1.
Design your pricing as
part of your product
Steven Forth
Ibbaka, Vancouver, BC
November 5, 2018
steven@ibbaka.com

2.
Our goals
• Clarify the role the product manager can play in pricing
• Provide basic knowledge of pricing methods, strategies and
models
• Go deeper into value-based pricing
• Connect pricing to service design

3.
Key takeaways
• Understand how economic and emotional value interact to
shape willingness to pay (WTP)
• Have a repeatable method to design pricing and packaging
• Know what data you need to collect to evolve
your pricing model and messages

4.
Steven Forth
• Active investor in early-stage innovation
• Authoring a book on
Value Innovation and Pricing
• Advises companies large to small
on pricing strategy

5.
Steven Forth – Skill Profile
My top skills according to my TeamFit profile.
As determined by my peers based on the projects I work on.

6.
Steven Forth – Foundational Skills
Foundational skills are used to build other skills.
They often give better insight than business or technical skills
into how a person works.

7.
What we will cover
• When to start thinking about pricing
• Who should own pricing
• Value is the foundation of pricing
• Pricing methods
• Pricing strategies
• Pricing models and innovation
• Pricing and service design
• Three key steps

8.
When to start thinking about pricing
Let’s do a little poll.
When do you start to think about pricing?
Just before launch
As part of go-to-market planning
During development
As part the product requirements
As part of initial discovery
Other

9.
What we often see
Innovation Product Cost Price Value?

10.
What we recommend
Customer
Understanding
Differentiated
Value
Price Product Cost

11.
Who should own pricing
Another quick poll.
Who owns pricing at your organization?
CFO and Finance
Sales Leadership
Marketing Leadership
Product Leadership
Operations Leadership
Other

12.
Who should own pricing?
Whoever is closest to the customer and who
best understands how the customer is getting
value.
Early on this is generally the
Product Manager.

13.
Pricing ownership changes over time
Owner
CFO When financial metrics
drive pricing
Sales When sales have a close
understanding of the
customer needs
Marketing When pricing is key to
brand and positioning
Operations When pricing is used to
balance resource utilization
As an offer matures in the
market it can make sense
for pricing ownership to
change.

14.
Value is the foundation of pricing
• We are going to be talking a lot about value.
• Customers only buy over the long term when
Value Received > Price

15.
Value is always relative
• Value is relative to the alternative and there is
always an alternative
A direct competitor
An alternative
The status quo
Doing nothing

16.
Value is is economic and emotional
• Economic – the impact you have on your
customer’s business
• Emotional – how your offer makes
your customer feel about
themselves

17.
Economic Value Estimation (EVE)
Next Best
Alternative
Positive
Value
Drivers
Negative
Value
Drivers
Differentiation
Value Normal
Price
Range
Developed by Tom Nagle in
his book The Strategy and
Tactics of Pricing (now in its
6th Edition)

18.
Positive Value Drivers (Economic)
Six Types of Value Driver
Improve Revenues Market Scale, Market Share, Pipeline
Metrics (Conversion Rates, Velocity)
Decrease Operating Costs Efficiency, Productivity, etc.
Decrease Operating Capital Inventory Turns, Collections, etc.
Decrease Capital Expenses Capacity, Utilization, etc.
Decrease Risk Liability, Errors & Omission, Competition
Increase Options Innovation, Resiliency, Alternatives

19.
Negative Value Drivers (Economic)
Relative to the Alternative
Unique Costs Unique costs of your solution relative to
the alternative
• Training
• Switching costs
• Configuration
• Etc.
Shortcomings Your competitor’s positive economic value
drivers (what they do better than you)

20.
Economic Value Estimation (EVE)
Next Best
Alternative
Shortcomings
Differentiation
Value Normal
Price
Range
The four most common value drivers
are higher revenue, lower operating
expenses, lower operating capital and
lower capital investment
- Capital
Investment
- Operating
Capital
- Operating
Costs
+ Revenue
Unique Costs

21.
Emotional Value Drivers
Pricing power increases
as one moves up
Maslow’s hierarchy of
human needs

22.
Value and Customer Needs
Customer Needs
Your
Solution
Competitor
Solution
Your Positive
Differentiation
Your Negative
Differentiation
Commodification

23.
Value and Customer Needs
Customer Needs
Your
Solution
Competitor
Solution
Next Best
Alternative
Shortcomings
- Capital
Investment
- Operating
Capital
- Operating
Costs
+ Revenue
Unique Costs

