Department of MBA

IMS Engineering College, Ghaziabad

Marketing Analytics
Ashish Awasthi, Assistant Professor,
UNIT 2
Department of MBA

Pricing Analytics
Marketing Analytics: Data Driven Techniques with Microsoft Excel Wayne L
Winston, Wiley India Pvt Ltd.
 Pricing Analytics
Introduction
• Pricing impacts revenues and revenues impact
profitability
• Understanding how pricing impacts revenues &
profitability is one of the most important issues
faced by managers
• To do so, managers need to understand how
consumers’ willingness to purchase changes at
different price levels and how these changes
impacts profitability
• In short, managers need to understand the demand
curve
 Introduction to
Linear and Power Demand Curves
• As we know there are two types of demand curves
– Linear and Power (non linear) demand curves
• Linear demand curve is a straight line, power
demand curve is a downward sloping curve
• Linear demand curve has a equation q=a – b*p,
where a and b are constant, q is the quantity
demanded and p is the price
• Power demand curve has the equation q = a*pb
here – b is the price elasticity
• These are two most frequently used demand curves
 Introduction to
Linear and Power Demand Curves
• In case of linear demand curve, the Price elasticity of
demand, Ep is variable, while in case of power demand
curve it is constant
• To estimate a profit maximizing price, two things are
required to be known:
 The variable cost to produce a unit product = UC
 The demand curve of the product. Demand curve tells the
number of units of a product a consumer will demand at
each price.
 E.g. At price of Rs. p, the no. of units demand will be D(p)
 A firm’s demand curve is constantly changing and depends
of factors which are beyond firm’s control.
 Calculation of Profit
• When UC, p and D(p) are known;
Profit = (p – UC)*D(p)
• When you have an equation that gives the
quantity of the product demanded for each
price, you can find out the profit maximizing
price with the help of Microsoft Excel solver.
 Price Elasticity of Demand
• Given a demand curve, the price elasticity of
demand is the decrease in demand resulting from
1% increase in price.
• When elasticity is larger than 1, the demand is price
elastic. When elasticity is less than 1, the demand is
price inelastic.
• When demand is price elastic, a price cut will result
into increase in revenue
• When demand is price inelastic, a price cut will
decrease revenue
 Estimates of elasticity
• Studies by economists have found the following
estimates of elasticity:
 Salt: 0.1 (Highly inelastic)
 Coffee: 0.25 (inelastic)
 Legal fees: 0.4 (inelastic)
 TV sets: 1.2 (slightly elastic)
 Restaurant meals: 2.3 (elastic)
 Foreign travels: 4.0 (highly elastic)
• A 1% decrease in price of foreign travel can
increase the demand of foreign travel by 4%
 Estimating a
Linear Demand Curve
• Suppose that a product follows a linear demand curve
• Given the current price, the demand and price elasticity,
it is a simple matter to estimate the demand curve of the
product
• E.g. the current price is Rs. 100, Demand is 500 units
and EP = 2
• A 1% decrease in price will decrease demand by 2%
• Two points are needed on Demand curve one is (100,
500) other is (101, 490)
• Using this information, we will estimate the linear
demand curve
 Estimating a
Linear Demand Curve
• Demo link on estimation of Linear demand
curve:
https://www.youtube.com/watch?v=XI3MJ7bP
-CQ
• Demo link on estimation of power demand
curve:
https://www.youtube.com/watch?v=XI3MJ7bP
-CQ
 Complementary Products
• A complement refers to a complementary product or
service used in conjunction with another product or
service. Usually, the complementary product has little
to no value when consumed alone, but when
combined with another product or service, it adds to
the overall value of the offering
• The joint demand nature of complementary products
causes an interplay between the consumer need for
the second product as the price of the first product
fluctuates. In economics, this connection is called
negative cross-elasticity of demand
 Complementary Products
• For example, should the price of hot dogs
increase, it can cause a decrease in the demand
for hot dog buns. Since the cost of hot dogs
has an inverse relationship with the demand
for hot dog buns, they are considered
complementary products
 Pricing Bundling
• In a bundle pricing, companies sell a package or
set of goods or services for a lower price than
they would charge if the customer bought all of
them separately. Common examples include
option packages on new cars, value meals at
restaurants and cable TV channel plans.
• Pursuing a bundle pricing strategy allows you to
increase your profit by giving customers a
discount.
 Pricing Bundling
• Bundle pricing is built on the idea of consumer
surplus. Every customer has a price that he is
willing to pay for a particular good or service
• The difference between what the customer
pays and what the customer was willing to pay
is known in economics as the consumer
surplus. Bundle pricing is an attempt to
capture more of your customers’ consumer
surplus.
 Pricing Skimming and Sales
• Price skimming is a product pricing strategy
by which a firm charges the highest initial
price that customers will pay and then lowers
it over time. As the demand of the first
customers is satisfied and competition enters
the market, the firm lowers the price to attract
another, more price-sensitive segment of the
population
 Pricing Skimming and Sales
• The skimming strategy gets its name from
“skimming” successive layers of cream, or
customer segments, as prices are lowered over
time.
• Price skimming is often used when a new type
of product enters the market. The goal is to
gather as much revenue as possible while
consumer demand is high and competition has
not entered the market.
 Pricing Skimming and Sales
• Firms often use skimming to recover the cost of
development. Skimming is a useful strategy in the
following contexts:
• There are enough prospective customers willing to
buy the product at a high price.
• The high price does not attract competitors.
• Lowering the price would have only a minor effect
on increasing sales volume and reducing unit costs.
• The high price is interpreted as a sign of high
quality.
 Pricing Skimming and Sales
• Demo Link for price skimming:
https://www.youtube.com/watch?v=DK0IWT
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