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What are the most appropriate frameworks for pricing cases?

Case Case Interview Framework McKinsey pricing pricing strategy profitability
New answer on Nov 10, 2023
11 Answers
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Gauthier asked on Jul 20, 2017

Hi,

I'm struggling with finding clever ways of approaching pricing cases.

I typically use the classic P=R-C, but I find it hard to use that when the competition and/or seasonality is an issue.

Do you know any good framework for pricing cases?

Thanks!

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Vlad
Expert
replied on Jul 21, 2017
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

The general framework for pricing is: Cost base - Value based - Competitor based - pricing strategy

1. Cost based - you actually check what are the costs and apply standard industry / target markup

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

  • For existing products 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.
  • For new products you have to calculate the value of the closest alternatives and think how much additional value we provide by replacing them. Think of the discount airlines compared to trains or buses

3. Competitor based pricing - basically it's benchmarking against competitors. Make sure you take into account the segment (i.e. in premium higher price may be the proxy for quality)

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 fremium) and how it helps to drive price perception and fulfill strategic goals

Good luck!

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Gauthier on Jul 21, 2017

Thanks Vlad, very helpful!

Ray on Sep 19, 2017

Hi Vlad, I just want to ask you what the difference would be regarding point 2 - value-based and point 3 - competitor? It seems like you're comparing with competitors' products and/or substitutes for both options. Thanks

Grace on Jun 11, 2019

I think the point 2 focuses on customers' WTP (willingness to pay). Figuring out customers' WTP is the best way to price the product

Originally answered question:

Pricing Strategy

Anonymous replied on Jul 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.

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Rushabh
Expert
Content Creator
replied on Nov 26, 2022
Limited Availability | BCG Expert | Middle East Expert | 100+ Mocks Delivered | IESE & NYU MBA | Ex-KPMG Dxb Consultant

Hello Gauthier,

I would approach any pricing question as narrowing down from certain starting points:

1- Highest price - Customer's willingness to Pay

2- Lowest price - Cost of producing the product

 

After having this range in mind, we need to further narrow it down. This can be done by:

3- Internal factors:

a. Price of other products in the company's portfolio - there should be an alignment between the company's existing and future intended pricing policy i.e. selling at value vs selling at high markups

b. How much money does the company want to make from this product

 

4- External factors

a. Competitor's prices

b. Industry price trends

 

All the best!

Rushabh

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Frederic
Expert
Content Creator
replied on Nov 10, 2023
ex Jr. Partner McKinsey |Senior Interviewer| Real Feedback & Free Homework between sessions|Harvard Coach|10+ Experience

Adding few more pricing themese for you:

Cost-Based Pricing:

  • Break down costs into fixed and variable components.
  • Assess how changes in production volumes or costs impact pricing.

Market-Based Pricing:

  • Analyze competitors' pricing strategies.
  • Consider market demand and supply dynamics.
  • Evaluate pricing based on customer perceptions and willingness to pay.

Value-Based Pricing:

  • Understand the value proposition for the customer.
  • Assess how much value the product/service provides to customers.
  • Set prices based on the perceived value by the customer.

Dynamic Pricing:

  • Consider factors such as seasonality, demand fluctuations, and market trends.
  • Implement pricing strategies that can be adjusted in real-time.

Penetration Pricing vs. Skimming Pricing:

  • Penetration: Set prices low to gain market share quickly.
  • Skimming: Set high initial prices and gradually lower them.

Bundle Pricing:

  • Evaluate the pricing strategy for product bundles.
  • Assess the impact on overall revenue and customer adoption.

Lifecycle Pricing:

  • Consider pricing adjustments at different stages of the product lifecycle.
  • Evaluate how pricing might change during product introduction, growth, maturity, and decline.

Geographic Pricing:

  • Assess the impact of pricing variations in different geographic regions.
  • Consider factors like local competition, economic conditions, and customer preferences.
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Clara
Expert
Content Creator
replied on May 28, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hi!

To add on top of previous comments, in a nutshell: Break-even, benchmarking and willingness to pay calculation.

