demand curve

1. PRICING
ANALYTICS
Estimating Demand Curves Without
Price Elasticity

2. Demand Curves Without Elasticity
Data
• Need to estimate three points on product’s demand
curve:
• Lowest price we’d consider charging, and demand at that price
• Highest price we’d consider charging, and demand at that
price
• Median price, and demand at that price

3. Demand Curves Without Elasticity
Data
• Excel can fit basic quadratic demand equation to our
three price/demand points:
d = a(p)2 + b(p) + c
• d: demand
• p: price
• a, b, and c: auto-calculated for us by Excel to give best fit

4. Demand Curves Without Elasticity
Data
• Quadratic curve adjusts to fit all three demand/price
points
• Reasonable assumption: curve that fits our three
points approximates demand between the points
• Excel’s Solver can be used against demand curve to
determine optimal price

5. Exampl
e
• We’ve just acquired a new product, and need to
evaluate pricing ASAP
• Could make high/median/low guesses about
demand
• Running small experiment instead:
• 3 CVS stores around Harvard Square
• Shoppers randomly choose store
• Stores have equivalent sales
• Pricing: $1.50, $2.49, $3.29
• Unit Sales: 93, 72, 18

6. Enter
price/demand
data points

7. Select data points
by dragging over
them with mouse
Insert Scatter
with
only Markers
chart

8. Right-click on any
data
point
Choose
Add
Trendline
…

9. Select
Polynomial
trend type
Order is 2 since
we’re
fitting quadratic
Display equation
on
chart
Click Close
button

10. d = -25.86(p)2 + 81.97(p) + 28.23
a b c

11. Starting guess
for optimal
price

12. Enter demand formula:
=25. 86* B6^2+81. 97* B6+28. 23

13. Enter variable cost
of
producing one unit

14. Enter profit
formula:
=B7*(B6-B8)

15. Start the Solver
tool

16. Maximiz
e
Profi
t
By changing
Price

17. Add
constraint

18. Optimum
price
Greater than/equal to
Minimum
price
Click
OK

19. Add
constraint

20. Optimum
price
Less than/equal
to
Maximum
price
Click
OK

21. Click Solve
button

22. Optimum price:
$2.47