Pricing Analytics: Creating Linear & Power Demand Curves

[@VanLe-bh9cc]

Thank you very much. It helps me a lot for understanding pricing analysis.

[@antoinettemilano359]

OMG!!! You are sooooo much better than my instructor. And you did it in half the time. I was seriously lost and now I think I am getting it! PLEASE KEEP POSTING! By the way I love you calming voice. :-[ I mean that in a nice way not creeper alert way.

[@gonzalochavez2006]

Thanks for the video, I have one question. In the power demand curve, for me doesnt make sense have a price elasticity = 2 (elastic). It should be less than 1 (inelastic), because the quantity doesnt change when the price change.

[@anacatarinafigueiredopinto5410]

As he says in the video: "price elasticity stays at 2 regardless what we do with the price per shirt".

[@abdulwakel74]

Hi Michael, How i can solve thee question if we have the demand equation for seven days. how to determine the price that optimize the revenue?

[@LaurelMeredithPrivat]

Thank you for the very informative instructional video. It is very helpful to be able to translate these formulae into Excel! Question: What if you are attempting to optimize the pricing of video television content? I don't know how to determine the elasticity of demand since the "units" vary from show to show and very much depend on the consumer "sentiment." The model is also B2B...do these concepts still apply in a B2B marketplace? The end consumers are not buying the television content directly, but rather purchase through a bundle of channels via a distributor. Thanks for any guidance!

[@MichaelLamont]

The basic theories behind these methods still apply to your situation, but you're definitely in a "special case" area. I'm normally loathe to do this, but I think you're going to need to talk to a consulting firm (there are several good ones you can find via a Google search for "pricing strategy" or "pricing consultants"). I suspect your main problem is going to be a very thin data set that makes it difficult to do any sort of statistical analysis. A possible strategy might be to cluster similar shows together and treat them as a single "product". I don't know if it'll apply to your scenario, but there should be a similar KZbin video in this channel that discusses estimating demand curves without factoring in elasticity.

[@empireaj6331]

man you are the true saviour

[@freeearnest3078]

can i use the above curves to design a product pricing decision support system

[@ronaldespares9189]

hi michael, how can i know the price elasticity of a product? since i noticed that to be able to know the increase or decrease of the demand I need to know if the product is elastic or inelastic?

[@MichaelLamont]

The formula for price elasticity is simple - its the % change in demanded quantity divided by the % change in price. Determining those KPIs is what's difficult - you need to either hire an econometrics firm to determine them for you, or gradually slide the price of your product up and down for a few weeks at a time and measure the change in demand at each price point. Again, that's harder than it sounds, since you need to try to control for external variables like seasonality and promotions. A quick and "good enough" solution most firms follow is to buy a year's worth of weekly sales data from a syndicated data provider like Nielsen, IRI, or NPD and then review the Unit Sales and Average Price KPIs. Depending on how accurate you want to be, you can calculate your product's price elasticity for the entire US or calculate the different elasticities for different markets and trading areas.

[@ronaldespares9189]

Michael Lamont hi michael thanks so much for quick response this helps me a lot, thanks!

[@MichaelLamont]

Amy Gallo at the Harvard Business Review wrote a nice blog post that I think does a good job explaining in detail how elasticities are calculated and used, if you're looking for some additional info: hbr.org/2015/08/a-refresher-on-price-elasticity

[@MsRamington]

Thanks for the video, just a quick question so when you determine the second point for the linear curve you said 1% in crease in price and demand by 2%, how did you decide on these and can it be universally applied.

[@harrison9032]

How did he determine it was 2%??

[@SherlyDenis18]

Harri son Its 2% because the elasticity is calculated to be 2. %increase in price decreases demand by (elasticity) %

[@antoinettemilano359]

2/1

[@jenessajohnson3799]

So how do you determine if price elasticity changes or remain constant thereby knowing which curve to use? Would really appreciate your feedback

[@MichaelLamont]

Generally, doing large-scale A/B testing is the only way to establish to a statistical certainty which curve to use. If you're selling consumer goods, you can buy data from syndicated providers like Nielsen, IRI, NPD, etc that you can use to establish this. (For a sizable consulting fee, they can do all of that for you.) In the real world, the curves are usually pretty close to each other for most products inside real world pricing bands. People tend to use the linear method just because it's easier to compute and understand (or at least easier to explain to sales and marketing executives), unless they discover it diverges too much from reality. Then they shift over to the power curve.

[@jenessajohnson3799]

Thanks for responding! Appreciate it.

[@MrRobertHerron]

I am a small business owner and I seem to have a problem with one of my newest product screws. We keep raising the price but so far month over month have not yet see a decrease in items sold. Because of this i question the accuracy of any elasticity calculations.... Which of these 2 charting methods do you recommend in my case, or do i need to hold off until i find that tipping point where price does start to negatively effect demand?

[@ebukaphilip2868]

increase in price of your product does not affect your price elasticity, this means that you cant use the linear demand curve. Try the power demand curve.

[@sreejx]

Hi Michael ,can you make a video on how retailers come up with discount/promotion strategies like for e.g. Buy 2 get 1 free or Buy 4 at 30% off ,what is the maths/logic behind it and once the promotion is over how do they measure performance of these discounts/promotions.Thanks.

[@MichaelLamont]

Woof. That's a big topic - there are entire textbooks devoted to it, several of which will probably teach you what you're looking for. If you search Amazon for "marketing strategy" and "promotion strategy" you should turn up plenty of options. But thanks for the suggestion - that's something I can try for a future course.

[@YvesAustin]

Good series of videos. Clear, concise and to the point.

[@simonkalibwani5832]

I think you meant "for linear demand curves, price elasticity (slope) remains constant, but for power demand curves, elasticity changes depending on where you're at on the curve", right?

[@sharonstone1279]

my excel is not giving me this information what am I doing wrong I am following it step by step it is not working and is frustrating to me

[@MichaelLamont]

I'm going to need a little more information to help you. Exactly where are you in the process, and exactly what information do you believe Excel isn't showing you?

[@MichaelLamont]

Absolutely!

[@sirfletch9802]

The implication should be: Every $.90 increase in shirt price is going to cost demand for 20 shirts. NOT 22. or Every $1 increase in shirt price is going to cost demand for 22 shirts. FYI

[@ronaldespares9189]

I mean how did you know that the price elasticity is 2 for ralph lauren shirt? is there a way to compute it?

[@MichaelLamont]

See my reply to your earlier comment for instructions on how to determine a product's price elasticity. For the example in the video, I made it up. ;-)

[@ronaldespares9189]

Owkie understood thanks though😊

[@iranidearaujojr.616]

oustanding needs improvement with the introduction demand curve at inception