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    Cost Based Pricing Formulas

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    MV
    This document discusses various pricing formulas and concepts used in cost and economic analysis. It covers topics such as markup percentage, margin, margin percentage, selling price, profit, cost-plus pricing, target-cost pricing, unit margin, consumption-adjusted margins, break-even analysis, linear regression, multiple regression, demand models, price elasticity, cross-price elasticity, income elasticity, price optimization using demand information, customer lifetime value (CLV) models, and marginal cost. The document provides formulas and definitions for these key pricing strategy and economic analysis terms.

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    Cost Based Pricing Formulas

    Uploaded by

    MV
    109 views5 pages
    This document discusses various pricing formulas and concepts used in cost and economic analysis. It covers topics such as markup percentage, margin, margin percentage, selling price, profit, cost-plus pricing, target-cost pricing, unit margin, consumption-adjusted margins, break-even analysis, linear regression, multiple regression, demand models, price elasticity, cross-price elasticity, income elasticity, price optimization using demand information, customer lifetime value (CLV) models, and marginal cost. The document provides formulas and definitions for these key pricing strategy and economic analysis terms.

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    Cost Based Pricing Formulas

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    This document discusses various pricing formulas and concepts used in cost and economic analysis. It covers topics such as markup percentage, margin, margin percentage, selling price, profit, cost-plus pricing, target-cost pricing, unit margin, consumption-adjusted margins, break-even analysis, linear regression, multiple regression, demand models, price elasticity, cross-price elasticity, income elasticity, price optimization using demand information, customer lifetime value (CLV) models, and marginal cost. The document provides formulas and definitions for these key pricing strategy and economic analysis terms.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    109 views5 pages

    Cost Based Pricing Formulas

    Uploaded by

    MV
    This document discusses various pricing formulas and concepts used in cost and economic analysis. It covers topics such as markup percentage, margin, margin percentage, selling price, profit, cost-plus pricing, target-cost pricing, unit margin, consumption-adjusted margins, break-even analysis, linear regression, multiple regression, demand models, price elasticity, cross-price elasticity, income elasticity, price optimization using demand information, customer lifetime value (CLV) models, and marginal cost. The document provides formulas and definitions for these key pricing strategy and economic analysis terms.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Formulas Used in Cost and Economics in Pricing Strategy

    Week 1

    Markup Percentage
    markup percent = (selling price - cost)/cost

    Margin
    margin = selling price - cost

    Margin Percent
    margin percent = (selling price - cost)/selling price

    Selling price
    selling price = cost/ (1 - margin %)

    Use this formula when you have a target margin.

    Profit
    profit=quantity * (price - cost)

    This is an example of a profit function with the quantity expressed as a functional form
    Profit = (15 - 3P) * (price - cost)

    Functional form
    Q = f(p)

    Week 2

    Cost-plus Pricing

    Cost + markup = selling price


    Target-cost Pricing

    Target cost = market price - target margin

    Unit Margin

    Unit margin = margin/unit quantity

    Consumption-adjusted margins

    (unit margin) * (1 + % consumption expansion)

    Break-even analysis

    (1 + % consumption expansion) * (margin per unit on larger size) = smaller size unit margin

    Week 3

    Linear Regression

    ~Q = a + b * Pi

    ~Q = Predicted quantity sales


    a = intercept
    b = slope
    Pi = price

    Multiple Regression

    ~Q = a + b1*Pi1 + b2*Pi2

    ~Q = Estimate or forecast of unit sales


    a = intercept
    b1 = slope of variable 1
    Pi1 = price of variable 1
    b2 = slope of variable 2
    Pi2 = price of variable 2

    Linear Model or Demand Model

    Q = dependent variable of quantity sold


    X1 = my own price
    X2 = price of a related good
    X3 = measure of disposable income
    X4 = trend variable
    e1 = error term

    Price Elasticity

    Definition of price elasticity E = %Q/%P can also be written as E = Q/P * P1/Q


    1

    E = elasticity
    = change
    Q = quantity
    P = price

    Cross-Price Elasticity

    Definition of cross-price elasticity EC = %Q/%P can also be written as EC = Q/PO * PO/Q


    EC = cross-price elasticity
    = change
    Q = quantity
    PO = competitor price

    Income Elasticity

    EI = Q/I * I/Q

    EI = income elasticity
    = change
    Q = quantity
    I = income

    Price Optimization Using Demand Information

    = (P - MC)Q

    = price
    MC = marginal cost
    Q = quantity sold

    Week 4

    $GP (contribution per period from active customers)

    Contribution = Sales Price - Variable Costs

    Simple CLV Model

    t=0 $GP - $R

    t=1 r $GP - r $R

    t=2 r2 $GP - r2 $R

    t=3 r3 $GP - r3 $R

    etc.

    $GP = contribution per period from active customers


    $R = retention spending per period per active customer
    r = retention rate
    d = discount rate per period

    Measurement of CLV

    CLV = present value of contribution margin - present value of marketing cost


    M = amount of money you make per customer per period
    r = retention rate
    i = discount rate per period
    n = number of periods to forecast

    3-year CLV

    CLV = M + Year 2 retention rate * (M/Year 2 discount rate) + (Year 3 retention rate*Year 2 retention
    rate) * (M/Year 3 discount rate)

    Marginal Cost

    Marginal cost = change in cost/change in quantity

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