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