Impact Pricing Podcast

Ep164: Who Should Own Product Pricing with Ray Ranga

 

Ray Ranga is currently the VP of Product Management at Momentive AI. Before working in Momentive, Ray was the Senior Director of Product Management at Splunk. Ray is an instructor at UC Berkeley and he also conducts a pricing class at Stanford.

In this episode, Ray discusses the power behind involving the people who know the product’s value when making pricing decisions as he specifically points out the benefits of having pricing teams connect with people from the product management department.

 

Why you have to check out today’s podcast:

  • Discover which team should own pricing in a company in relation to the value the product has;
  • Find out how to effectively package products in a way that resonates best with what your customers want; and
  • Understand why pricing and product management people should be one when making pricing decisions towards their product

              

“Understand your customers to a deep, deep level. See what gets your customer ticking, and then I’m sure everything else follows.” 

Ray Ranga

           

Topics Covered:

01:31 – How Ray got into pricing: From being an engineer then shifting to product management

02:31 – Answering the question “who should own pricing?”

04:50 – The role of product management

05:37 – What Ray teaches in his pricing and product management/marketing class

07:43 – The difference between behavioral economics and pricing for value

10:17 – How to package products, explained in the simplest possible manner

15:44 – Why you should go for market segments first, not across market segments

18:13 – The similarities of Mark and Ray’s practices when figuring out market segments

21:42 – Talking about the presence of confidence problem with regards to charging a high price

25:01 – Ray’s piece of pricing advice for today’s listeners

         

Key Takeaways: 

“Pricing and product management needs to go hand in hand.” – Ray Ranga

“Product marketing is good on pricing. They understand our customers well. They understand the persona and the segment we sell into typically. I do have a bias towards who should not own pricing. I feel like finance or sales should not own pricing, for some obvious reasons. But other than that, I think product management and product marketing are fine owning pricing.” – Ray Ranga

“Pricing is a number at the end of it, but it’s so much more. It’s so much more about operationalizing pricing, and that’s where customer experience comes into play. You need the right ways to consume the price of the product that you just priced.” – Ray Ranga

“Analysis and research and competitive positioning is very useful. And I think, sometimes, you should take that seriously when you have the data points in front of you.” – Ray Ranga

“Enablement is very key to pricing, especially in zero to one products. You want to be with the sales team in those initial calls until they feel comfortable that they can tackle these questions about pricing in the early days.” – Ray Ranga

 

People / Resources Mentioned:

Connect with Ray Ranga:

Connect with Mark Stiving:   

                          

Full Interview Transcript

(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)

Ray Ranga

Understand your customers to a deep, deep level. See what gets your customer ticking, and then I’m sure everything else follows.

[Intro]

Mark Stiving

Today’s podcast is sponsored by Jennings Executive Search. I had a great conversation with John Jennings about the skills needed in different pricing roles. He and I think a lot alike. If you’re looking for a new pricing role or if you’re trying to hire just the right pricing person, I strongly suggest you reach out to Jennings Executive Search. They specialize in placing pricing people. Say that three times fast.

Welcome to Impact Pricing, the podcast where we discussed pricing, value, and the packaged relationship between them. I’m Mark Stiving. Today, our guest is Ray Ranga, and here are three things you’d want to learn about Ray before we start.

He is the VP of Product Management at Momentive AI. He’s an instructor at UC Berkeley. He also teaches a pricing like class at this little school called Stanford. And he’s Senior Director of Product- was Senior Director of Product Management at Splunk, which I may want to ask him about that as well. There’s so much I want to talk to him about.

Welcome, Ray.

Ray Ranga

Hey, Mark. Nice to meet you, and thank you for inviting me. I’m so excited to talk to you today.

Mark Stiving

Oh, it’s going to be fun, I’m sure.

So, you’re actually in product management, but I’m going to ask the question – how did you get into pricing?

