Pricing strategies - Framework

Question 1

Our client has developed a new Hollywood screenwriting software package. How are we going to price it? WHat’s our strategy and why?

How would you approach this problem

Answer 1

1. Investigate the product
2. Choose a pricing strategy - Is the company in control of its own pricing strategies, or is it reacting to suppliers, the market and its competitors?
3. Supply and demand

Question 2

What are the four main ways to price the product?

Answer 2

1. Competitive analysis
2. Cost-based pricing
3. Price-based pricing
4. Company objective

Question 3

What questions would you ask to assess the product (5)

Answer 3

1. What’s special or proprietary about our product?
2. Are there similar products out there, and how are they priced?
3. Where are we in the growth cycle of this industry? (growth phase? transition phase? maturity phase?)
4. How big is the market?
5. What were our R&D costs?

Question 4

What questions would you ask to assess which pricing strategy to choose (5)

Answer 4

1. cost-based pricing vs price-based costing (e.g., do you decide pricing based on how much the product costs to produce or on how much people will pay?)
2. How much does it cost to make or deliver/provide?
3. What does the market expect to pay?
4. Is it a “must have” product?
5. Do we need to spend money to educate the consumer?

Question 5

What questions would you ask to assess supply and demand(5)

Answer 5

1. What’s the supply? How’s the demand
2. How will pricing have an effect on the market equilibrium?
3. Matching competition: What are similar products selling for?
4. Are there substitutions?

Question 6

Competitive analysis

Answer 6

1. Are there similar products out there?
2. How does our product compare to the competition?
3. Do we know their costs?
4. How are they priced?
5. Are there substitutions available?

Question 7

Cost-based pricing

Answer 7

take all our costs, add the up and add a profit to it. This way you’ll know your break-even point

Question 8

Price-based costing

Answer 8

1. What are people willing to pay for this product?

If they’re not willing to pay more than what it costs you to make, then it might not be worth making. On the other hand, they may be willing to pay much more than what you would get by just adding a profit margins. Profit margins vary greatly by industry.

Grocery stores have a very thin margin while drug companies traditionally have a large profit margin

Question 9

Company objective

Answer 9

1. What is the motivation behind the pricing?
2. Is the company interested in profits (usually priced higher) or market-share (usually priced lower)?

This can often be the deciding factor when picking a price.