Approach of Pricing Cases

Question

Hey,

how to approach a Prcing case?

My usual approach is:

First, I would analyse the clients comoany (meaning market share, product, costs, financial data) and what is the goal (gain market share? max profit? response to a (new) competitor?).

Second, I investigate the market: competitors and their products (substitutes?) and prices.. benchmarking. In addition to that, analyse the costumers (what are they willing to pay).

Third, I choose a pricing strategy taking into account the following:

Cost-based: P=R-C (ineffective)
Value-based: compare the values of your product vs. competitors. Is there value added and are costumers willing to pay more? => higher price.
Competitor-based: set a price based on the second step of the approach (benchmarking).

Is there a better approach/framework? General things to consider in pricing cases?

Thank you very much!

Answer 1

Hi,

The general framework for pricing is: Cost base - Value based - Competitor based - pricing strategy

1. Cost based - you actually check what are the costs and apply standard industry / target markup

2. Value based pricing can be done in 2 ways:

You compare the value proposition and features of your product vs. the VP of the closest product of your competitors. If you have a significant difference in value prop - you have to define how much value you propose to the customer in $ terms.
Another way is to calculate the closest alternatives and think how much additional value we provide by replacing them. Think of the discount airlines compared to trains or buses

3. Competitor based pricing - basically it's benchmarking against competitors if you have a product with a very similar value prop. Make sure you take into account the segment (i.e. in premium higher price may be the proxy for quality).

4. Pricing strategy - here you define how you will price the product taking into account 1,2,3 and your company strategy. Maybe you decide to have a zero margin if you can crossell other services. Or maybe you would like to subsidize to win the competition. Also, think of price differentiation and having different pricing tiers (e.g. basic, premium or even fremium) and how it helps to drive price perception and fulfill strategic goals

Good luck!