Ray Ranga

Yeah. So, I started out as an engineer back in the day, and I got very curious about who’s using our products and how do we know what to build. And that’s the short story of how I got into product management. And once I got into product management, the questions – how do we price the products that we build? What do we know, how do we know that this is the right price for the product? And is it going to sell more if we price it in a different way? – were all questions in my mind. Then I soon learned that pricing, as you and most of our viewers might agree with me, is closely tied to value, and felt like pricing and product management need to go hand in hand. That’s kind of how I got started. And in most of my roles, I’ve been responsible for pricing in my past lives. I’m not, at my current role at SurveyMonkey, but definitely been a big player in defining pricing for my products in my past lives.

Mark Stiving

That’s kind of interesting, because I’m often asked the question “who should own pricing?” And my answer is always somebody who understands the value of the product. And so usually, that’s product management or product marketing. You have a strong opinion that that should be product management?

Ray Ranga

Well, I’m a product manager so I’m going to be biased towards that answer, but I think product marketing is good on pricing. They understand our customers well. They understand the persona and the segment we sell into typically. I do have a bias towards who should not own pricing. I feel like finance or sales should not own pricing, for some obvious reasons. But other than that, I think product management and product marketing are fine owning pricing in my view.

Mark Stiving

Yeah. I think that makes sense. And I don’t know that I’ve ever articulated it this way, but let me articulate this and then hear your thoughts. It almost seems to me that product management makes more sense in a traditional, more transactional type business, and product marketing makes more sense in a subscription business. And I say that because in a subscription business, usually, we’re trying to watch current usage, current trends, what’s going on in the market, and in a more transactional business, we’re trying to figure out what’s the next thing? How do I build the next thing? And that’s the person who should be pricing it. What do you think of that thought?

Ray Ranga

I think that makes sense. I will also throw another player into this equation, outside of just product marketing and product management.

In a subscription business, companies these days have growth teams, and they are constantly experimenting on value and top of the funnel and conversions and metrics such as those, right? So, growth teams could own pricing as well, and I think that makes a lot of sense for certain businesses. But yeah, you’re absolutely right about product marketing and subscription businesses. It makes a lot of sense. I could argue the same with product management, because in a subscription business, product management kind of morphs itself into a slightly different role than in a traditional business. So, when you look at how the product management role itself transforms itself to subscription-based products, I think I could argue that pricing could be owned by product management. Like I said, I’m biased.

Mark Stiving

Awesome.

Well, I want to hear your opinion on this. So, I view product management’s most important role as deciding what we build next. So, I’m curious. What do you think product management’s role is, and how does that change from a traditional business to a subscription business?

Ray Ranga

I think it’s about product market fit at the base of it all. That’s the role of product management. And it’s to make sure that we do the right things for the markets and segments we serve, in terms of creating value for our buyers and our users.

So, that’s how I see product management and their role, regardless of whether it’s a traditional business or a subscription business, if that makes sense.

Mark Stiving

Yeah, makes all the sense in the world. Yeah. Okay.

Well, okay. Now, I didn’t know that I was going to ask this question, but I’m going to ask it. What do you teach in your pricing class?

Ray Ranga

Yeah. So, I’ll talk about the other class at Berkeley, which is about product management, product marketing, and then I’ll talk about Stanford as well, just for the context of viewers and listeners.

Product management and product marketing at Berkeley has a small sub-lecture on pricing, but it’s mostly about how do you take a concept? How do you look at a whitespace? How do you kind of segment the market and understand the needs of that market, build it, and then take it, go to market and take it to market, and then enable your sales teams, and so on.

Also, useful to understand here is I’ve worked in the industry for about 24 years, and all of that experience – 100% of that experience – is in enterprise software. I’ve not worked in B2C at all. So, I’ll just put it out there for context, right?

So, that’s what I teach at Berkeley. So, I blow up that sub lecture that I talked about on pricing, and then I’ve made it a class at Stanford.

