Pricing
Setting price with cost, competitors, and value to the customer, and judging price changes with the trade-off between margin and volume.
Key takeaways
- Cover cost and competitors quickly, spend your time on value to the customer, and test any price change against the volume it can lose or must gain.
- Pricing often appears as a sub-question inside a profitability or launch case.
- The strong answer reaches value-based pricing and checks it against how the customer decides.
What this case type is and when it shows up
A pricing case asks what a company should charge, often for a new or changed product, or whether to raise or cut an existing price. Strong candidates show all three angles on price, lean on value to the customer, and check the effect on volume.
The underlying theory, in plain language
There are three ways to think about price. Cost-based: add a markup to what it costs you. Competitor-based: price relative to rivals. Value-based: price against what the product is worth to the customer. The first two are easy and common; the third is where most of the profit and insight sit.
Value-based pricing starts from economic value to the customer (EVC). Take the customer's next-best alternative and its price, then add the extra value your product creates over that alternative, in money, over its life. The sum is the most a rational customer would pay. Your price should sit between your cost (the floor) and this value (the ceiling), leaving the customer a clear reason to switch.
Money received in later years is worth less than money today, so business buyers often discount future savings or apply their own payback rule. Present value converts future money into today's money: divide each year's amount by (1 plus the discount rate), once for each year of waiting.
Every price change trades margin against volume. Contribution per unit is price minus variable cost. For a price rise, the share of volume you can lose before profit falls equals the price rise divided by (contribution per unit plus the price rise). For a price cut, the volume gain you need equals the cut divided by (contribution per unit minus the cut). Price cuts are harder to justify than they look.
Do not mix up margin and markup. Markup is profit as a percent of cost; margin is profit as a percent of price. The first worked case below shows both on the same numbers.
What the prompts sound like, from simple to hard
- Simple: how should a Singapore cafe price a new drink.
- Medium: price a new industrial part with no direct competitor for German factories.
- Hard: a rival undercuts your whole range in the UK; which prices do you change.
Finding and narrowing the real problem
Key idea
Cover cost and competitors quickly, spend your time on value to the customer, and test any price change against the volume it can lose or must gain.
Frameworks for this type, each as a thinking tool with its limit
- Cost, competitor, value: Three angles on price; always reach the value angle. Limit: Value is the hardest to estimate and the easiest to skip, which is why it sets you apart.
- Economic value to the customer (EVC): Price of the next-best alternative plus the extra value you create, in today's money. Limit: Value differs by customer segment, so one number can mislead.
- Break-even volume change: How much volume a price change can lose or must gain before profit changes. Limit: It tells you the threshold, not what customers will do; you still need evidence on customer response.
Methods for solving this type
- Find the cost floor
- Map the competitor range or the next-best alternative
- Estimate value to the customer in today's money
- Choose a price that shares the value, and check the customer's payback
- For price changes, compare the break-even volume change with evidence on customer response
The math patterns it relies on
- Cost plus markup, and margin at that price
- Present value of future savings
- Break-even volume change = price change / (contribution plus or minus the price change)
Worked cases
Worked case
Pricing a money-saving industrial part in Germany
The prompt
A German company has a new part that costs EUR 200 to make (variable cost) and saves the customer EUR 1,000 a year in energy for five years. The customer's current part costs EUR 300. There is no direct competitor. The table below compares the two parts. How should the new part be priced?
Interviewer-led: the interviewer shows the comparison table and asks for a cost-based price, then the value to the customer, then a recommended price.
Clarifying questions, with the interviewer's answers
- What do customers use today instead?Answer: A standard part that costs EUR 300 and gives no energy saving.
- How sure are the savings, and do all customers get them?Answer: Tests show EUR 1,000 a year for five years in large plants; smaller plants save less.
- How do customers judge purchases like this?Answer: Their finance teams want the extra spend paid back within two years, and they discount future savings at about 10 percent a year.
