Pricing case interviews

An overview of the different types of pricing case interview questions with a full wallkthrough of a pricing case question from an ex-McKinsey & Company Business Analyst.

Kenzie Seal, ex-McKinsey & Company, Founder at Forkright Published: August 25, 2021 | Last updated: March 28, 2024

Example pricing cases | Pricing frameworks | Full case example

Amongst the many archetypes of case interview questions – such as profitability case interviews and market sizing case interviews, discussed in other Rocket Blocks blog posts -- pricing case interviews are one style that come up time and time again.

The high-level goal of a pricing question is to use a variety of data to triangulate the optimal price for a client’s offering, or to explain why a given price may be suboptimal. There are three common formats for pricing drills, one of which you are reasonably likely to come across as you march your way through the dozens of interviews often required to land an offer:

• Set a price for a new product, service, or market: These questions take the form of a go-to-market strategy, sometimes involving an extant business unit that is looking to expand its offerings and other times involving the launch of a brand-new business unit or subsidiary.
  
  Less commonly, you may be asked to determine pricing for an existing product or service as the client expands into a market where it doesn’t have a presence today – though questions in this format are more likely to touch on pricing as one piece of a broader market entry strategy, with less time and energy spent on pricing strategy alone.


• Evaluate a proposed change to the price of an existing product or service: These questions are usually anchored to the goal of either growing revenues or expanding margins.
  
  Sometimes an interviewer will be more interested in your analysis of price elasticity (i.e., how sensitive demand is to a change in unit price) to determine whether a price increase (or decrease) will successfully grow overall revenues. Other times, the interviewer will be more focused on how you think about price in conjunction with changes in cost – including potential variable cost increases to support a price change (e.g., through increased marketing expense to justify a pricing increase to customers) and fixed cost defrayment as price interplays with volume.


• Explain a change in prices observed in the market: These question formats are focused on assessing your understanding of how price, volume, and profit interact. Expect charts and data to analyze.
  
  This question format is differentiated from the first two formats in that it’s more focused on helping a client understand market behavior than it is on setting the client’s own prices. That said, don’t forget to tie it back to the client in the end, and provide a specific recommendation on how the client should respond to the market behavior – be it by increasing prices, decreasing prices, or holding them steady.

Pricing case interview questions are popular because they allow an interviewer to evaluate a candidate’s fluency with one of the key levers of profitability, while also allowing the candidate to demonstrate their understanding of how price interplays with demand to shape market forces.

Example pricing cases (Top)

Read through the following examples of pricing interview questions to make sure you can identify them in all their forms:

“Your client is launching a new fast casual restaurant banner, offering better-for-you salads and grain bowls. Their thesis is that they can differentiate the brand based on a social responsibility message, emphasizing environmental stewardship and employee pay & working conditions. This model obviously carries higher input costs than their competitors. How much should they charge customers for each meal they sell?”

Note that this question is asking you to set a price for a new product that is differentiated from the market and thus requires fresh pricing analysis. This is the case that we will solve in the full example case below.

“JetSmart airlines, like all major commercial carriers in the US, saw customer traffic decline precipitously during the height of the COVID-19 pandemic in 2020. Management is desperate to grow revenues, and brings you in to evaluate whether a price drop of up to 50% will improve volume and flatten or reverse the revenue decline.”

Note that this question is asking you to evaluate a proposed change to the price of an existing service. You should expect to come up with a go / no-go decision on a price reduction, as well as a specific percentage reduction to pre-pandemic fares.

“In Q2 2021, commodity lumber futures in the United States spiked to $1,671 per board foot, up from $701 at the start of the year, due to a tightening of lumber supply on the market. As furniture manufacturers see profits get squeezed, how are they likely to respond, and how much of the lumber cost increase will be passed on to consumers in finished furniture prices?”

Note that this question is asking you to explain a change in prices observed in the lumber market, and hypothesize about how those shifts are likely to impact equilibrium pricing in the finished furniture market.

💡 Shameless plug: Our consulting interview prep can help build your skills

Pricing frameworks (Top)

As you likely know, in case interviews there’s no such thing as a one-size-fits all framework for any given type of question – and the same, unfortunately, holds true for pricing problems. That said, applying a combination of the following three strategies – and often all three – can help set you on the right path. Don’t forget to customize this framework to the specifics of the question at hand.

Three key strategies for price setting:

1. Competitive benchmarking: This is the gold standard in pricing. Knowing where similar products and services are priced is the foundation for pricing your own. This effectively allows you to piggy-back on years of real-world price discovery by the competitors that came before you.
   