So, it’s all about understanding – if you want to get very theoretical – understanding the four P’s and the interlock between pricing and the four P’s. Obviously, one of those P’s is pricing, but then, beyond that framework, like a SAAS model, understanding the adoption life cycle, the Crossing the Chasm. I start there, the basics, and then I talk about pricing thresholds and anchors and psychology of pricing, buying behavior and usage behavior tied to pricing, then we talk about configurations for those good, better, best. We talk about how to calculate value-based pricing, and then we look at several interesting case studies. Like, there’s one from Swarovski as a company, there’s one from Porsche, there’s one from LinkedIn. There’s a bunch of new studies we talk about. And then there’s some project work where students get to pick a product of their choice and then they figure out value-based pricing for that product.

So, that’s the course in edges.

Mark Stiving

It sounds fabulous.

So, I want to ask you some questions, because I want to know if you would answer them the same way I would answer them, if that’s okay.

Ray Ranga

Of course.

Mark Stiving

So, describe for me, in your mind, the difference between behavioral economics and pricing for value.

Ray Ranga

Yeah, it’s an awesome question. So, I think the bottom line here is if you look at theoretical pricing calculations and theoretical definitions of pricing, and you apply them to buyer behavior and psychology, some of those prom rules are violated upfront. And so, when you look at stuff like prestige pricing, you just can’t rationalize why a product is so much more expensive in the luxury category vs. the non-luxury category, and that violates economic principles and finance principles and stuff like that, right?

So as an example, Volkswagen and Audi or Porsche might have exactly the same features – obviously, one is a luxury model and the other one is not, but buyers in the market is willing to have different price sensitivities for these brands.

So, I look at it as there are thumb rules, and when you apply behavior, psychology, and neuroscience to these thumb rules, they easily get violated. I hope that answers your question.

Mark Stiving

Yeah. So, let me say my answer, and then you can comment on it.

My answer is behavioral economics tends to be how do we – and I hate to say these words – but how do we take advantage of the fact that buyers are often irrational, and yet, they’re predictably irrational, based on Dan Ariely’s book, right? Great title. But when we price for value, what we’re trying to do is get to the rational side of decision making and say, how is it that a customer is really going to make this decision? And I tend to think that in pricing’s world, we should focus more on the value side but not forget the behavioral economics side.

Ray Ranga

I 100% agree. I think the way you described it is spot on. When you look at the first iPhone released by Apple, people went completely berserk and nuts as you know. And so, there was no logic to why there was loads and loads of people outside the Manhattan store. That picture became very popular as you know. And that’s behavioral economics and irrational behavior for a certain brand that the industry has never seen before. So, I totally agree with your description.

Mark Stiving

Yeah. So, another thing that you said that you teach in the class, which I find as being the single hardest thing to teach or to understand or to do, and that’s how to figure out how to package the products. So, how do you create good, better, best? How do you decide which features go in which package? What’s going to be an option? What’s not going to be an option? Do you have any brilliant insight into that that’s going to simplify it for our listeners?

Ray Ranga

Yeah. I’ve learned a thing or two. I don’t know if they’re brilliant, but I’m happy to talk about them.

You know, this goes back to pricing is a number at the end of it, but it’s so much more. To me, I tie it to customer experience. I don’t even tie it to just value, right? Because if you align it with value and you arrive at a certain number that ties to value, then you kind of like dust your hands and you say, “Okay, we’re done here. We know the pricing.” But to me, it’s so much more about operationalizing pricing, and that’s where customer experience comes into play, right? So, you need the right ways to consume the price of the product that you just priced, the right metering in terms of licensing. For example, stuff like the right back-office systems to implement the licensing in a multi-product portfolio company, so that you can think of stuff like core terming.

And this is stuff that you necessarily don’t learn out of a book, and it comes out of experience for most people. That’s how I learned. I didn’t pick these up from a book, and I learned this over a period of time.

