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Pricing Analytics: Price Skimming

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.
Published on: Mar 4, 2016
Published in: Data & Analytics
Source: www.slideshare.net

Transcripts - Pricing Analytics: Price Skimming

• 1. PRICING ANALYTICS Price Skimming
• 2. 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
• 3. 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
• 4. 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
• 5. Enter trial prices for each of the 12 months
• 6. Enter formula to calculate highest value customer left: =B3-1
• 7. Select cell containing formula Select handle at bottom right of formula cell, then drag down while holding Ctrl key
• 8. Enter formula for units sold in a month: =C2-C3
• 9. Select cell containing formula Select handle at bottom right of formula cell, then drag down while holding Ctrl key
• 10. Enter formula for the month’s revenue: =B3*D3
• 11. Select cell containing formula Select handle at bottom right of formula cell, then drag down while holding Ctrl key
• 12. Enter formula to aggregate the entire year’s revenue: =SUM(E3:E14)
• 13. Launch Excel Solver
• 14. Maximize Yearly revenue By changing prices Using Evolutionary solving method