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how to choose between 3 pricing strategies

pricing
New answer on Aug 31, 2020
5 Answers
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Anonymous A asked on Aug 23, 2020

I know the three pricing strategies: value based, cost based, competitor pricing. But, how do I determine which strategy to use in a case? Is there a specific info I should look for that implies I should use one strategy over other?

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Ian
Expert
Content Creator
replied on Aug 23, 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Great question!

Question #1: Are there competitors (or is this a new market)?

Q1A: If yes, can I differentiate my product?

If yes, value-based

If no, competitor pricing/benchmarking is eliminated.

Q1B: If no, can I determine the value-add of my product (i.e. if saves x costs or a survey says people will pay x)?

If yes, value-based

If no, cost-based

Summary: If you can, you always want to do value-based. This is the most effective form of pricing. If you have "something" to go off of, you use it, else you use cost-based because you have no other choice.

Value-based occurs if:

1) You are a monopoly

2) You are the first entrant into a market

3) You can differentiate your product from other (I.e. monopolistic competition)

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Anna on Dec 23, 2020

If I cannot determine the value of my product, why would I do cost-based (Q1B,"if no")?

Ian on Dec 30, 2020

That's literally the last option left! There's no competition to reference, and I don't know what people are willing to pay...I have to go off of what it costs...

Sidi
Expert
replied on Aug 23, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi Anonymous,

very good question.

Adam is right in that the objective of the client should be the starting point of all considerations. However the exampes provided do not make too much sense: since thr pricing strategy does not influence the cost structure, there is no difference between the two options outlined. A price which maximizes revenue will automatically also maximize profits!

However, Adam's principle approach is correct! The objective may determine the pricing strategy. If your objective is not profit maximization, but e.g. to penetrate the market as quickly as possible, while avoiding losses, then you should adopt cost-based pricing.

Moreover, the context mostly plays a major role: if the focal product is an innovation (which is usually the case in pricing questions, then Benchmark Pricing or Cost-Plus Pricing do not make much sense, since you don't have a point of reference! This leaves you with value-based Pricing, which usually is the way to go in consulting case interviews.

An frankly speaking - from the interviewer's perspective, value-based pricing usually is the only option that leads to an interesting case study. The other two options are trivial - then the case would be over within 3 minutes if the candidate is strong! ;)

Cheers, Sidi

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Clara
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Content Creator
replied on Aug 24, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Precisely this is the difference between a good case and an excellent one.

Depending on how the case is prompted, the best way to go is precisely laying off the different options, explaning pros and cons of each of them -totally tailored to the industry- and touching base with the client (interviewer) again to see which one fits best.

Hope it helps!

Cheers,

Clara

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Adam replied on Aug 23, 2020

How I would tackle this is link it to the objective of the client (which should be asked for in the beginning).

Say the objective is profits --> Choose the pricing strategy that gives the client the highest profits.

Say the objective is revenue growth --> Choose the pricing strategy that gives the client the highest revenues.

Etc.

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Antonello
Expert
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replied on Aug 31, 2020
McKinsey | NASA | top 10 FT MBA professor for consulting interviews | 6+ years of coaching

Hi, it depends on the objectives of the case and the priorities of the client

Best,
Antonello

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Ian gave the best answer

Ian

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