Pricing Framework

Question 1

Market Sizing Framework/Estimation Questions

Answer 1

Ask you to determine the size of a particular market or to estimate a particular figure

Two different sizing approaches
-Top down approach: start w/ a large number and then refine and breakdown the number until you get your answer
- Bottom up approach: start w/ a small number and then build up and increase the number until you get your answer

*framework consists of writing bullet points of the exact steps you would take to calculate the requested market size or estimation figure

Question 2

Pricing Framework (3 ways)

Answer 2

1. Pricing based on costs: set a price by applying a profit margin on the total costs to produce or deliver the product or service
2. Pricing based on competition: set a price based on what competitors are charging for products similar to yours
3. Pricing based on value added: set a price by quantifying the benefits that the product provides customers

Question 3

Pricing Based on Costs (Pricing Framework)

Answer 3

1. How much does it cost to produce this product?
2. What is the profit margin that the company is trying to achieve?
   *this determines the minimum price you can set

Question 4

Pricing Based on Competition (Pricing Framework)

Answer 4

1. How much do competitors price their products for?
2. How does our product compare to competitors’ products?

*this determines which price in between these two price points you should set - costs vs value added

Question 5

Pricing Based on Value Added (Pricing Framework)

Answer 5

1. What benefits does this product provide to customers?
2. How much value does this provide to customers?

• will determine the maximum possible price

Question 6

Recommendation (Pricing Framework)

Answer 6

Pricing based on costs will determine the minimum price you can realistically set. Pricing based on value added will determine the maximum possible price. Pricing based on competition will determine which price in between these two price points you should set.

In order to get customers to purchase your product, the difference between your price point and the customer’s maximum willingness to pay must be greater than or equal to the difference between your competitor’s price point and the customer’s maximum willingness to pay for their product.