Product Development: The 4 Rules of Pricing

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As an engineer turned product manager, most of my new role came naturally to me, but the dark art of packaging and pricing eluded me. Then, one day, I had a eureka moment. A client’s CFO said something that instantly coalesced everything I had ever thought, heard, or read about product packaging and pricing into what I like to call “The 4 Rules of Pricing.”

To Slick or Not To Slick

I had scheduled a meeting to decide whether or not the new VoIP PRI product we were developing should carry a “Subscriber Line Charge” (abbreviated “SLC” and pronounced “slick”). Back then, SLCs were an important part of a service provider’s revenue diet because they appeared alongside the other regulatorily approved third party charges in the “taxes” section of the bill, but were not remitted (paid out) to the approving third party like those other charges, making them essentially “found money.”

What made this particular exercise different was that it was a VoIP PRI product, and VoIP lacked the clear regulatory framework that supported charging SLCs on traditional PRIs (delivered via TDM). Thus, the need for a meeting with key stakeholders, including the client’s CFO. In the middle of that meeting, she stood up, pounded her first on the table, and said something I will never forget.

Rule #1: “Raid and Pillage”

Ok, I softened it a bit; hers was more a diktat to a Viking raiding party (and she more a Viking chief than CFO at that moment). But the meaning was clear, Rule #1 of packaging and pricing was to get as much money as they could for the product. For our purposes, that meant she was in favor of charging a SLC on the VoIP PRI.

In my mind I saw Rule #1, but it was not alone; there were other Rules that must also be obeyed. Inspired, I jumped out of my chair and made a mad dash to the whiteboard where I wrote “The 4 Rules of Pricing” as the heading and Rule #1, just as the CFO has stated it, underneath. Then I wrote Rule #2.

Rule #2: “Fool the Customer”

While it may sound harsh, Rule #2 needs to be tough to act as a check on Rule #1, which reads like an invitiation for an infinite money grab. The customer should think they’re getting a good value (perception is reality), even if they’re not. Ideally they are getting a good deal, but your packaging and pricing should ensure that they think that they are. In this case, by keeping the price low and charging the SLC, we were doing our best to communicate the value of the product.

There’s a corollary to Rule #2, which is that, if you don’t need it, you aren’t using Rule #1 correctly. In other words, if your customers think they’re getting a fantastic value, maybe you’ve underpriced your product, or maybe you’ve included too many features in the packaging. Regardless, if you’re not worried you priced your product too high, you probably haven’t priced it high enough.

Rule #3: “Follow the Herd”

The “herd” are your competitors and you should “follow” them by emulating their packaging and pricing models, since they are often ahead of you, trampling in your target market meadow, and creating expectations in the minds of your prospective customers that are hard to undo. It is easier to fit into those expectations than it is to break them and make new ones. When it came to VoIP PRIs, we found there was not one herd, but two, with some VoIP PRIs carrying a SLC and some not, which supported either option.

There’s also an exception to Rule #3, which is “unless you have a good reason not to.” One good reason not to follow the herd is if they’re behind you, or if there is not herd at all. If you find yourself in that situation, look around to see if a similar herd recently passed through your target market meadow, because they probably left some expectations in their wake. Another good reason if is you’re the black sheep of your herd with a disruptive packaging or pricing model.

Rule #4: “Don’t go to Jail”

This is inarguably the most important Rule: don’t do anything illegal (or even shady) when packaging and pricing that might land you in jail (or in any kind of legal trouble). Rule #4 reminds us that there are limits to what we can (and should) do when packaging and pricing products. As such, it should never be far from our minds. That day we determined that charging a SLC on the VoIP PRI would not violate Rule #4, which settled the matter in favor of including a SLC on the VoIP PRI product.

And, if you’re wondering why this was a Rule at all, you haven’t worked in telecom as long as I have.

Rob Johnson, VP of Products and Platforms

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