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Cost-Based Pricing Formulas Explained

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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86 views5 pages

Cost-Based Pricing Formulas Explained

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.

Uploaded by

MV
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

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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