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Pricing an high tech product, one of the challenges of the product manager

Pricing an high tech product, one of the challenges of the product manager

Pricing keeps being a real challenge for the product manager.
I would better say that determining the price of a product place the product manager in front of several challenges!

Newly appointed product manager, or simply to refresh your knowledge, read the few lines that follow and do not hesitate to challenge Product Managers on that subject.

Pricing keeps being a real challenge for the product manager. I would better say that determining the price of a product place the product manager in front of several challenges!

Newly appointed product manager, or simply to refresh your knowledge, read the few lines that follow and do not hesitate to challenge Product Managers on that subject.

Pricing and co…         

When a high tech company looks into the “pricing problem”, this is about much more than a simple price. Beyond the “facial price” of the offer, this is about experience curve effect, competition, bill of material/bill of software, total cost of ownership, business model choice, retailing networks and profitability.

The subject is complex and it is better to have a strong background to tackle the subject in the right order and in an as exhaustive way as possible. Otherwise, beware of the unpleasant surprises at the outcome time.

The three pricing’s axes

There are three pillars to determine the price of an offer:

 

Pricing

The costs: from the conception to the time of delivery for the customer.

The perceived value, that determines the price the customer is willing to pay to benefit from this offer.

The competitors’ prices for a rival technology or an offer that could replace yours.

 

Costs and experience curve effect

Costs include :

  • Hardware costs
  • Production costs (labor force but also investments in industrial material)
  • Software costs (the costs of using software not developed by you, ex : licences)
  • Guarantee, customer maintenance and support services
  • Carrying and logistics costs
  • Marketing and sales costs (promotion, retailing network margin…)

These different costs are accounted at different levels of the P&L, but it is important not to forget one if you don’t want to be disappointed by the profitability results….

It is very important to take the quantities into account when determining the price. The unit cost has most of the time nothing to do with the cost in volume.

It is also necessary to introduce the experience curve effect notion. In fact, if the first unit is very costly, it is very likely that the 100th or 1000th one will not have the same impact on costs !

The experience curve has the following profile and it is important to anticipate it.

pricing

 

The pricing paradox for high tech

It happens frequently that the price fall is staggering over time. The electronic mass market is an obvious example.

High tech companies have to be ready to counterbalance this phenomenon by maintaining a fall of the costs superior to the fall of the prices.

There are plentyful of leads :

  • Working on the fall of costs (BOM, BOS…)
  • Fighting the inefficient process
  • Avoiding the commodity markets
  • Cultivating the agility of the company in launching new products on the market
  • Finding new resources:
    • New uses for existing products
    • Climbing in the value chain (« solution end-to-end »)
    • Making bundle-products
    • Identifying new market segments, less sensitive to the price
    • Derivating from new products
    • Building a long-term relationship with the customers, making them captive
    • Keep a dynamic and adaptable pricing
In conclusion: pricing requires a real expertise

The checklist seems long to process. In reality, it is easy for someone that masters the process. Each sector has it specificities: an equipment manufacturer does not pull the same lever than a software editor; a service provider does not concentrate on the same issues than a solution retailer.

Setting up the business model and the pricing of a product is a project in itself, which is susceptible to impact the company’s strategy : the business model, but also the process, its retailing network, its choice of subcontracting/internalizing etc…

Product Managers, attach importance to pricing, the global profitability of your company is at stake!

C. Kokoreff

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