price new or existing category Flashcards
1. ASK QUESTIONS ABOUT GOAL, PRODUCT, COMPETITORS and market segment 2. B. PRICING METER (DETERMINE A PRICE RANGE) C. RECOMMENDATION & NEXT STEPS
framework
A. ASK QUESTIONS (ABOUT GOAL, mc^3)and market segment
“I am not familiar with the product/category market. Do you mind if I ask a few questions…”
Goal:
Is our goal to maximize MS OR capture profit OR defensive move OR customer satisfaction?
market and customer:
Are there any other products like this in market (that is existing vs new category)?
customer segment? (Eg:mass market/luxury)?
Purchase driver (price, brand, features)
Price sensitivity of segment?
company and product:
How much did product cost to make? Are there any R&D costs, major fixed costs we have to consider?
Our products value proposition?
How does our product compare to competitor?
(extra: how product works)
Competitor:
Who is main competitor to our product? (Or is it a brand new category?)
What is competitors selling price?
B. PRICING METER (DETERMINE A PRICE RANGE)
There are 3 different ways we can look at pricing.
Candidate writes on the board
a. Customer’s willingness to pay (maximum price) – (for existing category: price = main competitors price + our product Value proposition vs main competitors value proposition )
b. Competitor pricing
What is our main competitors selling price?
What is our products value proposition vs competitor product Value prop.?
c. cost to make (minimum price/floor/lowerbound) – what is “cost to make” (VC) of our product? Do we need to consider other costs at the moment such as R&D costs and FC?
C. Recommend a price
If existing category
=main competitor product + strategic goal + how much % is our product better/worse than competitor + customer segments willingness to pay
If brand new category
= costs saved + revenue gained
OR
= cost to make + other costs such as (+ R&D cost + FC + opportunity cost) + profit margin desired
depending on the
strategic goal (MS vs profit) ;
comparison of product features,
recommend the lower bound (COGS), upper bound (CWTP) or middle of the range as final recommendation for price
If goal = maximize MS => consider
pricing = COGS, or BELOW competitors (eg: kindle) (“razor & razorblade strategy”)
If goal = maximize profit => our price ABOVE competitors (eg: iphone) or BELOW competitors (by increasing volume)
D. next steps/real world: (CSPD)
1. demand & supply curve:
To build a demand curve, we can test different price points. From that data, we can extrapolate the right price to maximize overall product profits.
2. Surveys - Pricing surveys
3. Pilots - in smaller markets (and extrapolate those results to a domestic or international launch.)
4. differential pricing - for different customer segments, and different channels
———-X——–END OF “PRICE [PRODUCT]” FRAMEWORK———————————————————————————————————-X————————-X———
What are the different ways to price?
- customer value
competitors price (EG: kindle vs nexus7, azure
- COGS + profit margin (EG: teleportation device = COGS + 80% profit margin bcoz of rarity of product OR AT COST (EG: kindle tablet, razor & razorblade strategy)
eg1: (uberx = cost per mile + cost per minute + minimum price $5 + ubers 30% commission + high demand multiple)
eg2: pricing of cloud storage = based on data storage/bandwidth usage with ability to dynamically add/remove services - Cost savings + revenue gains (EG: long lasting bulbs, stent, maine apples) (Customer willingness to pay for new category)
2 types of price new product questions
- Existing category (eg: kindle is tablet category, iphone is smartwatch category)
For this use either “competitor price” OR “cost to make +profit margin desired” after understanding goal, product, competitor product and customer segment.
competitors price (EG: kindle vs nexus7, azure
COGS + profit margin (EG: teleportation device = COGS + 80% profit margin bcoz of rarity of product OR AT COST (EG: kindle tablet, razor & razorblade strategy)
eg1:(uberx = cost per mile + cost per minute + minimum price $5 + ubers 30% commission + high demand multiple)
eg2:pricing of cloud storage = based on data storage/bandwidth usage with ability to dynamically add/remove services - Brand new category that does not exist (eg: long lasting light bulb, new fertilizer for maine apples)
For this generally use (price of brand new category/product = cost savings + revenue gains to customer
general strategy to price a tech product?
