Look Inside: The Product Pricing Methodology

The Pizza and Breadsticks Puzzle

Up for a challenge? Let’s see if you can crack this puzzle.

Question: Imagine you own a world famous pizzeria that makes delicious pizza and cheese breadsticks. You have long wondered how to price your products. You study your customers and determine that you have four types, or segments. Segment A loves pizza and will pay as much as $9 for it but is not a big fan of breadsticks (they’ll only pay $1.50 for this). Segment D loves breadsticks and will pay $9 but doesn’t love pizza (they will only pay $2.50). The other two segments, B and C, fall in between A and D in willingness to pay (WTP). You also find out the size of your segments is the same—100 people in each.

Pizza and Breadstick table

Since you operate in a transparent world (anyone can walk into your store, and you must post your prices), you cannot charge each segment a different price for each item (that is, you cannot sell pizza to segment A for $9 and the same pizza to segment C for $4.50). You can only set one price per item or bundle. Further, assume the WTP numbers in the table are the maximum a segment would pay for each item. If you offered any segment a product priced less than or equal to the maximum WTP, they would buy that item. If it is more than the maximum, they would not.

Also assume you can sell to all 100 people in each segment, which means you have the chance to sell to 400 people in total. Your goal is to maximize revenue. So as an example, if you sell the pizza at $4.50 and the breadsticks at $5, you would make a total of $2,850, since at $4.50, segments A, B, and C will buy the pizza; at $5 for the breadsticks, segments B, C, and D would buy it. Total revenue would equal ($4.50 ∗ 3 ∗ 100) + ($5 ∗ 3 ∗ 100) = $2,850. Now that you understand the puzzle, answer this question: What is the maximum revenue you can make? Ready, set, go.

See the answer