Mastering the Pricing Case Study: A Comprehensive Guide

Mastering the Pricing Case Interview

Setting the optimal pricing for products or services is important for a company as it directly impacts profitability. So every management consulting firm helps its clients with pricing strategies. The primary goal of a pricing case is to recommend a price that maximizes profit, taking costs for product/service and market considerations into account.

A typical pricing case interview would start something like this –

A manufacturer of kitchen knives sells a range of products, from low-end to professional, to customers at different price points. They’ve developed a new line of knives in collaboration with a celebrity chef and would like help setting the prices for these products.

Pricing cases might not seem straightforward initially, but with the right frameworks and practice cases, we will help you prepare for it.

In this article, we’ll discuss:

  • Examples of pricing cases.
  • The alternative pricing methods.
  • How to approach a pricing case interview.
  • An end-to-end pricing case example.

Let’s get started!

Pricing Case Examples

As companies mature, pricing becomes more complex because:

  • Companies develop multiple products with different cost structures.
  • Clients have different product/service needs and price sensitivities.

Pricing can also be a source for driving revenue growth if you can identify opportunities to price based on value to the customer or in a way that optimizes the tradeoff between revenue and costs. Let’s explore a few situations where consultants can help with pricing:

New Art Museum

A new modern art museum is scheduled to open next year in a major European city. The project lead has requested your help with the pricing of the admission tickets. He has two questions: How would you approach selecting a pricing method for the museum? What price would you recommend and why?

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Animal Healthcare

Our client provides healthcare services for animals and develops veterinary drugs. The client has recently developed a product that enables cows to increase milk production by 20%. They have turned to you to figure out how to price this new product in order to maximize profits.

California Municipality

Your client is a local municipality in California. The town recently built a complex of six parking lots, encircling a nearby community center and outdoor mall, which features shopping, restaurants, and some light attractions. In total there are 20,000 parking spots in these lots. Our client wants to maximize the profit it generates from the parking lots with a focus on revenue generation. How would you think about different types of pricing structures and revenue models for the parking lots?

What Are the Most Common Pricing Strategies?

In most pricing case questions, you’ll have to work through one or a combination of the following pricing strategies:

What Are the Most Common Pricing Strategies

Most companies use a combination of these alternative pricing strategies to maximize profitability. For example, a manufacturer of diet pills that costs $10 to produce may be able to charge $100 per bottle if the target customers have low-price sensitivity and high perceived value (a savings of many hours working out in the gym and/or eliminating the negative health effects of being overweight).

The Relevant Pricing Strategy for Our Pricing Case Examples

Note that for these examples, multiple correct solutions are possible. The important thing in pricing case interviews is to back up your answer well with analysis and logic.

A new modern art museum is scheduled to open next year in a major European city. The project lead has requested your help with the pricing of the admission tickets. He has two questions: How would you approach selecting a pricing method for the museum? What price would you recommend and why?

Relevant pricing strategies + sample approach:

  • Since the costs of running the museum are mostly fixed (e.g., staff, maintenance, and utilities), a cost-based pricing strategy will not provide much insight. 
  • The new museum should therefore use a combination of demand-pull and market-based pricing.
  • Since the museum is new, they should set their pricing below the average market price in order to draw in early customers to check out the museum and spread awareness to their friends.
  • Do a check that the proposed price point will cover a good portion of the museum’s costs with expected attendance numbers.
  • Note that for a museum, ticket sales are probably not expected to fully cover costs. Exhibit sponsors, grants, and donations will be additional sources of funding.

Our client provides healthcare services for animals and develops veterinary drugs. The client has recently developed a product that enables cows to increase milk production by 20%. They have turned to you to figure out how to price this new product in order to maximize profits.

Relevant pricing strategies + sample approach:

  • The cost of making a dose is $30.
  • The competition charges $300 per dose.
  • Clients are willing to pay $300 per dose because the 20% increase in their revenues will more than offset the product’s price.
  • Therefore, the client should set its price based on a combination of market-based pricing and demand-pull.
  • The recommendation of whether to price above or below the competitor’s $300 price depends upon how our product compares to theirs. If the client’s product is superior in any way, we may be able to command a higher price. If we are entering the market late and with a comparable product, we’ll need to set our price lower in order to provide an incentive for customers to try our product.
  • At $300, this will provide a very attractive gross margin of close to 90%.

Your client is a local municipality in California. The town recently built a complex of six parking lots, encircling a nearby community center and outdoor mall, which features shopping, restaurants, and some light attractions. In total there are 20,000 parking spots in these lots. Our client wants to maximize the profit it generates from the parking lots with a focus on generating additional revenue. How would you think about different types of pricing structures and revenue models for the parking lots?

