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How to Pick the Price for Your Product by Amazon Product Manager

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Pricing is one of the most important skills a Product Manager needs to have. Whether it be pricing a a new product, service launch, pricing an upgrade or just thinking about price cuts to stay competitive. We talked about how top firms think about pricing, various pricing strategies, architecture and implementation.

Aditya Vikram, Product Manager at Amazon discussed the importance of pricing, pricing strategies, and price setting and architecture.

Published in: Technology
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How to Pick the Price for Your Product by Amazon Product Manager

  1. 1. How to Pick the Price for Your Product by Amazon Product Manager www.productschool.com
  2. 2. FREE INVITE Join 12,000+ Product Managers on productschool.com/slack-community
  3. 3. Product Management 2-month part-time Courses
  4. 4. Coding for Managers 2-month part-time Courses
  5. 5. Data Analytics for Managers 2-month part-time Courses
  6. 6. Include @productschool and #prodmgmt at the end of your tweet Tweet to get a free ticket for our next Event!
  7. 7. Aditya Vikram Bhuwania Tonight’s Speaker
  8. 8. Aditya Vikram Bhuwania Picking the Right Price for your Product
  9. 9. Comprehensive Pricing (10 mins) Different Types of Pricing(15 mins) Price Communication (7 mins) Pricing Exercise (8 mins)
  10. 10. 1% increase in Price leads to 11% rise in Profit Margin 1% decrease in cost of goods leads to 6% rise in Profit Margin 1% increase in operational efficiency leads to 4% rise in Profit Margin
  11. 11. Comprehensive Pricing Pricing Strategy and Goals Price Tools & Software Pricing Architecture & Implementation Price Analytics Pricing Organization
  12. 12. Pricing Strategy & Goals • Pricing Goals should be created in line with Corporate Goal • Pricing Goals should be well understood by the Product Manger • A solid pricing strategy should consider following 4 aspects about your product: ➢ Who are my customers? ➢ What is value I am providing to the customers? ➢ What customer problem does my product solves? ➢ Who all are your Competition? Pricing Strategy & Goals
  13. 13. Pricing Architecture & Implementation Pricing Architecture & Implementatio n • Pricing Architecture represents the initial price setting method • A solid price architecture includes costs of goods sold, and unit contribution cost : ➢ R&D or Product Development ➢ Operations ➢ Manufacturing ➢ Marketing/Advertising • Pricing Implementation means how is price communicated to the customers, sales and everybody else in the organization
  14. 14. Pricing Tools & Software Pricing Tools & Software • Smart data analytics, competitive intelligence tracking, Margin analysis, etc. can be done through pricing softwares • Quote-to-Invoices are the tools for creating, presenting your price quotes to your customers • Configure-Price-Quotes tools are used by sophisticated and complex software solution makers to create pricing packages • Pros, Vendavo, Zilliant are some best in-class pricing softwares
  15. 15. Pricing Analytics • Product managers need to create effective data analytics and tracking points of value is important for price setting. • Understanding Customer Segments, product and feature mix, pricing bundles, SKUs should be analyzed over time, geos and competitors • Price Waterfall and Dispersion Charts are effective tools to understand the true Net Profit and source of Price leakages due to in-effective discounting • For SaaS companies, the margin on entire deal/quotes and each of the products should be analyzed to help sales and marketing efforts Pricing Analytics
  16. 16. Pricing Organization Pricing Organization • Usually Product Manager are responsible for price setting process - An effective Product manager should not only do data and market analysis but also take feedback from sales, field engineers, pricing managers to understand the customer’s ability to play • A strong pricing organization involves 2-3 tiers of Pricing managers and director - each manager is given liberty to maintain P&L statement of their business line. • A pricing organization has to collaborate with Sales teams during the deal negotiation process to make sure the deal goes through and at the same time protect profit margin
  17. 17. Types of Pricing Strategies Pricing that make sense for your customer and product
  18. 18. Sales and Profit over the Life Cycle of the Product The right Pricing model depends on the what phase your product is. The Pricing model can change vastly over the life cycle of the product - Sophisticated transition of pricing model can cause a significant blow to you competitor.
  19. 19. Cost Plus Pricing • Cost Plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, the direct material cost, direct labor cost, and overhead costs for a product are added up and added to a markup percentage (to create a profit margin) in order to derive the price of the product. • This methodology is used for pricing mature products. • Competitive advantage is gained in 2 ways 1. By providing more features and/or value at same price to the customers 2. Giving better prices by achieving cost efficiencies like improved operations, cheaper raw material, cheaper labor, etc. • Used for standard products, with little or no differentiation. Not ideal for growth industries especially making any software or tech products
