What's Wrong with Product Management?

Over at the On Product Management blog, Saeed asks us to complete a brief survey on what the biggest problems are in technology product management.

I answered roughly as follows:

Q1. What do you see as the biggest problems facing the technology product management profession today?

1. Too much tactical activity in the absence of sound strategy.
2. The lack at most companies of a skilled interaction designer or user experience professional role.
   

Q2. What solutions would you suggest to address these problems?

1. Educate executives about the importance of strategy and how to best determine it.
2. Hire skilled interaction designers or user experience professionals.
   

Q3. Which of the following best describes your role/department?
Product Management

Value-Based versus Cost-Based Pricing

Over on the Accidental Product Manager blog, Dr. Jim Anderson writes that cost-based pricing of a product is a bad idea, and that value-based pricing is the way to go.


Cost-based pricing and value-based pricing are two different ways a product manager can decide on the price of a product.

A cost-based price is the cost of producing a unit of the product plus a certain margin. For one example of applying cost-based pricing, see Adam Bullied's blog entry on the pricing new products.

A value-based price reflects the value of the product to the customer. The way I suggest pricing a product based on value is to use negative pricing.

Dr. Anderson points out that price and volume have mutual feedback effects:

Since your unit cost is changing with volume, your price will determine how much you sell. This will then impact volume which then impacts unit cost.

As a result:

So what’s wrong with cost plus pricing? Simple - cost plus pricing will cause you to over-price your product when there is a weak market and will cause you to under-price your product when there is a strong market.

Let me try to reconcile some of the conflict between the two approaches.

The goal that both approaches have in common is to maximize profit. Maximizing profit means finding the ideal balance of margin and volume.

With cost-based pricing, your product manager tries to find the right margin but can also take the impact on volume into account. The hazard is that all the variables are dependent, and maintaining positive margin may result in such small volume that the product isn't profitable.

With value-based pricing, your product manager uses knowledge of the competition and the urgency of the problems being solved to determine the price of the product. A product that addresses urgent problems that the competition doesn't address merits a high price. The hazard is that the value-based price of the product may not cover the costs.

It's fairly straightforward to conclude that there has to be some convergence of the two approaches. Whether it's you, your product manager, or another person in your company, someone has to project the costs and compare them to the value of the product to the customer. This analysis is part of determining whether the product is worth developing in the first place.

Either way, pricing is often an iterative process. Initial research into the market and your projected costs will almost certainly be incomplete or off target. By "testing" prices in the market, your product manager will gain further insight into what the product's true value is to the customer.

Two Approaches

Back in November, Seth Godin wrote about a frustrating experience almost all of us have shared. You call customer service, navigate a long sequence of touch-tone prompts, only to be informed that the office is closed. In Godin's case, he endured nine prompts.

If a typical product manager or business analyst presided over the development of this telephone navigation system, I can imagine how it went.

"Let me talk to your subject matter experts (SMEs)."

"What are the departments a customer might need to contact?"

"Let's draw a chart showing the different paths through the phone system."

Contrast this approach with the following focus on real requirements. The product manager or business analyst converses with customers and customer support to understand the problems that they are trying to solve and avoid by calling support. The problems don't just include the reason they call support in the first place. They also include potential problems with support itself.

Among the problems that customers want to avoid are:

1. Spending a long time to resolve an issue.
2. Expending a lot of energy (by pressing a lot of buttons or having to talk a lot).

Armed with knowledge of true customer challenges, the product manager or business analyst formulates metrics corresponding to these problems:

• It shall take an average of no more than X seconds for a customer to resolve issue Y.
• Outside of support hours, it shall take no more than X gestures (button presses, voice commands, etc.) for a customer to be informed that the office is closed.
  

These metrics are off the top of my head and no doubt could use some refinement. But the point is that the frustrating customer experience Godin described is a result of a requirements failure, a failure to understand and formulate in measurable terms the problems the customer wishes to solve and avoid.