And so, I’ve done this. We talked about my experience at the beginning of the podcast, and in one of my past lives, we had to understand how to price the value, and as part of that, we had to configure for our users – this was a data analytics company, and we were pricing historically for the last 10, 15, 20 years, based on how much data was ingested into the platform itself. And that was fundamentally disincentivizing our customers from sending more data, because you are charging on volume of data that they send to us, not what you could do with that data, right?

So, we wanted to change the paradigm and price the value, which is basically, if you look at how that data is used, people search that data, find answers from that data, and then they analyze it, and they find insights that drives business decisions. That’s the bottom line. So, it all starts with a search.

And so unfortunately, I apologize, because many of my examples are hardcore technical examples, because of my B2B background. So, keeping that in mind.

So, we wanted to understand what’s a typical sort of search volume for a typical user. And there’s no such thing as typical, so we started like segmenting our market, and we go from SMBs to large, large enterprises and multinational banks around the world. And so, we started looking at profiles and characteristics of customers. We split by vertical, we split by geography. We looked at various characteristics, and then we came up with some ballpark numbers.

Another great way, which we didn’t do at that time, but you could absolutely look into is if you have the horsepower and the IP within a company, you could apply data science to such problems. And you could figure out the profile of customers that you have today, as well as in your past, and then predict sort of the usage patterns of a new customer that wants to buy your product, right?

So, we did all of this analysis, and the result was we came up with a setup like characteristics of customers and users and the kinds of searches that they would do, search volumes, and then analytics, and all the downstream activities that the customer does. And so, we started applying bands across each of these characteristics, and that’s how we came up with configurations that we could sell to our customer base.

Mark Stiving

Yeah, that’s a very challenging situation, because the company that you’re with is a platform type product. And I think platform products- I think most people would understand if we talk about it. Let’s say we were going to price AWS, right? We’re going to put a price on AWS today. To do what you just described is really, really hard.

Ray Ranga

Yes, it is.

Mark Stiving

Because I don’t know how much value one customer’s application generates vs. another customer’s application, and that probably isn’t really related to the number of transactions or CPU cycles or anything else that goes on. So, this is a really tough problem.

Ray Ranga

It is a very tough problem – you’re spot on about that – which is why you don’t slice and dice in one way. You look at various different characteristics. And notably, I mentioned verticals. What is important for a healthcare banking customer may not be important for retail as much. For example, you’ve got regulations, you’ve got data privacy, you’ve got all of that stuff that needs to be tightly locked up for a banking customer or healthcare customer; think about HIPAA regulations and stuff like that. So, that’s why looking at similarities across the segments and across the user base and customer base is very critical as well. But this is a problem that takes quite a bit of like time and effort and energy to solve. And I think it’s safe to say, that company that I’m referring to is still trying to fine tune some of these findings.

Mark Stiving

Yeah.

So, one of the things that I found early, and I’m going to use LinkedIn Pricing for a second; it’s my favorite company for pricing, but one of the things I found is that good, better, best make so much more sense when I’m inside a market segment than when I’m trying to go across market segments. And it feels like a lot of what we just talked about; it was how do I find the market segments that makes sense, and then after I figured out the market segment, now I could say, “Oh, these are the people who have higher willingness to pay inside my market segment.” And so, LinkedIn, of course, they have their four market segments. They’ve identified salespeople, job seekers, recruiters, and professionals, everybody else. And if you take any one of those categories, they’ve got packages inside, that market segment that says, “Here’s your good, better best” even though they don’t price it on their website that way anymore. But it’s pretty fascinating, to try to figure out we have to do market segments first.

Ray Ranga

It is. And this is why I love when pricing is part of product management or product marketing, because as part of building a product, you understand market segments, you understand the persona, you understand who your buying center is and what your users’ top problems are and pain points are that you’re trying to solve. And all of these are data points that are incredibly useful in figuring out the price of your product.

