In this video, learn how to use data to build a demand curve.
- [Narrator] I'm in the 01_06_Begin Excel file. Alright, now what we want to do is go through and build out the data that leads us to a demand curve. So what we've got here is a variety of prices and unit sales based on those prices. Notice the higher the price gets, the lower the unit sales are. And we have some data already. This data might be based on past sales prices that we've set and, you know, perhaps promotional events that have been run by the firm, etc.
Now notice, we're still missing a whole bunch of data points. We don't have sales at, say, a price of 180. There's two ways we could get those sales. Either A, we could go and actually set a price of 180, look at how many units we sell, and then fill in this data point. That's time-consuming and frankly, a little bit costly. Or perhaps setting a sub-optimal price. The alternative way to do this is through a statistical technique that we call linear interpolation. I've done a few examples of linear interpolation for you here in green.
Now, let's just look at the formula in B6. What we see here is, we've used our unit sales at a price of 130. Those unit sales are 830 units. And we want to see how those unit sales will change if we set the price equal to 140. So from that 830 units we're going to subtract off a proportional change related to our rise in price.
So what we've got is our new price of 140 minus our price of 130, multiplied by the relative change in sales when we go from a price of 130 to a price of 170. I want to copy this formula down and apply it to the 180 price. Now I'm going to need to change some figures here. To begin with, I certainly need to change my cell reference. So now we're going to be looking at cell A10. Next, I need to change the high and low points for my price.
So at a price of 170, which is my new upper bound reference point, we don't sell 830 units, we instead sell 630 units. Now, our new price associated with that sale is 170. And I need to go through and everywhere I see an 830, I'm going to change that to 630. Next, I need to look at my lower bound. So the lower bound on sales is no longer 630 units, but instead it's 515.
That's the price that we've set down here. Based on that price of 170 we sold 630 units. At a price of 210, we sell 515 units. So we need to change our prices here so that they now reflect the price of 210 versus the price of 170. When we do that and hit enter, voila! This tells us that at a price of $180, we expect to sell roughly 601 units.
I'm going to go through and fill in the rest of these cells now. Now, when we finish we see that we have a completed schedule of product prices and sales. We also observe this is the data behind a simple demand curve. As prices rise, the number of units that we sell falls. From here we're equipped to begin making decisions about what the right price is for this particular product.
- Reviewing the pricing strategies available to firms
- Analyze pricing relationships
- Identifying different types of price discrimination
- Using pricing and revenue drivers to maximize profits and revenues
- Assessing the impact of competition and the competitive landscape
- Using variance analysis walks to analyze price and do cost analysis
- Gathering data to build pricing models and assess profit impact