Pricing Analytics: Optimizing Sales Models
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PRICING ANALYTICS Optimizing Sales Models
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Sales Rationale • Different shoppers value the same product differently
• Pool of potential buyers changes over time for durable goods
• When pool is mostly people with low valuation of product, charge a lower price (sale) to support total product sales
• When pool is mostly people with high valuation of product, charge higher price to maximize profit
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Example Sales Model • Target’s private-label yoga pants
• Model 18 months of sales
• Shoppers divided into 3 price pools: • $24.99 (MSRP)
• $19.99 (Promotion)
• $14.99 (Sale)
• Pool of 18,000 potential buyers
• Equal number of buyers at each price level
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Example Sales Model • 1,000 new market entrants each month at each price point
• Half of potential buyers actually purchase each month
• Implication: Anyone who values pants at less than the current price is going to potentially purchase them
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Create data table for the 3 price points & their
associated price codes
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Make the table a range named PriceCodes
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Enter trial price codes for each of the 18 months in our model
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Enter price lookup formula: =VLOOKUP(B7,PriceCodes,2)
Accept formula
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Select handle at bottom right of formula cell, then drag down
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3,000 shoppers will purchase at each price point 3,000 shoppers will purchase at each price point 3,000 shoppers will purchase at each price point
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3,000 shoppers won’t purchase at each price point
3,000 shoppers won’t purchase at each price point
3,000 shoppers won’t purchase at each price point
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Buyers = Previous Nonbuyers + (Previous Buyers – Previous
Sales) + ½ Previous Sales + ½ New Shoppers
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Nonbuyers = ½ Previous Sales + ½ New Shoppers
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Enter formula for MSRP buyers: =E7+(D7-J7)+0.5*J7+0.5*1000
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula for MSRP non-buyers: =0.5*1000+0.5*J7
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula for promotional buyers: =G7+(F7-K7)+0.5*K7+0.5*1000
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula for promotional non-buyers: =0.5*1000+0.5*K7
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula for sale buyers: =I7+(H7-L7)+0.5*L7+0.5*1000
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula for sale non-buyers: =0.5*1000+0.5*L7
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter cell reference for MSRP unit sales: =D7
Accept reference
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Select handle at bottom right of formula cell, then drag down
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Enter conditional for promo unit sales: =IF(C7 <= $F$4, F7, 0)
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter conditional for sales unit sales: =IF(C7 = $F$2, H7, 0)
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula to calculate monthly revenue: =SUM(J7:L7)*C7
Accept formula
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Select handle at bottom right of formula cell, then drag down
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Enter formula to calculate total revenue: =SUM(M7:M24)
Accept formula
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Launch Excel’s Solver tool
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Maximize
Total Revenue
Monthly Prices
Choose Evolutionary solving method
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Click Add button
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Monthly price codes
Less than/equal to
3
Click OK
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Click Add button
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Monthly price codes
Greater than/equal to
1
Click OK
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Click Add button
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Monthly price codes Must be integers
Click OK
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Click Solve button
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Click OK button
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~ $8.74 million in total sales
Promotional pricing not used in optimal solution
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