Download Price Promotions & Profits

Example of a Linear Price-Quantity Demand
Function
MWB(uy)
Quantity
Demande
d
Two observations on the
price-quantity demand
schedule
*
*
MWP(ay)
0
0
Price
Variable Cost (VC)Charged
Constant Elasticity of Demand in $ Terms
600
Sales Volume
500
The Optimal price is the mid
point between the Maximum
Willingness to pay and Variable
Cost of the Product
Price
elasticity
Gross
Margin
-1.5
67%
-2
50%
-3
33%
-4
25%
400
300
200
100
0.
0
0
0
$1
$9
.0
0
0
$8
.0
Price
$7
.0
0
$6
.0
0
$5
.0
0
$4
.0
0
0
5/23/2017
$3
.0
$2
.0
$1
.0
0
-
Paul Farris
GM* = -1/e
Where, GM*, (gross margin*)
indicates the gross margin at
the optimal price and e = the
elasticity of demand.
Since GM*= (P*-VC)/P* =-1/e,
1
Pricing Principles
• Cost
• Value
• Competition
5/23/2017
Paul Farris
2
Product Life Cycle
Clay Christensen
•
•
•
•
Features, technologies
Quality, reliability
Ease of use, convenience
Price
5/23/2017
Paul Farris
3
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
5/23/2017
Paul Farris
4