Create an account and get free access to 50+ articles.
Sign up for free >>

BootCamp Articles

Articles read: 0/52

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 This strategy is now considered outdated.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.

Takeaways

  • 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).

Interested in facing pricing issues? Crack our Shaving & Co. or Bank envelope cases

4 Comment(s)
October 25, 2018 06:39 pm -
Bruno

Hello and thank you for the article. When trying to estimate the customer's willingness to pay in a 'value-based pricing' strategy, what tools should be used to avoid being excessively hypothetical/not based on facts? Thank you!

January 07, 2016 08:12 am -
Faisal

really helpful information and I will definitely go for combination of competitive pricing and price-based costing for my business: http://destinyseo.com

October 20, 2014 08:57 pm -
ritika

Jones, thanks for asking the question. Yes, price-based costing also known as value-based pricing are synonymous. Either one can be used. For further clarification, we have now also included the term "value-based pricing" as well :)

October 20, 2014 07:55 pm -
Hugo

Hi! “Price-Based Costing” should be "Value-Based Pricing", right?

Related consulting question(s)
Best answer so far:
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

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... (more)

Best answer so far out of 2 answers:
ex-Manager - Natural and challenging teacher - Taylor case solving, no framework

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... (more)

Best answer so far out of 2 answers:
Dorothea
Expert
Ex-Oliver Wyman with 100% interview success rate - specialized in female career coaching

Hi Brinja, please find my answer below: When applying a competitor-based approach, the main question is: „How much do customers pay for comparable products of competitors or substitutes?“... (more)

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... (more)

Best answer so far out of 2 answers:
Sidi
Expert
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 50+ candidates secure MBB offers

Hi Anonymous, cost based pricing relies on having a reference regarding the margin that you add to the production cost of your good or service. Such a reference margin does only exist if you are deal... (more)

Related case(s)

Bank envelope

Solved 36.2k times
4.4 5 1306
| Rating: (4.4 / 5.0) |

Your client, Customlope, is the leader in the US secure envelope manufacturing industry. Banks buy these envelopes for operations such as money deposits and high value transactions. Next year, a new digital technology will reduce the overall number of units sold in the industry by 25%. In the ... Open whole case

Fysikum

Solved 27.7k times
4.4 5 1654
| Rating: (4.4 / 5.0) |

Your client, Fysikum, is an operator of squash centres in Sweden. The squash centres include sauna, spa, pool, gym and of course the squash courts. Due to the extreme success in Sweden the company is considering expanding to other countries of Europe, in particular Germany. Therefore they asked u ... Open whole case

Shaving & Co

Solved 25.3k times
4.3 5 1038
| Rating: (4.3 / 5.0) |

Our client is an international CPG (consumer packaged goods) firm called Bryan, with multiple business units (toothpaste, batteries, skin & body care, among others). They are the global market leader in every market they play in except for the hair removal market. They came to ... Open whole case

In-flight Broadband

Solved 13.1k times
4.3 5 490
| Rating: (4.3 / 5.0) |

Our client is a startup that can deliver broadband internet aboard commercial flights.The company owns a patent on a necessary technology. They want to know whether their current business model is valid. Open whole case

Wall Inc.

Solved 7.7k times
4.3 5 239
| Rating: (4.3 / 5.0) |

Your client, Wall Inc., is a dry wall manufacturer. A new competitor has just entered the market. Since the competitor charges low price company, Wall Inc. is thinking about reducing its price by 20%. The client wants us to evaluate this plan. Open whole case