How to Crush Your Pricing Case Interview
Pricing consulting cases are one of the most common types of case interviews. Along with market entry and merger and acquisition cases, you will most likely see at least one pricing strategy case in your upcoming interviews.
A pricing case interview may look something like the following:
Apple is about to launch their latest version of the iPhone. What is the optimal price that they should set for this new product?
Fortunately, pricing cases follow a predictable pattern. Once you have practiced a few pricing cases, you should be able to solve any pricing case interview.
In this article, we’ll cover:
- A comprehensive pricing case interview framework
- The 7 steps to solve any pricing case interview
- A full-length pricing case interview example
Pricing Case Interview Framework
The best pricing case interview framework looks like the following:
The framework starts by looking more closely at the company and product. Understanding the company and product better will help you get a sense for how you should be pricing the product.
Afterwards, the framework covers the three different ways to price a product or service. We’ll cover each of these pricing strategies in detail so you can fully understand how to use this framework. You’ll likely use a combination of all three of these strategies to solve a pricing consulting case.
Pricing based on costs
The simplest way to price a product is to look at the costs to produce a product and set a higher price. If the company has a specific profit margin figure in mind, they can set a price to reach their profit margin goals.
Example: If it costs Apple $200 to produce their iPhone and they are aiming for at least a 20% profit margin, they would need to price their iPhone for at least $240.
Pricing based on costs ensures that the company will be profitable from selling the product. It does not make sense to price a product lower than its costs because the company would be losing money on each sale.
Pricing based on costs sets the lower end of the pricing range you should consider.
Pricing based on value provided
Pricing based on value provided is the most complex way of pricing. To price a product using this strategy, you need to identify all of the benefits that the product provides and quantify how much value these benefits provide to customers.
This will equal the customer’s maximum willingness to pay. For example, if a product provides $800 of value to the customer, they will not be willing to pay more than $800 for it. It does not make sense to price the product for more than this because no customers would buy it.
Example: The iPhone provides various benefits such as entertainment, productivity, communication, and status. If customers get $300 of value from entertainment, $200 of value from productivity, $400 value from communication, and $100 value from status, customers would be willing to pay a maximum of $1,000.
Pricing based on costs helps set the upper end of the pricing range you should consider.
Pricing based on competition
Pricing based on competition will help you determine where in between your lower and upper range of prices you should price your product for. To price based on competition, you will need to identify competitor products that are substitutes for your product.
Pricing based on competition is based on two factors, the price that competitors set for their product and the customer’s maximum willingness to pay for their products.
The difference between these two numbers is the amount of value the customer captures from purchasing the competitor’s product. In economics terms, this is known as consumer surplus.
In order for customers to purchase your product, you will need to give customers more value than they get from purchasing a competitor’s product.
Example: Apple’s main competitor, Samsung, has a competing smartphone that they are selling for $400. This product provides customers a value of $600 from the benefits it provides. Therefore, customers get $200 in value from purchasing this product.
If Apple’s customers get a value of $1,000 from purchasing an iPhone, Apple will need to give customers at least $200 of value to make customers purchase an iPhone instead of a Samsung smartphone. Therefore, Apple can charge a maximum of $800 for their iPhone.
The 7 Steps to Solve any Pricing Case Interview
1. Understand the goal or objective of the company
The first step to solving any pricing strategy case interview is to determine the goal or objective of the company.
Most of the time, the company is looking to price a product to maximize profits. However, there are times when a company may be looking to maximize revenues, market share, or number of customers.
Your pricing strategy will differ tremendously based on the company’s specific goals. Therefore, it is important that you understand what the company’s exact goals are.
2. Develop a framework
Next, develop a framework to help you structure your approach to solving this pricing case.
Depending on how much context of the company or product that you have, you may also need to understand the company or product better. These could be the first one or two areas of your framework.
The rest of your framework should include the three different pricing strategies we have covered:
- Pricing based on costs
- Pricing based on value provided
- Pricing based on competition
Make sure to walk the interviewer through your framework to see if they agree with your approach. They may provide feedback or offer a few suggestions.
3. Determine the minimum price point
Using the pricing based on costs strategy, determine what the minimum price point of your product should be. Remember, price needs to be greater than costs in order for the company to achieve a profit.
4. Determine the maximum price point
Next, use the pricing based on value provided strategy to determine what the maximum price point of your product should be.
Identify all of the benefits that the product provides customers. Then, quantify these benefits into a dollar value. The sum of the value of the benefits represents the customer’s maximum willingness to pay.
5. Determine the optimal price point
Afterwards, use the pricing based on competition strategy to determine which price point between your lower and upper price points is optimal.
Identify competitor products that are substitutes for your product. Quantify the benefits that competitor products provide customers and compare that to the prices they are set at.
The difference between these two values is the minimum amount of value that you need to give to customers in order for them to want to purchase your product.
6. Consider additional pricing factors
Now that you have an idea for the optimal price, you can consider additional pricing factors:
- Are there additional products that the company can cross-sell or up-sell?
- Can different versions of the product be sold at different price points?
- How do you think competitors will respond to your pricing decisions?
All of these considerations may change the price point that you set.
- If you can cross-sell or up-sell additional products, you may be willing to lower the price of your product further if it means generating more overall profits
- If there are multiple customer segments with different needs and willingness to pay, it may make sense to have multiple versions of the product to sell at different price points
- If you set a price that undercuts competitors, they may also cut prices to compete with you. Therefore, you should anticipate the consequences of the price point that you set
For simple pricing cases, you may not need to look at any of these considerations. However, more complex pricing cases may require you to think more creatively or thoroughly on what other factors may dictate the price point the company should set.
7. Deliver a recommendation
At the end of the pricing case interview, you’ll synthesize all of the work you have done to deliver a clear, concise recommendation.
You should try to structure your recommendation in the following way:
- Recommend the optimal price point or price range
- Provide the two to three reasons that support this
- Propose next steps
Next steps can include areas of your framework that you have not covered yet, additional pricing considerations, or any open questions that you don’t have answers to.
If you can’t think of next steps, ask yourself what you would need to know to make you more confident in your recommendation. This is a helpful way to generate ideas for next steps.
Pricing Case Interview Example
Watch the video below for a comprehensive example of a pricing case interview. This example comes from BCG’s interactive case interview library.
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