PRICING ANALYTICS

Optimizing Price
Optimizing Price
• Best price – price that yields max profits, not necessarily max
unit sales
• Excel’s Solver tool can be used to construct useful pricing
models
 Sets value to be
Excel Solver maximized or
minimized

Variables that can be

adjusted to optimize
objective cells

Restrictions on how
Solver can change
variable cells
Excel Solver
• Solver tries all reasonable solutions that fit the specified model
• Chooses optimal solution – values for variable cells that
produce best value for target cell
Worksheet-2a Pricing Optimization
• Find best price for ink jet printer
• Current price: $75
• Demand at current price: 5,000 printers
• Cost to produce one printer: $59
• Price elasticity: 2.0
• Linear demand curve
• Two known points on demand curve:
• (p=$75, d=5000)
• (p=$75.75, d=4900)
Enter price and
demand values
 Insert Scatter with
only Markers chart

Select data cells by dragging

over with the mouse
 Swap axis data to fix
slope of demand curve
Right-click data point

Choose Add Trendline…

 Select Linear Trendline

Check option to Display Click Close button

Equation on chart
Demand Curve Formula:
d = 15,000 – 133.33 * p
 Enter per-unit
manufacturing cost
Enter initial guess for
optimal price
 Accept formula

Enter demand formula:

=15000-133.3*B7
 Accept formula Total Profit = (Price – Unit Cost) * Demand

Enter profit formula:

=B8*(B7-B5)
Start Solver
 Maximize Total Profit

By changing price
Select GRG Nonlinear
solving method
Click Solve button
 Optimal price per
printer: $86

Total profit:
$95,415.98
Complementary (Tie-In)
Products Product Tie-In
DVD player DVDs
Razor Blades
Cell phone Car charger
Flashlight Batteries
Inkjet printer Ink cartridges
Worksheet 2b-Pricing Optimization w/Tie-In Product
• Including profits from tie-in products lowers optimum price for
original product
• Assumptions for our example:
• Average printer lifetime: 3 years
• Ink cartridge lifetime: 6 months
• Ink cartridges sold per printer: 6 (2/yr * 3 yrs)
• Ink cartridges must be priced at $34
• Profit per ink cartridge sold is $12
 Enter cost to
manufacture printer
 Ink cartridges we’ll sell
per printer

Profit per ink cartridge

sold
Initial guess for optimal price
Enter demand formula:
=15000-133.3*B7
Printer Profits = [(Price - Unit Cost) * Demand]
 Printer Profits = [(Price - Unit Cost) * Demand] +
(Demand * Cartridges per Printer * Profit per Cartridge)
Enter updated total profit formula:
=B5*(B4-B1)+(B5*B2*B3)
Start Solver
 Maximize Total Profit

By changing price
Click Solve
 Best price for our printers is a
$9 loss per sale!!

Total profit:
$525,112.42