pricing analytics: price skimming
DESCRIPTION
The prices of several product classes – notably fashion and technology – tend to drop over time. One possible reason for the drop over time is different customers assigning a different value to the same product or service. Price skimming models can be used to maximize a product or service’s revenue by planning price reductions over time in a manner that slowly cuts tranches of higher-value customers out of the market. This presentation provides a hands-on demonstration of constructing a price skimming model in Excel, and optimizing planned price reductions.TRANSCRIPT
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