEP 2. Present your exhaustively researched pricing model and subsequent recommendations the head of product management, and then the other sundry Veeps (Marketing, Sales, Development). Then, sit and wait while these execs they pick apart your elaborate model and throw out 90% of your analysis in order to retain only that which supports their “gut feel” for price.

STEP 3. Revise your presentation by completely rewriting it from scratch. Don’t forget to put clip art of dudes and dudettes leaping over bar charts in the PowerPoint.  This is essential for any presentation to be given to the Big Boss.

STEP 4. Present the revised VP-approved analysis to the Big Boss (aka CEO or GM).

STEP 5. Watch as the Big Boss ignores your recommendations and either doubles the price for every product across the board because of “Moore’s law” or some other universally misapplied rule-of-thumb that is five words or less (the Cranky PM’s fave is the Salmonella Avoidance Law: “Don’t Buy Sushi on Sundays”), or cuts the prices drastically based on “instinct.”  This so-called “instinct” will depend on whether:

• immediately before the meeting the Big Boss heard his /her #1 salesperson bitch about prices being too high (in which case, the Big Boss will drop prices)
• The Big Boss has deal-envy of a $10 million deal done by a competitor (Big Boss will send prices higher)
• The BB read some tech magazine or blog or something about the trend being toward open source and free software (prices go lower)
• A long-time customer doesn’t make his customary big order this year because he’s managed to “consolidate his licenses” on a single server using server virtualization technology (prices go higher).

STEP 6: Now for your Real Job as the expert in pricing your particular product: edit the official price list with the Big Boss’s “inspired” numbers, which have no relation whatsoever to the research you did in step #1.  Good thing you listed “Microsoft Office” as one of your skills on your resume.  Hope you took good notes, you transciptionist, you!

STEP 7. Now sit and wait for a month or two, while the new prices take effect.

STEP 8. Analyze the next quarter’s sales.  Observe that although the price of every product doubled, revenue was down.  Meaning your volume was cut by more than half.

STEP 9. Next quarter, realize that some deals are discounting your software by 95% or more. Ponder the question “what the hell does a price list mean when discounts are that huge and that variable?” Seek the guidance of your spiritual leader, or at least call into a podcast talk show for psychotherapy, or something.

STEP 10. Vow to never spend more than 30 minutes on pricing again.

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Footnote 1: Get it?  You know, you can compare apples to apples?  And therefore nonsense to nonsense…?  Get it?  That Cranky PM is so freakin’ hilarious with her FUNNY jokes!