So, the part with the LinkedIn example that you mentioned that I really like is if you look at the sales professionals, I believe that’s a market segment within LinkedIn, you’ve got good, better, best within that segment, and I think that’s very helpful because the genius of the good, better, best is you’ve got an option for every kind of sort of price-sensitive and quality-sensitive and features-sensitive buyer in that segment. So, you don’t have sort of like a take it or leave it, a single option, but you’ve got three options, and the chance of you converting a new prospect into a customer is really high when you’ve done a proper research and analysis of that segment, understand what drives the needs of that segment, and you can figure those options in a clear and thoughtful way.

Mark Stiving

Yeah, spot on.

So, let’s go back to the platform example for a second, and kind of share with you what I typically teach my clients or an exercise I do with my clients, and you can tell me if this is something you do or makes sense to you. But I usually say let’s list a dozen customers and give me on a scale of 1-5 their willingness to pay or you can define it as how much value they get from our product. And now, let’s take a look at the features they use, right? What’s their usage and all the different things. And you can start to figure out, “Oh, this might be my market segment.” It’s not statistically significant, but it certainly starts to get us a feel for which segments value which things, and you could certainly see things like medical requirements and HIPAA falling out as you do exercises like this.

Ray Ranga

Yeah, 100%. I think that makes a lot of sense to me.

When you’re introducing a new product, that’s typically how I’ve operated as well. Take a dozen customers. Let’s understand their price sensitivity and let’s understand their sensitivity to certain features, because there are certain- I like the definition of leaders and fillers and killers. You do want to understand what motivates a buyer within that segment or within that cohort of customers, and then you want to understand- and those are leaders, they are critical features, right? And then you want to understand what are fillers. These are nice to have and they don’t mind paying. But killers are features that might kill a deal, and you don’t want to shove that down the throat of your customers because it might hurt you and your opportunities and your sales projections in that segment.

So, I like that definition, and I also looked at a sort of introductory price based on all the analysis and modeling and everything you’ve done, competitive pricing and differentiation you’ve done in a brand-new product that I’ve done in one of my past companies where we sold information security and software security to enterprises. This was a great example where we were licensing by a number of devices that are within an organization.

So, let’s say you’ve got 10,000 employees. Typically, you’ve got somewhere between three to five times the number of devices as the number of employees. So, you probably have 30-50,000 devices. And so, you price by per device per year.

And so, we did all the analysis. We came up with a number, and the company decided to undercut the market. And so, we went way below that number. And I did an exercise with a certain cohort of initial customers, and I told the sales guy, “Why don’t we go three times that number, and then just see what happens? And if they don’t like that number, we can always say, ‘You know what? You’re a great customer. We’re going to give you an introductory discount, and then we’ll cut it back. And that’s not a problem, because this is a new product, and I think we can position it appropriately.’” And to my surprise, maybe it was not so surprising, because I thought the market could bear a higher cost, so the customer did agree to purchase the product for three times the lowest price.

And so, that was a great way of learning that analysis and research and competitive positioning is very useful. And I think, sometimes, you should take that seriously when you have the data points in front of you.

Mark Stiving

Yeah, I think that’s fascinating.

Let’s talk briefly about this issue of undercutting the market or charging three times what our lowest prices. One of the things I find that’s true with pricing people, salespeople, business people – doesn’t matter – is we have a confidence problem. We’re afraid to charge a high price, for whatever reason. And maybe we’re an expensive product, but we’re afraid to make that more expensive. Any thoughts on that? How do we overcome that?

Ray Ranga

I think the confidence problem stems from many reasons, in my view. One is you don’t believe in the innovation and the value you provide, and you think there’s not a whole lot of differentiation between you and some other established players in industry. I’ve come across those situations. You really need to like go back to the drawing board and understand why you are set up as a company and what is the value that you provide. If you’re a ‘made to’ product and you’re a commodity of sorts, that’s a different thing, but if you do have a way of differentiating yourself from the next closest competitor, then you have to double down on that. That’s one reason why people have a confidence problem.

