pricing analytics: price skimming

PRICING ANALYTICS Price Skimming

Price Reductions Over Time • Prices of items in several product/service categories decrease

over time

• Three common reasons for these price reductions: • Competition

• Learning curve

• Price skimming

Price Skimming • Basic economic principle: not every customer places the same

value on a product/service

• Initial “value pricing” can maximize unit sales, but cannibalizes potential revenue from high-value customers

• Initial “premium pricing” can maximize revenue, if you drop prices over time to attract remaining customers

Price Skimming Example • Skimming model for Rolex smartwatch

• Cover 12 months of sales

• Sell 10,000 watches

• Prices adjusted on 1st of each month

• Assumption: Sell all 10,000 watches in 12 months

Enter trial prices for each of the 12 months

Enter formula to calculate highest value customer left:

=B3-1

Select cell containing formula

Select handle at bottom right of formula cell, then drag down while holding Ctrl key

Enter formula for units sold in a month: =C2-C3

Select cell containing formula

Select handle at bottom right of formula cell, then drag down while holding Ctrl key

Enter formula for the month’s revenue: =B3*D3

Select cell containing formula

Select handle at bottom right of formula cell, then drag down while holding Ctrl key

Enter formula to aggregate the entire year’s revenue:

=SUM(E3:E14)

Launch Excel Solver

Maximize

Yearly revenue

By changing prices

Using Evolutionary solving method

Click Add button

Price Must be an integer

Click OK

Click Add button

Price Less than/equal to $10,000

Click OK

Click Add button

Price Greater than $1

Click OK

Click Solve button

Maximized yearly revenue

Optimized monthly price levels