Developing Products and Pricing Strategy In Tandem

Last week I attended the Professional Pricing Society’s Spring Conference in Atlanta. Since I was coming from the never-ending winter of Chicago, I deeply appreciated the fact that temperatures were over 20 °F (11 °C) warmer in Georgia. Besides enjoying the weather in Atlanta, I was also exposed to some fascinating ideas.

The keynotes and breakouts were top-notch, covering everything from practical application of the Pareto principle to pricing, to harnessing the power of behavioral pricing. However, one of the breakouts that really captured my attention was by Jennifer Swain, the Head of Technology Practice at Fuld+Company.

Ms. Swain presented on cognitive biases in pricing. Cognitive biases are mistakes that mere mortals make in cognitive processes. These mistakes can often be the result of clinging to prior beliefs, even when presented with new information that contradicts those beliefs. Psychologists study cognitive biases as they relate to risk-taking, decision-making, reasoning, and memory.

Ms. Swain briefly reviewed different categories of cognitive biases and pointed out that both vendors and customers have different cognitive biases that can impact their mutually acceptable price. Additionally, she provided a powerful set of tough questions that pricing professionals can use to determine how cognitive bias may be affecting pricing practices.

But what stuck with me most from her presentation was a story about a company’s product development experience. The company first designed a product based on customer data, then they developed a pricing strategy, and finally they reviewed market and competitive intelligence. Unfortunately, their pricing strategy was influenced by cognitive biases and assumptions they had about the market.

The market and competitive intelligence provided new information that challenged those market assumptions, but this data was only analyzed once the pricing strategy was designed. The end result was additional rounds of product redesigns and repricing, which led to delays and additional costs.

Ms. Swain proposed that the company should not have approached this project with a sequential process. Instead, the company should have designed the product, assessed the external factors, and created the pricing strategy all at the same time.

The essential takeaway for me was that each of these parts of product development do not exist in isolation. Rather, they are pieces of a larger picture. And each of these pieces influence the others and feed into the others. Thus, anyone trying to successfully design and launch a product should not silo these tasks. Instead, these tasks should integrate with each other into a coherent whole and be performed simultaneously.

Part of the reason that this insight stayed with me is due to the article I wrote last month for the Wiglaf Journal on design thinking. In the five-stage design thinking model popularized by the d.school at Stanford University (which consists of the Empathy, Define, Ideation, Prototype, and Test stages), the stages are not necessarily linear. Rather, a team using the model may meander from stage one to stage two to stage three, realize that they missed a key insight, and then revisit stage two before moving on through the remaining stages. The process of design thinking does not always go through the five stages in sequence.

Likewise, these three stages of product development are not sequential. In contrast, these stages must be simultaneous. Modifications to one may necessitate modifications to the other two. Market and competitive intelligence may impact both your product design and your pricing strategy. Your product design may affect both the pricing strategy you pursue and the market intelligence you gather. And pricing strategy could impact both the product you design as well as the intelligence you collect from the field.

If anything, this is all confirmation of something we all know: that pricing professionals have many factors to take into account when creating solutions that match the needs of customers and the market.