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Antonello

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7

Valuation and Pricing

Hi everyone,

For cases like : " how much would you sell the Eiffel Tour for ? " or " How much would you pay for a satellite ? ", I am always confused between choosing :

- pricing strategy (cost-based, value-based, competitor-based)

- valuation method (Discount Cash Flow, Multiple in the industry, Assets value)

When should I choose a pricing strategy vs a valuation method?

Hi everyone,

For cases like : " how much would you sell the Eiffel Tour for ? " or " How much would you pay for a satellite ? ", I am always confused between choosing :

- pricing strategy (cost-based, value-based, competitor-based)

- valuation method (Discount Cash Flow, Multiple in the industry, Assets value)

When should I choose a pricing strategy vs a valuation method?

7 Antworten

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Coaching mit Antonello vereinbaren

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Coaching mit Ian vereinbaren

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Hi there,

That's because these aren't priving questions...they're market sizing questions :)

Now, I'm going to answer your two seperate questions.

HOW DO I PRICE?

1. Value-based or Willingness to Pay

When: This is your top choice.

How: Find a $ value for what customers would pay. This is normally adding the revenue increase and/or cost reduction that your customers get by buying your product/service. If it's more of a utility/happiness product, then customer surveys of product comparisons serve well as well.

Then, charge a discounted amount of that WTP, based on your eagerness/desire to capture market share.

2. Benchmarking

When: This is what you have to do if there's competition

How: See what price your competition charges!

3. Cost-based

When: This is what you do if you can't benchmark (i.e. no competition) AND you can't get a gauge on WTP.

How: Figure out your cost structure. Get the break-even point (i.e. how much you need to price the product at for there for be 0 profit per item sold). Then, charge a % margin on top (normally 10-20%)

---------------------------------------------------

What's the step-by-step logic in pricing?

Question #1: Are there competitors (or is this a new market)?

Q1A: If yes, can I differentiate my product?

If yes, value-based

If no, competitor pricing/benchmarking is eliminated.

Q1B: If no, can I determine the value-add of my product (i.e. if saves x costs or a survey says people will pay x)?

If yes, value-based

If no, cost-based

Summary: If you can, you always want to do value-based. This is the most effective form of pricing. If you have "something" to go off of, you use it, else you use cost-based because you have no other choice.

Value-based occurs if:

1) You are a monopoly

2) You are the first entrant into a market

3) You can differentiate your product from other (I.e. monopolistic competition)

HOW DO I MARKET SIZE?

Remember that there's rarely a "best" answer with market sizing. What's important is that you break down the problem the way it makes sense to you. Importantly, break it down so that the assumptions you make are the ones you're most comfortable in.

For example, do you know all the major brands? Great go with that. Do you understand all the segments of that country's population (either age or wealth or job breakdown)? Go with that. Do you know the total market size of a similar industry? Then break it down that way.

Hi there,

That's because these aren't priving questions...they're market sizing questions :)

Now, I'm going to answer your two seperate questions.

HOW DO I PRICE?

1. Value-based or Willingness to Pay

When: This is your top choice.

How: Find a $ value for what customers would pay. This is normally adding the revenue increase and/or cost reduction that your customers get by buying your product/service. If it's more of a utility/happiness product, then customer surveys of product comparisons serve well as well.

Then, charge a discounted amount of that WTP, based on your eagerness/desire to capture market share.

2. Benchmarking

When: This is what you have to do if there's competition

How: See what price your competition charges!

3. Cost-based

When: This is what you do if you can't benchmark (i.e. no competition) AND you can't get a gauge on WTP.

How: Figure out your cost structure. Get the break-even point (i.e. how much you need to price the product at for there for be 0 profit per item sold). Then, charge a % margin on top (normally 10-20%)

---------------------------------------------------

What's the step-by-step logic in pricing?

Question #1: Are there competitors (or is this a new market)?

Q1A: If yes, can I differentiate my product?

If yes, value-based

If no, competitor pricing/benchmarking is eliminated.

Q1B: If no, can I determine the value-add of my product (i.e. if saves x costs or a survey says people will pay x)?

If yes, value-based

If no, cost-based

Summary: If you can, you always want to do value-based. This is the most effective form of pricing. If you have "something" to go off of, you use it, else you use cost-based because you have no other choice.

Value-based occurs if:

1) You are a monopoly

2) You are the first entrant into a market

3) You can differentiate your product from other (I.e. monopolistic competition)

HOW DO I MARKET SIZE?

Remember that there's rarely a "best" answer with market sizing. What's important is that you break down the problem the way it makes sense to you. Importantly, break it down so that the assumptions you make are the ones you're most comfortable in.

For example, do you know all the major brands? Great go with that. Do you understand all the segments of that country's population (either age or wealth or job breakdown)? Go with that. Do you know the total market size of a similar industry? Then break it down that way.

