What are the most appropriate frameworks for pricing cases?

Dear [],

I would say your understanding is not as limited as you think!

What you have described are great starting points to rationalising pricing strategies. But I think you could push yourself harder on this one. Don't memorise 'scenario templates' when you go into these conversations. Picture yourself in an actual interview where pricing strategy comes up, and your interviewer asks you what factors might a company consider when approaching pricing strategy.

You mention all three of those listed above, and the consultant asks the dreaded 'What else?'

Be robust! :-)

What are other factors that could lead us to consider pricing strategy:

1) Is there an internal price bundling strategy that might drive new demand for an existing product line?

For example: if we reduce the cost of our cable TV subscriptions by 10%, it might cause a 15% jump in demand for our internet services...

2) Is there a product placement strategy to drive customer traffic regardless of price margin?

For example: if we place small shower gel bottles at cost-price to be visible to external traffic in our mall locations, it might increase internal traffic by x%, and drive sales by y% would which then cost net margins to rise by z%.

3) Is there a customer segmentation strategy to boost the attractiveness of a mass market product to upmarket customers?

For example: if I sell Cider at the corner Bodega for $12, shouldn't I add a considerable mark-up to sell the exact same Cider at duty-free to widen the net to affluent customers who equate price with prestige? $21.50 a bottle, anyone?

4) Is there a sales strategy to maximise sales of units in inventory whose production has been discontinued?

For example: we no longer manufacture the pocketless gymn shorts of which our inventory remains robust. What is the right off-load price to maximise profit without diminishing the brand?

5) Is there a social pressure factor to be aware of as we price our patented products with an aim to quickly re-couping sunk R&D?

For example: should Martin Shkreli really have hiked the price of Daraprim so exponentially? Was there not a compromise between what the public would have accepted and what would still have represented a healthy profit margin?

Of course, I presented the above, in somewhat haphazard fashion, to illustrate the depth of strategies one could consider in a broad array of scenarios.

It is by no means an ordered, or exhaustive list!

In this case, I'm challenging you to think beyond finite lists. What would make the above answer even punchier is to think of categories of strategies (which you began in your original question, well done), try to establish a MECE list of those strategies, and then assigm some of the ideas I mentioned above (and more of your own, of course!) to really do this question further justice.

I trust others will add to this conversation so you may have a well-rounded perspective.

Hi Brinja,

please find my answer below:

1. When applying a competitor-based approach, the main question is: „How much do customers pay for comparable products of competitors or substitutes?“
   • You base your prices on the costs for comparable products produced by competitors. If no comparable product is available (e.g. as it is the case with the anti-smoking pill), you would investigate the pricing of substitutes (in this e.g. case anti-smoking patches).
   • Your reasoning here is that your product is of equal value to the customer as are those of competitors and the customers is likely to switch to a different product if there is a huge price difference (it is not really that different if you take a pill each day or put on an anti-smoking patch, is it?). Of course you would need to take into consideration customers’ total spend (e.g. it takes 30 days to quit smoking if you use anti-smoking patches, and only 15 days when using pills)
2. When applying a value-based approach, you approach the issue from the customer-side: "How much would the customer would be willing to pay for my product?" If your anti-smoking pill has a much stronger effect than an anti-smoking patch has when it comes to the rate of relapse (e.g. you are a bit more likely to quit smoking for ever than when using an anti-smoking patch), customers are very likely to pay a higher price for your product. Here, your product is of higher value than are those of competitors. A typical example for applying the value-based approach is the iPhone - from a performance perspective, iPhones are not that different from Samsung phones, however, the iPhone is often bought because people think it is cooler than a Samsung (this is its unique value).
3. For the cost-based approach, the question is: "How much does my product cost in production and what margin do I want to apply?" You would consider all costs that occur during production and apply a margin. Here it is important, that you want to make sure that you 1. cover all your costs and 2. ensure that you earn something on top. You may choose whether you allocate your R&D costs to the cost-base or whether you cover them using your margin and accordingly apply a higher margin. In reality, this approach is used very rarely because it is rather theoretical and neither takes into account the competitor nor the customer perspective.

Hope this helps!

Hi,

In addition to Vlad answer which is very complete, I would advise to first clarify weither it's a B2C or B2B case.

In the latter, the same product may be sold at different price depending on customers /industry targetted, and you would have at some to consider this in your approach.

Best
Benjamin

Hello Gauthier,

I would approach any pricing question as narrowing down from certain starting points:

1- Highest price - Customer's willingness to Pay

2- Lowest price - Cost of producing the product

After having this range in mind, we need to further narrow it down. This can be done by:

3- Internal factors:

a. Price of other products in the company's portfolio - there should be an alignment between the company's existing and future intended pricing policy i.e. selling at value vs selling at high markups

b. How much money does the company want to make from this product

4- External factors

a. Competitor's prices

b. Industry price trends

All the best!

Rushabh

Hi!

To add on top of previous comments, in a nutshell: Break-even, benchmarking and willingness to pay calculation.

Cheers,

Clara

Just to add, I think a really key part of pricing cases is thinking about the objective and strategy of the company when setting prices.

Cost and value based pricing are fine, but where are you going to price between them? You need to know what you are aiming for.

Value based pricing

Vlad has outlined the overall approach to pricing in his answer, I want to focus a little more on one aspect - value based pricing. This is the one that is key to most pricing based cases you will come across whether in an interview or in an actual live case.

Value based pricing is based on the principle that the best way to price a product (i.e. where the marginal utility derived from consuming a product is equal to the marginal cost of producing it) is to price it at the highest willingness to pay. It is worth noting that this willingness to pay differs across users and in an ideal world, you would charge each consumer the price they want to pay (the most common example of this being pricing in airlines - basic economy, economy, economy plus, business and first class).

When solving cases related to optimally pricing a product, you will often have to think of ways to come up with prices for a product. Below are some common ways to do so

1. If the product is similar to ones in the market you will have to look at how competitors are priced
2. If it has improvements/relevant differences (say a drug with better targeting mechanisms than current drugs) then some things to look at are
   1. Scope of improvement - for example if instead of 3 injections a month you ony need to take one injection every month you can price the drug at at least 3x price of current drug in the market
   2. Willingness to pay - this can be judged through surveys, A/B testing, pricing the value to the customer (e.g., If it saves 5 hours, you can assume that each hour is worth at least say $30 and 5 hours $150, etc.
3. If the product is completely new (e.g., immunotherapy in cancer, iPhone when it launched etc.) you can look at:
   1. How did previous industries think about price disruptions when they first launched
   2. Do you want access to all or few core clients. e.g., a digital platform like facebook first needs scale and relevance before becoming a key product and so is free to start, something like a tesla may prefer a wow factor and is priced accordingly. All of these are industry and product specific
   3. Barriers to entry - how difficult is it for others to enter by copying your product/do you have an IP. The easier it is the closer you have to price to the cost of making it
   4. How will you price differentiate if it is relevant (e.g., launching google pixel 3 and google pixel 3a with less premium features)

As you can see there are many elements to a pricing case, so it is helpful to read up on the theory and research cases that have looked at pricing, especially from a value base pricing perspective

Udayan

There are two more things when you work on pricing strategy, they are market positioning and value creation.

1. Market Positioning: Market Positioning is setting your target customer, focussing exclusively on the target customers and hyper customization for particular customer needs is very much important. It is your wish to decide weather you are offering a premium high end-low volume product or low end-high volume product.

2. Value creation is very much important for lasting in the game. Value creation gives utmost satisfaction for the customers. Value of the commodity and cost effectiveness goes hand in hand.