How to Determine Pricing of a Product

Ideally, I wouldn’t talk about how to determine pricing of a product. The primary reason for this is that, traditionally, the onus of this is on the corporate people, financial people and so forth to actually make decisions like this. It’s not entirely outside our purview.

But, the problem with business, it’s a multi-field domain in which none of the fields are mutually exclusive from any other fields. It’s the biggest Venn diagram in the multiverse, where everything overlaps everything else to at least a minimum degree. Isn’t that so much fun, when it brings in things like how to determine pricing of a product into product management? Sigh.

Why it Overlaps:

Well, it overlaps because these higher ups are going to need input from you reflecting cost metrics in production, distribution, packaging, support and marketing. They have to set a price that covers this overhead, while also turning a revenue without exceeding an upper limit of price appropriate for the product and demographic.

This is ridiculously difficult for them, and they’re trained to think in currency and resource exchanges. We’re not. We’re product managers and we think in logistics and sociology playing in a dance.

And, on top of this, these price concerns are often the source of edicts handed down from higher ups that gum up the works for us. We can’t preemptively get around this stuff without understanding it.

A Problem:

Well, the problem is that this is something with no rules or guidelines beyond some basic, vague precedents and limited legislation from most first world governments that control ethical pricing. It’s such a subjective thing that you can’t really draw on outside sources or examples very readily for this.

When it comes to how to determine pricing of a product, it’s always an exercise of moving from ignorance to enlightenment the long way around. Always.

Common Factors:

The common factors of pricing are obvious for the most part. The biggest concern is covering overhead, which in our field, we contribute a solid ninety percent of the analytics for measuring.

This overhead consists of research and development, employees across the entire company and companies doing B2B services to support us, processing and acquisition of recourses, manufacturing, distribution, retail overhead, marketing, and support. That’s a metric buttload of overhead from all over the place.

The price per unit of the product in conjunction with purchases per smallest fiscal unit must at the very least pay all that overhead across the board. Holy crap.

But, that’s not really turning a profit, which must therefore exceed overhead by a percentage. Now, price per unit numbers are cumulative, so individual price of something being a dollar or two per unit may pay for multiples of millions of dollars in overhead and still turn pure profit of multiples of millions, if the product is successful enough!

As a product manager, I’m a bit closer to the people than the money counters are, by nature of our disparate fields among other things. This is not a judgment nor condescension to those professionals, merely a fact.

The result of that fact is a problem for us here, not for them. The problem is, I base my suggestions on practical ethics, whereupon the most general suggestion possible would be that a five percent above overhead per unit in cumulative analytics is probably going to be the most sound.

But, I’m not the last authority on how to determine pricing of a product. No product manager is.


Mark Silver
Mark is the Lead Author & Editor of Spectechular Blog. Mark established the Spectechular blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to Product Management.
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