The prices of several product classes – notably fashion and technology – tend to drop over time. One possible reason for the drop over time is different customers assigning a different value to the same product or service. Price skimming models can be used to maximize a product or service’s revenue by planning price reductions over time in a manner that slowly cuts tranches of higher-value customers out of the market. This presentation provides a hands-on demonstration of constructing a price skimming model in Excel, and optimizing planned price reductions.

1. PRICING ANALYTICS
Price Skimming

2. Price Reductions Over Time
•Prices of items in several product/service categories decrease over time
•Three common reasons for these price reductions:
•Competition
•Learning curve
•Price skimming

3. Price Skimming
•Basic economic principle: not every customer places the same value on a product/service
•Initial “value pricing” can maximize unit sales, but cannibalizes potential revenue from high-value customers
•Initial “premium pricing” can maximize revenue, if you drop prices over time to attract remaining customers

4. Price Skimming Example
•Skimming model for Rolex smartwatch
•Cover 12 months of sales
•Sell 10,000 watches
•Prices adjusted on 1st of each month
•Assumption: Sell all 10,000 watches in 12 months

5. Enter trial prices for each of the 12 months

6. Enter formula to calculate highest value customer left:
=B3-1

7. Select cell containing formula Select handle at bottom right of formula cell, then drag down while holding Ctrl key

8. Enter formula for units sold in a month:
=C2-C3

9. Select cell containing formula
Select handle at bottom right of formula cell, then drag down while holding Ctrl key

10. Enter formula for the month’s revenue: =B3*D3

11. Select cell containing formula
Select handle at bottom right of formula cell, then drag down while holding Ctrl key

12. Enter formula to aggregate the entire year’s revenue:
=SUM(E3:E14)

13. Launch Excel Solver

14. Maximize Yearly revenue
By changing prices Using Evolutionary solving method

15. Click Add button

16. Price
Must be an integer Click OK

17. Click Add button

18. Price
Less than/equal to $10,000
Click OK

19. Click Add button

20. Price Greater than
$1 Click OK

21. Click Solve button

22. Maximized yearly revenue
Optimized monthly price levels