Customised Pricing Structure

Hi there,

For questions like “How much would you pay for XYZ?”, where XYZ is a product that can generate revenues directly for the buyer (eg dump, parking garage), you normally use valuation methods.

You will almost always have to use a DCF of the estimated cash flow (normally simplified with profit) of the object.

The revenues from the cash flow/profit equation depend on the object itself. If the revenue streams are not obvious you can clarify with the interviewer.

Examples of possible revenue streams:

• Dump ➜ Regulated payment from the government.
• Parking Garage ➜ Fees for using the garage.

If you have to estimate a bid price like for the dump, given this method will give you the maximum amount you may be able to pay, you could consider to:

• Bid a lower amount so that you will receive a return of investment comparable to the opportunity cost you may have (eg 10%).
• Try to estimate the possible bids of competitors (very difficult).

Alternatively, you may use the other valuation methods. But they don’t work well for very unique assets without real comparables:

• Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
• Computation from asset value – identify the equity value as the fair value of total assets minus net debt. This is normally going to give you the minimum price you could pay for the object, as it is considering the assets in isolation.

The other pricing strategies you mentioned (cost-based, value-based, competitor-based) are normally used instead when you have to define the price of products that can’t generate revenues directly for the buyer (eg a new pesticide or headache pill bought by the final customer).

Hope this helps,

Francesco

None of those are really pricing cases. They're about how much is something worth.

1. For the first case:

• You need to figure out how much profit they can make from the dump, and what's the minimum profit you accept in the deal (the difference is the max you would be willing to pay.
• Then you need to look into your competition, and understand how much they could be willing to pay, and if there is something that makes the deal more valuable to you than to them.
• Finally, you can build a probability tree to see what is the bid that would maximize value (this is one option, there are other possibilities).

2. This is how I would approach it. Considering this is a large parking lot and the buyers would be investors:

• Assess how much profit it makes (or even better, how much profit it could make if being well managed). There's a lot of detail that could and should go into this, but I'll keep it at the high level.
• Look into multiples for similar transactions in the area. And adjust considering the difference in value/risk of the clients' parking lot.
• Also consider price trends or anything that may impact the value of the lot, i.e. price per hour and occupancy rates (e.g. new parking lots being built, change in car usage trends, etc.)

Hope this helps!

Hi there,

This is indeed an interesting question which is probably relevant for quite a lot of users, so I am happy to provide my perspective on it:

• First of all, I would not consider “pricing” the right word for it. It rather is a M&A question (i.e. “Should you buy - yes/ no?") since you will need to assess whether the bidding/ offer price is justified or not.
• Generally speaking, I would advise you to approach the question in the following way: 1) (Optionally) conduct a broad, superficial assessment whether the industry and player make any sense to have a look into (e.g. airlines during COVID-19 crisis), 2) Assess the fair value of the target, 3) (Optionally) Assess the fair value of target when you will re-sell it, 4) Put the financial result into context.
• The main component of the case study will be the assessment of the fair value of the target, to be precise, assess yearly profits as key input variable. Contradictory to what other coaches said, it is highly unlikely you will need to do so using a (simplified) DCF method. Instead, you will most likly need to assess the fair value of the target using trading/ transaction multiples or consider it a perpetuity.

In case you want a more detailed discussion on how to solve any type of case study in a customized yet thought-through way, please feel free to contact me directly.

I hope this helps,

Hagen

Hi there,

Neither of these are really pricing! Pricing is normally in regards to a product with multiple sales. Here, you're just figuring out the price of a single thing.

For #1, you need to figure out the value/cost of the dump management. Determine how much it will cost the company, what ROI is needed, and what other projects exist (i.e. can we afford to lose this). Then, determine probabilities of winning the contract based on price.

For #2, this is a bit more like pricing, and you would go with WTP (try to measure the inherent value of the lot) or benchmarking (see what other garages in the area have sold for).

Hello,

As a general rule of thumb I would approach any pricing question as narrowing down from certain starting points:

1- Highest price - Customer's willingness to Pay

2- Lowest price - Cost of producing the product

After having this range in mind, we need to further narrow it down. This can be done by:

3- Internal factors:

a. Price of other products in the company's portfolio - there should be an alignment between the company's existing and future intended pricing policy i.e. selling at value vs selling at high markups

b. How much money does the company want to make from this product

4- External factors

a. Competitor's prices

b. Industry price trends

All the best!

Rushabh

Hello!

To add on top of what has been said before, in pricing cases you 

.