- In general ask “cost to make” to establish lower bound of range
- then ask who is direct competitors and their price
- then Compare our product to competitors product – (our product and competitors USP) and see if we can justify a higher price based on providing more features/etc.
- lastly we look at strategic goal —-If strategic goal is to gain market share then we price it at cost or at least below competitor. If our product is luxury (iphone/selfdriving car) and provides eg: 50% greater value than competitors (and our goal is profitability) then we price it above competitors)
How would you price kindle tablet
= minimum = Cost to make $175; maximum = price of closest substitute nexus tablet = $199; range = 175 to 199, recommend = $175 bcoz strategic goal is to gain market share) ——-
How would you price the Kindle Fire HD?
ASK QUESTIONS ABOUT A. STRATEGIC GOAL, B. PRODUCT, C. COMPETITORS PRODUCT,
CANDIDATE: My understanding is that Kindle Fire HD is a 7-inch
tablet with an HD display. I’m not familiar with the tablet market. Do I
mind if ask you a few questions?
INTERVIEWER: Sure, go ahead.
CANDIDATE: Who are its main competitors?
INTERVIEWER: The main competitors are the iPad Mini, Samsung
Galaxy Tab, and Google’s Nexus 7.
CANDIDATE: How much do those retail for?
INTERVIEWER: The iPad Mini retails for $329 while the Galaxy Tab
and Nexus 7 sell for $199.
CANDIDATE: What makes Kindle Fire HD standout from its
competition?
INTERVIEWER: Kindle Fire HD has a higher resolution than the
Galaxy Tab and iPad Mini.
My last question: How much does it cost to make a Kindle Fire HD?
I can’t release internal data. However, a market research firm, iSuppli,
disassembled a Kindle Fire HD and publicly estimated that each Kindle
Fire HD costs $174 to make.
CANDIDATE: Thanks for the background information. There are
three different ways we can look at pricing.
Candidate writes on the board
Customer’s willingness to pay
Competitive pricing
Cost-based pricing
CUSTOMER WILLINGNESS TO PAY:
First, I’d think about the customer. If they didn’t have
the product, what would they do instead? How much they would pay
for an alternative or substitute product? Negotiators call this the
BATNA or the best alternative to a negotiated agreement. Here, I’ll call
it the customer’s willingness to pay for the product. It represents the
maximum a customer would pay for the product.
In this case, if a customer couldn’t buy a Kindle Fire HD, the best
alternative device is the Nexus 7. It has specifications, especially screen
resolution, that’s most similar to the Fire HD. The Nexus 7 costs $199,
so that likely is the most we could charge for the Kindle Fire HD.
COST TO MAKE COGS:
Next, we look at Kindle Fire HD’s unit cost of $174. We can add an
absolute or relative markup to the unit’s final price. Knowing how
strategic the Fire HD is to selling additional digital content, it’s possible
that Amazon could pursue the “razor and razor blade” strategy. That is,
sell the Kindle Fire HD at, or below, cost, and make its profits on future
digital content sales. Given this, let’s say the pricing lower bound could
be $174.
COMPETITOR PRICING:
Then, we compare prices with what’s already on the market. The Nexus
7 and the Galaxy Tab are selling for $199.
DEMAND AND SUPPLY CURVE
Finally, we should evaluate supply and demand. Limited supply and
high demand might merit a higher price point while the inverse might
merit the reverse. To build a demand curve, we can test different price
points. From that data, we can extrapolate the right price to maximize
overall product profits.
INTERVIEWER: So what’s your recommendation?
RECOMMENDATION & NEXT STEPS
CANDIDATE: Given the urgency, there’s no time to experiment and
derive a supply and demand curve. Based on the discussion, we’ve got a
tight pricing bound from $174 to $199. I would recommend the low
end of the pricing spectrum, $174.Amazon needs to protect its core
business of selling books, music, and movies. In the digital world,
iTunes and Google Play can sell books. By ceding control of the
platform, the tablet, Amazon will find it hard to compete. It’s more
important that Amazon wins market share now and create a strong
distribution footprint of tablets. Using the Kindle Fire HD as a loss
leader, Amazon can generate profits on future sales of digital content.