Relevant pricing strategies + sample approach:

  • Costs are mostly fixed (staff salaries and bond payments for garage construction), so a cost-based strategy doesn’t provide much insight. 
  • Competitive garages are priced similarly, but less convenient for shoppers.
  • Excess capacity provides the opportunity to identify additional revenue sources by driving higher utilization of the parking spaces and offering customers additional services while parked in the garage. 
  • Brainstorming options to increase revenue identifies a variety of options (offer monthly passes, charge stores monthly fees to validate customer parking, provide valet parking and car washing, use excess capacity for concerts, fairs, or other large events that require parking spaces.)
  • Do a check that the proposed price point, including value-added services, will cover salary and bond payments.

How to Approach a Pricing Case Interview

Like any other case interview, you want to spend the first few moments thinking through all the elements of the problem. Also, there is no one right way to approach a pricing case study but it should include the following:

Pricing Case Study Framework
Example issue tree for a pricing case interview:
  • Which pricing strategy makes sense for the customer’s market?
    • Cost-based: What is the cost of making the product or delivering the service?
    • Market-based: What is the pricing of a comparable product or service? Can we price above what the competition is charging?
    • Value-based: What is the customer’s willingness to pay? Will we lose customers if we charge higher prices? Are there incremental services we could provide that customers would value?  
  • Which pricing strategy offers the most attractive margins?
    • What is the volume impact of the alternative pricing model? What is the incremental revenue expected?
    • What significant costs will be incurred if the pricing model changes?
    • What revenues and costs will be realized if value-added services are launched?
  • What risks will the client face as it implements price changes?
    • It can be hard to raise prices once customers are used to a low price. Price anchoring (establishing a higher price but discounting it) may be needed for some time to transition customer expectations.
    • What is the expected response from the competition?
    • What is the impact on the brand if we reduce prices?
    • What is the impact on volume if we increase prices?

An End-to-End Pricing Case Example

Let’s go through the pricing case for the California municipality with 6 parking lots. Remember that the instructions said to focus on incremental revenue. As you develop your structure for the case, remember the key components of our pricing issue tree approach:

  • Pricing strategies including offering value-added services
  • Financial Impact
  • Risk

Tailor Your Pricing Case Approach for this Client

The first thing you will need to do in a pricing case study, as well as any other consulting case, is to ensure you understand the problem you need to solve by repeating it back to your interviewer. If you need a refresher on the 4 Steps to Solving a Consulting Case Interview, check out our guide.

Second, you’ll structure your approach to the case. Stop reading for a moment and consider how you’d structure your analysis of this case. We gave you some hints in our sample cases section. After you’ve outlined your approach, read on and see what issues you addressed, and which you missed. Remember that you want your structure to be MECE and to have a couple of levels in your Issue Tree

  • Which pricing strategy/strategies should our client use and why?
    • Cost-based considerations: 
      • What is the municipality’s cost structure? 
      • How much revenue is required to cover costs?
      • How much of a profit expectation does the municipality have? Do they want to generate as much revenue as possible or cover their costs and provide a service to their community at an attractive price?
    • Market-based considerations: 
      • What are the municipality’s current pricing structure and prices?
      • How do the municipality’s current prices compare to alternative parking options?
      • What alternative pricing structures could the municipality use (hourly rates, daily rates, monthly rates, store validation, etc.)
      • What non-price considerations are there? (Proximity to popular destinations, roof vs. no roof, lighting/safety, cleanliness)
    • Value-based considerations
      • What services could the parking lots provide in addition to the parking spot?
      • How much space would providing additional services require?
      • How much revenue would they generate?
  • What financial Impact would the new pricing strategy have on the client?
    • What are the expected revenues of alternative pricing models?
    • What are the expected revenues of value-based services?
    • Would additional costs be incurred?
  • What risks could come with changing the pricing model?
    • How might customers react to alternative pricing models?
    • To value-based services?
    • How might competitors react?

Pricing Case Brainstorming Exercise

After you structure your approach, the interviewer asks you to brainstorm some revenue growth opportunities for the California municipality. Again, stop reading for a moment to do this exercise yourself because you’ll learn more if you do. When you’re done, note the ideas you didn’t consider. Few candidates hit every possibility, but to move on to the next round of interviews, you’ll definitely want to go beyond the straightforward responses. 

  • What changes to the garages’ pricing structure could drive incremental revenue?
    • Charge store owners for parking spots to offer free parking for visitors.
    • Charge higher pricing for spots closest to the stores.
    • Offer annual/monthly parking passes.
  • What value-add services could the client provide?
    • Valet parking
    • Car washing
    • Quick car servicing (e.g., oil change)
  • What other options would increase utilization of space?
    • Locate public transportation/bus stops adjacent to the lots and provide parking to commuters at a monthly rate.
    • Rent space to event attendees (e.g., sporting events, concerts, fairs).