24.
Commodification Expands Over Time
Customer Needs
Your Solution Competitor
Solution
Commodification
In most markets
commodification increases
over time as a standard offer
emerges

25.
Pricing methods
Cost Plus
– Apply a mark-up to costs
(most companies do not know their costs)
Market Following
– Price relative to a widely accepted price
Value Based
– Capture part of your differentiation
value

26.
The Emergence of Dynamic Pricing
Cost Plus
Market Following
Dynamic
Value Based

27.
Outcome Based Pricing is Coming
Cost Plus
Market Following
Value Based
Dynamic
Outcome Based

28.
Dynamic Pricing
• Generally used for transactional pricing
• Must be possible to change prices quickly
• Used with dynamic offer customization
• AI and Machine Learning are
being applied here

29.
Outcome-Based Pricing
• Tie the price paid to the outcomes delivered
• Generally for long-term relationships where
there is deep trust
• Requires strong contracts that are
fair to both sides

30.
When to Use Each Method
Method When to Use
Cost Plus When the customer controls the offer and how value is received
Market Following When there is a well established reference price or when certain
inputs control the economics (such as interest rates for many
financial products)
Value Based When there is strong positive differentiation
(use to price subscriptions)
Dynamic When value changes rapidly (use to price transactions)
Outcome Based Captures the most value, vendor must be willing and able to accept
risk, requires strong contracts and great trust on both sides

31.
Pricing strategies
• Penetrate
price low to enter or grow a market
• Market Following
price relative to an alternative or market input
• Value-Based
price to capture
positive differentiation

32.
Pricing Power Matters
“The single most important decision in
evaluating a business is pricing power. If you've
got the power to raise prices without losing
business to a competitor, you've got a very
good business. And if you have to have a prayer
session before raising the price by 10 percent,
then you've got a terrible business.”
Warren Buffet

33.
What is Pricing Power
Next Best
Alternative
Positive
Value
Drivers
Negative
Value
Drivers
Differentiation
Value
Brand
Smaller Scope
Pass Throughs
Risk
Larger scope
Lack of completeness
Pricing power is the
degree to which you
can capture your
differentiation value

34.
Putting the pieces together
Next Best
Alternative
Positive
Value
Drivers
Negative
Value
Drivers
Differentiation
Value Premium
Market Following
Penetration

35.
Pricing changes as markets mature

36.
Pricing changes as markets mature
Prefer not to
pay

37.
Pricing changes as markets mature
Prefer not to
pay
Pay for
competitive
advantage

38.
Pricing changes as markets mature
Prefer not to
pay
Pay for
competitive
advantage
Buy because
others are
buying

39.
Pricing changes as markets mature
Prefer not to
pay
Pay for
competitive
advantage
Buy because
others are
buying
Buy solutions
to their
problem

40.
Pricing changes as markets mature
Prefer not to
pay
Pay for
competitive
advantage
Buy because
others are
buying
Buy solutions to
their problem
Buy when
bundled in

41.
Pricing models
• A good pricing model
– Tracks value delivered
– Sharpens your differentiation
– Makes it easy to buy
• Combine several value metrics into
one
pricing metric
• Combine a subscription or license with
a transactional fee

42.
Pricing model innovation
Power
by the hour
(Jet Engines)
Pay per
click
(Advertisements)
Charge
per output purity
(Intelligent Filters)

43.
Pricing and service design
• Service design follows the experience of the
customer (and the larger community
supporting the customer – including staff) as it
changes over time
• Captures interactions at
touch points

44.
Value at touch points
• At each touch point map
– Value understanding - Do they get it?
– Value resonance - Do they care?
– Value delivery – Have they gotten value?
– Payment – Have they paid?

45.
Include value in your journey map
Pay attention to how value
perception delivery and
payment interact over the
customer journey

46.
Look for value disconnects
• Understanding vs. Resonance
– Do they understand your value when they care
about that value?
• Value Received vs. Price Paid
– Is when and how they pay aligned
with when and how
they receive value?

47.
Three key steps
1. Understand who you provide value for and how
you provide emotional and economic value
(begin with value-based market segmentation)
2. Develop a pricing model that connects price to
value and that sharpens your differentiation
3. Combine subscription & transactional
components and test their
interactions

48.
Follow ups
Contact me at steven@ibbaka.com
Follow our blog at ibbaka.com
Join the Professional Pricing Society’s
LinkedIn Group