What factors determine the price that we can set?

New answer on Nov 26, 2022
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Anonymous A asked on Sep 19, 2020

What are general pricing capabilities?

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replied on Sep 20, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School


Look at the following:

1. Cost-based pricing - you actually check what are the costs and apply the 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 (think of a pipeline of drugs where 8/10 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 cross-sell 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!

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Content Creator
replied on Sep 19, 2020
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

1. Value-based or Willingness to Pay

When: This is your top choice.

How: Find a $ value for what customers would pay. This is normally adding the revenue increase and/or cost reduction that your customers get by buying your product/service. If it's more of a utility/happiness product, then customer surveys of product comparisons serve well as well.

Then, charge a discounted amount of that WTP, based on your eagerness/desire to capture market share.

2. Benchmarking

When: This is what you have to do if there's competition

How: See what price your competition charges!

3. Cost-based

When: This is what you do if you can't benchmark (i.e. no competition) AND you can't get a gauge on WTP.

How: Figure out your cost structure. Get the break-even point (i.e. how much you need to price the product at for there for be 0 profit per item sold). Then, charge a % margin on top (normally 10-20%)


What's the step-by-step logic in pricing?

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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Anonymous replied on Sep 19, 2020


You can think of these five factors to consider when pricing your products and services.

1. Costs

First and foremost you need to be financially informed. Before you set your pricing, work out the costs involved with running your business. These include your fixed costs (the expenses that will come in every month regardless of sales) and your direct costs (the expenses you incur by producing and delivering your products and services).

2. Customers

Know what your customers want from your products and services. Are they driven by the cheapest price or by the value they receive? What part does price play in their purchase decision?

Also look at what you are selling, are your current customers buying high-end or low-end products and services? This information will help you determine if your price is right, what level of service or inclusions you should be offering and lastly if you are targeting the right market. It may be that you need to change your market to make your business more profitable.

3. Positioning

Once you understand your customer, you need to look at your positioning. Where do you want to be in the marketplace? Do you want to be the most expensive, luxurious, high-end brand in your industry, the cheapest, beat it by 10% brand or somewhere in the middle? Once you have decided, you will start to get an idea of your ideal pricing.

4. Competitors

This is one of the key times you can give yourself permission to do a little competitor snooping. What are they charging for different products and services? What inclusions and level of service are they offering for those prices? What customers are they attracting with their pricing? And how are they positioned in the marketplace? The answers to these questions will give you an industry benchmark for your pricing.

5. Profit

One of the most important questions business owners neglect to ask themselves is, “How much profit do I want to make?” They tend to look at what others charge and then pull a figure out of the air to be competitive without giving consideration to how much profit the want and need.

While you may be in business for the passion and to add value to the lives of others, you also need to add value to your own. So give careful consideration to what your time is worth.

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Content Creator
replied on Sep 20, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut


Factors are many, and totally depends on each case and should be tailored.

As other coaches already mentioned, another thing is the different pricing approaches you can take:

  • Cost-base: covering your costs, breaking even.
  • Benchmark: against relevant peers
  • Willingness to pay: how much consumers are happy to pay for your particular value proposition?

Careful, factors is not the same as approaches!

Hope it helps!



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Anonymous replied on Sep 19, 2020

Dear A!

There are several ways to determine the price.

First of all, cost based pricing, which means that the price is a function of overall costs required to produce the product or service + expected margin to receive from the product.

Secondly, competitive based pricing, where the pricing is a function of an average of the market prices more or less comparable to the competitive products and services.

The third one, most widely used, is value based pricing, which results in the best value assessment of the product, which the client receives.

There are also several other classifications. The best I would strongly recommend you to review a book or material on the price management for more details.

Hope it helps!



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


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!


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Vlad gave the best answer


McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School
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