Customised Pricing Structure

pricing
New answer on Nov 30, 2021
6 Answers
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Anonymous A asked on Nov 21, 2021

Hi All,

when asked to price a product/asset I find difficult to customise the structure. See the 2 questions below:

  1. Your Client wants to partecipate to a bid for the management of a dump. How much should he offer?
  2. Your Client wants to sell his parking garage in the center of Big City X. How much should be the price?

I know that there are 3 different pricing strategies (benchmarking/cost-based/value-based) but how would the structure differ in the examples above?

Thanks

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Francesco
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replied on Nov 22, 2021
#1 Coach for Sessions (4.000+) | 1.400+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 9Y+ Coaching

Hi there,

For questions like “How much would you pay for XYZ?”, where XYZ is a product that can generate revenues directly for the buyer (eg dump, parking garage), 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.

The revenues from the cash flow/profit equation depend on the object itself. If the revenue streams are not obvious you can clarify with the interviewer.

Examples of possible revenue streams:

  • Dump ➜ Regulated payment from the government.
  • Parking Garage ➜ Fees for using the garage.

If you have to estimate a bid price like for the dump, given this method will give you the maximum amount you may be able to pay, you could consider to:

  • Bid a lower amount so that you will receive a return of investment comparable to the opportunity cost you may have (eg 10%).
  • Try to estimate the possible bids of competitors (very difficult).

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

  • 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 strategies you mentioned (cost-based, value-based, competitor-based) are 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

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Pedro
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replied on Nov 22, 2021
Bain | EY-Parthenon | Roland Berger | FIT | Market Sizing | Former Head Recruiter

None of those are really pricing cases. They're about how much is something worth.

1. For the first case:

  • You need to figure out how much profit they can make from the dump, and what's the minimum profit you accept in the deal (the difference is the max you would be willing to pay.
  • Then you need to look into your competition, and understand how much they could be willing to pay, and if there is something that makes the deal more valuable to you than to them.
  • Finally, you can build a probability tree to see what is the bid that would maximize value (this is one option, there are other possibilities).

2. This is how I would approach it. Considering this is a large parking lot and the buyers would be investors:

  • Assess how much profit it makes (or even better, how much profit it could make if being well managed). There's a lot of detail that could and should go into this, but I'll keep it at the high level.
  • Look into multiples for similar transactions in the area. And adjust considering the difference in value/risk of the clients' parking lot.
  • Also consider price trends or anything that may impact the value of the lot, i.e. price per hour and occupancy rates (e.g. new parking lots being built, change in car usage trends, etc.)

Hope this helps!

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Hagen
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updated an answer on Nov 22, 2021
Current Bain & Company Project Leader and interviewer | 250+ interviews conducted | 6+ years of coaching and mentoring

Hi there,

This is indeed an interesting question which is probably relevant for quite a lot of users, so I am happy to provide my perspective on it:

  • First of all, I would not consider “pricing” the right word for it. It rather is a M&A question (i.e. “Should you buy - yes/ no?") since you will need to assess whether the bidding/ offer price is justified or not.
  • Generally speaking, I would advise you to approach the question in the following way: 1) (Optionally) conduct a broad, superficial assessment whether the industry and player make any sense to have a look into (e.g. airlines during COVID-19 crisis), 2) Assess the fair value of the target, 3) (Optionally) Assess the fair value of target when you will re-sell it, 4) Put the financial result into context.
  • The main component of the case study will be the assessment of the fair value of the target, to be precise, assess yearly profits as key input variable. Contradictory to what other coaches said, it is highly unlikely you will need to do so using a (simplified) DCF method. Instead, you will most likly need to assess the fair value of the target using trading/ transaction multiples or consider it a perpetuity.

In case you want a more detailed discussion on how to solve any type of case study in a customized yet thought-through way, please feel free to contact me directly.

I hope this helps,

Hagen

(edited)

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Anonymous B on Nov 22, 2021

I didn’t get your last point. A perpetuity is a simplified DCF, why are you considering it differently?

Hagen on Nov 28, 2021

Sure thing, happy to clarify. A proper DCF would be one where you calculate the discounted cashflows for every year (without terminal value), the simplified version would be with terminal value. In the end, all valuation methods are more simple/ complex versions of one another.

Ian
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replied on Nov 21, 2021
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

Neither of these are really pricing! Pricing is normally in regards to a product with multiple sales. Here, you're just figuring out the price of a single thing.

For #1, you need to figure out the value/cost of the dump management. Determine how much it will cost the company, what ROI is needed, and what other projects exist (i.e. can we afford to lose this). Then, determine probabilities of winning the contract based on price.

For #2, this is a bit more like pricing, and you would go with WTP (try to measure the inherent value of the lot) or benchmarking (see what other garages in the area have sold for).

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Marco-Alexander
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updated an answer on Nov 30, 2021
Former BCG | Case author for efellows book | Experience in 6 consultancies (Stern Stewart, Capgemini, KPMG, VW Con., Hor

(edited)

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Clara
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replied on Nov 24, 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

To add on top of what has been said before, in pricing cases you 

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Francesco gave the best answer

Francesco

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