How much should you charge for a new product you have never sold before?

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 How much should I charge for my product?

How can I determine the profit-maximizing price for the concert tickets I am
selling? (We are using concert tickets as an example). Let’s suppose that you pay $25 for
each ticket that you plan to sell. You are considering charging between $40 and $80 for a
concert ticket. You believe that at a price of $40, you will sell 60 concert tickets. At a
price of $60, you think you will sell 50 tickets, and at a price of $80, you will sell 25
tickets. What price should you charge for a ticket?

Ticket cost, price, and demand are contained in the worksheet named Profit
Maximizing in the file Profit Maximizing.xls, which is partially shown in the figure
below. The data points that will chart our demand curve are in cell range E3:F6. After
selecting E3:F6, click the Chart Wizard button and then select the option for an XY
(Scatter) chart. Click finish. On the graph, right click on a data point and select Add
Trendline. In the Add Trendline dialog box, choose Polynomial and select 2 in the Order
box (to produce a quadratic curve of the form of equation 1). Then, click on the Options
tab and select the option Display Equation On Chart. The chart is shown in the figure
below. Our estimated demand curve is Demand = -0.0187*Price2 + 1.375*Price + 35.

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 Now we insert a trial price in cell I2 ($60). The product demand is computed in
cell I3 with the formula =-0.0187*I2^2+1.375*I2+35. We then compute our profit from
selling concert tickets in cell I4 with the formula =I3*(I2-E2). Now we can use Solver,
which uses an algorithm to find the optimal solution, to determine the price that
maximizes profit. The Solver Parameters dialog box is shown below. Note that we
constrain our price to be between the lowest and highest specified prices ($40 to $80). If
we allow Solver to consider prices outside this range, the quadratic demand curve might
slope upward, which implies that a higher price would result in larger demand. This kind
of result would be unreasonable, so we constrain our price to be between $40 and $80.

Click on Tools and select Solver. Our Set Target Cell is cell I4 (profit). For the
Equal to: button, select Max. By Changing Cells is cell I2 (price). Click Add to insert the
first constraint:

Cell Reference: I2 <= E6

Click Add
Cell Reference: I2 >= E4
Click OK
Click Solve
Select Keep Solver Solution
Hit OK

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 It appears that we should charge $66 for a concert ticket. This would yield sales of
44 tickets and a profit of $1,816.04. This approach in determining what the price should
be can be applied to all the different products you are selling when you are not sure what
price you should charge for your product. The only data that needs to be specified for
each product is its variable cost and the three given points on the demand curve.

Legal Disclaimer

The opinions and analyses provided here represent my own and not those of my Clients.
Bears repeating: The tutorials do not represent the thoughts, intentions, plans, actual data
or strategies of my clients or employer. To download the Excel spreadsheet that contains
the actual data, please go to www.SmartDigitalSpending.com.