PRICING ANALYTICS Optimizing Sales Models

Sales Rationale • Different shoppers value the same product differently

• Pool of potential buyers changes over time for durable goods

• When pool is mostly people with low valuation of product, charge a lower price (sale) to support total product sales

• When pool is mostly people with high valuation of product, charge higher price to maximize profit

Example Sales Model • Target’s private-label yoga pants

• Model 18 months of sales

• Shoppers divided into 3 price pools: • $24.99 (MSRP)

• $19.99 (Promotion)

• $14.99 (Sale)

• Pool of 18,000 potential buyers

• Equal number of buyers at each price level

Example Sales Model • 1,000 new market entrants each month at each price point

• Half of potential buyers actually purchase each month

• Implication: Anyone who values pants at less than the current price is going to potentially purchase them

Create data table for the 3 price points & their

associated price codes

Make the table a range named PriceCodes

Enter trial price codes for each of the 18 months in our model

Enter price lookup formula: =VLOOKUP(B7,PriceCodes,2)

Accept formula

Select handle at bottom right of formula cell, then drag down

3,000 shoppers will purchase at each price point 3,000 shoppers will purchase at each price point 3,000 shoppers will purchase at each price point

3,000 shoppers won’t purchase at each price point

3,000 shoppers won’t purchase at each price point

3,000 shoppers won’t purchase at each price point

Buyers = Previous Nonbuyers + (Previous Buyers – Previous

Sales) + ½ Previous Sales + ½ New Shoppers

Nonbuyers = ½ Previous Sales + ½ New Shoppers

Enter formula for MSRP buyers: =E7+(D7-J7)+0.5*J7+0.5*1000

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula for MSRP non-buyers: =0.5*1000+0.5*J7

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula for promotional buyers: =G7+(F7-K7)+0.5*K7+0.5*1000

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula for promotional non-buyers: =0.5*1000+0.5*K7

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula for sale buyers: =I7+(H7-L7)+0.5*L7+0.5*1000

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula for sale non-buyers: =0.5*1000+0.5*L7

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter cell reference for MSRP unit sales: =D7

Accept reference

Select handle at bottom right of formula cell, then drag down

Enter conditional for promo unit sales: =IF(C7 <= $F$4, F7, 0)

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter conditional for sales unit sales: =IF(C7 = $F$2, H7, 0)

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula to calculate monthly revenue: =SUM(J7:L7)*C7

Accept formula

Select handle at bottom right of formula cell, then drag down

Enter formula to calculate total revenue: =SUM(M7:M24)

Accept formula

Launch Excel’s Solver tool

Maximize

Total Revenue

Monthly Prices

Choose Evolutionary solving method

Click Add button

Monthly price codes

Less than/equal to

3

Click OK

Click Add button

Monthly price codes

Greater than/equal to

1

Click OK

Click Add button

Monthly price codes Must be integers

Click OK

Click Solve button

Click OK button

~ $8.74 million in total sales

Promotional pricing not used in optimal solution