Pricing Strategy & Tactics

Linear Optimal Price Formula

Linear OP = 1/2 (a/b+VC)

Multiplicative Optimal Price Formula

Multi OP = (b/(1+b))*VC

Price Formula

Price=((profit+FC)/Qty) +VC

Profit formula

Profit = ((price-VC)*Qty)-FC

Quantity Formula

Qty=(profit+FC)/(price-VC)

T or F: In general the price elasticity is lower (less negative) for consumer who exhibit a high quality orientation.

True

T or F: a 1% price change usually has a stronger effect on sales than a 1% change in the advertising budget.

True

T or F: when trying to find the function that beat fits your observes data, a linear PRF gives you R2=0.90, whereas a multiplicative PRF gives you R2=0.80. This, the linear PRF fits the data better.

True

Variable Cost Formula

VC=Price-(Profit+FC)/Qty)

In price discrimination, when are FC removed?

When calculating profit for both products

When calculating the profit max price in bundling, when do you take away FC?

When you are determining the whole total profit for the company at the very end for both products AND when you calculate bundle profit

In price discrimination, how do you count sum of purchases (demand)?

As each number of the customer segment size (ie 500, not 3)

In price discrimination, when you are asked to calculate the profit max price for one product when you are only told the price for the first version, how do you cost the second product?

Cost of product 1 plus 1 cent

If you have a positive linear elasticity, what does this mean for an increase / decrease in price?

Decrease in price = X% decrease in vol Increase in price = X% increase in vol

If you have a negative linear elasticity, what does this mean for an increase / decrease in price?

Decrease in price = X% increase in vol Increase in price = X% decrease in vol

Fixed Cost Formula

FC = ((price-VC)*Qty)-Profit

T or F: whenever a company changes its price by 30%, its sales decrease by 10%. The price elasticity is this -3.

False