pricing analytics: optimizing price

PRICING ANALYTICS Optimizing Price

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

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

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

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)

Enter price and demand values

Select data cells by dragging over with the mouse

Insert Scatter with only Markers chart

Swap axis data to fix slope of demand curve

Right-click data point

Choose Add Trendline…

Select Linear Trendline

Check option to Display Equation on chart

Click Close button

Demand Curve Formula: d = 15,000 – 133.33 * p

Enter per-unit manufacturing cost

Enter initial guess for optimal price

Enter demand formula: =15000-133.3*B7

Accept formula

Total Profit = (Price – Unit Cost) * Demand Accept formula

Enter profit formula: =B8*(B7-B5)

Start Solver

Maximize Total Profit

By changing price

Select GRG Nonlinear solving method

Click Solve button

Optimal price per printer: $86

Total profit: $95,415.98

Complementary (Tie-In) Products

Product Tie-In

DVD player DVDs

Razor Blades

Cell phone Car charger

Flashlight Batteries

Inkjet printer Ink cartridges

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

Enter cost to manufacture printer

Ink cartridges we’ll sell per printer

Profit per ink cartridge sold

Initial guess for optimal price

Enter demand formula: =15000-133.3*B7

Printer Profits = [(Price - Unit Cost) * Demand]

Printer Profits = [(Price - Unit Cost) * Demand] + (Demand * Cartridges per Printer * Profit per Cartridge)

Enter updated total profit formula: =B5*(B4-B1)+(B5*B2*B3)

Start Solver

Maximize Total Profit

By changing price

Click Solve

Best price for our printers is a $9 loss per sale!!

Total profit: $525,112.42