A hypothesis to say out loud: The part creates far more value than it costs to make, so my hypothesis is that value, not cost, should set the price, and the practical limit is the customer's two-year payback rule.
The structure
- Cost floor, value ceiling, and a price the customer accepts
- Cost floor and a cost-plus reference
- Key: Value ceiling: alternative price plus savings in today's money
- Chosen price: customer payback and our contribution
The exhibit
| Item | Current part | New part |
|---|---|---|
| Purchase price (EUR) | 300 | To be set |
| Energy saving (EUR a year) | 0 | 1,000 |
| Useful life (years) | 5 | 5 |
| Our variable cost (EUR) | Not our product | 200 |
Working it through
1. Cost-plus reference
A cost-plus approach might add a 25 percent markup to the EUR 200 cost.
Cost-plus price (EUR):200 × 1.25 = 2502. Markup versus margin
At EUR 250, profit of EUR 50 is a 25 percent markup on cost but only a 20 percent margin on price.
Margin at EUR 250 (%):(250 - 200) ÷ 250 × 100 = 203. Savings before discounting
EUR 1,000 a year for five years.
Undiscounted savings (EUR):1,000 × 5 = 5,0004. Savings in today's money
Discount each year at the customer's 10 percent rate: 1.21 is 1.1 x 1.1, 1.331 is 1.1 x 1.1 x 1.1, and so on.
Present value of savings (EUR):1,000 ÷ 1.1 + 1,000 ÷ 1.21 + 1,000 ÷ 1.331 + 1,000 ÷ 1.4641 + 1,000 ÷ 1.61051 = 3,7915. Economic value to the customer
The price of the alternative plus the savings in today's money: about EUR 4,100 is the most a rational customer would pay.
EVC (EUR):300 + 3,790.79 = 4,0916. Customer payback at EUR 1,500
At EUR 1,500 the customer pays EUR 1,200 more than for the old part and saves EUR 1,000 a year.
Customer payback (years):(1,500 - 300) ÷ 1,000 = 1.27. Our contribution at EUR 1,500
Price minus variable cost. This is contribution, not profit: development and sales costs still have to be covered.
Contribution per unit (EUR):1,500 - 200 = 1,300
What the exhibit shows
The new part costs little to make but saves EUR 1,000 a year for five years, so its value to the customer is far above its cost.
The recommendation
Price on value, at about EUR 1,500. First, that is far above a cost-plus price of EUR 250 and well below the customer's value of about EUR 4,100 (the EUR 300 alternative plus about EUR 3,800 of savings in today's money), so both sides gain. Second, the customer earns back the extra EUR 1,200 in 1.2 years, inside its two-year rule. Third, we earn EUR 1,300 of contribution per unit toward development and sales costs. Offer a lower-priced version for small plants, where savings are lower.
Risks: Savings in real plants may be lower than in tests; A competitor may copy the part within a few years, pushing prices down.
Next steps: Confirm savings with three pilot customers; Set prices by plant size.
A strong candidate
Anchored on the customer's next-best alternative and discounted savings, then chose a price that passes the customer's payback rule.
A weak candidate
Added a 25 percent markup to the EUR 200 cost and stopped at EUR 250.
Worked case
Will a 10 percent price rise pay?
The prompt
A UK coffee-capsule brand sells capsules at GBP 0.40 each, with a variable cost of GBP 0.16. It is considering a 10 percent price rise, to GBP 0.44. How much volume can it lose before profit falls, and should it go ahead?
Candidate-led: you decide what to calculate and ask for evidence on customer response; the interviewer pushes back.
Clarifying questions, with the interviewer's answers
- What is the contribution per capsule?Answer: Price GBP 0.40, variable cost GBP 0.16.
- What do we know about how customers react to price?Answer: A test in 20 stores showed volume fell about 8 percent after a 10 percent rise.
