The “best” price for a product or service is one that maximizes profits, not necessarily the price that sells the most units. This presentation uses real-world examples to explore how Excel’s Solver functionality can be used to calculate the optimal price for any product or service.

1. PRICING ANALYTICS
Optimizing Price

2. Optimizing Price
•Best price – price that yields max profits, not necessarily max unit sales
•Excel’s Solver tool can be used to construct useful pricing models

3. Excel Solver
Sets value to be maximized or minimized Variables that can be adjusted to optimize objective cells
Restrictions on how Solver can change variable cells

4. Excel Solver
•Solver tries all reasonable solutions that fit the specified model
•Chooses optimal solution – values for variable cells that produce best value for target cell

5. Pricing Optimization Example
•Find best price for ink jet printer
•Current price: $75
•Demand at current price: 5,000 printers
•Cost to produce one printer: $59
•Price elasticity: 2.0
•Linear demand curve
•Two known points on demand curve:
•(p=$75, d=5000)
•(p=$75.75, d=4900)

6. Enter price and demand values

7. Select data cells by dragging over with the mouse Insert Scatter with only Markers chart

8. Swap axis data to fix slope of demand curve

9. Right-click data point Choose Add Trendline…

10. Select Linear Trendline Check option to Display Equation on chart
Click Close button

11. Demand Curve Formula:
d = 15,000 – 133.33 * p

12. Enter per-unit manufacturing cost

13. Enter initial guess for optimal price

14. Enter demand formula:
=15000-133.3*B7 Accept formula

15. Total Profit = (Price – Unit Cost) * Demand Accept formula
Enter profit formula:
=B8*(B7-B5)

16. Start Solver

17. Maximize
Total Profit
By changing price

18. Select GRG Nonlinear solving method

19. Click Solve button

20. Optimal price per printer: $86
Total profit: $95,415.98

21. Complementary (Tie-In) Products
Product
Tie-In
DVD player
DVDs
Razor
Blades
Cell phone
Car charger
Flashlight
Batteries
Inkjet printer
Ink cartridges

22. Pricing Optimization w/Tie-In Product
•Including profits from tie-in products lowers optimum price for original product
•Assumptions for our example:
•Average printer lifetime: 3 years
•Ink cartridge lifetime: 6 months
•Ink cartridges sold per printer: 6 (2/yr * 3 yrs)
•Ink cartridges must be priced at $34
•Profit per ink cartridge sold is $12

23. Enter cost to manufacture printer

24. Ink cartridges we’ll sell per printer
Profit per ink cartridge sold

25. Initial guess for optimal price

26. Enter demand formula:
=15000-133.3*B7

27. Printer Profits = [(Price - Unit Cost) * Demand]

28. Printer Profits = [(Price - Unit Cost) * Demand] +
(Demand * Cartridges per Printer * Profit per Cartridge)

29. Enter updated total profit formula: =B5*(B4-B1)+(B5*B2*B3)

30. Start Solver

31. Maximize
Total Profit By changing price
Click Solve

32. Best price for our printers is a $9 loss per sale!!
Total profit: $525,112.42