Download - Pricing Analytics: Optimizing Price
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PRICING ANALYTICS Optimizing Price
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Optimizing Price • Best price – price that yields max profits, not necessarily max
unit sales
• Excel’s Solver tool can be used to construct useful pricing models
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Excel Solver Sets value to be
maximized or minimized
Variables that can be adjusted to optimize
objective cells
Restrictions on how Solver can change
variable cells
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Excel Solver • Solver tries all reasonable solutions that fit the specified model
• Chooses optimal solution – values for variable cells that produce best value for target cell
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Pricing Optimization Example • Find best price for ink jet printer
• Current price: $75
• Demand at current price: 5,000 printers
• Cost to produce one printer: $59
• Price elasticity: 2.0
• Linear demand curve
• Two known points on demand curve: • (p=$75, d=5000)
• (p=$75.75, d=4900)
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Enter price and demand values
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Select data cells by dragging over with the mouse
Insert Scatter with only Markers chart
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Swap axis data to fix slope of demand curve
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Right-click data point
Choose Add Trendline…
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Select Linear Trendline
Check option to Display Equation on chart
Click Close button
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Demand Curve Formula: d = 15,000 – 133.33 * p
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Enter per-unit manufacturing cost
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Enter initial guess for optimal price
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Enter demand formula: =15000-133.3*B7
Accept formula
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Total Profit = (Price – Unit Cost) * Demand Accept formula
Enter profit formula: =B8*(B7-B5)
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Start Solver
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Maximize Total Profit
By changing price
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Select GRG Nonlinear solving method
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Click Solve button
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Optimal price per printer: $86
Total profit: $95,415.98
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Complementary (Tie-In) Products
Product Tie-In
DVD player DVDs
Razor Blades
Cell phone Car charger
Flashlight Batteries
Inkjet printer Ink cartridges
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Pricing Optimization w/Tie-In Product • Including profits from tie-in products lowers optimum price for
original product
• Assumptions for our example: • Average printer lifetime: 3 years
• Ink cartridge lifetime: 6 months
• Ink cartridges sold per printer: 6 (2/yr * 3 yrs)
• Ink cartridges must be priced at $34
• Profit per ink cartridge sold is $12
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Enter cost to manufacture printer
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Ink cartridges we’ll sell per printer
Profit per ink cartridge sold
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Initial guess for optimal price
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Enter demand formula: =15000-133.3*B7
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Printer Profits = [(Price - Unit Cost) * Demand]
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Printer Profits = [(Price - Unit Cost) * Demand] + (Demand * Cartridges per Printer * Profit per Cartridge)
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Enter updated total profit formula: =B5*(B4-B1)+(B5*B2*B3)
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Start Solver
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Maximize Total Profit
By changing price
Click Solve
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Best price for our printers is a $9 loss per sale!!
Total profit: $525,112.42
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