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Pricing Analytics: Estimating Demand Curves Without Price Elasticity
The document outlines a method for estimating demand curves without relying on elasticity data, focusing on determining three key price points and their corresponding demand. Using Excel, users can fit a quadratic demand equation to these points, enabling them to identify an optimal price for a product. An example involving pricing experiments at CVS stores demonstrates the application of this method to derive an optimal price of $2.47.
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Pricing Analytics: Estimating Demand Curves Without Price Elasticity
- 1. PRICING ANALYTICS EstimatingDemand Curves Without Price Elasticity
- 2. Demand Curves WithoutElasticity 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
- 3. Demand Curves WithoutElasticity 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
- 4. Demand Curves WithoutElasticity 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
- 5. Example •We’ve justacquired 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
- 6. Enter price/demand datapoints
- 7. Select data pointsby dragging over them with mouse Insert Scatter with only Markers chart
- 8. Right-click on anydata point Choose Add Trendline…
- 9. Select Polynomial trendtype Order is 2 since we’re fitting quadratic Display equation on chart Click Close button
- 10. d = -25.86(p)2+ 81.97(p) + 28.23 a b c
- 11. Starting guess foroptimal price
- 12. Enter demand formula: =25.86*B6^2+81.97*B6+28.23
- 13. Enter variable costof producing one unit
- 14. Enter profit formula: =B7*(B6-B8)
- 15. Start the Solvertool
- 16. Maximize Profit Bychanging Price
- 17.
- 18. Optimum price Greaterthan/equal to Minimum price Click OK
- 19.
- 20. Optimum price Lessthan/equal to Maximum price Click OK
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- 22.