Coaching mit Francesco vereinbaren

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Hi there,

Good question. For questions such as “How much would you pay for XYZ?”, where XYZ is a product that can generate revenues directly for the buyer (eg Eiffel Tower, Golden Gate, satellites), you normally use valuation methods.

You will almost always have to use a DCF of the estimated cash flow (normally simplified with profit) of the object.

Revenues from the cash flow/profit equation depend on the object itself. If the revenue streams are not obvious (eg satellite) you can clarify with the interviewer.

Examples:

  • Golden Gate ➜ Fees paid by vehicles to use it
  • Satellite ➜ Revenues from sales of data provided by satellite
  • Eiffel Tower ➜ Direct tickets and additional tourism attracted thanks to the Tower

Alternatively, you may use the other valuation methods. But they don’t work well for very unique assets without real comparables (eg Eiffel Tower):

  • Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
  • Computation from asset value – identify the equity value as the fair value of total assets minus net debt. This is normally going to give you the minimum price you could pay for the object, as it is considering the assets in isolation

The other pricing strategy you mentioned (cost-based, value-based, competitor-based) is normally used instead when you have to define the price of products that can’t generate revenues directly for the buyer (eg a new pesticide or headache pill bought by the final customer).

Hope this helps,

Francesco

Hi there,

Good question. For questions such as “How much would you pay for XYZ?”, where XYZ is a product that can generate revenues directly for the buyer (eg Eiffel Tower, Golden Gate, satellites), you normally use valuation methods.

You will almost always have to use a DCF of the estimated cash flow (normally simplified with profit) of the object.

Revenues from the cash flow/profit equation depend on the object itself. If the revenue streams are not obvious (eg satellite) you can clarify with the interviewer.

Examples:

  • Golden Gate ➜ Fees paid by vehicles to use it
  • Satellite ➜ Revenues from sales of data provided by satellite
  • Eiffel Tower ➜ Direct tickets and additional tourism attracted thanks to the Tower

Alternatively, you may use the other valuation methods. But they don’t work well for very unique assets without real comparables (eg Eiffel Tower):

  • Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
  • Computation from asset value – identify the equity value as the fair value of total assets minus net debt. This is normally going to give you the minimum price you could pay for the object, as it is considering the assets in isolation

The other pricing strategy you mentioned (cost-based, value-based, competitor-based) is normally used instead when you have to define the price of products that can’t generate revenues directly for the buyer (eg a new pesticide or headache pill bought by the final customer).

Hope this helps,

Francesco

Coaching mit Clara vereinbaren

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Hello!

These are totally not pricing, but brain teasers-market sizing!

For sure the 2nd option is not going to get you further, since honestly, how do you do cash flows with the E. Tower? ;)

You can try to start taking the classical pricing case resolutions as a starting point:

  • Willingness to pay
  • Benchmark -most of the times won´t work, since things that are going to be asked are too specific and you cannot compare them with others
  • Break even - same as above

Hope it helps!

Cheers,

Clara

Hello!

These are totally not pricing, but brain teasers-market sizing!

For sure the 2nd option is not going to get you further, since honestly, how do you do cash flows with the E. Tower? ;)

You can try to start taking the classical pricing case resolutions as a starting point:

  • Willingness to pay
  • Benchmark -most of the times won´t work, since things that are going to be asked are too specific and you cannot compare them with others
  • Break even - same as above

Hope it helps!

Cheers,

Clara

Coaching mit Henning vereinbaren

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These questions are not about getting to the right answer - that doesn't exist. But they are about the structured and creative approach. So if you have a good rationale for why you're doing so, you can apply every method you can think of.

These questions are not about getting to the right answer - that doesn't exist. But they are about the structured and creative approach. So if you have a good rationale for why you're doing so, you can apply every method you can think of.

Coaching mit Raj vereinbaren

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169 USD / Coaching

Like Clara mentioned these are fundamentally market sizing questions rather than valuation questions.

You need to think about deriving value from first principles - # of users and WTP.

Think top-line

Like Clara mentioned these are fundamentally market sizing questions rather than valuation questions.

You need to think about deriving value from first principles - # of users and WTP.

Think top-line

Coaching mit Denis vereinbaren

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The method itself is not that important - they all have one thing in common, that is trying to figure out the (intrinsic) value of an asset. In the case of the Eiffel Tower, that could be DCF (expected future cash flows - tbh for consulting totally sufficient), or sort of more rough and basic opp cost (e.g. raw material weight x iron price etc). Cash-based methods more preferred of course. However, if data / approach not feasible, get creative.

The method itself is not that important - they all have one thing in common, that is trying to figure out the (intrinsic) value of an asset. In the case of the Eiffel Tower, that could be DCF (expected future cash flows - tbh for consulting totally sufficient), or sort of more rough and basic opp cost (e.g. raw material weight x iron price etc). Cash-based methods more preferred of course. However, if data / approach not feasible, get creative.

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