TEI 280: Learn how product managers should set product price – with Ben Malakoff

Three phases of pricing for product managers

This episode is about pricing.

A lot of product managers are not very involved in pricing decisions. If you are one of them, you should change that.

Our guest, Ben Malakoff, learned how to price products and in this interview he shares what you’ll need to know to be part of pricing decisions, increasing your influence.

Ben has held several product management roles and is now the senior director for sales operations at FiscalNote.

Summary of some concepts discussed for product managers

[2:51] Let’s imagine we’re pricing a voice-controlled kitchen faucet. What are the elements of pricing a product?

Pricing is very much an art and a science. Three methodologies of pricing are value-based, market level, and cost-plus. For the voice-controlled faucet, there are elements of value-based because it’s a new, exciting product that you might be able to charge a premium for, and elements of cost-plus because it’s a hardware product connected to consumer goods and services.

[4:12] What are the three phases of pricing?

[4:45] Data Analysis

One of my mentors, John Damgaard, said, “In God we trust. All others bring facts.” To make your pricing opinion count, you’ll have to bring data. An important piece of data is unit sales—how many units and in what segments are you selling? Also, consider how much you need to discount to move a certain amount of product and whether people buy more with the discount. Identify the market size and trajectory. Faucet sales are significantly impacted by new home construction and remodeling, so if few homes are built, faucet sales may decrease. A couple of other types of data analysis are attach rates of other products and the cost of developing the product.

[6:39] Market Research

Market research is finding out what you can charge based on what you’re offering. You want to find out whether you can charge a premium for your voice-activated faucet. Find out what your competitors are doing. The most important activity is talking to your customers. Ask them how much they would pay for the faucet.

[8:08] Pricing Recommendation

The first two steps are the science. This one is the art. You have to somewhat take a leap of faith, because you won’t know the exact right price until you’re in the marketplace, but you have enough information to make a very educated guess. Use your data, market research, and team to assign a price.

[8:40] Why is pricing work important?

This is a very basic pricing process, but it’s very successful. I often see organizations not doing any pricing work. Just doing the level of work I’ve outlined often results in a 10x-20x ROI. Pricing work is a low-investment, high-return activity.

[10:39] Why are attach rates important?

Attach rates are a calculation of which products are selling together. For example, sinks or dishwashers might be sold with the faucet. This gives you insight into packaging. What could you bundle with your faucet and what promotions could you have? Nailing the price alone is only 1/5 or 1/6 of what you have to do for successful pricing. Packaging analysis is another important piece.

[13:09] How does SaaS pricing work?

SaaS pricing is primarily value-based. The SaaS companies I’ve worked with typically try to get a 3x-10x ROI, which is typically way above the cost. Cost is more of a factor in SaaS businesses that have certain suppliers or other major expenses.

[15:42] What market research tools do you recommend?

Know your competitors cold. Your price-to-value ratio is largely set by your competitors.

When you interview your customers, always ask their willingness to pay. Conjoint analysis is a great way to do that in a survey. A less advanced option is doing a large number of customer interviews.