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Value-based pricing = Cost savings + Revenue gain

Talisa Lim asked on Apr 28, 2019

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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Sidi replied on Apr 30, 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 80+ candidates secure MBB offers
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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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