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