A pricing case study can be either a stand-alone or part of a broader case like 'entering a new market'
In a case interview, you can approach this type of case in three steps:
1. Investigate the company.
2. Investigate the product.
3. Choose a pricing strategy (options discussed in the following paragraphs) based on your investigation.
1. Investigate the company
Get a feeling for the business of the company:
- 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? Competitive response? Make sure to clarify the objective before starting the analysis.
2. Investigate the product
- How does the client’s product differ from competition? How does the production differ? What is its Unique Selling Point (USP)?
- What are the alternatives or substitute products?
- At what stage of the product lifecycle is the product?
- Are the supply and demand foreseeable?
3. Choose a pricing strategy
The choice of a strategy depends on the information gathered in the first two steps. There are three major pricing strategies:
(1) Competitive analysis (benchmarking): In this strategy, the price is based on the price our competitors charges. Therefore, you want to investigate:
- Are there comparable products/services?
- If yes, how do they compare to the client’s product?
- How are they priced? Important: Keep in mind that competitors will likely change their prices once the client introduces its product.
(2) Cost-based pricing: This strategy bases the price on the cumulated costs per item (break-even) plus a profit margin. Therefore, you need to know the client's cost structure. This strategy is now considered outdated. However, it is important to know the client's cost structure before choosing a price.
(3) Price-based costing (or value-based pricing): This strategy is based on determining the "value" of the client's product or the amount customers are willing to pay. This approach is similar to competitive analysis in that you can generally determine customers’ willingness to pay from prices of different substitutes. Keep in mind that different customer segments may have a different willingness to pay for the client's products, implying that the client could charge different prices to different customer segments by changing the "value added" to justify the changes in prices.
It is important to know the three strategies mentioned above and know that while knowing costs of the product is important, cost-based pricing is generally seen as ineffective and obsolete.
While it may make sense to strive for a certain profit margin, the product simply might not sell because the customer may be unwilling to pay that price. Thus, make sure to investigate customers' willingness to pay. Furthermore, consider breaking the price into various parts. For instance, you could charge a certain price for the product and charge separate delivery costs.
On the other hand, sometimes customers might be willing to pay a lot more for a product than its costs plus a 'usual' margin. Think about highly differentiated products such as iPhones.
- There are three main pricing strategies: Competitive analysis, Cost-based pricing and Price-based costing.
- Cost-based pricing by itself is largely seen as insufficient.
- Make sure to investigate what the customer is willing to pay before pricing the product (Price-based costing).