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Who should own product pricing? Is this a hotly debated topic in your company? This article explores who owns pricing in an organization, who shouldn’t own it, and why the product team is ideally positioned due to their deep understanding of the product’s value to buyers
Who should own pricing in an organization? When I ask students this question, it almost always evokes emotion. Some people respond confidently, while others are more sheepish. And a lot of people think their companies are doing it wrong. One thing everyone can agree on, however, is that it’s an important question that directly impacts a product’s success.
Let’s look at what it means to “own pricing”, who shouldn’t own it, and why the product team is the natural choice.
Components of Pricing
So, who should own pricing in an organization? Before we answer this question, it’s important to define what pricing means because there are so many pieces to the pricing puzzle. For example, someone must decide which pricing model to use. SaaS or perpetual license software? Do we price by the seat, the gigabyte, the transaction or something else? Usually, executives decide this, or at least participate in the decision.
Another aspect of pricing is negotiating discounts. In most companies the sales team does, and should, own this part of pricing. However, when most people respond to this question, they typically mean who is responsible for setting the price. This involves determining the list price and often establishing guidance for discounting.
For now, we’re going to agree with most people that when we’re asking about who owns the pricing in an organization, we are really asking who sets the price. With this clarified, the answer is obviously someone from the product team!
Why the Product Team Should Own Pricing
The product team’s job is to know how much value the product delivers to buyers. And the person setting the price must know value in order to establish value-based pricing (VBP). VBP is the basis for all profit-maximizing pricing strategies. It means we charge based on what buyers are willing to pay, which is a function of the value buyers receive. The product team is uniquely positioned to know that value and determine how much markets are willing to pay.
How do customers decide their willingness to pay? They make their decision using either value in use or value in choice.
What is Value in Use?
Value in use is when customers estimate the inherent value they get from buying a product. They will pay some percentage of that value to buy the product. For example, how much would you pay for gas if you’re in the middle of the desert, your gas gauge is empty, and you see a sign that says, “Last gas for 75 miles?” You would probably pay a lot. That is value in use.
What is Value in Choice?
Value in choice is when buyers compare your product with an alternative. If they decide they get more value from your product, they will buy it. Imagine a busy intersection with a gas station on each corner, and your gas tank is empty. How much would you pay to buy gas at the most convenient station if all the other stations are charging $2.25? Probably much less than what you would pay in the desert. That is value in choice.
To use VBP, a person must understand the value that the market and market segments receive from using your products. They must be able to put a dollar value on it. Even more challenging, they must understand the value in choice. This means knowing competitors, their prices, how they are different (both better and worse) and how much buyers value those differences.
Who inside your company understands this value? The only real answer is the product team. Your product team knows the competitive landscape and understands how your buyers make decisions better than anyone else. And because they must understand all these things, they should be responsible for setting prices.
Additional Reason Product Teams Should Own Pricing
An additional reason the product team should set prices is because they determine what the next product will look like. This includes which features have the highest priority. Whoever makes that decision is who I want to own setting prices.
Why? Because companies should strive to make products that buyers value more. To do that, they must choose the best new features, ones that add more value to their product in the minds of their buyers. If product management owns setting prices, they are in that exact mindset. They get to decide which new capabilities might give them the ability to charge more.
If sales set prices, product management wouldn’t need to understand the value of their product. When deciding which features get priority, they would just rely on sales. In fact, if sales set prices, they would become the de facto product team. To make it worse, each new capability sales asks for will be based on direct customer requests. This is a surefire way to ensure that the company only builds incremental innovations.
Why Sales and Finance Should Not Own Pricing
We already demonstrated one serious flaw with letting sales own pricing, but one might argue that it could work. After all, great salespeople are value focused. They try to understand value from each buyer, which aligns with VBP. However, they have two strikes against them. First, salespeople have the incentive to close deals quickly, which often means dropping the price. Second, they don’t see the entire market, only their specific customers. Someone needs to aggregate this information to provide companywide guidance.
Your finance team should not own pricing. Finance has the desire but not the knowledge to set prices based on value. Although they care about margins and understand costs, finance people don’t know the value their products deliver. They also do not understand your competitors’ products. This means that if finance sets prices, the only method they can use is cost-plus pricing.
What would it look like if finance sets prices? Again, the only way finance has to set prices is cost-plus, so they would take the cost and add a margin. When deciding whether to add a new feature, product management then would only need to determine if buyers are willing to pay more than the cost plus the margin. If the answer is yes, they would put the feature in. If the answer is no, they would omit it.
This would be especially onerous for software companies. The marginal cost of manufacturing any new feature is near zero. This would allow product management to say yes to virtually anything and still meet that rule. The product manager has no incentive to find new high-value features. The company won’t charge for them. Hence, the company ends up with only slightly better products, market-driven innovations.
In the end, the right answer is to let product management own pricing. Their goal should be to choose the price and product features that maximize the profitability of the product. They can trade off the importance of customer requests against the value of brand-new capabilities. When they set the price, they have control of both important levers, price and product.
So, if you want to maximize profits, the product team is the only section of your company with the knowledge and incentives to effectively implement VBP. More importantly, if you want to create more valuable new products, the people who define the next product should also be the ones that set its price.
