Better Product Managers, and Product Management

Most product managers I know secretly (or not-so-secretly) dread pricing.  Price too high, and you risk alienating customers; price too low and you’re undervaluing yourself and making it harder to raise prices later.

We stress so much about that number that we tend to forget that “price” isn’t a single number to our customers.  When customers consider “what something costs”, they’re actually measuring three main drivers:

Money: The obvious one.  What am I going to pay in dollars and cents?

Mental energy: How much do I have to think about this?

Time: How long will it take to learn/deploy/configure?

As you can probably guess, these points aren’t independent. The reason “free” is so psychologically powerful is that it entirely removes the “money” axis and strongly reduces the “mental energy” axis.

I don’t have to think about “free” at all.  Paying even one cent – that requires some mental energy.  I need to enter a credit card number, or remember my PayPal password.

For someone who works in a large-ish company, a $500 purchase may be very low mental energy – they can charge and reimburse it without additional work. A $501 purchase might mean writing up a description, asking for pre-approval, getting a signature, having to write up a purchase order… a huge increase in mental energy over an additional dollar.

Time and money are related when the product requires expensive consulting, or steals an expensive internal resource from whatever they were working on previously.  Also, long deployment cycles can mean paying for a service for months before starting to see the benefits.

Which shape should your pricing triangle be?

Market maturity and customer priorities determine how high or skewed your triangle can be.

Commodity Product, Mature Market

For example, a product in a mature market that has seen commoditization can’t be very high on any dimension.  If I’m looking at, say, dryer sheets, I’m not going to choose an option with a higher price tag, or a set of warning labels and detailed instructions, or one that increases drying time.

I just don’t care enough.  Some dryer sheet maker would have to come up with a truly disruptive innovation before I’d even consider increasing my “cost” on any axis.

New Technology, Early Adopter

On the other hand, take the first-generation MP3 players.  They were expensive.  You had to find software to rip your CDs, and then often another piece of software to load the music onto them.  It probably took 45 minutes to load up my Diamond Rio for the first time with a whopping 45 minutes’ worth of music.

The early adopter is okay with spending more money, expending mental energy, and spending time futzing with this new product.  Everyone else… is not.  This has led many a product down a bad path.

Cash-Poor, Time-Rich

If your target customer is a high school or college student, this is what your triangle may look like.  Don’t incur costs trying to make the installation faster or the instructions easier – do whatever you can to make it free or cheap.

Time-Poor, Cash-Rich (or adequate, anyways)

Why does Amazon OneBox exist when BitTorrent is out there?

Because to this audience, it’s not worth the time of searching for a specific episode among a bunch of crap, waiting to download, dealing with corrupted files… when you could just pay a couple bucks and get your missed TV show with One-Click.

For this market, don’t worry about your pricing being too high.  (If it is, you won’t permanently scare people off; they’ll come back when you adjust it.)  Worry A LOT about how to make the purchase a no-brainer.  Write better documentation. Streamline your checkout process.  Invest in making deployment incredibly fast and easy.

I often hear product managers complaining that they don’t have enough time to listen to customer feedback, but in practical terms the opposite may be true: you may already be listening too much!

OK, not quite.  But not all customers are created equal, and not all have the same impact on your bottom line.   So start by figuring out where the value lies and how to measure it.

A couple years ago, I was talking with a customer, a bank business analyst, and she told me that they had solid data on three clusters of customers – the top tier, who through very high net worth and using multiple bank services brought in 80% of revenues, the broad mainstream tier that collectively brought in 40% of revenues, and — wait, isn’t that 120%?  … That’s right, the bottom tier of customers actually lost the bank money.

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If you hired a contractor to remodel your kitchen, wouldn’t you expect her to tell you about that load-bearing wall?

You don’t hire a professional just because you don’t have the hours to do some hammering and electrical wiring; you’re also hiring their experience and the knowledge they’ve built up.

A good contractor will recognize that your ideas about kitchen design will leave you tearing your hair out later when you realize there are no outlets to plug in the blender, and propose alternate suggestions.

The same thing applies to your customers.  They aren’t buying software – they’re buying problem solved.

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