The second why people don’t want to charge the appropriate amount for that type of value is there’s a lot of pressure to meet sales quarters. And so, when the other sales in an organization looks at a high price point, then automatically, their sort of psyche goes towards, “Hey, I can’t post my quota. Let’s start with a lesser price point.”

And so, I think that’s another problem that I’ve seen oftentimes in enterprises.

Mark Stiving

Yeah. Do you work a lot with sales organizations, trying to help salespeople sell better?

Ray Ranga

I do.

Mark Stiving

What’s your attitude that you go through? Or what’s the approach you take when you do that?

Ray Ranga

I tried to. I think it’s important to, first of all, arm the salespeople with the right information, right? So, talking about competitive differentiation, why are you better? Why is the product that they are trying to sell better than the next competitor? And demos, articles, documentation, battle cards – all of that stuff are very helpful there. The second is you do want to explain it; you want explainability in your pricing. So, you’re pricing and licensing a certain way. You’re pricing based on seeds. You’re pricing based on number of devices, or whatever it is. You want the salesperson to have talking script or sales objections figured out so that they can answer these questions when a customer asks them or a prospect asks them.

So, I think enablement is very key to pricing, especially in zero to one products. You want to be with the sales team in those initial calls until they feel comfortable that they can tackle these questions about pricing in the early days.

Mark Stiving

Yeah, I love that answer. And you’ve probably heard me say this before, but the salespeople have to have the products, the knowledge, and the confidence to win at the prices we think they should win at; otherwise, they won’t.

Ray Ranga

Absolutely. I totally agree.

Mark Stiving

Nice.

Ray, we are running out of time, but we are going to ask the final question. What’s one piece of pricing advice you would give our listeners that you think could have a big impact on their business?

Ray Ranga

Understand your customers to a deep, deep level. There are many ways to do this. You need competitive Intel user research team that is constantly trying to understand the personas within your organization. Talk to your salespeople; they know a lot. Talk to your product marketing folks. There’s a ton of information you may not be aware that you have. But at the bottom of all of that is a deep understanding of your customer base. Start there and see what gets your customer ticking, and then I’m sure everything else follows.

Mark Stiving

So, I really love that answer, but I think it brings us right back to what we talked about when we first started the conversation about who should own pricing. And when I think about pricing professionals in a company, I tend to think that they don’t know the value of any individual product as much as a product manager or product marketer does. And so, I would say if you’re in product management and product marketing, what you just said is absolutely spot on, and that you should be the one responsible for the pricing, because you know the value. I just think the pricing people, they should start to know this, but they have way too many products that they’re focused on and there’s no chance that they can manage all of those products.

Ray Ranga

Yeah. I’ve worked with a lot of pricing folks and they are experts at modeling. They’re experts at experimentation and throwing some good ideas out there. But I think, at the end of the day, it’s a tight collaboration between folks in core pricing teams as well as product management, product marketing. I think this is not a one-man show. This is something- that’s why a lot of good companies that do this well, they have a price committee, they have a price council, and discounting and various other re-pricing tactics go through the council. And there is rigor around this. And I think that’s very important to keep in mind.

Mark Stiving

Yup. Absolutely spot on.

Ray, thank you so much for your time today. If anybody wants to contact you, how can they do that?

Ray Ranga

They can reach out to me via my LinkedIn profile. Search for Ray Ranga. And I think I’m the only one, if I’m right.

Mark Stiving

And we’ll have the link in the show notes anyway, so it’d be easier for them to find.

Alright. Episode 164 is all done. Thank you so much for listening.

If you enjoyed this, would you please leave us a rating and a review? And finally, if you have any questions or comments about the podcast or pricing in general, feel free to email me: mark@impactpricing.com.

Now, go make an impact.

Thanks again to Jennings Executive Search for sponsoring our podcasts. If you’re looking to hire someone in pricing, I suggest you contact someone who knows pricing people. Contact Jennings Executive Search.

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