   Often the close competitors are obvious – for example, if you were asked to price a new ridesharing service, you could probably easily think of Uber and Lyft to benchmark – but more distant alternatives can also be indicative, especially when close comps don’t exist – for example, by benchmarking the prices of public transit or the amortized cost of car ownership.


2. Cost analysis: Think of cost analysis as uncovering the minimum price you can afford to charge. By adding up the components costs of delivering your offering, you can determine the breakeven price you would have to charge to avoid losing money. From there, you can add the client’s target contribution margin on top of the costs to determine the minimum acceptable price. Margins vary widely by industry, but many industries see contribution margins in the 10-30% range.
   
   It’s worth noting that while price generally must exceed costs, this isn’t always true. You may want to consider whether engaging a loss leader is a viable strategy for driving profitability in other areas. For example, the under-market $4.99 rotisserie chicken at Costco is sold at a loss as part of a strategy for keeping foot traffic high.


3. Willingness to pay: To the extent that cost analysis dictates the minimum price, determining customer willingness to pay can set the ceiling for maximum price. To do this, consider customer price elasticity – for example, you might survey customers to ask how much they would pay for theoretical products or try rolling out different prices for the same product in different markets, to assess the impact on demand.
   
   Analyzing willingness to pay is a thorny problem which can become hugely complex – think airline seat-level dynamic pricing models, for example – so unless you’re going into the interview with expertise on the subject, stick to the basics.

Full case example (Top)

Now, let’s work through the case we introduced earlier step-by-step, using the three-pronged framework above.

“Your client is launching a new fast casual restaurant banner, offering better-for-you salads and grain bowls. Their thesis is that they can differentiate the brand based on a social responsibility message, emphasizing environmental stewardship and employee pay & working conditions. This model obviously carries higher input costs than their competitors. How much should they charge customers for each meal they sell?”

As always, your first step is to structure, structure, structure. You should jot down the key information as you are given it, and then you might list out the three approaches you are going to engage on your page.

1. Benchmarking: It sounds like the client is looking to launch an offering unlike (and higher cost than) those already on the local market. Given this, we should understand that we’re benchmarking an alternative product, rather than a direct competitor.
   
   You might ask who the closest existing competitors are, and where their meals are priced. You’re likely to be read out some numbers and tasked with some mental math (ugh) or given some printed data which may involve more complex arithmetic. Let’s say you run the math, and determine that these competitors are priced at $10.50 per meal on average. Remembering that these competitors are working with a lower cost structure, you might ask what their contribution margin is, for additional triangulation, and learn that they’re working with a 20% margin


2. Cost Analysis: Shifting tacks, you work on identifying the major variable costs (you might list out food cost and labor) and fixed costs (you might list out occupancy and store-level SG&A). When you probe on competitors’ base costs for each cost bucket, your interviewer might give you a full P&L for a sample competitor. There you discover aggregate per-unit costs of $8.50, of which $3.15 comes from labor and $2.60 comes from food cost.
   
   Absent more information, you decide to estimate the increase to these two cost buckets under the client’s new business model. Let’s say you use +20% for each, giving (rounded!) increases of $0.65 and $0.50, respectively.
   
   Adding these increases to your base cost of $8.50, you find your new unit cost to be $9.65. You note that holding flat at the market price of $10.50 would leave you with a contribution margin of less than 10%.


3. Willingness to pay: You might observe that the client’s thesis on the value proposition is unproven, and suggest the client conduct some market research to determine whether customers in fact care about social responsibility, and if so, how much more they would be willing to pay for a meal that meets these values (e.g., via a survey).
   
   In response, you are told that customers reported being willing to pay up to 20% more for an environmentally-responsible lunch and up to 15% more to a restaurant that treats its staff fairly.
   
   Running the math, you note that a 15-20% hike from the market price of $10.50 is approximately $12.00-12.50, which would give a 20% or higher contribution margin on your new costs of $9.65.

Don’t forget that your final task is always to provide a specific, actionable recommendation.

Synthesizing your three approaches together, you are likely to conclude that an above-market price for your differentiated product is necessary – after all, your costs are higher and customers seem willing to pay a premium for your offering.

Given that any price premium is likely to hit volume, you might suggest the client only take an ~15% price increase to $12.00 per meal. This still leaves you with a competitive 20% margin – better to maximize profitable traffic up front, you reason, than turn off potential customers with sticker shock by trying to be too greedy up front.

Conclusion

This case demonstrates the usefulness of having this pricing framework in your pocket – giving you a simple heuristic to structure your work as you triangulate optimal pricing. All that said, don’t expect every case to fit into this framework exactly – every interview question is unique, and the only way to gain fluency with this approach is to practice until you can tailor the framework effortlessly.