Using the Strategic Power of Pricing in Your Business
- product management
- 5 min read
By Vignesh Kumar – Director – Product Pricing & Monetization and Operations at VMware
For product managers, product pricing is one of the most important aspects of the product development roadmap. It can swiftly alter the course of a business positively or negatively. It helps in creating a direct impact on your revenue and profitability and also creates the product’s first impression for the customer. It can be strategically utilized by product managers to drive sales promotions and create customer demand.
Key Takeaways:
- Pricing is a flexible factor in marketing and can be used to create price changes very quickly.
- It has a direct impact on the revenue and profitability of the product.
- It creates the first impression for the customer.
- It is a key driver for sales promotions and to drive customer demand.
- It provides an easy way to compare competing products and can be used by product managers to create a competitive advantage of their product.
1. A flexible factor in marketing, i.e., price changes can be made very quickly
Pricing is the most dynamic factor that can impact your business very quickly. There is no better platform to understand pricing than the e-commerce platforms that you use. When you open your e-commerce apps like Amazon or Flipkart, you will observe a pattern. Whether it’s a personalized offer crafted just for you or a flash sale lasting a mere fifteen minutes, the underlying motivation is clear: price manipulation. It’s not like those deals have a motive of adding cool features to a product. It’s all on the price point play. For the same cosmetic or health product, if you have a need and you know that you are going to consume it, pricing ensures that you can monetize that product right now. A discount on diesel for cab bookings within the next quarter-hour is a prime example. That’s how impactful pricing can be to get your end of sale or your entire code to cash complete.
2. Direct impact on the revenue and profitability
There is no clearer metric than price which defines what your revenue would be and what your profitability would be. If your cost remains constant, the selling price determines whether you are profitable or what revenues you will land. It’s that important a lever to understand, else you will be a great product designer but you might not be a very successful product evangelist or end-to-end product leader.
3. Creates the first impression for the customer
You can find hundreds of examples on the internet where prices have been positively reinforcing to people and sometimes it has also been detrimental. Let us take an example where it has been positively reinforcing people. It is often hard to understand by many people how customers can pay a premium for Apple phones. It happens because it is perceived as a premium product. It’s no longer a question about why you would pay so much to get a Ferrari, or for high-end designer dresses. End of the day, if someone comes with the mindset to break down the cost associated with it, and realizes that it is the same material, it has a tailor stitching it, then a designer comes and puts it together, then questions as to why is it being sold at such a high cost? In essence, pricing becomes a vessel for communicating exclusivity, signaling to consumers that they’re investing in more than just a product – they’re buying into a lifestyle, an image.
It can also be played the other way, by negatively reinforcing people. Let us take the example of Tata Nano. People perceive cars as a status symbol in India. They would not want to buy a car that is made to look like a poorer version of a better car or an upgrade to a motorcycle. The moment Tata Nano started being marketed as a practical, cheaper car, people started shying away from buying it because they did not want to bring an asset that was thought of poorly by other people. Had it not been widely marketed like that, as a one lakh car, it might have been a success story. It would have been a great alternative to our traffic in metro cities.
4. A key driver for sales promotions and to drive customer demand
Take the example of two hotels to understand this better. The first hotel has all the required facilities for potential customers and is priced at 3000 bucks. There is another hotel with fewer facilities and priced at 7000 bucks. But people might prefer the more expensive hotel because they would perceive that a higher price means better facilities. Ultimately, pricing completely depends on what the customer sees and perceives. Everyone finally gets a rate card.
5. An easy way to compare competing products
This is like going through the menu card of a hotel. If you are price conscious, you will never pay for a 200 rupees dosa. Someone might dissect the price and understand that the dosa is just 40 bucks, and the rest of the money is for the experience and ambiance. They might be fine with paying extra for a better experience. This is how just 200 bucks can be perceived differently by different people. That’s the problem for a pricing strategy person because you don’t have one size that fits everyone. That’s why product managers have to constantly keep working on their prices and innovate so they can keep addressing different segments using the same product.
Hence, pricing is an essential tool in product management which shapes consumer perceptions, drives purchasing decisions, and ultimately determines business success. By having a deep understanding of customer psychology and ongoing market trends, product managers can drive successful business outcomes.
About the Author:
Vignesh Kumar – Director – Product Pricing & Monetization and Operations at VMware
Frequently Asked Questions
The purpose of product pricing is to maximize profits and for the product to be aligned with the product’s value proposition, target market while keeping in mind the competitors.
Pricing strategy is important because it helps the business to maximize profits, improve customer satisfaction and keep a competitive edge over competitors.
Pricing is one of the most important steps in the product roadmap. It is one of the most important decisions business leaders make.
Factors that influence pricing are cost of the product, its demand among customers, the extent of competition in the market, and marketing tactics used by product managers.
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