How to Answer Pricing Strategy Questions

Pricing strategy questions assess your ability to set a product price that makes sense in a given business context. Pricing is much more complex than just setting a number, and answering pricing questions well requires a firm understanding of how the product serves users and the core business. Example questions include:

• “How would you go about pricing a self-driving car?”
• “How would you price buying a season of a show?”
• “As a Google PM, what’s the next piece of hardware you would launch, and how would you price it?”

To answer these, work through the general framework first, then consider the many ways product pricing can impact the success of a product and the larger company. For starters:

• Price affects revenue and gross margin. Generally, higher-priced products sell fewer units, but the gross margin on each unit is higher.
• Different prices attract different user groups. For example, luxury goods with sky-high prices attract users with certain characteristics in common.
• Pricing affects how people perceive the product. For example, consumers expect luxury brands to sell expensive products and they expect a quality product in return, whereas a mass-market product priced similarly might seem like a ripoff.

Keep these considerations in mind as you work to understand the problem context, the product and company goals, and the competitive landscape. Once you’ve covered those, you can hone in on a pricing strategy.

Step 1: Define the landscape

When asking clarifying questions, be sure to ask how the product offers value beyond the company’s existing portfolio. Understanding new features or content offerings will help you discern who the target users are, which will help you set a reasonable pricing strategy.

You’ll also want to ask questions to help you understand how the product will be launched - is it a brand-new offering, in which case you’ll set the initial price? Or has there been a change that requires new pricing? If this is the case, you’ll have to consider the existing pricing strategy and how it might make sense to diverge from it.

As you define product goals and company strategy, consider where the company is right now, and where it would like to go. For example:

• Is the company entering a new market? Seeking market dominance?
• Is the company seeking short-term profits or investing in a strategy for the long term?
• What about this product is novel, and how will offering this novelty affect the company’s brand?
• What risks exist in moving ahead with this product?

Finally, consider landscape factors:

• Competition: Is the market highly competitive? Are there entrenched players? If so, is the company one of them?
• Public opinion: How will the public react to the product? Are there any regional factors to consider?
• Internationalization: How is the current pricing strategy applied in international markets (if any)? How relevant is the scalability of the pricing strategy to other geographies?
• Consumer Price Sensitivity: Is inflation affecting the market right now? What is current consumer price sensitivity?

All of these factors can potentially affect your pricing strategy, but the list is not exhaustive. Figure out what makes sense given the specifics of your question.

Step 2: Identify a pricing strategy

After you’ve defined goals and landscape considerations, move on to pricing. Here are some common pricing strategies to be aware of:

• Value-based pricing: When using value-based pricing, set product price according to the value of the product as perceived by its users.
• Cost-plus pricing: One of the simplest pricing strategies. Simply apply a markup to production cost.
• Dynamic pricing: Instead of setting a price for an extended period of time, in some markets it makes sense to price products dynamically according to fluctuating demand. Surge pricing from rideshare companies like Uber and Lyft is an example.

Consider whether there is an existing strategy in place, in which case you’d likely adapt that to suit your product, or whether there is another benchmark price you can make use of. If you’re pricing an entirely new product, you might use the cost-plus strategy taking into consideration the company’s brand and the expected value of the product to users.

Then, consider the company’s macro and micro goals - overall, what is the company mission? What is it trying to do in the space? And what is it trying to do with this product? Don’t forget to consider how the product sits in the company’s product portfolio. Sometimes a new offering will cannibalize existing products. Use your judgment as a PM to make a call.

Let’s work through an example to illustrate.

Pricing Example: Assume Uber is rolling out autonomous vehicles (AVs) in San Francisco. How would you price a ride for these vehicles?

First, ask clarifying questions. For the Uber question, you’d want to ask:

“What’s the performance (and regulatory status) of these vehicles?”

“How many vehicles will Uber have? Will they all be deployed at once?”

“Is this a separate service from UberX?”

