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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