Comments: Candidate used an easy-to-follow pricing framework.
The interviewer perceived the candidate to be an expert. It’s not
feasible to build supply and demand curves in the interview, but the
acknowledgment is important. It was also good that the candidate
recommended a specific price. Other candidates may have fallen
short and refused to commit. It may come as a surprise that the
candidate can ask for so much background information. But he must
because he doesn’t know much about the tablet market or the price
points. It would be lethal to answer based on assumptions and be
criticized for a wrong detail.
How would you price microsoft band/smartwatch
= (minimum = COGS, maximum = price of apple/samsung smartwatch, recommend COGS if goal is to gain MS)
price google driverless car
= identify market = luxury, so direct competitor product & = tesla model S = $70k
price uberx trip?
= use a modified version of “cost+profit margin” method => price of uberx = cost per mile + cost per minute + minimum price $5 + ubers 30% commission)
price teleportation device?
= COGS + 80% profit margin bcoz of rarity of product
price Microsoft azure (cloud biz)
= (consider
- strategic goal (gain MS or capture profit)
- high switching costs for companies,
- compare to amazon aws, IBM, Oracle, Google, our product usp&cost,)
price long lasting bulb from case in point,
(price of brand new category/product = cost savings + revenue gains to customer
Let me make sure I understand. GE has invented a light bulb that never burns out, and the marketing director wants us to help her
decide on a price.
– That’s correct.
Is coming up with a price the only objective? Or is there something else I should be concerned about?
– Pricing is the only objective.
Is there any competition for this product, and do we have a patent?
– We have a patent pending, and there is no other competition.
We know that the advantage is that this bulb never burns out. Are there any disadvantages to this product? Does it use the same
amount of electricity?
– There are no disadvantages, except maybe price. And that’s why you’re here. What did you spend on R&D?
– It cost $20 million to develop this product.
What are the costs associated with a conventional light bulb?
– It costs us five cents to manufacture. We sell it to the distributor for a quarter, the distributor sells it to the store for 50 cents and the store sells
it to the consumer for 75 cents.
And what does it cost us to manufacture the new light bulb?
– Five dollars.
So, if we use the conventional bulb-pricing model, that would mean the consumer would have to pay $75 for this light bulb. If we use
another simple model and say that a light bulb lasts one year and people will have this new bulb for 50 years, that’s an argument for a
retail price of $37.50 (50 years x $0.75). Then we need to ask ourselves whether a consumer would pay $37.50 for a light bulb that
never wears out. Now we’re looking at price-based costing. What are people willing to pay? And is it enough to cover our costs and
give us a nice profit?
The other main issue is that the more successful we are, the less successful we’ll be in the future. For every eternal light bulb we sell,
that’s 50 or 75 conventional bulbs we won’t sell in the future. In a sense, we’re cannibalizing our future markets. So, we have to make
sure that there is enough of a margin or profit to cover us way into the future.
– Good point.
I’ll tell you, I have reservations about selling to the consumer market. I just don’t think the opportunity for pricing is there.
– So, what do we do, scrap the project? We’ve already spent over $20 million in R&D.
Not at all. We turn to the industrial market. For example, the City of Cambridge probably has 2,000 street lamps. Those bulbs cost
maybe $20 and have to be changed twice a year. The real expense there isn’t the cost of the bulb; it’s the labor. It might take two
union workers. In addition, you have to send out a truck. It probably costs the city $150 in labor costs just to change the light bulb.
Now, if we were to sell them this ever-lasting bulb for $400, they would make that money back in less than two years and we would
make a handsome profit.
– Not bad.
Type of case: Pricing
Comments: First, the candidate looked at cost-based pricing and realized that the price was too high and that the typical
consumer would not shell out $75 for a light bulb. Then he looked at price-based costing and concluded there wasn’t enough of a
margin built in to make it profitable. Thinking outside the outline given in the pricing case scenario, the student also realized that he
would be cannibalizing his future markets. Thus, he decided that neither pricing strategy made sense for the retail market. So, instead
of suggesting that GE just cut its losses and walk away from the project, he went looking for alternative markets and concluded that
there was great potential in the industrial market.
