Date post: | 20-Jun-2015 |
Category: |
Data & Analytics |
Upload: | michael-lamont |
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PRICING ANALYTICS Estimating Demand Curves Without Price Elasticity
Demand Curves Without Elasticity Data • Need to estimate three points on product’s demand curve:
• Lowest price we’d consider charging, and demand at that price
• Highest price we’d consider charging, and demand at that price
• Median price, and demand at that price
Demand Curves Without Elasticity Data • Excel can fit basic quadratic demand equation to our three
price/demand points:
d = a(p)2 + b(p) + c
• d: demand
• p: price
• a, b, and c: auto-calculated for us by Excel to give best fit
Demand Curves Without Elasticity Data • Quadratic curve adjusts to fit all three demand/price points
• Reasonable assumption: curve that fits our three points approximates demand between the points
• Excel’s Solver can be used against demand curve to determine optimal price
Example • We’ve just acquired a new product, and need to evaluate
pricing ASAP
• Could make high/median/low guesses about demand
• Running small experiment instead: • 3 CVS stores around Harvard Square
• Shoppers randomly choose store
• Stores have equivalent sales
• Pricing: $1.50, $2.49, $3.29
• Unit Sales: 93, 72, 18
Enter price/demand data points
Select data points by dragging over them
with mouse
Insert Scatter with only Markers chart
Right-click on any data point
Choose Add Trendline…
Select Polynomial trend type
Order is 2 since we’re fitting quadratic
Display equation on chart
Click Close button
d = -25.86(p)2 + 81.97(p) + 28.23
a b c
Starting guess for optimal price
Enter demand formula: =25.86*B6^2+81.97*B6+28.23
Enter variable cost of producing one unit
Enter profit formula: =B7*(B6-B8)
Start the Solver tool
Maximize
Profit
By changing Price
Add constraint
Optimum price
Greater than/equal to
Minimum price
Click OK
Add constraint
Optimum price
Less than/equal to
Maximum price
Click OK
Click Solve button
Optimum price: $2.47