How should we price this new product?

• That you reason first from value to the customer. Starting from cost and adding a margin is the simplest method and the weakest, because it ignores what the buyer is willing to pay.
• That you ask for the objective. Maximising profit, gaining share fast or establishing a premium image lead to different prices.
• That you can put a number on value. For a product sold to businesses, that often means calculating what the product saves or earns the buyer.
• That you think about the effects of price: competitors' reaction, the impact on the client's other products, and the option of different prices by segment.

1. 1

   Understand the product and the objective

   How the product differs from what exists, who it is for, and what the client wants: volume, margin, a position.
2. 2

   Calculate the floor

   Variable cost per unit gives the price below which every sale loses money. Fixed costs and investment give the volume to reach.
3. 3

   Estimate the ceiling and the reference

   Quantify value to the buyer: savings, gains, time saved, compared with their best alternative. Then note the prices of competing or substitute products.
4. 4

   Choose and check

   Place the price in the range according to the objective, then test it: what volume at that price, what margin, what reaction from rivals. Mention whether different prices by segment would make sense.

"Our client makes farm machinery and is launching a sensor that lets a tractor automatically adjust the amount of fertiliser it spreads. It is asking what price to sell it at. Two questions first: is there already a comparable product on the market, and is the client trying to equip as many farms as possible quickly or to maximise its margin per sensor?

I would look at three reference points. The lowest is the cost of making and installing it, which I will ask you for. The highest is what the sensor is worth to a farmer: if it cuts fertiliser use, I can estimate the annual saving for a typical farm, and a farmer will not pay more than the device saves over a few years. In between, I would look at the price of neighbouring solutions. I suggest starting with value to the farmer, because that sets the maximum. For that I would need the area of a typical farm and its fertiliser spend..."

This example is made up: it shows the tone and the construction, not a script to memorise. Your answer has to come from your own experience or from the data the interviewer gives you.

• Offering only cost plus margin. That is a lower bound, not a pricing method.
• Matching competitors without asking whether the product is worth more or less than theirs.
• Giving a price without checking what it implies in volume and profit.
• Forgetting that the client can charge several prices: by buyer size, by subscription rather than purchase, with or without service.