In a case interview, you can approach this type of case in three steps:
1. Investigate the company.
2. Investigate the product.
3. Choose a pricing strategy (options discussed in the following paragraphs)based on your investigation.
Get a feeling for the business of the company:
The choice of a strategy depends on the information gathered in the first two steps. There are three major pricing strategies:
(1) Competitive analysis (benchmarking): In this strategy, the price is based on the price our competitors charges. Therefore, you want to investigate:
(2) Cost-based pricing: This strategy bases the price on the cumulated costs per item (break-even) plus a profit margin. Therefore, you need to know the client's cost structure. This strategy is now considered outdated. However, it is important to know the client's cost structure before choosing a price.
(3) Price-based costing (or value-based pricing): This strategy is based on determining the "value" of the client's product or the amount customers are willing to pay. This approach is similar to competitive analysis in that you can generally determine customers’ willingness to pay from prices of different substitutes. Keep in mind that different customer segments may have a different willingness to pay for the client's products, implying that the client could charge different prices to different customer segments by changing the "value added" to justify the changes in prices.
While it may make sense to strive for a certain profit margin, the product simply might not sell because the customer may be unwilling to pay that price. Thus, make sure to investigate customers' willingness to pay. Furthermore, consider breaking the price into various parts. For instance, you could charge a certain price for the product and charge separate delivery costs.
On the other hand, sometimes customers might be willing to pay a lot more for a product than its costs plus a 'usual' margin. Think about highly differentiated products such as iPhones.