A hypothesis to say out loud: Capsules earn a high contribution margin, so every lost sale is costly and the volume we can afford to lose is limited. My hypothesis is that a 10 percent rise still pays, as long as volume falls by less than the break-even amount, which I will calculate before looking at the test.
The structure
- Price rise versus volume loss
- Contribution per capsule before and after
- Key: Break-even volume loss
- Compare with the store test
Working it through
1. Contribution now
Candidate: "I will start with what each capsule earns today: price minus variable cost."
Contribution now (GBP):0.4 - 0.16 = 0.242. Contribution after the rise
The GBP 0.04 price rise goes straight to contribution.
Contribution after (GBP):0.44 - 0.16 = 0.283. Break-even volume loss
Candidate: "Before asking what customers will do, let me find how many sales we can afford to lose." Price rise divided by (contribution plus the price rise).
Break-even volume loss (%):0.04 ÷ (0.24 + 0.04) × 100 = 14.294. Profit with the tested 8 percent loss
Interviewer: "The store test showed volume falling about 8 percent. Is that good or bad?" Candidate: "Good. 8 percent is well below the break-even of about 14 percent, so profit rises. As a ratio to today:"
Profit after vs today:0.92 × 0.28 ÷ 0.24 = 1.075. The opposite case: a 10 percent cut
Interviewer: "The sales team wants a 10 percent cut instead, to win share." Candidate: "A cut of GBP 0.04 would need this much extra volume just to keep profit the same."
Volume gain needed for a cut (%):0.04 ÷ (0.24 - 0.04) × 100 = 20
The recommendation
Raise the price to GBP 0.44. First, volume would have to fall by more than about 14 percent before profit drops. Second, the store test showed a fall of about 8 percent, which gives about 7 percent more profit. Third, the alternative the sales team wants, a 10 percent cut, would need about 20 percent more volume just to stay even, which is rarely achieved in a mature product.
Risks: The store test may understate long-term losses if customers switch slowly; Retailers may push back on a higher shelf price.
Next steps: Roll out the rise in one region first and track volume weekly; Agree the new shelf price with the two largest retailers before the national rollout.
A strong candidate
Calculated the break-even volume loss and compared it with evidence on customer response.
A weak candidate
Said "a price rise will lose customers" without asking how many customers it could afford to lose.
Prompt: "What should we charge for this part?"
Weaker answer
Says "cost is 200, add a markup, charge 250," ignoring that the part is worth thousands to the buyer.
Stronger answer
Notes the EUR 200 cost floor, values the part at about EUR 4,100 against the customer's alternative using discounted savings, and picks EUR 1,500, which passes the customer's payback rule.
Why the stronger answer wins: The strong answer reaches value-based pricing and checks it against how the customer decides. The weak one leaves almost all the value with the customer.
Common mistakes, traps, and curveballs
- Pricing only off cost and leaving value unclaimed
- Adding up future savings without discounting them
- Calling price minus variable cost "profit," when fixed costs are still to be covered
- One price for very different segments
- Confusing margin and markup
- Cutting price without checking the volume gain needed
Pricing often appears as a sub-question inside a profitability or launch case. When it does, still show the value angle and the volume check, because that is usually what separates a strong candidate. Formats differ by office and change over time, so check the current process for your target office.
Practice
An item costs 60 and sells for 100. What is the margin, in percent?
Contribution is 5 per unit. You raise the price by 1. What percent of volume can you lose before profit falls?
A delivery company in Johannesburg pays ZAR 2,000 for a tyre that lasts 50,000 km. A new tyre lasts 80,000 km and is the same in every other way. Ignoring the time value of money, what is the most a rational buyer would pay for the new tyre, in ZAR?
A product sells for 100 with a variable cost of 70. The team proposes a 10 percent price cut. What volume gain is needed to keep profit the same?
Large plants save EUR 1,000 a year with a new part, while small plants save EUR 300. What is the strongest pricing approach?
Where should a value-based price sit?
Set price between your cost and the customer's value, and test every price change against the volume it can lose or must gain.
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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