Pricing

Pricing plays a crucial role in a company's profitability as it directly contributes to it. For this reason, establishing optimal prices for products or services is of great importance. Business consultants therefore assist their clients in developing pricing strategies.

A case study on pricing is an analysis focusing on the pricing of a product or service. It can stand alone or be part of a broader case, such as entering a new market.

Three Steps to Approach A Pricing Case

In a case interview, you can approach this case type in three steps:
 

1. Investigate the Company

At the outset of your case, you should gain a solid understanding of your client's business model.

• 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? Make sure to clarify the objective before starting the analysis.
   

2. Investigate the Product

After familiarizing yourself with the company's business model, it's time to learn more about the product. When examining the product, it's important to pay attention to the following aspects:

• Product differentiation: Analyze how the client's product differs from those of competitors. Explore not only the product's features but also its production processes and methods.
• Unique Selling Proposition (USP): Identify the unique selling point of the product. What makes it unique and attractive to potential customers?
• Alternatives and substitutes: Consider alternative or substitute products in the market as well. How do they compare to the client's product?
• Product lifecycle: Determine the stage of the product lifecycle. This can influence the pricing and marketing strategy.
• Predictability of supply and demand: Examine whether supply and demand for the product are predictable. This can help assess risks in pricing and take appropriate measures.

Once you've thoroughly assessed these aspects, you'll have a clearer understanding of the product and its positioning in the market, which will inform your pricing strategy recommendations.
 

3. Choose a Pricing Strategy

The choice of strategy depends on the information gathered in the first two steps. There are three important pricing strategies:

Competitor-Based Pricing

With this strategy, also known as 'benchmarking', the price is determined based on the prices set by our competitors. So, you want to find out:

• Are there comparable products/services?
• If yes, how do they compare to the client's product?
• What are their prices? Important: Keep in mind that competitors are likely to adjust their prices once the client introduces their product.

Cost-Based Pricing

With cost-based pricing, the price of a product or service is set based on the accumulated item costs (break-even) plus a reasonable profit margin. This strategy varies by industry due to different cost structures and margins. Therefore, it's important to understand the specific customer costs before setting a price (taking into account fixed and variable costs).

Although cost-based pricing offers a simple and transparent method, it does not consider the perceived value of the product or service to customers and may be less effective in certain markets. To determine customer willingness to pay, it's important to consider this and possibly break down the price into different components, such as a separate price for the product and delivery costs.

Value-Based Pricing

Value-based pricing is a strategic approach based on assessing the customer's perception of the product or the amount customers are willing to pay. Different customer segments may have different willingness to pay. This means that companies can set different prices for different customer segments by adjusting the perceived value to justify price changes.

A good example of this is the iPhone, a highly differentiated product for which customers are often willing to pay significantly more than the pure costs plus a "typical" margin. This illustrates how customers are inclined to accept a higher price for products they perceive as particularly valuable or differentiated.
 

Key Takeaways

From what we've learned previously, we can now extract the following insights as key takeaways:

• There are three key pricing strategies: Competitor-based pricing, cost-based pricing, and value-based pricing. Cost-based pricing alone is sometimes considered insufficient.
• Understand the primary objective of the company (profit, market share, growth, brand positioning) as the basis for the pricing strategy.
• Know the business model, products/services, and market position of the company and consider it in your strategic approach.
• Understand the customers' willingness to pay and needs, and adjust the pricing strategy to customer preferences and market conditions.