“Pricing Revealed, What Every Product Manager Should Know” with Mark Stiving, Director of Pricing at Maxim Integrated
by Dan Galatin
June 2013 Event
Mark Stiving, Director of Pricing at Maxim Integrated, educator, author and coach discussed three key principles of effective pricing: know your value and charge for it; segment your pricing; and build a product portfolio.
Dr. Stiving started with a discussion of the power and multi-faceted nature of pricing. Pricing can have an immediate, direct effect on a company’s bottom line. Pricing is fundamentally the “grade” the market gives your product – it is simply what your customers are willing to pay.
Cost-plus pricing is fundamentally the wrong way to price. For example, the price of a subscription to Microsoft Office has nothing to do with the negligible cost for Microsoft to download the product to your computer. The key takeaway is to always use value based pricing. Every time someone makes a decision to buy something, they ask two questions: “Will I?”, and “Which One?” Price does not drive the “will I” decision. (People will either choose to bungee-jump or not.) “Will I” products are truly new, innovative products with no competition (and relatively rare). For B2B “Will I” products, you can generally charge about 10% of the economic value to customers.
By contrast, “Which One” products are those with competition. Price has a powerful impact on customers’ choice in this case. Value is fundamentally generated by product differentiation perceived by customers, so companies need to create differentiation, find it, and communicate it.
Segmentation is the mechanism that allows us to charge less to customers who are willing to pay less and charge more to customers who are willing to pay more. There are four methods that can be used to segment by price: customer characteristics (e.g. government and education sector discounts), transaction information (e.g. volume discounts), customer behaviors (e.g. coupons and sales), and products (e.g. additional features). Dr. Stiving’s favorite example of transaction-based pricing was a variable-priced Coca-Cola vending machine that automatically raised prices for drinks in hot weather. This resulted in bad publicity (when they could have just as easily said that they give discounts in cooler weather)!
Pricing should help you construct a product portfolio that is composed of versions and complements. For example, McDonald’s draws customers in with a 99¢ double cheeseburger, but then makes more money on “complements” like soda. A “good/better/best” set of product versions tends to result in optimal pricing. Price competition happens at the low end. Customers who don’t want to be bothered with the decision buy the high end. Those who don’t know which to choose tend to buy the middle option. (Complexity in software pricing is a common problem that results in customer confusion.) “Anchoring” is a technique that involves offering a very high-priced option (like a premium margarita for $30) to make the prices of other options seem more reasonable by comparison. The technique of using complementary products is extremely valuable (examples range from popcorn at the movie theater to hotels and retail at Disney World).
There are many ways to give away products for free to gain attention and customers. Dr. Stiving discussed freemium products that are given away in order to attract a small subset of customers to upgrade to a paid offering. (An example is paid LinkedIn accounts, which effectively subsidize the vast majority of free accounts.) Freemium products must have a low cost to serve, offer real value for free, have upgrades that are valuable for a segment, ideally have network effects (again, like LinkedIn), and preferably have a subscription pricing model. Realistically, one should expect a 1%-5% conversion rate for freemium products.
Dan Galatin has over 20 years of combined experience in product management and software engineering. He is currently a Senior Product Manager at Keynote Systems and can be contacted at email@example.com.