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Louay
on Aug 19, 2018
Global
I want to receive updates regarding this question via email.

When is the "increase in prices" a solution for sales' decline? In other words, what are the things that I should keep in mind before choosing this particular solution?

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Benjamin
Coach
edited on Aug 20, 2018
ex-Manager - Natural and challenging teacher - Taylor case solving, no framework

Hi,
I think Vlad did a very good job with listing the drivers.
I would only add to his answer that you need to consider the type of business.
In general price increase can be better managed in B2B businesses applying price differentiation to the different customers (size x industry)

BEst

Benjamin

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Vlad
Coach
on Aug 19, 2018
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

You should keep in mind several factors:

  • Overall strategic objective - are we trying to increase market share or profits?
  • Nature of the product - mass vs premium
  • Price elasticity. In other words - what is the relationship between price and volumes and what are the implications of the price increase for overall revenue
  • Price perception and willingness to pay - how does the customer perceive the price? 
  • Competitors pricing - will the customers switch to competitors?
  • Product differentiation and pricing tiers. What is the role of the product in your portfolio? Maybe the price should be low but you can earn more on cross-selling
  • Government regulations

Best

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Deleted user
on Aug 19, 2018

There are external factor that may affect the pricing strategy.

You should keep in mind:

-What other competitors are doing? Are they increasing pricing or not?

-What's your positioning in the market? Is it a low cost or premium brand? 

-What customer really wants and their willingness to pay.

Sometimes sales are strongly related to brand perception where price is one of the main drivers.

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Pricing
Pricing plays a crucial role in a company's profitability as it directly contributes to it. For this reason, establishing optimal prices for products or services is of great importance. Business consultants therefore assist their clients in developing pricing strategies.A case study on pricing is an analysis focusing on the pricing of a product or service. It can stand alone or be part of a broader case, such as entering a new market.In a case interview, you can approach this case type in three steps: 1. Investigate the CompanyAt the outset of your case, you should gain a solid understanding of your client's business model.What products does the company sell and where does the company stand in the market? For instance, is the company a market leader? In terms of volume or quality or both?What is the company’s key objective? Profits? Market share? Growth? Brand positioning? Make sure to clarify the objective before starting the analysis. 2. Investigate the ProductAfter familiarizing yourself with the company's business model, it's time to learn more about the product. When examining the product, it's important to pay attention to the following aspects:Product differentiation: Analyze how the client's product differs from those of competitors. Explore not only the product's features but also its production processes and methods.Unique Selling Proposition (USP): Identify the unique selling point of the product. What makes it unique and attractive to potential customers?Alternatives and substitutes: Consider alternative or substitute products in the market as well. How do they compare to the client's product?Product lifecycle: Determine the stage of the product lifecycle. This can influence the pricing and marketing strategy.Predictability of supply and demand: Examine whether supply and demand for the product are predictable. This can help assess risks in pricing and take appropriate measures.Once you've thoroughly assessed these aspects, you'll have a clearer understanding of the product and its positioning in the market, which will inform your pricing strategy recommendations. 3. Choose a Pricing StrategyThe choice of strategy depends on the information gathered in the first two steps. There are three important pricing strategies:Competitor-Based PricingWith this strategy, also known as 'benchmarking', the price is determined based on the prices set by our competitors. So, you want to find out:Are there comparable products/services?If yes, how do they compare to the client's product?What are their prices? Important: Keep in mind that competitors are likely to adjust their prices once the client introduces their product.Cost-Based PricingWith cost-based pricing, the price of a product or service is set based on the accumulated item costs (break-even) plus a reasonable profit margin. This strategy varies by industry due to different cost structures and margins. Therefore, it's important to understand the specific customer costs before setting a price (taking into account fixed and variable costs).Although cost-based pricing offers a simple and transparent method, it does not consider the perceived value of the product or service to customers and may be less effective in certain markets. To determine customer willingness to pay, it's important to consider this and possibly break down the price into different components, such as a separate price for the product and delivery costs.Value-Based PricingValue-based pricing is a strategic approach based on assessing the customer's perception of the product or the amount customers are willing to pay. Different customer segments may have different willingness to pay. This means that companies can set different prices for different customer segments by adjusting the perceived value to justify price changes.A good example of this is the iPhone, a highly differentiated product for which customers are often willing to pay significantly more than the pure costs plus a "typical" margin. This illustrates how customers are inclined to accept a higher price for products they perceive as particularly valuable or differentiated. Key TakeawaysFrom what we've learned previously, we can now extract the following insights as key takeaways:There are three key pricing strategies: Competitor-based pricing, cost-based pricing, and value-based pricing. Cost-based pricing alone is sometimes considered insufficient.Understand the primary objective of the company (profit, market share, growth, brand positioning) as the basis for the pricing strategy.Know the business model, products/services, and market position of the company and consider it in your strategic approach.Understand the customers' willingness to pay and needs, and adjust the pricing strategy to customer preferences and market conditions. 
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