Pricing Analytics: Optimizing Price
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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