Pricing cases are one of the most common types of case interviews. You will most likely see at least one pricing strategy case in your upcoming consulting interviews. I'm a former Bain manager and interviewer, and if you hate spending hundreds of hours preparing for case interviews, don't worry because I'll teach you everything you need to know about pricing case interviews in under 10 minutes.
By the end of this video, you'll be able to solve any pricing case interview with ease and impress your interviewers. To solve a pricing case interview, you need to know the three different ways to price a product. Pricing based on costs, pricing based on value provided, and pricing based on competition.
Let's look at the first method, pricing based on costs, first. Pricing based on costs. The simplest way to price a product is to look at the cost 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. For 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. For 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 from communication, and $100 value from status, customers would be willing to pay a maximum of $1,000. Pricing based on value provided, Help 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 ranges 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 economic 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. For 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 purchasing a competitor's product.
The price of this product is $500. 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 consumer surplus to make customers purchase an iPhone instead of a Samsung smartphone. Therefore, Apple can charge a maximum of $800 for their iPhone. If you're finding this video helpful, please take a second to give this video a like. Also, make sure to subscribe to the channel so that you don't miss any of our new case interview content.
These two actions help support our channel so that we can make more free videos for you. Now that you know everything you need to know about pricing, we can cover the 7 steps to solve any pricing case interview. Step 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. Step 2. Develop a framework.
Next, develop a framework to help you structure your approach to solving the 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 covered.
Pricing Pricing based on costs, pricing based on value provided, and pricing based on competition. The perfect pricing case interview framework might look something like the following. Company or product. What is the product's unique selling point?
How does the product compare to other substitutes? What other products does the company sell? Pricing based on costs. How much does it cost to produce the product?
What is the profit margin that the company is trying to achieve? Pricing based on competition. How much do competitors price their products for?
How does our product compare to competitors'products? Pricing based on value added. What benefits does this product provide to customers?
How much value does this provide to customers? 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.
Step 3. Determine the minimum price point. Using the pricing based on cost 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.
Step 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.
Step 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 consumer surplus that you need to give to customers in order for them to want to purchase your product. Step 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 upsell additional products, you may be willing to lower the price of your product further if it means generating more overall profits across all products. 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 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 that the company should set.
Step 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. And 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. In summary, you've learned the 3 major pricing strategies and the 7 steps to solve any pricing case interview. You can now solve any pricing case interview thrown your way.
If you want to watch how to solve other types of cases, such as profitability case interviews or M&A case interviews, I've linked videos to these in the video description below. And last important message for you. If you're looking for a step-by-step shortcut to learn case interviews quickly, check out our comprehensive case interview course and books.
Links are in the video description. We teach the most robust, effective case interview strategies in the least time-consuming way to save you hundreds of hours of prep time and help you land multiple consulting job offers.