Pricing Case Interview: 3 Pricing Methods and a Fully Worked Example

A pricing case asks one deceptively simple question: what should the client charge? Candidates who handle a profitability case with ease often freeze here, because there is no single formula to fall back on. Charge too little and the client leaves money on the table; charge too much and nobody buys. The way through is to know that every price can be worked out in only three ways, to run all three, and then to explain which one should set the final number. This guide covers the three methods, a full worked example with the numbers shown, and how to handle the other common version of the case: should we raise or cut our price?

The three shapes a pricing case takes

A full case. "Our client has built a new product. What should they charge?"

One part of a bigger case. You need a price before you can size a market entry, or a profitability problem turns out to be caused by discounting.

A price-change question. "Should we raise our price by 10%?" This one needs different maths, which is covered further down.

The three pricing methods

1. Cost-based: the floor

Work out what each unit costs, add the margin the client wants, and you have a price.

Price = unit cost ÷ (1 − target margin)

It's quick and easy to defend, and on its own it's almost always wrong. It ignores what customers would pay and what competitors charge. A product that costs $60 to make might be worth thousands to the buyer, and cost-based pricing would never tell you.

Use it as the lowest price you could accept, never as the answer.

2. Competitor-based: the market's frame

Look at what customers pay today for the closest alternatives, including the "do nothing" option and workarounds. This tells you what the customer is comparing you against.

The trap is treating competitors' prices as a ceiling. If your product does something the alternatives can't, the market price only shows where the comparison starts.

Use it to understand what customers will compare you against.

3. Value-based: the ceiling

Work out how much money the product makes or saves for the customer. That's the most a rational customer would ever pay. Your price sits somewhere below it, low enough that buying is an easy decision and high enough that the client captures a fair share.

This is the method interviewers most want to see, because it's where the real thinking happens.

Use it to set the upper limit and guide the final number.

Worked example: pricing a predictive machine sensor

The prompt: Our client, a US industrial equipment company, has built a wireless sensor that clips onto factory machines and warns when a breakdown is coming. What should they charge per sensor?

Step 1: Cost-based floor

Item	Per sensor
Components and assembly	$45
Share of software, support and overheads	$15
Total unit cost	$60

With a 30% target margin: $60 ÷ 0.7 ≈ $86.

So the client should never charge less than about $86.

Step 2: Competitor-based frame

What does a factory use today?

• Basic wireless sensors that report vibration but don't predict failures: about $150
• Wired monitoring systems with prediction: about $500 of equipment plus $1,000 of installation per machine → $1,500
• Doing nothing and fixing machines when they break: free upfront, expensive later

So the market range is $150 to $1,500. The client's sensor does what the wired system does, without the installation cost.

Step 3: Value-based ceiling

What does the sensor save a factory?

• An unexpected breakdown costs about $40,000 in lost output and emergency repairs
• A typical machine breaks down unexpectedly about once every two years → $20,000 a year in expected cost
• The sensor prevents about half of these → saves $10,000 a year per machine
• The sensor lasts three years → $30,000 of value per sensor

The ceiling is far above both the cost and the competitor range.

Step 4: Pick the number and defend it

The three methods give $86, $150 to $1,500 and up to $30,000. Where should the price land?

A good answer: "Basic sensors sell for $150, so price at around $200 to stand out as premium."

A better answer: "I'd price at about $1,200 per sensor. That's below the $1,500 installed cost of the wired alternative, so the comparison is easy for buyers. The factory gets its money back in about six weeks ($1,200 ÷ $10,000 a year). And the client still earns roughly 20 times its unit cost. I'd also test a subscription of around $40 a month, because some factories prefer operating budgets to upfront purchases."

The first answer anchors on the wrong competitor and leaves most of the value with the customer. The second uses all three methods: cost as a floor, the closest true alternative as the anchor, and value as the reason the price is easy to accept.

Step 5: Name the risks

• Customers may not believe the savings until they've seen them, so a pilot at a few factories would help.
• A competitor could copy the product and undercut the price, so speed to market matters.
• Large customers will push for volume discounts, so set a list price that leaves room to negotiate.

When the question is about changing a price

"Should we raise our price by 10%?" needs a different tool: how much volume can you lose before profit falls?

Break-even volume loss = price increase ÷ (contribution margin + price increase)

Example: A coffee chain sells a drink for $5. Each one costs $3 in ingredients and packaging, so the contribution margin is 40%.

A 10% price rise means the chain can lose up to 10 ÷ (40 + 10) = 20% of its customers before profit falls.

Check it in dollars:

• Before: 1,000 drinks × $2 contribution = $2,000
• After: the price is $5.50, so contribution is $2.50 a drink. 800 drinks × $2.50 = $2,000.

So the question becomes: would more than one in five customers walk away over 50 cents? For a daily coffee habit, probably not. For a product with a cheaper identical rival next door, quite possibly.

A price cut works in reverse, and the maths is far less forgiving. Cutting price by 10% at a 40% margin means volume must rise 33% just to stay level (10 ÷ (40 − 10)). That's why "lower the price to win share" is rarely a strong recommendation without a clear reason.

Mistakes interviewers see constantly

Stopping at cost-plus. It's the easiest calculation and the weakest answer.

Treating the cheapest competitor as the benchmark. Compare against the alternative that does the same job, not the one with the lowest price.

Giving a range instead of a number. "Somewhere between $500 and $2,000" isn't a recommendation. Commit, then explain.

Forgetting the customer's decision. Payback time, budget type (upfront vs monthly) and who signs off often matter as much as the number.

Build the habit

Knowing the three methods takes ten minutes. Using them quickly, out loud, with the arithmetic flowing, takes practice.

Sharpen your structuring with Structure Drills, tackle full pricing problems in Prep Cases, and run a live pricing case with a partner in a Peer-to-Peer Session.

Could you defend a price in front of a partner? Find out with TheConsulting.io's Prep Cases, or see the plans.