Pricing Is Like Tic Tac Toe, Only a Lot More Complex
First a question. Is there anyone who doesn’t know what tic tac toe is? That’s a genuine question asked by a naive American. It’s so ingrained in my mind and my childhood that it seems everyone in the world knows it. Let me know, please. Now to the substance.
Tic Tac Toe (TTT), is impossible to win if both players know what they are doing. And it isn’t hard to know what you’re doing. After playing several times, you’ve figured out what the end of the game looks like and you’ve reasoned backward how to play.
For example, if you move second and your opponent’s first move is choosing a corner, you have to take the center or you will lose (if your opponent doesn’t err). You know this because you can see all of the future possible moves and there is a clear path for your opponent to win.
TTT is the simplest of games, but it’s a great example of how when we play games, we project ourselves into the future, think about the decisions of what the other players will make and then reason backward to figure out our best move now.
The exact same things happen in chess, only the players can’t see all possible moves. They still project themselves into the future and reason backward to what is their best move now.
Now, let’s talk about pricing. Project yourself into the future, a buyer is deciding between your product and a competitor’s product. How will they make that decision? They will trade off the features, quality, and price. Knowing that you need to find out how your features and quality are going to be compared in the mind of the buyer so you’d know what price to put on it. In other words, buyers estimate the value of your product relative to the competitors. Pricers need to understand the value in order to price it.
But wait, that’s like thinking only one move ahead. Here’s your product, the competitor’s product, set the price. What if you go back in the process so you can think further ahead? You may be able to influence what the buyer thinks about your product through effective marketing. If you could do that first, then when buyers get involved, you could win at a higher price. Marketers need to understand the value to market effectively.
But wait, that’s thinking only two moves ahead. What if you go back another step in the process so you can think 3 moves ahead? What if you thought about what products you could build, so marketers could market them, so buyers want to buy them at higher prices? Product teams need to understand the value to build great products.
So often, companies view pricing as that thing you do just before launching a new product. Ugh. Pricing is about Value. If everyone in this chain, and more, don’t understand what value is, it’s hard to make up for it at launch by finding a magical price.
In pricing, as in other games, the farther ahead you can think, the more likely you are to win.