Cheers,

Clara

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Andi
Expert
updated an answer on Aug 28, 2023
BCG 1st & Final Round interviewer | Personalized prep with >95% success rate | 7yrs coaching | #1 for Experienced Hires

Hi there,


Adding some additional thoughts to this ever-green question.

1. Understand the product well enough - understand what it is that you're selling, to an extent its features and why people would buy it. Without that, it's hard to price adequately

 

2. Use the 3 main techniques highlighted (cost-based, value-based, competitor-based) in an iterative manner. Usually, cost-based is your lower bound of the spectrum, WTP (value-based willingness-to-pay) your upper bound and what competition does somewhere in between. Map all 3 data points along the spectrum of min - max and then rationalize where you should position the product, based on quality, brand, positioning in the market. 

Hope this helps.

Regards,

(edited)

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Anonymous replied on Dec 24, 2022

Just to add, I think a really key part of pricing cases is thinking about the objective and strategy of the company when setting prices.

Cost and value based pricing are fine, but where are you going to price between them? You need to know what you are aiming for.

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Udayan
Expert
Content Creator
replied on Oct 07, 2019
Top rated Case & PEI coach/Multiple real offers/McKinsey EM in New York /12 years recruiting experience

Value based pricing

Vlad has outlined the overall approach to pricing in his answer, I want to focus a little more on one aspect - value based pricing. This is the one that is key to most pricing based cases you will come across whether in an interview or in an actual live case.

Value based pricing is based on the principle that the best way to price a product (i.e. where the marginal utility derived from consuming a product is equal to the marginal cost of producing it) is to price it at the highest willingness to pay. It is worth noting that this willingness to pay differs across users and in an ideal world, you would charge each consumer the price they want to pay (the most common example of this being pricing in airlines - basic economy, economy, economy plus, business and first class).

When solving cases related to optimally pricing a product, you will often have to think of ways to come up with prices for a product. Below are some common ways to do so

  1. If the product is similar to ones in the market you will have to look at how competitors are priced
  2. If it has improvements/relevant differences (say a drug with better targeting mechanisms than current drugs) then some things to look at are
    1. Scope of improvement - for example if instead of 3 injections a month you ony need to take one injection every month you can price the drug at at least 3x price of current drug in the market
    2. Willingness to pay - this can be judged through surveys, A/B testing, pricing the value to the customer (e.g., If it saves 5 hours, you can assume that each hour is worth at least say $30 and 5 hours $150, etc.
  3. If the product is completely new (e.g., immunotherapy in cancer, iPhone when it launched etc.) you can look at:
    1. How did previous industries think about price disruptions when they first launched
    2. Do you want access to all or few core clients. e.g., a digital platform like facebook first needs scale and relevance before becoming a key product and so is free to start, something like a tesla may prefer a wow factor and is priced accordingly. All of these are industry and product specific
    3. Barriers to entry - how difficult is it for others to enter by copying your product/do you have an IP. The easier it is the closer you have to price to the cost of making it
    4. How will you price differentiate if it is relevant (e.g., launching google pixel 3 and google pixel 3a with less premium features)


As you can see there are many elements to a pricing case, so it is helpful to read up on the theory and research cases that have looked at pricing, especially from a value base pricing perspective

Udayan

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Anonymous D on Oct 08, 2019

Hi Udayan,

Anonymous D on Oct 08, 2019

From my experience, for value based pricing cases, you normally determine the maximum price (i.e. the user's willigness to pay) using the following equation: [additional incremental profit per year] x [client investment horizon] >= [investment costs]. The point at which this equation equals zero determines the maximum price of the product, therefore I'd normally quantify the incremental profit through use of a new product as a function of it's price, and solve the equation to determine the Price. Does this sound like a sensible approach for all value based pricing scenarios?

Udayan on Oct 10, 2019

Hi, I would have to look at the case to give a better answer as it's not always a plug and play solution

Originally answered question:

Pricing Strategy

Anonymous C replied on Jul 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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Vlad

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