Post on 31-Dec-2015
description
04/19/23 Paul Farris 1
QuantityDemanded
Price Charged
**
MWB(uy)
MWP(ay)
Variable Cost (VC)
Two observations on the price-quantity demand schedule
Example of a Linear Price-Quantity Demand Function
0
0
The Optimal price is the mid point between the Maximum Willingness to pay and Variable Cost of the Product
GM* = -1/eWhere, GM*, (gross margin*) indicates the gross margin at the optimal price and e = the
elasticity of demand.Since GM*= (P*-VC)/P* =-1/e,
Constant Elasticity of Demand in $ Terms
-
100
200
300
400
500
600
Price
Sal
es V
olu
me
Price elasticity
Gross Margin
-1.5 67%
-2 50%
-3 33%
-4 25%
04/19/23 Paul Farris 2
Pricing Principles
• Cost
• Value
• Competition
04/19/23 Paul Farris 3
Product Life Cycle Clay Christensen
• Features, technologies
• Quality, reliability
• Ease of use, convenience
• Price
04/19/23 Paul Farris 4
Summary
• Cost, value, competition and sense of strategy over the product life cycle
• One price will rarely do the job– Segmentation– Bundling– Selling through distributors
• Pricing is a process that can be improved and innovated