Value-based pricing = Cost savings + Revenue gain

Case Interview Pricing case study
Recent activity on Apr 30, 2019
1 Answer
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Nina
Proficient
asked on Apr 28, 2019
Dartmouth Tuck student prepping case interviews (done 25+)

Hello,

I received a case at Roland Berger - launching new coffee machine where customer can just send the order via app directly to machine. How to price this new product?

I went with value-based pricicing = WTP of customer = Cost savings + Revenue gain (over lifespan of machine - 2 years).

1. Cost savings = (reduced labour + reduced material wastage) = $200/day

2. Revenue gain = increased efficiency so cafes at 100% capacity can serve more = +$5.4k/day (seems incredibly large but she said its ok)

So WTP = 365 X 2 X ($5.4k + 200) plus old price of coffee machine.

Came up to almost $4m, which is crazy high?

Interviewer kept nodding her head and said she loved my case but didn't pass me in the end. Possible bc I didnt do well for the second interviewer.

Is this method right? Usually I see WTP as cost savings. Should it be additional profit or additional revenue....

Thanks.

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Best answer
Sidi
Expert
replied on Apr 30, 2019
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi!

WTP is derived from the additional value that the product generates for the user. This additional value consists of the sum of additional revenue and cost savings + any "intangible" benefits that might play a role (e.g., better comfort/usability - although one might argue that this can/should also be quantified and enter either the revenue or the cost side).

Cheers, Sidi

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Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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