Pricing Analytics: Estimating Demand Curves Without Price Elasticity
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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.
Pricing Analytics: Estimating Demand Curves Without Price Elasticity
- 1. PRICING ANALYTICS Estimating Demand Curves Without Price Elasticity
- 2. 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
- 3. 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
- 4. 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
- 5. 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
- 6. Enter price/demand data points
- 7. Select data points by dragging over them with mouse Insert Scatter with only Markers chart
- 8. Right-click on any data point Choose Add Trendline…
- 9. Select Polynomial trend type 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 for optimal price
- 12. Enter demand formula: =25.86*B6^2+81.97*B6+28.23
- 13. Enter variable cost of producing one unit
- 14. Enter profit formula: =B7*(B6-B8)
- 15. Start the Solver tool
- 16. Maximize Profit By changing Price
- 17. Add constraint
- 18. Optimum price Greater than/equal to Minimum price Click OK
- 19. Add constraint
- 20. Optimum price Less than/equal to Maximum price Click OK