Sell low, sell more. Enticing as that thought might seem, sales expansion often occurs at the expense of profits. Managers of direct-sale products are thus faced with the dilemma of leaving money on the table by pricing too low or risking market rejection by pricing too high.
“Improving product profitability is an equation of cost and price (and demand), and it’s an ever-present challenge for product teams because pricing must also be dynamic,” says Gartner VP Analyst Annette Zimmermann. “Product teams can either shift from sales goals to profit goals by setting objectives around returns or profits, but they must also adapt the price strategy as the product evolves through its life cycle.”
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Challenges for product teams
Outside of the cost/price equation, product managers face a range of environmental challenges as they seek to price products profitably. These include:
- Balancing cost and price models in light of perceived product value and competitive offerings; as customer loyalty builds over time, there are opportunities to increase the price, but timing is critical.
- Expanding product offerings to capture higher price points while maintaining revenue growth.
- Finding the price for optimal profitability without losing customers to the (cheaper) competition.
- Getting adequate say in pricing decisions (many product teams are involved in pricing but don’t cast the deciding vote).
Shift from sales goals to profit goals
The first imperative, then, is to shift the focus of the product marketing organization to profit improvement, especially since a disconnect has long existed between pricing strategy and financial objectives. In the 2019 Gartner Annual Product Management Survey, for example, respondents cited sales, profit and loss as the most-used metrics for measuring the performance of a business unit in the product management organization. And yet a minority ranked “achieving financial objectives of the product and service” in their top three metrics.
As a product manager, you have two main options when prioritizing profits: One, set a target return objective; two, set a profit maximization objective.
In setting a target return, set a specific profit margin — for example, 15% on sales or capital investment. The target return depends on several internal and external factors, such as industry, organization size, competitive situation and corporate culture. Ultimately, however, profitability is determined by a robust pricing strategy and tight cost control.
Setting a goal to maximize profit can be a little less fixed. Even so, express it in a time-specific manner, such as “charge the highest possible price to maximize profits during the first two phases of the product life cycle” or “generate a return on investment in the shortest possible time frame.” That doesn’t mean it’s synonymous with exorbitantly high prices, especially in highly competitive or alternative markets.
Whether you choose a target return or profit maximization objective, the cornerstone of product strategy is a customer-centric approach. As a result, changes in customer demand must shape price and profit targets.
At the same time, competitive analysis is an ongoing process that often involves detailed specifics about the competition’s pricing and how this is viewed by your buyers.
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Adapt the pricing strategy along the product life cycle
This ensures profitability as the product moves along the four stages of its life cycle.
There are distinct pricing strategies at each stage, reflecting the decision-making process of “maintain, refresh or retire” as a product matures toward the end of its life.
By using this approach, you can optimize your tactics dynamically to maximize profitability at each stage.