How to build a simple demand curve for a product

Building a demand curve is about finding the relation between price and quantity.
The relation between those two variables is in the sales and income books and can
be retrieved form the organizational computer system.
But the main problem is that all you know is what the sales levels for a price list are.
If you were asked to provide a sales figure for a price that hasn't being in the past all
you can do is using your rules-of-thumbs or simply guessing.
Well, I will try to teach you how to forget about guessing and how to use Analysis 6
software tool to get precise figures.

Let us look at an example:

Here are some product price and quantity figures for a year including special
campaigns and different sales channels.

Price Quantity
$59.00 3226
$59.00 3412
$59.00 3440
$59.00 3500
$59.00 3360
$59.00 3560
$79.00 2295
$79.00 2240
$79.00 2300
$79.00 2400
$79.00 2600
$79.00 2280
$79.00 2612
$79.00 2641
$79.00 2595
$79.00 2630
$79.00 2615
$79.00 2589
$79.00 2730
$99.00 1882
$99.00 2114
$99.00 2300
$99.00 2159
$99.00 3354
$99.00 3354

Viewing the table it is easy to find out that there is a decreasing of sales quantities
when price is rising. However, can you answer the question: what will the sales
quantity if the price is $83?
To answer the question you will have to build a demand curve that will help you to
get as precise figures as possible.
Building a demand curve using Analysis 6 software is easy and made for the busy
executive.

Step No .1: Selecting the demand curve variables

The Explained variable is the variable that we would like to know how the changes of
explanatory variable values (In this case: price levels) affect it.
As "Explanatory variable", we may select "Price" and move him from "Explanatory
Variable" frame to the "Selected Column" frame.

Analysis 6 is capable to finding the best-fit regression for the problem so we will use
the "All Regressions" option and we let the software to find the best-fit regression
model for us.
Step No .2: Viewing results

Here is our demand curve that the software has computed for us. The software select
the Polynomial regression type to be the most appropriate but you can choose any
other regression type.
You may have noticed that there is a big deference between polynomial regression
and linear regression. The Polynomial regression is hard to interpret so you might
want to select other, easier, regression to build the demand curve.
The Explanation value is the regression model ability to explain the variation of the
explained variable (In our example the "Price" variable can explain 89.61% of the
Quantity values). That’s means that Price can be a very good predictive measure for
"quantity".
Step No .3: Working with model results

After implementing the most appropriate regression, we can finally answer the
question: what will the sales quantity if the price is $83?

The regression model computes the predicted to be: 2392 units will be sold at price of
$83.

Now that you have the answer, you can decide what is best according to this model
and other considerations.

An interesting option is using the "Sensitivity Table" to create a demand curve based
on the regression model.
Step No .3: Creating a demand curve

When you would like to have a good estimation for a new price list, you can use the
"Sensitivity Table" to predict demand and to understand the affects of different prices
on sales levels.