Interviewer: You are Uber launching in a new market in New Zealand, how will your price Uber rides?
This is the kind of question that you get asked a lot in consulting case interviews. So how do you approach such a pricing question?
This article will help answer that question for you using CasePrep Master’s proprietary two step approach.
Step 1: Confirm the companies objective with the product.
The first question that you should ask the interviewer is “what is the key objective of the company to offer this new product?” And the answer to that question can be categorized in two main categories.
A: The company is pricing the product hoping for immediate profit.
B: The company is pricing the product for market entry and market share with no need for immediate profit. Market.
Notice the strategies with pricing are completely different depending on A or B.
Step 2: Proposing your pricing strategy
If A: The company is pricing the product hoping for immediate profit, there are three major pricing strategies.
Cost-based pricing. This is the pricing strategy that most companies use for pricing. Companies would calculate all the fixed and variable costs of offering a product or service and then simply add a profit margin on top of it that the company sees fit. For example, for a shoe manufacturer to price a new shoe, it takes the shoe manufacturer $10 for the raw material, $3 for labor and $7 for shipping, transportation and overhead for a overall cost of $20 to produce a pair of shoes. That company would simply add a profit margin on top of, say $10, and offer the shoes for sale at $30.
Competitive-based pricing. Competitive based pricing is a second way that companies strategize to offer a product where the company is bound by what its main competitors are pricing for very similar products. If Pepsi is offering its 1 gallon soft drink at supermarkets for one dollar, it would be very difficult for Coca-Cola to offer its one gallon soft drink for two dollars, because they are very similar products. So oftentimes companies are bound by what their competitors are offering in terms of price for a very similar product. Take another example of Uber and Lyft, if you take Uber from Destination A to B, you’ll see that its fare is very similar to lift precisely because of both companies employing competitive-based pricing strategies. If only one company had the monopoly in the market, it would have more flexibility with price.
Value-based pricing. This is when companies scratch the notion of traditional cost-based pricing and competitive-based pricing and charges clients for the value that they provides. For example, if a consulting firm is offering service to a major client on corporate strategy to try to grow its revenues, then based on the principles of value-based pricing, that consulting firm can ask for perhaps 1% of the increase in revenue for that company as compensation. Because if the value is measured by the amount of additional dollars of revenue generated, then how much we price for our services can be based on that value.
If B: The company is pricing the product for market entry and market share with no need for immediate profit.
In this second overall scenario, if the company instead is not going for profit with this new product but is instead trying to grow that product very quickly in a new market or trying to enter a market and letting the products grow exponentially in that market, then the strategies are very different for pricing because that company might want to hold off monetizing products in the early stages of the launch but rather focusing on letting the product reach to more customers while offering products for free.
If Uber wants to enter the New Zealand market which is a new market for Uber, then it can offer new customers the first 10 rides free with 50% off normal fares in the first 6 months, just to attract customers to Uber so that it can monetize on these customers later on.
So in conclusion, there is a two-step approach to the question of how to price a product. The first step is asking the key objective of the company and only after the first step can one go to the second step to find out exactly what your pricing strategy should be.
So should you offer your product for $1 or $1,000,000 dollars.
Now you should have an answer.