  20. 20. Skimming • Selling a product at a high price, sacrificing high sales to gain a high profit is called "skimming" the market. • Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in consumer electronics industry, e.g., Smart Phones, Smart Watches, etc. • This strategy is often used to target "early adopters" of a product or service, who are relatively lower price-sensitive: their need for the product outweighing their need to economize; a greater understanding of the product's value; or simply having a higher disposable income.
  21. 21. Penetration Pricing • Penetration pricing is strategy of setting the price low with the goals of attracting customers and gaining market share. The prices are raised once the market share is gained. • This strategy can create goodwill among the early adopters segment and can create more trade through word of mouth. • This strategy is very effective in discourage new competitors from entering a market position. • Great strategies for startups to increase demand for their product and gain their customer attention. • The main disadvantage with penetration pricing is that it establishes long-term price expectations for the product, and image preconceptions for the brand and company. That makes it difficult to eventually raise prices.
  22. 22. Freemium Pricing • Freemium is a pricing strategy by which a product or service (typically software, media, games or web services) is provided free of charge, but money (premium) is charged for additional features, services, or virtual goods through tiered pricing • There are multiple ways this is implemented : Limited features, Limited capacity, Limited use time, Limited support, etc. • Ideal for startups and software companies to get a lot of traction among users. Communicating value proposition for paid tiered is very necessary.
  23. 23. Value Based Pricing • Value-based price is a pricing strategy which sets prices according to the perceived or estimated value of a product/service to the customer rather than according to the cost of the product or historical prices. • This pricing strategy is frequently used where the value to the customer is many times the cost of producing the item or service. • The perceived value will depend on the alternatives open to the customer. For e.g., We compare the price of next best option and see if the new product/service is cheaper than that. • Sophisticated Value-based models can have different prices for different types of customers, and/or in different geos and/or feature
  24. 24. Pricing Waterfall Ideal way to calculate the net Pocket margin
  25. 25. Price Communication Apple Home Pod launch 2017 Video : Scroll to start at 12: 39. Stop at 13:05 • Communicating the reasoning and logic behind pricing your product is EXTREMELY important, especially if you opt for Value based pricing or Skimming. • Price increase communication should be taken seriously – A Product manager should consult legal team, marketing and professional writers before making any price increase. Price Communication done right
  26. 26. Price Communication gone wrong Netflix 2011 : Netflix splits DVD and streaming services ➢ Netflix created 2 different services DVD and Streaming and each of them were priced at $7.99. ➢ A price reduction for only DVD or only Streaming user - This was supposed to be win-win for both. ➢ Netflix lost 80k subscribers and their stocked tanked by 80% in span of 7 months. Price Communication : Lesson learnt Netflix Oct 5, 2017 : Netflix is raising the price of its most popular plan ➢ Netflix raised it’s prices by $1 to 10.99 for the most popular plan and $2 for the 4K Premium Plan to $13.99. ➢ Kept the price of basic plan at $7.99 for the price sensitive subscribers ➢ Times the price raise just weeks ahead of much awaited 2nd season of “Stranger Things” ➢ Communicated the increase as a necessary step to keep producing quality content ➢Stock prices went up by 9% in 3 days.
  27. 27. Ethical Pricing April 3, 2017: Mylan hit with racketeering suit over big price hikes of EpiPen ➢ "Mylan has tried every trick in the book to avoid taking accountability to the millions of people who are living without the EpiPen they need to prevent a life-threatening allergic reaction," ➢ Big drug-maker Mylan was slapped with a class- action racketeering lawsuit that claims the company engaged in an illegal scheme to dramatically increase the list price of its EpiPen anti-allergy device over the past decade. Mylan has 94% market share ➢ Prices were $100 in 2009 and they are sitting at $600 in 2017
  28. 28. Pricing Exercise 1 • Launching a Mexican Beer – Lager. Made from blue agave and Mexican spices • Initial launch in California, Nevada, New Mexico, Texas, Florida and Phoenix • Alcohol content : 4.5% abv • Calories : 95 • Competition price: $1.2-$1.75
  29. 29. Pricing Exercise 2 • Launching a craft American India Pale Ale • Initial launch in California, Portland, Washington, Texas, Phoenix, Florida • Blonde , Mildly Bitter ( 50 IBU) with a kick of orange, spices and ginger • Alcohol content : 8% abv • Competition price: $4 -$8 per serving
  30. 30. Part-time Product Management Courses in San Francisco, Silicon Valley, Los Angeles and New York www.productschool.com

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