The Role of Pricing in Defining Product Requirements

invention-153341_640The Pragmatic Institute theme for this month is “Requirements”. As their pricing blogger I wanted to write on how pricing should help when defining product requirements. Here are my thoughts. What are yours?

Let’s start by defining “requirements” as what the product team gives the development organization to work on. These are the next features or products the company will develop. So when does pricing care about what development does? I’d say the answer is two-fold.

First, we’d rather development develop the attributes that have the most value in the market. Given a choice between two attributes, we’d prefer to develop the one that has the biggest return. That may be measured in number of new customers or the extra amount someone is willing to pay or a combination of these. Our knowledge of pricing should be able to help with these decisions. Possibly the most powerful tool to help with understanding the value of an individual attribute is Conjoint Analysis.

Second, we care a lot about the product portfolio. As product people knowledgable about pricing, we want good, better, best portfolios. Development won’t create them unless we write the requirements.  It’s our job to define what goes in each version.  The good product should be barely good enough so only buyers who can’t afford to buy up will purchase this. As an extreme example, in the late 1800’s, third class train service didn’t have a roof just to be sure that anyone who could afford it would buy second class. Your best product should be expensive and full featured, while the better product is what most of your buyers will buy.

Still on product portfolio, we want complementary products. Often we have to compete aggressively for business, achieving lower margins than we would like just to win. It would be great if we could have additional products we can sell to the customers we win so we can increase profitability and margins. Again, development won’t create complementary products unless we write the requirements.

In the end, the product team is responsible for deciding what development should develop. Should they build the next generation of your current product? Should they build good and better versions? Should they build complementary products? Using our knowledge of the market and our knowledge of pricing, we can guide them to build the most profitable products.


Photo courtesy of Pixabay.

Mark Stiving

Mark Stiving

Mark Stiving is chief pricing educator with Impact Pricing LLC. Connect with him on LinkedIn

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