What a typical prompt looks like
Pricing problems typically require you to help determine the price of a product for a company. This product is, more often than not, an innovation or patented product that is being introduced for the first time.
Example prompt
"Your client has introduced a new drink that helps cure balding. Help them develop an appropriate price for the product."
Important preliminary questions you can ask in a pricing case:
- 1What is the existing line of business of the company?
- 2Familiarize yourself with the product/service and understand its qualities, lifecycle and other benefits.
- 3Understand the primary objective of the producer. Is it profits, market share etc.
- 4When is the client planning to launch the product/service?
- 5Understand the competitive landscape.
While solving pricing cases, you can use 4 methods to arrive at the price of the product.
Cost-based: the lower limit of the price you can charge
Under this method, you identify the various costs associated with the product and arrive at the cost required to produce one unit. This sets the lower limit as any price below this would mean costs are higher than revenues leading to losses.
Note
The trick with this step is to estimate the appropriation of the fixed cost per product/service. It is always important to ask over what period or over how many products the manufacturer wants to recover their fixed costs. This would give us the fixed cost per unit.
Value-based: the upper limit of the price you can charge
In this method, you need to put your thinking caps on. The aim of this method is to estimate the maximum amount customers would be willing to pay for your product/service. The best way to do this would be to compare it to the substitutes the competitor might use to get the same level of satisfaction. For example, the price of a balding drink can be compared to the price that a customer would be willing to pay to buy a personalized wig, as they both cater to the same objective: the customer not looking bald anymore.
Competitor-based: the range of the price you can charge
Under this method, you need to compare the price competitors are charging for providing a similar product/service. This gives you a rough range of the price you can charge, since the aim is to be competitive.
Note: It is important at this step to differentiate between our product/service and that of the competitors. If we provide a better product with more features, we will be justified in charging a higher price.
This method can be used only if competitors exist for the product/service.
Demand-supply-based: choosing the optimal price point
An alternative method for pricing. Also known as price-elasticity method, this method is really uncommon and can only be used if the interviewer has prior information regarding the various demand-supply points of the product/service. The goal of this method is to choose the price point that maximizes either profits or revenues.
Refer to the case "Fly Me to the Moon" for a better understanding of this method.