When you ask about the municipality’s current pricing and parking space utilization rates, your interviewer provides you with the following exhibit and asks you to calculate the daily revenue. Note that the parking lot has two sources of revenue:

  1. Tourists/shoppers buying parking tickets for an hourly rate.
  2. Store owners buying monthly parking permits for their staff.

Calculation of current daily revenue:

  • Tourists/shoppers:
    • 3 hour parking: Revenue = (20,000 parking spots) * (30% of total lot occupancy for tourists/shoppers) * (75% of tourists/shoppers occupancy for 3hr parking) * ($2/hr) * (*3hrs) = $27,000
    • 5 hour parking: Revenue = (20,000 parking spots) * (30% of total lot occupancy for tourists/shoppers) * (25% of tourists/shoppers occupancy for 5hr parking) * ($10 flat fee) * = $15,000
    • Total tourist/shopper revenue – $42,000
  • Store owners: Revenue = (20,000 parking spots) (5% lot occupancy for owners) *($240/month) (1/30 to convert to daily revenue) = $8,000
  • Total tourist/shopper + store owner daily revenues= $50,000

Alternative Pricing Model: Store Validation

If we move to a store validation model, in which a store validates the ticket of any customer who buys something, the spots taken would increase to 10,000, or 50% of available capacity. This is because the cost of parking is currently a deterrent to customers shopping at this mall. More shoppers at the mall would be a significant benefit to store owners.

The cost per validation would be $5 to the store. Assume every person parking a car purchases something. The number of store owner permits would drop to 750 since store owners will likely decide to save money on permits to pay for visitor parking spots.

What would be the impact on daily revenue?

    • Increase in the tourist/shopper revenues = $8,000 = (10,000 spots) * ($5 per spot) – $42,000
    • Store owner revenues would decrease by $2,000= (750 permits) * ($240 per permit/30 days per month) – $8,000 
    • Change in total daily revenue = + $6,000
  • A good candidate will recognize that the increase of 12% in daily revenues is a positive move forward.

Risks to the Change to a Validation Pricing Model

Do you see any risks to a validation pricing model? Do you think you’re likely to run into any resistance? From which types of stores and why?

  • Stores with low price per transaction (such as ice cream shops) will likely lose money if they pay for the $5 validation fee, therefore 100% of stores will not be willing to participate.
  • An alternative validation model would be to charge stores based on a percentage of transactions or profits. This would get less pushback.
  • Under the percentage model, there would need to be a cap on the price charged to stores. A 5% charge on an ice cream may be reasonable but a 5% charge on a $1000 handbag would not be.
  • You could note that while the focus of this case is on revenue generation, the costs to run a validation model might be slightly higher because the municipality will need to process the validation numbers and bill the stores.

Recommendation

Lastly, provide your recommendation for the client. Try coming up with your own before reading our sample.

The California Municipality should proceed with the transition to the validation pricing model because it provides an incremental $6000 per day or an increase in revenue of 12%. While doing this, it should study the risk of pushback from store owners with low transaction value and the possibility of charging based on a percentage of the transaction. Additionally, the municipality should roll out revenue growth opportunities such as renting out excess capacity and offering value-added services (e.g., valet parking) over time.

6 Tips for Solving a Pricing Case Interview

  1. Determine the relevant pricing strategy to apply (e.g., cost-based vs. market-based or demand pull).

  2. Brainstorm all possible changes in pricing methodologies that might bring in additional revenue (e.g., hourly, daily, or monthly pricing, a store-validation model for our parking lot case)

  3. Don’t forget that charging for value-added services could be part of a broader pricing & revenue generation strategy (e.g., oil changes, car wash for our parking lot case).

  4. Calculate the incremental revenues from suggested changes in pricing.

  5. Always have an answer to whether to proceed or not.

  6. Detail the risks associated with the pricing changes.

– – – – –

In this article, we’ve covered:

  • Examples of pricing cases
  • Approaches for solving a pricing case
  • Different pricing strategies 
  • Tips for solving a pricing case

Still have questions?

If you have more questions about pricing case study interviews, leave them in the comments below. One of My Consulting Offer’s case coaches will answer them.

Other people prepping for pricing case studies found the following pages helpful:

Help with Case Study Interview Prep

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2 thoughts on “Mastering the Pricing Case Interview: A Comprehensive Guide”

  1. In the Alternative Pricing Model: Store Validation

    The original tourist/shopper revenue is $42,000
    Under the alternative pricing model, (10,000 spots) * ($5 per spot) = $50,000, an $8,000 increase

    The original store owner revenue is $8,000
    Under the alternative pricing model, (750 permits) * ($240 per permit/30 days per month) = $6,000, a $2000 decrease.

    The new total daily revenue = $56,000
    Original daily revenue = $50,000

    Shouldn’t the change in total daily revenue be = $56,000 – $50,000 = $6,000, a 12% increase?

    I’m confused about the change in total daily revenue $2,000 and 4% numbers.

    Reply

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