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Pricing Strategy

Anonymous A

Hello,

With my limited understanding, there are around 3 ways to work on pricing strategy cases, 1) Competiton bench marking , 2) market willingness to pay; 3) cost effective.

However these sound quite general and not sure whether there are any additional ways to better tailor a pricing strategy cases?

Thank you.

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Tyrion Lannister replied on 07/14/2018

Dear [],

I would say your understanding is not as limited as you think!

What you have described are great starting points to rationalising pricing strategies. But I think you could push yourself harder on this one. Don't memorise 'scenario templates' when you go into these conversations. Picture yourself in an actual interview where pricing strategy comes up, and your interviewer asks you what factors might a company consider when approaching pricing strategy.

You mention all three of those listed above, and the consultant asks the dreaded 'What else?'

Be robust! :-)

What are other factors that could lead us to consider pricing strategy:

1) Is there an internal price bundling strategy that might drive new demand for an existing product line?

For example: if we reduce the cost of our cable TV subscriptions by 10%, it might cause a 15% jump in demand for our internet services...

2) Is there a product placement strategy to drive customer traffic regardless of price margin?

For example: if we place small shower gel bottles at cost-price to be visible to external traffic in our mall locations, it might increase internal traffic by x%, and drive sales by y% would which then cost net margins to rise by z%.

3) Is there a customer segmentation strategy to boost the attractiveness of a mass market product to upmarket customers?

For example: if I sell Cider at the corner Bodega for $12, shouldn't I add a considerable mark-up to sell the exact same Cider at duty-free to widen the net to affluent customers who equate price with prestige? $21.50 a bottle, anyone?

4) Is there a sales strategy to maximise sales of units in inventory whose production has been discontinued?

For example: we no longer manufacture the pocketless gymn shorts of which our inventory remains robust. What is the right off-load price to maximise profit without diminishing the brand?

5) Is there a social pressure factor to be aware of as we price our patented products with an aim to quickly re-couping sunk R&D?

For example: should Martin Shkreli really have hiked the price of Daraprim so exponentially? Was there not a compromise between what the public would have accepted and what would still have represented a healthy profit margin?

Of course, I presented the above, in somewhat haphazard fashion, to illustrate the depth of strategies one could consider in a broad array of scenarios.

It is by no means an ordered, or exhaustive list!

In this case, I'm challenging you to think beyond finite lists. What would make the above answer even punchier is to think of categories of strategies (which you began in your original question, well done), try to establish a MECE list of those strategies, and then assigm some of the ideas I mentioned above (and more of your own, of course!) to really do this question further justice.

I trust others will add to this conversation so you may have a well-rounded perspective.

Vlad replied on 07/14/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

I would look at the following areas:

1. Costs - you actually check what are the costs and apply standard industry / target markup. You need to take into account R&D and capital costs if the case (interviewer) specifically states that. Also, the availability of patent is important, since the whole point of it is to protect your price and achieve ROI on the whole R&D pipeline of drugs (including the ones that were not launched / approved)

2. Competitors - basically it's simply benchmarking against competitors with a similar product. Make sure you take into account the segment (i.e. in premium higher price may be the proxy for quality). Since the value proposition of the competitors may be different, competitor pricing is just one of the metrics that you should take into account

3. Value-based pricing can be done in 2 ways:

  • For existing products, you identify what it the economic value and perceived value for the customer. Also, you compare the value proposition and features of your product vs. the VP of your competitors. If you have a significant difference in value prop - you have to define how much value you propose to the customer in $ terms. (e.g. your product may have additional customer support, better packaging, additional features and thus should be priced hire. Or it should be priced the same and you will win the market share due to these differences)
  • For the new products, you can calculate the closest alternatives and think how much additional value we provide by replacing them. Think of the discount airlines compared to trains or buses

4. Pricing strategy - here you define how you will price the product taking into account 1,2,3 and your company strategy. Maybe you decide to have a zero margin if you can crossell other services. Or maybe you would like to subsidize to win the competition. Also, think of price differentiation and having different pricing tiers (e.g. basic, premium or even freemium) and how it helps to drive price perception and fulfill strategic goals

Good luck!

Anonymous B replied on 07/18/2018

There are two more things when you work on pricing strategy, they are market positioning and value creation.

1. Market Positioning: Market Positioning is setting your target customer, focussing exclusively on the target customers and hyper customization for particular customer needs is very much important. It is your wish to decide weather you are offering a premium high end-low volume product or low end-high volume product.

2. Value creation is very much important for lasting in the game. Value creation gives utmost satisfaction for the customers. Value of the commodity and cost effectiveness goes hand in hand.

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