Session 4 - Price Optimisation Flashcards
moving prices- volume hurdle
change in price
required changed in volume such that price change laves one better of or at least indifferent as before
% DELTA Q
equal or greater
-% delta P /(%CM + %delta P)
% DELTA Q
Qfinal - Qinitial / Q initial
% DELTA P
Pfinal - Pinitial / Pinitial
% CM
Pinitial - VCu / (Pinitial)
Decision Implication
price reduction% delta P <0
Total is positive
expected increase in Volume associated with price reduction it will overcome volume hurdle
price reduction will increase profitability
Decision Implication
price reduction% delta P >0
Total is negative < VH
Price Elasticity
independent of scale
measure of the change in Volume delivered with change in prices
moving prices and see reaction of Demand
compering diff. products, bands, markets
Interval Elasticity
delta q/delta p *
average p/ q at average p
p = price at average level in the interval
q= level of demand- quantity at average p
Point Elasticity
elasticity of demand in an interval at a certain level of demand
(assumed linear) sloped * p/q
p = price at certain level of D.
q= quantity at specific price
Volume Hurdle
Disadvantages
does NOT consider LT changes in Customer Demand as well as competitor´s reaction
Volume Hurdle
Disadvantages
does NOT consider
a) LT changes in C. Demand
b) competitor´s reaction
temporary price reductions may change customer´s expectations
Inelastic Markets
0 – < -1 Normal Markets
Infinity –> -1 (IE Markets)
demand changes little with price change (per unit)
tend to favour price increase to improve profitability (revenues will be greater)
Elastic Markets
-1 –> - infinity
demand changes drastically (very price sensitive) when price changes (per unit)
extreme - commodity
Elasticity
Characteristics
better measured in matured &commodities (we assume future is very similar to past - thus use historical data to calculate elasticity)
less well for branded markets
firm level (brand choice) >= category level (switch brand to reduce purchases)
LT (uncover substitutes) < ST (customer locked)
Profit Optimisation
Linear Price response curve
average of variable cost + max w.t.p
assumes changes in demand per price unit change in constant (not matter what the base price might be)
elasticity = slope
1. w(x)= 1/10 (if x (0,10)) &0 (otherwise) –> UNIT DISTRIB.
2. d(p) = D - mp
LINEAR DEMAND
constant elasticity price response
distribution of wtp which is highly concentrated near 0
demand does not drop to 0 at any time (close)
d(p) = C*p^-1 (hyberbola)
Both WTP &Price Response are hyperbolic, but Price Reponse is more to the left (asymptote)
Logit Price Response
most popular
Wtp corresponse to Gausch
Price Response is logic
closest to market price
Constant Elasticity
Moving Prices
moving prices using elasticity assumes demand curve is hyperbolic
good enough if we move them around the point calculated
Profit Optimisation
Elasticity
p optimal = (VCu * e)/(1+e) problems: industry vs product level LT total cost Unitary ST Variable cost Unitary
Log Linear Model
exponential Regression Model
slope coefficient of Log-linear regression gives us elasticity of y in respect to x
e.g 1% increase in Quantity will result in a decrease about X% in Price
