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Pricing and Revenue

Forecast Model

Multivariate Solutions

Applications and Goals

This pricing and revenue forecast model is used primarily to


determine optimal pricing of a product/service, and market share
penetration of a given product at specific price points.

Using that information, a model of revenue projection can be


built using simulation methods.

The goal is to give clients the tools to make an informed


decision about pricing a given product or service based on the
highest likelihood of maximum revenue.

The Monte Carlo Method

While it is a relatively straightforward matter to develop


confidence intervals for each of the revenue parameters taken
alone, what is really at issue is the confidence interval for
projected differences taken jointly. Such a problem is best
addressed through the use of so-called Monte Carlo methods.

In a Monte Carlo simulation, a model in spreadsheet format is


set up and the cells whose values come from the survey results
are identified (and which are therefore subject to sampling
error). For each of these cells, a distribution of possible values
using the appropriate means and standard errors is specified. A
series of trials is then generated, each one of which represents
a possible outcome of the process.

The Monte Carlo Method

(cont.)

On average, most of the trials will yield values close to the


mean, since the distributions are typically bell-shaped and high
values for some parameters are likely to be offset by low values
for others. Expected revenue represents a best-case outcome
given the survey results and confidence intervals associated
with the individual parameters. But if the simulation is
performed, say, 1,000 times, such a best-case outcome would
represent only a small fraction of the total trials.

The 1,000 outcomes of these trials can be arrayed in a


cumulative distribution, so that the probability of percentage
growth falling into any given interval can be read off as the
number of trials with outcomes in that interval.

The Product / Service

The product or service must be defined before the survey is


fielded. This model does not test different features for product
constructionthat is left to tradeoff methodologies.

This example is a cleaning foam that is used in the everyday


cleaning of kitchens and bathrooms.

During the survey the products features and benefits are


described in detail to the respondent. Possible sale points are:
$3.19
$3.49
$3.79
$4.09
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Constructing the Pricing Module

Read the product/concept description.


The pricing module on the questionnaire is constructed as
follows:
Given the features of this product, would be willing to pay
$3.49 for it?
If yes, then ask, Would you pay $3.79 for it?
If no, then ask , Would you pay $3.19 for it?
Continue with Yes until the respondent says, No. Record
the highest Yes.
Continue with No until the respondent says, Yes. Record
that Yes.
If Yes at top price ($4.09), record top price.
If No at bottom price, ($3.19), record No Answer.
Rotate the starting points so that all price points begin equally.
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Predicted Market Penetration

Cumulative line chart


The assumption is that if a respondent is willing to purchase the
product at $4.09, he/she will be willing to purchase that product at
$3.79 and all lower price levels.
Probability

74%

68%

61%
57%

$3.19

$3.49

$3.79

$4.09

Input for Revenue Forecast

Input based on market penetration estimates taken from survey.

To project revenue, information must be supplied by the client:


Size of potential market (range OK)
Our market is said to be 2 million foam-using households, +-10%

Fixed costs, e.g. production, marketing, dist., etc. (range OK)


Fixed costs are said to be $2.5 million, +-10%

Revenue Forecast
Projected Size of Target Market (Households)
Projected Fixed Costs
Price Point

2,000,000
$2,500,000
$3.19

Market Penetration
Number of Interviews

74%
300

Projected Revenue

$2,221,200.00

Revenue Forecast
Probability That Revenue Is Greater Than or Equal to Forecast
$3.19

Probability
100%

$3.49

Probability

1626

100%

1688

2030

2014
2094

2084

80%

80%
2136

2153

2179

2200

60%

60%
2221

2270
2264

2293

40%

40%
2306

20%

2363

20%

2349

2409

2434

2479
2668

0%
1600

2875

0%
1700

1800

1900

2000

2100

2200

2300

2400

2500

Forecast Revenue=$2,221,000

2600

2700

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

2600

Forecast Revenue=$2,270,000

Estimated Revenue for Cleaning Foam Sales at $3.19 and $3.49 Price Points

2700

Revenue Forecast
Probability That Revenue Is Greater Than or Equal to Forecast
$3.79

Probability
100%

$4.09

Probability

1366

1317

100%

1846

1863
1972

1972

80%

80%
2023

2054

2073

2108

60%

60%
2124

2163
2200

2217

40%

40%
2250

20%

2272

20%

2301

2353

2402

2490
2882

0%

2953

0%

1300 1400 1500 1600 1700 1800 1900 2000 2100 2200 2300 2400 2500 2600 2700 2800 2900

Forecast Revenue=$2,124,000

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

2600

Forecast Revenue=$2,163,000

Estimated Revenue for Cleaning Foam Sales at $3.79 and $4.09 Price Points

10

2700

Revenue Projection Results

At $3.19, mean expected revenue is $2,221,220. One can be


90% sure that revenue will exceed $2,029,800, but only 10%
sure that it will exceed the higher amount of $2,433,867.

At $3.49, the expected revenue is $2,269,667. The chances of


exceeding the revenue at $3.19 are 59%.

At $3.79, expected revenue is $2,123,800. At this price the


chances of exceeding the revenue at $3.19 are 36%, and at
$3.49, 27%.

At $4.09, expected revenue is $2,162,600. One can be 90%


sure this revenue will exceed $1,862,667, but only 10% sure it
will exceed $2,489,800. The chances of exceeding the
projections at $3.19 are 37%; at $3.49, 29%. Revenue at the
latter price is expected to be higher than at $3.79; the chances
of that are 57%.

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Price the Foam at $3.49 . . .


Mean Expected Revenue at Tested Price Points
x000s

$2,300
$2,250

$2,267
$2,221

$2,200

$2,163

$2,150

$2,124

$2,100
$2,050

$3.19

$3.49

$3.79

$4.09
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