What would be the feasible answer/approach for this pricing case study question?

Question

I was given the following case study question during an onsite interview in a consulting firm. I am not sure if my approach was on the right track and would like to get some feedback here if possible to potentially improve my thinking process in the future.

Question: A retailer increases prices for both iphones and windows phones, but the average selling price/phone sold from these two products has a decline. What are your approaches to explain this scenario?

Thank you.

Answer 1

Hi!

This can only happen if the two phones have different price levels, and a shift towards the cheaper phone has happened after the price increase, and the price of the cheaper phone after the price increase is still lower than the former average price.

Numerical Example:

Initial Situation:

iPhone: price 1,000 EUR / 100 units sold per month = 100K EUR Revenue
Windows Phone: price 500 EUR / 100 sold per month = 50K EUR Revenue
--> average selling price per phone is (100K + 50K) / 200 = 750 EUR

New situation after price increase (70% of former iPhone buyers now choose a Windows phone due to the price increase; 20% of former Windows Phone buyers refrain from buying a phone due to price increase):

iPhone: price 1,200 EUR / 30 units sold per month = 36K EUR Revenue
Windows Phone: price 600 EUR / 150 sold per month = 90K EUR Revenue
--> average selling price per phone is (36K + 90K) / 180 = 700 EUR

So the average price has decreased, because the mix has massively shifted to the cheaper product, which is still cheaper than the former average price. This results in the described phenomenon.

Cheers, Sidi

Answer 2

Hi there,

Sidi has it right, the cheaper phone is essentially being sold more than before