Because this product has yet to be released, and is without competition, the supply and demand theory doesn’t work in this case.
price heart stent from managementconsulted.com,
(price of brand new category/product = cost savings + revenue gains to customer
price new kind of chemical used to increase yield of apples?
```
Given
Number of apple farms in maine
Avg area of 1 farm
Average revenue from 1 farm
maine apples KCC 27
~~~
(price of brand new category/product = cost savings + revenue gains to customer
1. cost savings When asked to quantify the improvements, provide the following: - It costs $1.5K/night to maintain crops for 100 acre orchard - With the chemical, farmers are able to harvest crop 10 days sooner Interviewee should calculate cost savings per year using this information: ($1.5K/day x 10 days / 100 acres = $150/acre/year)
2. When asked to quantify additional revenue, provide the following: - Our client’s product improves the consistency of red apples and improves the yield by 10% - The sweetness factor is estimated to improve the juice yield by 5% - 25% of revenue comes from whole apple sales, 75% from juice sales Improved yield: ($30K/acre x 25% x 10% = $750/acre/ year) Improved sweetness: ($30K/acre x 75% x 5% = $1,125/acre/year)
1+2
Total improvement (with cost
reduction) = $2,025/acre/year
- price
Farmer’s incremental revenue/cost savings = $2,025/acre
Product costs = $100,000/200 acres = $500/acre
Profit margin = ($2025-$500)/$2025= 75%
The interviewee should note that this is an extremely high profit margin for the farmer and
realize that there is a significant opportunity for profits with this product.
- How much of this benefit can we capture in our pricing?
- Interviewee should provide a percentage between 25% and 50%. Anything higher than 50%
should be questioned due to the novelty of the product and resulting lack of social proof.
A 50% profit margin for our client would also realize a 50% profit margin for farmers. This is
absolutely a realistic price to set, if not a little low.
- Given the costs provided, will we make a profit? Yes
- Interviewee should calculate profit: ($100,000 / 200 acres = $500/acre).
Assuming $1,000 price per acre, gross margin will be 50%. [($1,000 - $500) / $1,000]
Overall, our client should commercialize this chemical and price it at approximately $1,000 per acre to make a 50%
margin.
How would you create a price for Amazon Prime?
Candidate: Just to clarify we are not looking to reprice amazon prime from its current price but arrive at a price for amazon prime?
Customer willingness to pay/Customer Value
Competitor pricing
Cost to service
We will focus on customer first and value to the customer.
Prime offers a lot of benefits. https://www.amazon.com/gp/help/customer/display.html?nodeId=201910360
We will focus on main ones:
Shipping costs saved + prime video + prime music + Reading + 5% discount benefits + Others
Lets calculate value of Prime to the customer
Shipping benefits: = for customer without prime the incremental cost for same day shipping is $4 ($10 same day shipping for non prime and $6 same day shipping for prime members) * #orders/year for prime customers
= $4* 24 orders/yr = $98
Prime Video benefits:
= annual price of Netflix * % of prime users using prime video (since this is a bundle we multiply by % of people using it to get an “expected value” type probabilistic model)
= $120 * 25% = $30
prime music benefits
= annual price of spotify * % of prime users using prime music
= $120 * 10% = $12
Shopping benefits (discount benefits)
(prime member spends $1200/year, prime saves 5% with Prime Card, 10% prime members use this service )
= $1200 * 5% * 10% = $6
Reading benefits
= average price of kindle books * number of books read in a year through prime * % of users using this service
= $10 * 12 * 10% = $12
Total = $158
Qualitative analysis——-
Strategy/Objective =
1. gain market share
2. Prime members spend 2X non prime (prime $1400 vs non prime $600)
3. prime members 10x more likely to buy movie/etc than non prime members
4. Opportunity to cross sell /up sell on movies/tv shows/ebooks/music not available for free on prime.
5. Reinforces brand image as “everything store”/one stop shop to buy almost anything.
6. Competitive move: Psychologically Since Customer is already paying for prime, he/she will not even search on competitors site even if competitor has it cheaper
