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Are your prices correct? 5 Simple steps to evidence based pricing

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It’s all good news and cheers into the New Year with the UK downturn finally expected to be left behind and as the size of the UK economy surpasses its pre-recession peak. With expected GDP growth rate of 2.7% the clear message of these indicators are that against the backdrop of a difficult economic climate, there are still pockets of strong demand for top quality services and products at an affordable price across different sectors which would continue to fuel the stimulus for growth in the economy. The challenge is for businesses to plug into these golden nuggets of opportunities with a winning price offering.

Access to top notch real time information about comparable products and services by consumers is so much easier with price comparison websites such as Money Supermarket, Go Compare, Martin Lewis’ Money Saving Expert, Google search engine, to mention just a few providing an invaluable service. The dilemma to success in this competitive market is getting the right balance between quality and price. The consumer’s buying decision for most products and services with elastic demand always come down to price. Understanding your product/service demand curve and elasticity is the key to maximising your corporate profits and bottom line, because it’s only when you know how much your consumers are willing to pay for your service or how indifferent they would be to a price change that you can confidently put out a winning price.

In a nutshell the markets are not perfect and a good price creates sales transactions that benefit the consumers, the business, and the economy. It is very clear that there are disparities and mismatches between prices offered for goods and services by businesses in the UK and the amount hard up consumers are willing to pay.

Gone are the days of setting prices based on “gut” or “experience”. I often hear clients say my plan for 2014/15 is to sell 20,000 widgets @ £30/each because I managed the same feat last year. Evidence should always be the key in setting prices, understanding the variables that affect pricing is a key insight into the competitive environment. This article takes you through the steps of achieving a profit maximizing price for your products or services and then puts into context of how growth in the economy could be stimulated.

Step 1

Build a two table column that shows all your prices (including discounts) and the associated demand over a period of one year. You can get this information from your general ledger.

Step 1
Jab Ltd
Price Quantity Demanded (Units)
£21.00 200
£26.00 196
£24.00 190
£12.55 280
£13.00 240

Step 2

Step 2
Price Demand
Low Price =MIN(B6:B10) =VLOOKUP(F6,$B$6:$C$10,2,FALSE)
Medium Price =MEDIAN(B6:B10) =VLOOKUP(F7,$B$6:$C$10,2,FALSE)
High Price =MAX(B6:B10) =VLOOKUP(F8,$B$6:$C$10,2,FALSE)
Step 2
Price Demand
Low Price £12.55 280
Medium Price £21.00 200
High Price £26.00 196

Use excel function min, median, and max to find out the minimum, maximum, and average price

Step 3

Plot the points in a scatter graph from the tabled data, select the polynomial function for the trend line to display the formulae coefficient, where x represents price and y equals quantity demanded

Graph

Step 4

Put any trial price and Input your polynomial coefficients into the demand equation;

Step 4
y = 0.6444x2 – 31.088x + 568.65
y = quatity demaded
x = price
Price 20
Cost 11
Demand =(0.6444*G17^2)-(31.088*G17)+568.65
Profit =(Price-Cost)*Demand
Step 4
y = 0.6444x2 – 31.088x + 568.65
y = quatity demaded
x = price
Price £20.00
Cost £11.00
Demand 204.65
Profit £1,841.85

Step 5

Use the solver function in Microsoft Excel to calculate the profit maximising price. Check to see the solver function is enabled in your excel version – For excel 1993 click on Tools => AddIn => Tick Solver and For excel 2010 click on File => Addin => Tick solver

SolverSolution

Solution after solver

Step 5
y = 0.6444x2 – 31.088x + 568.65
y = quatity demaded
x = price
Price £26.00
Cost £11.00
Demand 195.9764
Profit £2,939.65

Based on the above evidence from solver we can deduce that the £26 price would maximize the organization’s profit, although this shouldn’t be taken in isolation as other factors affect demand and price

The importance of having a winning price for your products and services cannot be over emphasized as it could spell the difference between real competitive advantages and being priced out of the market.

We would love to hear your thoughts and comments


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