You could ask your interviewer what Uber’s goals are for launching these autonomous vehicles, but don’t be surprised if the interviewer asks you to define that yourself. Let’s assume your interviewer tells you that:

• The technology is approved by regulators
• Performance-wise, the AVs operate more safely than human drivers
• AVs will make up roughly 10% of the total fleet size at peak hours

Next, define the product goals for the AV fleet, and Uber’s overall strategy. It can be helpful to consider what’s novel about the product. For instance:

“Releasing AVs will change Uber’s operations significantly. AVs don’t need drivers, so they can operate more frequently and don’t need to be paid a wage — though there could be a rental fee if Uber doesn’t own the vehicles. The lack-of-driver factor obviously lowers the cost of operating the vehicles. Also, AVs are a new technology, which is exciting and could strengthen Uber’s brand as cutting-edge but could cause concern about drivers being replaced or about safety.

Overall, AVs are likely a significant investment. If deployed well, this would make Uber a leader in the space. Uber doesn’t seem to be aiming for short-term profits with this launch. I’m going to assume, going forward, that Uber is seeking market dominance. In terms of product goals, AVs can support Uber’s market domination goal by increasing vehicle availability while possibly reducing cost and by strengthening Uber’s positioning as a tech leader.”

The last factor to consider before jumping into pricing is the strategic landscape.

Recall that your interviewer already confirmed that the AVs drive safer than humans and that the technology is approved by regulators, so those two important factors don’t pose risks. The most important thing to note about the space Uber operates in is that it’s highly competitive. For example:

“Most rideshare users care about convenience and price; there’s not much brand loyalty to speak of. Users often compare Uber with competitors like Lyft when they’re looking for a ride. This means that Uber’s margin is squeezed; it must keep ride prices low to avoid losing customers, yet it must keep rates high enough to acquire drivers especially during peak hours.

Another thing to consider is that San Francisco has public transit options, especially in its most populous areas. These options are usually lower cost at the expense of longer travel times. Users could also just walk or drive themselves.

Overall, it’s a tough environment. Uber faces significant competition with thin margins. AV technology is not widespread though, so it’s a potential differentiator.”

Next, brainstorm pricing options. Uber already has a pricing structure in place, so you’d want to start there. Then, adjust the pricing model to accommodate the AV fleet, including any strategic factors you previously identified. For instance:

“Uber has a marketplace model that prices rides dynamically, based on current supply and demand. I see no reason not to use this pricing model as a baseline, and adjust it to the AV product. For example, at peak hours, the AVs will create some increase in supply, but the increase will be more notable during off-hours where they can provide a significant, predictable baseline; for example, for users trying to get a ride at 5:00 a.m.

On the strategic side, we’re assuming that Uber is trying to grow market share. To do that, it needs to get users excited enough about this technology, or, the AVs need to be better priced and more convenient than the competition. While Uber could explore putting a premium on the price as a signal of quality, it seems the best way to encourage usage is to offer these rides at a lower price than the competition. Uber can afford to do this because AVs have lower per-mile costs. Lower prices might encourage users who are hesitant about AVs to give them a chance.

One final consideration is that, from an Uber-wide perspective, AVs will compete with existing services. Uber won’t want to lose drivers, so AVs can’t be priced so low that users will be hesitant to take standard rides. There will have to be a balance between these factors.”

Given the above, you’re ready to give a more specific answer to the question at hand. Close with the following:

“Overall, I would propose that Uber use a market-based pricing model with a slight discount on AV rides to place prices below the competition. Uber’s margins are likely thin, so I’ll estimate that Uber can tolerate a price reduction of about 20%. Ideally, I’d want to better understand exactly what Uber’s tolerable loss-to-profit-margin is with the goal of outpacing competition in the long term. Without further information, I’d recommend aiming for rides to cost about 20% less than UberX."

As you wrap up, evaluate your answer. Consider strategic pitfalls that might challenge your pricing model. To dive a little deeper, you might consider how this strategy plays out long term or how you’d account for risks you identified but didn’t cover in detail. For example:

• You could talk about the longer-term vision and (if you think it’s the goal) how the initial AV rollout helps Uber get to a fully autonomous fleet. You could then plan pricing around that goal.
• You could think about how the price evolves over time. You could propose that Uber offer a promotion (at first) to get riders interested, then raise prices once riders are used to the service.
• You could consider how competitors might react to this and what you could advise to watch out for with this strategy. For example, competitors might temporarily raise driver pay to drive discontent with Uber, causing operational and public relations issues.